1. International Conference Manufacturing-led Growth for Employment Equality
“The challenges to reversing the decline of the apparel sector in South Africa” Mike Morris,
School of Economics, University of Cape Town and Justin Barnes,
Development Studies, University of KwaZulu-Natal

2. Introduction Central focus - is there a labour intensive path for SA?
Unpack apparel sector dynamics over the past 15 years
Identify domestic industry key drivers
Establish fit between these drivers and policy levers
Examine previous policy faults
Draw on Turkish experience lessons
Suggest differentiated policy alternatives to build a sustainable SA apparel industry at both market ends

3. Apparel GVC dynamics
Buyer dominated GVCs shaped by Northern Hemisphere retailer, own-brand, and technical market movements
China supply dominance - bifurcation of industry:
Long-lead time, highly price sensitive supply – China, India, Bangladesh, Vietnam, etc. (+ slide)
Short-lead time, less price sensitive supply, driven by OTIF delivery, QA, small batch runs, technology rich supply chain linkages – Turkey, Morocco, Southern Europe, Mauritius (+slide)
SSA marginal but apparel production NB to Mauritius, Madagascar, Lesotho, Swaziland, Kenya (++ slide)
SSA benefits: EPZs, AGOA, EU GSP
Important dynamic: SA market very meaningful (R30bn)

4. Top apparel exporting countries
Country/ Region
Value ($Mil)
World Share (%)
2000
2009
2011
China
48,019
123,988
155,478 25 41
EU-15
33,980
51,405
61,069 18 17 16
Bangladesh
4,862
14,241
21,938 3 5 6
Turkey
6,711
13,160
16,289 4
India
5,131
11,931
14,346
Vietnam --
9,410
14,077

5. SSA Exporters to US and EU
Value ($US Mil)
Share of SSA (%)
2000
2007
2012
Top SSA apparel exporters to US
Lesotho
140
384
301 19 30 35
Kenya 44
248
254 6 29
Mauritius
245
115
163 33 9
Swaziland 32
135 60 4 11 7
Madagascar
110
290 43 15 22 5 SA
142 24 2 1
Top SSA apparel exporters to EU
626
654
347
63.0
62.0 48
240
337
321
24.2
31.9
Ethiopia -- 31 77 26 12 8 3

6. SA apparel : 1st Period ISI driven (+/- 2000 – 2009)
AGOA – Local manufacturers renege domestic retailers
Rand strengthens 2003 – local manufacturers renege US
Retail big imports from China - $95m (2000) to $558 (2005) to $961m (2011) so 74% of imports in 2005
Exacerbated by illegal imports and crime syndicates
Globalisation impacts – labour/production (+ slide)
Policy response contradictory - ISI mindset dominates

7. South African apparel demand & production
Year - 31/10
NATIONAL TOTAL*
Employers
Employees
2003
1 042
97 960
2004
1 161
97 954
2005
1 149
85 854
2006
1 051
75 929
2007
1 041
72 919
2008
1 048
67 737
2009
1 001
60 253
2010
933
56 699
2011
952
58 647
2012
936
54 737
2013
865
52 656

8. Policy Response of Industry and Government
Manufacturers – ignored competitiveness issues
Called for increased protection
Union – retailers not globalisation are major cause
Demanded 75% local and quota on Chinese imports
Rigidify labour market: central bargaining, close metro/non metro wage gap, punish non compliant firms
State – Contradictory but supported union
Slashed tariffs/import controls
Imposed Chinese quotas and raised tariff to 45%
Supported union in CSP negotiations

9. South African apparel industry response
Industry caught in contradictions between the strategic positions of the past and the requirements of the future
Paralyzed its ability to respond:
Lack of firm-level and broader supply chain competitiveness
Misplaced government policy
Unions as victims of their own ISI-era success
All failed to take account of globalisation
Look at own role and responsibilities in transition
Instead marshalled resources & ideological frameworks from the past to deal with the challenges of the future
Result: Substantial decline

10. SA apparel : 2nd Period (2009 – now)
Regional market dynamics change fundamentally with PTA opportunities (SACU/SADC)
Huge jump imports from Lesotho/Swaziland (low to middle market segment) (+ slide)
Rising imports Mauritius/Madagascar (middle to top market segment) (++ slide)
This is a new major threat to local firms and labour
Cant solve with ISI policy agenda

11. Apparel Exports to South Africa
Lesotho
2005
2008
2009
2011
2012 Rm 6
110
239
436
605
US$m 1 13 28 60 74
Swaziland 11 96
133
573
886 2 16 79
108

12. Major apparel exporters to SA
Value (US$ Mil)
Share of Total (%)
2000
2005
2009
2011
World
192
755
1,011
1,534
China 95
558
670
961 50 74 66 63
Mauritius 1 9
103 5 7
Swaziland - 2 16 79
Lesotho 28 60 3 4
Madagascar 13 40
SSA 42
129
290 6 19

13. South African apparel industry response
Apparel manufacturers at lower market end response:
Relocated to Lesotho and Swaziland - generally flourished
Ignored bargaining council, paid a wage workers would accept
Informalised – competing by being “below the radar”
Demonstrated old ISI policy model restricts competitive & employment basis for this low market segment
Their legal status excludes from DTI support
So limits ability to define a competitive advantage, limits ability to upgrade, and create decent employment

14. Differential Response of Local Industry
Mid to higher market abandoned ISI mindset to focus on firm and systemic competiveness
Build firm capabilities - clusters (+ slide)
Value chain cooperation - retailers joining clusters
Industrial policy alliances - strategic industry alignment
Supply chain alignment – created retail supplier clusters to build quick response systemic competitiveness

15. Operational performance - CCTC/KZNCTC
2006
2012
% Change:
Total Inventory (operating days)
37.56
30.58
18.58
Work in Progress (days)
6.90
4.98
27.74
Finished Goods (days)
11.76
7.76
34.07
Customer Return Rate (%)
2.68
1.39
48.04
Lost production time to Style Changeovers (%)
8.36
5.85
30.05

16. What is Quick response (QR)?
Principle - use geographical nearness to provide retailers with speed & flexible supply (follow Turkish model to EU)
QR pilots with retailers key suppliers supply - demonstrated the positive impact of model
Retailers made 14% more relative to Asian long lead time orders
WHY?
Because local QR products, with point of sale information took 56 day delivery meeting requirements demanded by customers.
Item sold at full price – retailers higher retained margin than from Asian imports, latter required discounts to be cleared

17. South African apparel industry response
QR pilots demonstrated potential for a vibrant domestic industry that provides labour intensive employment.
Industry could potentially sustain 110,697 formal sector jobs by 2022 on the basis of SA retailers shifting 40% of their total purchases to the QR model
Key is developing the manufacturing performance attributes that align with QR retailing requirements:
Product flexibility - requires product upgrading
Production versatility - requires production upgrading
Supply chain management capabilities - needs retailer upgrading

18. South African government response
DTI
2010 incentives (PI and CTCIP) large number of firms upgrading (PI - R2.5bn, CTCIP R633m)
Support initiated textiles re-capitalisation
Support QR retail supply clusters – e.g. 1 retailer/7 firms, employment grew 12.6%
Support clusters – marginal employment growth
BUT
Labour influenced institutions still ISI mindset –
(Department, Bargaining Council, union)

19. General Conclusion
SA apparel sector faces extreme competition: Asia to SSA
Entire sector threatened
Old ISI defensive mindset of protecting insiders & punishing non-compliant is recipe for continued competitive decline, shrinking employment, and industry contraction
Policy must move from ‘one size fits all’, centralised, inflexible mode, and accept have different industry needs
Policy supported compliant firms but narrow focus trapped non compliant firms in downward spiral

20. What can we learn from Turkey?
National minimum wage (± $100 per 45 hour week)
Metro firms pay % above this level - drives productivity and sweating overheads
Flexible working environment - firms can extend to 54 hours at a 50% premium which allows for sweating overheads, and adjusting production output to variable market demand
Entire industry competes on a differentiated QR model with seamless linkages between high value adding metro firms, design centres and less advanced, lower cost rural firms

21. South Africa Policy Conclusion
Need a differentiated policy for the sector
On one hand, support more advanced firms to meet the domestic retailer QR demands, (and perhaps export to EU QR retailers)
On other hand, support rather than punish lower end market segment – small firms, non-metro, long lead time, unsophisticated, “commodity-type” producers

22. And manufacturing employment generally?
Industrial policy needs to be “tied up” - upgrading support is required, but treating an ISI-based labour market as sacrosanct, which limits competitiveness, hamstrings resuscitating labour-intensive industries
Manufacturing informalisation has to be reversed – but firms need incentivises to advance their operational capabilities. Competing on low labour productivity, and old capital, can only lead to a “race to the bottom”
“Forcing” demand for SA-made products is short-term, but the underlying uncompetitive basis needs to be dealt with if employment is to be created

23. Thank you