Today’s Newsletter is an insight in East Africa’s Textiles and Apparel sector and based upon a joint study by the International Trade Center, India ITME Society, ITME Africa and UK Aid. The report identifies demand for, and challenges towards, technology upgradation by textiles and apparel manufacturing companies in five East African countries – Ethiopia, Kenya, the United Republic of Tanzania, Uganda and Rwanda. Findings are based on face-to-face interviews with more than 110 out of the approximately 190 textile and apparel manufacturing companies that are currently active in these five countries.
The first part is a focus on the basic factors of the report, with a specific focus on Ethiopia. The next TextileFuture Newsletter (part 2) will cover the specifics of the other four countries and drawing conclusions on the entire report. We likely add to the series another feature on Africa’s Urbanisation process.
This report has been prepared for participants of ITME Africa 2020, an international textile engineering event in Addis Ababa, Ethiopia, from 14 to 16 February 2020, organised by the India International Textile Machinery Exhibitions Society (India ITME Society).
The report seeks to analyse the nature of the value chains within five East African countries – Kenya, Ethiopia, Rwanda, Tanzania and Uganda – and the effect that technology upgradation may or may not play in the current or future competitiveness of the industries operating there. While the analysis focused on these five countries, it is important to highlight the notion that many of the findings conveyed through this study are applicable to other countries in Sub-Saharan Africa that are seeking to build their textiles and apparel sectors. These include Botswana and Ghana, which will send delegations to ITME Africa 2020, and indeed all of the countries under the auspices of the African Continental Free Trade Agreement (AfCFTA). The AfCFTA, which was signed by all, but three of 55 African countries and went into effect in May 2019, establishes a single continental market and seeks to increase intercontinental trade. Indeed, the issues explored through this study are of a Pan-African nature.
The focus of this study is the textiles and apparel sector. However, many of the issues around technology upgradation are equally relevant to other subsectors and ancillary industries, including: fashion accessories, leather goods and home décor.
Supporting Indian Trade and Investment for Africa (SITA), the trade and investment partner for ITME Africa 2020, has prepared this report. SITA is funded by the United Kingdom of Great Britain and Northern Ireland’s Department for International Development (DFID) and implemented by the International Trade Centre (ITC). SITA supports increased trade and investment flows, and technology transfer, between East Africa and India as a global public good.
At ITME Africa 2020, SITA will organize investment seminars to highlight opportunities in East Africa’s textiles and apparel sector, and pre-matched business meetings between potential suppliers and buyers of equipment and technology.
This report is meant to be an actionable document for businesses – investors, technology suppliers and textiles and apparel manufacturers – seeking machinery upgradation as a means to remain globally competitive; and not an academic study.
Supporting Indian Trade and Investment (SITA) thanks representatives of East African textile and apparel manufacturing companies who shared their insights on technology upgradation.
We thank the Ethiopian Textile Development Institute, the Ethiopian Investment Commission and the Kenya Association of Manufacturers for their support in preparing and implementing the company surveys in Ethiopia and Kenya.
We express our gratitude to the Kenyan Ministry of Industry, Trade and Cooperatives; the Rwandan Ministry of Trade and Industry; the Tanzanian Ministry of Industry and Trade; the Textile and Garments Manufacturers Association of Tanzania (TEGAMAT); the Ugandan Ministry of Trade, Industry and Cooperatives; the Uganda Investment Authority; and the National Planning Authority of Uganda for their guidance and inputs.
Special appreciation and thanks go to the International Growth Centre (IGC), the Institute of Development Studies (IDS) and the Ministry of Industry and Trade in Tanzania through the Textile Development Unit (TDU) for sharing findings, results or anonymized data sets from company surveys conducted in Tanzania in 2018– 2019 – in an effort to avoid duplication and survey fatigue among companies, and create value for taxpayers’ money.
We thank the United Kingdom’s Department for International Development (DFID), SITA’s Funder, and the India ITME Society for their partnership and support.
This study analyses the demand for, and challenges towards, technology upgradation by textiles and apparel manufacturing companies in five East African countries: Ethiopia, Kenya, Tanzania, Uganda and Rwanda. There are approximately 190 active textile and apparel manufacturing companies in these five countries – 112 have been interviewed for this report.
East Africa has become an emerging hub in Africa for sourcing apparel. Buyers have increasingly established regional sourcing offices in Kenya and Ethiopia. Sourcing apparel from the region by major international brands has increased – as has the number of foreign apparel manufacturing companies, in particular in Ethiopia and Kenya. Preferential market access to the United States of America is a key pull factor for attracting export- oriented foreign direct investment (FDI) into the region.
Kenya is the largest apparel exporter for cut, make and trim (CMT) in the region, with the highest level of productivity. Some of the foreign companies based in Kenya specialize in the production of higher-level quality garments, while apparel production in Ethiopia is still dominated by basic apparel items. Ethiopia, however, is on the rise – its industrial parks with available plug and play infrastructure have recently attracted a number of foreign investors. Tanzania and Uganda are significant cotton producers and exporters; some of the very few integrated textile mills in the region are based here. Rwanda currently has two operating manufacturing units.
Textile production in the region is mostly for local apparel companies’ serving domestic and regional markets in basic goods. Export-oriented apparel factories source their inputs internationally, from Asia. Backward integration is in a very early stage; the very first textiles companies have started supplying to export-oriented apparel companies in the region.
Governments in East Africa view the textiles and apparel sector as critical to industrialisation, job creation and economic growth. The sector has been given priority status in all countries this report covers. Given the fragmented nature of value chains, countries are prioritizing backwards integration, with an emphasis on revamping the textiles subsector. This means upgrading the technology being used, particularly within existing textiles mills, and bringing in foreign direct investment.
Technology and machine upgradation are also critical to the sector’s ability to capitalize on the shifting demands of global buyers. Companies that source from Africa are beginning to push factories to utilize technologies that are both more efficient and better for the environment.
All of the companies interviewed for this report recognize the importance of technology to the competitiveness of their businesses. The majority of companies have an interest in upgrading their machinery: more than 80 % of the companies interviewed in Ethiopia and Kenya expressed their interest in upgrading. Companies’ primary motivations for upgrading their technologies are: to improve resource utilization efficiency, to comply with international standards quantity and quality requirements, and to diversify to new products and markets.
Machinery used in the region is of is of varying levels of age; in some countries and in some segments of the value chain, machines are more than 20 years old. Spinning and weaving segments in particular have ageing machinery that needs to be upgraded.
Main sources of existing technology across the five countries are Germany, China, Switzerland, Italy and India. China has successfully positioned itself as a machinery supplier across all segments of the textiles and apparel value chain – from spinning to finishing technology. In the spinning segment, German and Indian technologies are prevalent. Switzerland and China are also strong. Weaving machinery mainly originates from Switzerland, Italy and China, while knitting machinery originates from China and Germany. Sewing machines are mainly imported from Japan, followed by China. In the processing segments (printing, dyeing and finishing), China and Germany are strong, as are India and Japan.
Indian technology is relatively under-represented in Ethiopia, and more prevalent in the other four countries. This appears to be reflective of the types of technologies in demand by many of the newer investors in Ethiopia in the industrial parks, primarily garment units where the machinery needs are mostly sewing machines and related equipment. Indian technology is better represented in Kenya, perhaps unsurprisingly given the recent massive modernization of the Kenyan Rivatex East Africa Limited textiles mill, where all of the machinery came from India, courtesy a line of credit from the Government of India. Indian machinery can be found in other segments of the Kenyan value chain as well, especially spinning and some segments of processing (e.g. printing). In Tanzania, Indian technology is well represented. About one-third of the knitting and weaving machines are from India. India also supplies approximately one-third of the dyeing and printing machines.
The appetite for textiles technology upgradation seems to be largest in Kenya, with companies looking to upgrade their machinery across the textiles segment. In both Kenya and Ethiopia, however, garment-making machinery and related auxiliary machines are in highest demand, followed by finishing machinery (printing and digital printing, washing and dyeing). In Tanzania, good potential exists to supply machinery to certain segments of the value chain, including knitted fabrics and garments, which have shown growth in recent years. If Tanzania is able to capitalize on its investment targets through attraction of FDI, there will be increased demand for sewing machines as well as new technologies in the textiles subsector to fuel export-led growth in apparel production. In Uganda, companies currently have a strong interest in expanding the textile segment; in both Uganda and Rwanda, companies are motivated to upgrade their technologies across the value chain, from spinning through to finishing.
While there are a number of challenges, that companies face in the region, there is one area that is common to all countries in this study: the high cost of, and limited access to, finance. Financing from commercial banks is difficult given their generally risk-averse nature, and even where it is available, interest rates are high – as high 18 % in the region – putting financing out of reach for many companies. Consequently, companies must often consider other sources to fund capital investments. This lack of access to finance impedes companies’ ability to fund the purchase of new technologies. Companies that have numerous investment needs must often put off investing in new machinery. This constrains the sector from growing and increasing its efficiencies.
CHAPTER 1 OVERVIEW
The African textiles and apparel sector has a long and rich history dating back to the early 1900s. Many countries developed robust cotton and textiles sectors, with cotton production reaching its peak in the 1960s. Trade liberalization that began in the 1990s reversed this trend, with imports flooding the market, leaving much of Africa unable to compete and largely dependent on imports. Today, while close to 10% of the world’s cotton is produced in Africa – and two countries in East Africa, Tanzania and Uganda, are significant producers – the majority is exported.
The value chains in East Africa are incomplete and disjointed. There are fewer textiles mills in Africa today than there were in the 1960s. The textile mills that do operate produce primarily for domestic markets. The phasing out of apparel quotas in 2005 – the end of the Multifibre Arrangement (MFA) – led to massive shifts in the industry, with China benefitting most. While China’s worldwide apparel exports increased exponentially, Africa’s textiles and apparel sector also entered a new phase in 2000, spurred by the African Growth and Opportunity Act (AGOA).
Preferential market access to the USA is a pull factor for foreign investment
The African Growth and Opportunity Act (AGOA) is a non-reciprocal preference programme extended by the Government of the United States to eligible African countries. Signed into law in 2000 and in effect until 2025, AGOA provides duty-free access to the United States of America’s (USA’s) market for apparel that is manufactured in an AGOA-eligible country using fabrics from anywhere in the world. The advent of AGOA led to investors setting up factories in export processing zones. Indeed, these investors rapidly set up operations in AGOA countries specifically to benefit from duty-free access of apparel to the United States.
Apparel products exported under AGOA effectively gain a tariff advantage over its competitors of between 16 % (for cotton-based garments) and 32 % (for synthetics and other man-made garments). AGOA has been a major reason why the apparel industry has grown so impressively during the past 19 years. Paradoxically, the ability of African apparel producers to cut, make and trim using fabrics from outside of Africa while still benefitting from duty-free access to the USA market – the so-called “third-country fabric provision” – is an incentive to continue to source cheaper and better quality inputs from outside the country. This has led to a situation where countries in Africa have not had the incentive to develop backward linkages within the value chain, which, in turn, has led to the “fabric gap” that exists in Africa today. Indeed, it is telling that more than 90 % of garments produced in Africa for export markets still use fabrics produced outside of the continent.
It is clear that technology plays a paramount role in reversing this trend to establish a fuller, and more, robust value chain. Sustained efforts to upgrade the capacity of textiles producers in the region through the use of technology and modern machinery would begin to provide apparel manufacturers with local and regional options for their fabric needs.
All five countries examined in this study are AGOA-eligible (except Rwanda, which lost its eligibility in 2018 due to a ban on the importation of second-hand clothing from the United States).
Regional reliance on apparel production for exports
While the five countries analysed in this study have differing levels of development within their respective cotton- textiles-apparel sectors, and varying degrees of prioritization within the value chain, they have one area in common (with the possible exception of Rwanda in the short-term): a heavy reliance on the US market for its apparel exports. As a result of AGOA, the region has largely oriented its apparel production for exports, mostly cut, make and trim (CMT) factories operating in export processing zones or industrial zones, specifically to the United States market. Indeed, since 2000, apparel exports to the United States from AGOA-eligible countries have increased exponentially.
Exports to the United States spiked after AGOA was introduced in 2000, reaching a pinnacle in 2004 (Figure 1). Exports then steadily declined, hitting a low point after the 2009 financial crisis. With the worldwide economic recovery, the numbers began a steady rise, though generally levelling off and not reaching the previously attained highs.
East Africa has been a top region for apparel exports under AGOA, with Kenya (USD 391 million in 2018), Madagascar (USD 187 million in 2018) and Mauritius (USD 137 million in 2018) historically among the largest suppliers to the US market (Table 1). Ethiopia, a fast-emerging player on the scene (USD 110 million in 2018), may join the “big three” East African apparel producers if its growth trajectory of recent years continues. Ethiopia has shown the greatest trajectory in the past five years, increasing from a very low base in 2014 and doubling in 2018. Of the surveyed countries, the top exporters to the United States, by rank, are: Kenya, Ethiopia, Uganda, Tanzania and Rwanda.
African apparel exports to the rest of the world is significantly lower. Worldwide exports of apparel by the five countries taken in aggregate totalled USD 677.1 million in 2018 (Table 2). A full 80% of this total comprises exports from the region to the United States. In the case of the largest exporter, Kenya, the United States represents more than 90% of its apparel exports.
The “missing middle” textiles subsector
The flip side of this, of course, is the over-reliance on a single export market – and perhaps more critically, the value chain structures to which it caters – CMT apparel manufacturing, whereby the majority of fabrics are imported. The result has been a “missing middle” textiles subsector in the countries of East Africa. That is, the textiles subsector has not developed and evolved to adequately supply apparel manufacturers in the region. Very few textiles mills operate in these countries, and most textile production is for local apparel companies servicing domestic and regional markets in basic goods (uniforms, work wear, shawls, kikoys – traditional woven cloth, similar to sarongs – and home textiles, etc.).
In most cases, local fabric production cannot meet the quality standards or price of export-oriented apparel companies. In some cases, specific fabrics are simply not available locally. There are also a handful of fully integrated factories producing fabrics for in-house apparel production. These factories are again generally producing chiefly for domestic markets. There have been some new investments in textiles, particularly in Ethiopia. However, in all five countries, sectors dominated by export-oriented apparel production using imported fabric, with a smaller number of local producers focused on basic production, still largely define the value chains.
Textiles and apparel sector – recent trends
Governments in East Africa have given priority status to the textiles and apparel sector, including in all countries that this report covers. Also the East African Community (EAC) prioritizes textiles and apparel. In November 2019, EAC launched its Cotton, Textiles and Apparel Strategy, which aims at an integrated and globally competitive cotton, textiles and apparel industry for its six member countries.1 Technology upgradation of existing textiles mills and ginneries as well as to promote investments in integrated textile mills is a key strategic objective. By 2029, the current spinning capacity of less than 500000 spindles shall be increased to at least 2.7 million spindles. Countries in the region are diligently working to build the value chain through backward integration focused on revamping the textiles subsector. Upgrading the technology being used within existing textiles mills, as well as bringing in foreign direct investment, are critical components to accomplish this goal. Kenya is a good example with its recent revamp of the old Rivatex factory with Indian technology. Kenya is seeking to replicate this model in other regions of the country. Ethiopia has primarily grown its textiles base more recently through foreign direct investment.
The number of textiles and apparel companies is on the rise. While Kenya is the biggest player in terms of apparel production, Ethiopia has seen the sharpest rise of new entrants. Recent investors are mainly from China and India, but also other Asian countries, including Bangladesh, Sri Lanka, as well as Turkey and some European investors. In most cases, the factories are outfitted with machinery through established contacts of the mother company. Consequently, the machinery in these factories is often on par with comparable technologies worldwide.
In terms of machinery supply to the industry, there has been some movement toward greater local capacity. Few textile machine manufacturers now have offices in the region. Currently, the majority of machines are imported and there is a lack of technical support (which has limited the ability of manufacturers to service their machines locally) and spare parts. This has increased the burden locally in terms of time and cost, particularly when machines break down resulting in extended periods of downtime. Increasingly, service providers and suppliers to foreign investors are looking for distribution channels within the region. There are indications that companies supplying testing equipment and services now aim to set up offices in the region.
The establishment of the African Continental Free Trade Agreement (AfCFTA) in 2019 envisions the largest free trade area and economic zone in the world. Population trends, too, are favourable to Africa. The United Nations estimates that, in the next 15 years, Africa’s working age population will equal to that of China.2
1 Kenya, Rwanda, Tanzania, Uganda, Burundi and South Sudan.
2 United Nations, World Population Prospects, 2019
Many countries in Africa have experienced high economic growth rates. The middle class in Africa has also grown substantially during the past decade and the trajectory is expected to continue. Increased buying power has led to greater demand for quality garments. Many Africa-focused and domestic companies have sprung up catering to this new class of consumer. This is certainly observed in the fashion realm, where African-produced products are increasingly available on the local market.
East Africa as a sourcing destination
A McKinsey report in 2015 looked at the implications and possible future scenarios for the East African textiles and apparel sector (Figure 2). The report underscored the fact that the East Africa region has become an emerging hub for sourcing in Africa, and that Kenya, with its well-established industry and Ethiopia, a newer player in the industry with high growth rates, are particularly well placed. Today, East Africa has achieved the status of “new alternative” for global apparel sourcing. One global brand owner has committed to allocating a certain percentage – at least 15% – of its worldwide sourcing to Africa by 2022. In some product categories, this percentage has already reached 40%. Strategic investments are increasingly taking place in the region, which is driving the growth of production and exports.
As stated, brand-owners have increasingly established regional sourcing offices in East Africa, chiefly Kenya and Ethiopia. Sourcing from the region by a few large, international brands has increased. In some cases, the bulk of capacity within a given factory is dedicated to servicing these large clients. These buyers have sought longer-term relationships with apparel producers in the region, an indication that they plan to sustain sourcing connections with suppliers that are consistently able to meet quality and production standards. Indeed, some large brands with global footprints have made corporate decisions to move a certain percentage of their worldwide apparel sourcing to the region.
Technology – a critical component
Technology is a critical component. A large brand-owner with significant sourcing from Africa noted the need for East Africa to mirror the Sri Lankan model, whereby speed and automation are paramount. More efficient production, aided by technology and coupled with good logistics, will lead to greater backward integration. The evolving dynamics of the industry, which includes emphasis for “fast fashion”, is forcing the industry to look at how to get products to market quickly and efficiently to meet rapidly changing tastes and styles. This need has challenged leading suppliers in Africa to reconsider their processes and how to most effectively “retool” in response to the new industry paradigm. Technology and machine upgradation is critical to the sector’s ability to capitalize on this shift.
It is important to note that, while some major companies are increasing their sourcing from East Africa, they are not awaiting governmental action. While government action is seen as necessary to set clear parameters for the industry and create a conducive business environment, the companies are largely charting their own path. Indeed, these companies, with their massive buying power, are actively seeking to bring their global supply chains to Africa. They are effectively partnering with factories in East Africa to drive technology.
The push for new technology utilization also has implications for the environment. One large brand that sources significant volumes of apparel from East Africa selected the continent as a pilot for its corporate strategy on the use of environmentally friendly technology. This includes considerations of water and waste management and treatment, which are, in fact, often prerequisites for sourcing from a given supplier. Companies that source from Africa are beginning to push factories to use technologies that are both more efficient and environment friendly.
CHAPTER 2 METHODOLOGY
Survey scope and process
This report is based on findings from face-to-face interviews with East African textile and apparel manufacturing companies. There are approximately 193 operational companies across Ethiopia (110), Kenya (70), Rwanda (2), Tanzania (9) and Uganda (2). One hundred and twelve companies in Ethiopia, Kenya, Rwanda and Uganda were interviewed and visited for this report, using a standardized questionnaire to ascertain capacity utilization, the usage and extent of upgraded technology in the production process, and main motivations and hindrances to upgradation. For Tanzania, secondary data was used (see below).
The survey focused on textiles and apparel companies that are located outside export processing zones, primarily targeting domestic and regional markets and often having local ownership – with the assumption that these companies have the highest demand for upgrading technology. The survey also covered textile and garment companies with international ownership, based in export processing zones and targeting international markets.
Other stakeholders, including governmental agencies, development partners, sector associations, textile engineering companies and buyers were interviewed to ascertain their views on challenges and opportunities in the sector in each of the countries, with a particular view to the role that technology plays in the sector’s overall competitiveness.
All interviews were conducted from August to October 2019.
Survey implementation in Ethiopia
For Ethiopia, a registry of all textile and garment manufacturing companies was compiled using different sources, and with the support from the Ethiopian Investment Commission (EIC) and the Ethiopian Textile Industry Development Institute (ETIDI). According to ETIDI, there are currently 110 active textile and garment manufacturing companies in Ethiopia, including 37 textile companies, 59 garment companies and 14 integrated mills. For this report, 66 companies were interviewed. Most of the interviewed companies have more than one production unit. Thirty-nine textile companies with main activities ranging from spinning to printing have been interviewed. Of the interviewed companies, 45 have a sewing operation unit in addition to other processing units, while 19 companies are fully dedicated to garmenting. The majority of the interviewed companies (42%) operate in the Oromia region, followed by Addis Ababa (36 %). The remaining companies are based in Tigray (11 %), Southern Nations, Nationalities and People’s Region (8 %) and Amhara (3 %).
Survey implementation in Kenya
For Kenya, a registry of all textile and garment manufacturing companies was prepared in collaboration with the Kenya Association of Manufacturers (KAM). KAM also supported the preparation of the sample. In total, there are approximately 70 active textile and apparel manufacturing companies in Kenya, of which 38 were interviewed in preparation of this report. Those interviewed included 15 textile companies; 14 apparel companies producing for local and regional markets; and 6 apparel companies based in export processing zones (EPZs).
Tanzania – collaboration with other development projects
In Tanzania, there are currently nine operating textile and apparel manufacturing companies, while nine other companies are non-operational. Primary surveys were not conducted for Tanzania, to avoid replication of two similar surveys that were implemented in 2018 and 2019 by other development projects. The information used in this report is based on the findings and results from these two surveys. In 2018, the Annual Textile and Garment Factory Survey was conducted; and a report was prepared in 2019 by the Textile Development Unit (TDU), a specialist, independently funded programme within Tanzania’s Ministry of Industry, Trade and Investment. In 2019, the Institute of Development Studies (IDS) conducted a survey of Tanzanian cotton-to- clothing companies on behalf of the International Growth Centre (IGC), which is funded by the United Kingdom’s Department for International Development (DFID). In the spirit of creating value for money, IGC, through IDS, agreed to incorporate feedback and a few additional questions into their survey structure, and to share key findings and the anonymized survey data with SITA.
Interviews in Rwanda and Uganda
In both Rwanda and Uganda, there are currently two active textile and garment manufacturing companies operating in each country. All four units have been interviewed, complemented by interviews with other value chain stakeholders. To maintain confidentiality of the companies, findings have been combined for both countries.
CHAPTER 3 ETHIOPIA
Creation of textile industrial parks to attract foreign investment
Ethiopia has positioned itself to become a major player in textiles and apparel production. The government has proactively courted foreign investment, established numerous industrial parks, and benefitted from the entry of several prominent investors who have set up operations to capitalize on plug and play infrastructure and low operating costs. Labour costs in Ethiopia – which average $65 per month – are among the lowest of any apparel- producing nation, and certainly the lowest in Africa. Energy costs, too, at approximately three cents/kw, are among the lowest in Africa.
The Hawassa Industrial Park, which was established through the vision of PVH Corp. is currently fully leased and employs approximately 25,000 workers.3 Hawassa and the other industrial zones are at the centre of the government’s strategy to firmly establish Ethiopia as a production hub for apparel. The results can be seen in the growth trajectory of Ethiopia’s apparel exports, particularly to the United States under AGOA during the past several years. In 2018, Ethiopia’s apparel exports to the United States were more than USD 115 million – in comparison to approximately USD 26 million in 2017.4 In 2014–2018, the annual growth rate for articles of apparel and clothing accessories, knitted or crocheted (Harmonized System, Chapter 61) was 65 % and that for articles of apparel and clothing accessories, not knitted or crocheted (Harmonized System, Chapter 62) was 88 %.5 If the growth trend continues, it is anticipated that Ethiopia could rank among the top apparel exporters in Sub- Saharan Africa to the United States.
The government’s objective is also to attract textiles investors that set up their own mills linked to the structures of industrial parks. For instance, there is already dedicated land in Kombolcha for this. There has, however, been limited success to date.
Brand-owners have established sourcing offices in Ethiopia and are increasingly sourcing apparel, footwear and fashion accessories, from Ethiopia. Brands with global footprints are also encouraging investors within their supply chains to establish operations in East Africa. Several such companies have invested in Ethiopia, mostly within the industrial parks.
As noted, Ethiopian apparel exports to the United States have experienced impressive growth rates in recent years. Just five years ago, apparel exports were negligible.
Textile technology – need for upgrading
Most technology used within the sector is imported and has varying levels of age. Textile machinery, in particular in the spinning segment, tends to be relatively old and requires upgrading. Companies are interested in upgrading their technologies to replace older equipment unable to produce the level of quality needed for export markets. This highlights the demand and, therefore, potential for the supply of new technologies. As different buyers have come to Ethiopia in recent years seeking new products, factories are also seeking to invest in new technologies in finishing, printing and dyeing to expand their product offerings.
3 Ethiopian Textiles Industry Development Institute.
4 Trademap, International Trade Centre, 2019.
Key survey findings
Growing number of companies with predominately foreign ownership
The number of companies in the sector has been growing rapidly. There are currently 110 companies operating in the textiles and apparel sector in Ethiopia according to the Ethiopian Textile Industry Development Institute (ETIDI). These are broken down as follows: apparel (59 companies), textiles (37 companies) and integrated textiles mills with sewing units (14 companies).
The majority of the 66 interviewed companies are foreign owned – more than 72 % of the garment companies and 54 % of the textile companies are owned by foreign investors. Perhaps not surprisingly given the government’s push to attract foreign investment, the trend shows that the share of foreign companies has been growing fast, with the growth of local companies declining. Indeed, a significant number of companies have entered the sector in the past few years, particularly in the industrial parks. For instance, of the 66 companies interviewed, eight companies were established since 2017. The age structure of the companies based on their year of establishment is presented in Figure 3.
Sixty-seven per cent of interviewed companies are exporting, predominately to North America
Sixty-seven per cent of the interviewed companies are currently exporting and a further 7% have plans to export. Almost all garment companies are exporting, while only 56 % of the textile companies are exporting. The top export destinations include: North America (United States and Canada), Europe, Africa and Asia (Table 3). Approximately 40 % of the companies interviewed export to North America, while 34 % export to Europe and approximately 15 % trade regionally.
Majority of companies cover several manufacturing segments across the value chain
Most Ethiopian companies span manufacturing segments across the textiles and apparel value chain (Table 4). Approximately 68 % of interviewed companies have a sewing operation as a unit, while approximately 42 % of them are stand-alone garment manufacturing factories. Three of the interviewed companies are stand-alone spinning factories, representing 23.1 % of all spinning units. The majority of weaving, knitting and finishing units exist in integrated mills. In sum, there are 39 textile companies (with their main activities covering spinning to printing) and 22 garment companies (sewing as the only activity or sewing combined with designing).
Eighty per cent of companies are interested in upgrading technology
The majority of the companies (more than 80%) have an interest for technology upgradation. Thirty-three companies (half of the companies surveyed) are interested in upgrading their garment-making machinery and related auxiliary machines (Figure 4). Twenty companies have shown an interest to upgrade printing, while 16 companies are interested in upgrading their washing, bleaching, dyeing and finishing technologies. There is no appreciable difference between local and foreign companies in terms of their interest to upgrade their respective technologies, except in garment making.
Companies’ key motivations for upgrading their technology
Companies’ key motivations for upgrading their technology include: to comply with quality requirements, diversify into new products, improve resource efficiency, diversify destination markets, comply with requirements of scale, and international standards (Figure 5). Local companies’ key motivations to upgrade are to comply with quality requirements, diversify products and destination markets. In the case of foreign companies, it is improving resource utilization followed by compliance with quality requirements. The key motivations foreign- owned textile companies are largely in line with those of local companies, while the motivations are similarly aligned for garmenting companies.
Challenges within the operating environment
Ethiopia’s government has been successful in attracting new foreign investment in the sector. However, the country still faces numerous challenges. Indeed, there are significant challenges within the operating environment that impede capacity utilization. Chief among these are a lack or shortage of raw materials and the absence of an eco-system for inputs and consumables, power disruptions and lack of access to foreign currency to finance operations. In inquiring why companies are are operating at sub-optimal capacity, technology related constraints are rarely raised. This does not mean, however, that companies have no interest in upgrading their technology.
Challenges associated with technology upgradation
While the majority of companies have an interest in technology upgradation, there are challenges directly associated with said interest that act as obstacles to full capacity utilization. There are two main challenges in relation to technology upgradation: the lack of access to finance and the lack of access to foreign currency. Lack of awareness of available technologies and access to technologies are also significant hurdles.
Many companies highlighted lack of access to foreign currency as a critical hindrance. In Ethiopia, retention accounts are used whereby, in one account, 30% of foreign exchange earnings can be used and is constant, while in another account, 70% of the earnings revert to Ethiopian birr after 28 days. This severely limits a company’s ability to do long-term planning for investment purposes and use foreign exchange to purchase inputs.
One company noted: ‘We don’t see the expected benefits from the government per the sector strategy. We are exempted from tax on imports, but first you need the foreign exchange, which is tax on imports, but first you need the foreign exchange, which is not forthcoming. The problem now is all control is with the government.’ (General Manager of a locally owned and integrated textile factory)
The inability to retain and use export earnings is seriously restricting companies’ ability to reinvest in technology upgradation. Relaxation of foreign exchange controls, many companies noted, is a critical variable to enable importation of new technology.
Outlook for sector: Does technology play a role?
The textiles and apparel sector is evolving rapidly, with adaptive capacity and speed to market becoming increasingly important to satisfy customer demands. Technology can help to bridge this divide. All of the companies in this survey recognized the importance of technology in the competitiveness of their businesses. Indeed, to remain competitive means updating technology frequently.
Table 5 is a cross tabulation of the difference between what technology the firms currently use and up-to-date technology available in the global market, as well as a firm’s willingness to upgrade its technology. Approximately 20% of the companies claimed that there is a “very high” difference in the technology they already have and the technology available in the market. Importantly, all of these companies are willing to upgrade. Fifty-eight point five per cent of the companies claimed that there is “some difference” between the technologies they use and what is globally available, but only half of them are willing to upgrade. Regardless of the difference in their installed technology relative to what is available, 85 % have a willingness and interest to upgrade.
Approximately 27 % of garment companies claimed their technology difference is very high, while only 15 % of textile companies claimed the difference is very high. All but one company claimed existence of at least some difference between the technology they currently have and what is available globally. For approximately 34 % of foreign companies, there is no difference in the technology they have relative to the technology available in the global market.
These findings suggest that there is a lack of information as to what technologies are available from suppliers. The findings also demonstrate that, regardless of the knowledge of available technologies, the motivation to upgrade is high across the board.
Companies were asked about their outlook for their operations in country and how they might evolve in the next 5 – 10 years. The majority of the companies (approximately 88 %) have a positive outlook and consequently plan to expand through new investment. Less than 8 % of the companies noted that they planned to continue operating at their current capacity, while one company plans to reduce operations and another one plans to close and/or move to another market.
Eighty-eight per cent of the companies say new technology is vital
Companies were also asked about their outlook for the sector’s potential within the country in the next 5 – 10 years. The majority expressed a positive outlook. Notably, the role of technology plays a significant factor in this outlook. Indeed, 88 % of the companies said that the use of new technology plays vital role in their positive outlook for the sector.
More than 80 % of the companies believe that the sector will grow through new entrants into the market and expansion of existing companies (Figure 6). A small percentage have a negative outlook for the sector: less than 10 % believe that the sector will remain at current levels and less than 8 % believe there will be contraction and/or deep reductions in productivity.
Technology considerations by industry subsector
The average capacity utilization by interviewed companies is approximately 59%. Of the 66 surveyed companies, 17 are operating below the average capacity utilization rate. There is no significant variation in capacity utilization between the garment and textile subsectors. There is similarly no observable difference in capacity utilization between local and foreign companies. Half of the companies covered in the survey operate one shift, while approximately 27% and 23% operate two and three shifts respectively.
Characteristics of current machinery
Age of machines – spinning, weaving and knitting segments have comparatively older machinery
The age range of machinery currently used in Ethiopian textiles and apparel companies varies (Table 6). Thirty- six per cent of the companies report that their machinery is more than 10 years old, while 27 % have acquired new machinery in the past five years.
None of the 66 interviewed companies have machinery that is older than 20 years – this might be explained by the fact that the majority of interviewed companies were established in the recent past. Only eight of the interviewed companies have been in existence for more than 20 years; the majority of these eight companies were state-owned in the past and are now privatised – it can be assumed that machinery was upgraded post- privatization.
The spinning segment uses relatively old machines, certainly in comparison to other segments of the value chain. As Table 6 shows, more than 60% of the companies surveyed use spinning machines that are 10–20 years old, while less than 25% of spinning machines are less than five years old. The picture is similar in the weaving and knitting segments, where 42% and 33% of the machines are 10–20 years old.
The sewing and processing segments, on the other hand, use machinery that is comparatively newer in age. The majority (almost 80%) of the sewing equipment is less than 10 years old. A similar situation exists for dyeing, printing and finishing equipment. This overall picture matches the investment trends in Ethiopia, where new investments have been concentrated in the apparel subsector.
These findings suggest that there is a particular need and opportunity for technology upgradation in the spinning segment, but also knitting and weaving.
Origin of machinery – China, Europe and Japan dominate
Looking at the entire value chain, China is at the forefront, supplying more than 35% of all machines in the sector (Table 7). The next largest suppliers are Germany (18 %), Japan (13 %), and Italy (11 %). Taking a closer look at segments, in spinning, Germany is the leader, supplying half of the machines. This is followed by China and Switzerland, which each supply 21%. In the weaving and knitting segments, the top three suppliers in rank order are China, Italy and Germany. In the sewing segment, Japan and China dominate, supplying more than 82 % of the machines. In the processing segment, the situation is similar to the textile sector – the top three suppliers in rank order are China, Italy and Germany.
Major brands in use in Ethiopia include Rieter, Trützschler and Saurer Zinser in spinning, Sulzer, Somet and Toyota in weaving, Pailung, Gemsy and Orizio in knitting, and Juki and Brother in sewing.
China has managed to establish itself as a technology supplier across the value chain, with a stronger focus on knitting and processing. Germany and to a lesser extent Italy have managed to supply machines across the value chain, though a bit less balanced. Germany has a stronger focus on spinning technology, which is presumably older technology (that is, in some cases, being replaced by Chinese technology). Italy has a stronger focus on weaving, whereas Japan is strong in weaving and sewing technology.
According to the study, an insignificant number of machines in Ethiopia (1.9 %) are imported from India (Figure 7). These are in the knitting and processing segments.
It is interesting to note that, while many recent investors are Indian, they seem to import their technology from elsewhere and not necessarily from India. This suggests that government schemes are perhaps needed to incentivize Indian investors to source technology from India.
In general, approximately 38 % of the interviewed companies consider India as source of supply (machinery, accessories and chemicals) within the industry, while 15% are actively seeking to source from India (Figure 7). However, India is mainly considered as a source for chemicals and accessories, not for machinery.
As indicated previously, 13 companies are engaged in production of yarn (spinning), either as a stand-alone activity or as a production unit within the factory. Of the total, four companies use both ring and rotor spinning, while the remaining either use ring (4) or rotor (5) spinning only.
While the companies use a number of different brands of spinning machinery, Rieter, Trützschler and Saurer Zinser are among the most commonly used. The age of the machinery in most of the companies is 10–20 years. No company has machinery older than 20 years, while some companies have machinery less than 10 (and even less than five) years old.
Table 8 summarizes the installed and available spinning capacity and actual production in tons. The average spinning capacity per year is approximately 4525 tons. The available spinning capacity is 3270 tons per year, which accounts for only 72 % of the installed capacity. The actual production, however, is far below the installed and available capacities, and accounts for approximately 48 % and 66 % of the installed and available capacities, respectively.
The main technology related challenges to full spinning capacity in their order of relevance are:
● Lack of spare parts supply;
● Lack of skilled maintenance experts locally;
● Use of old technologies.
The low levels of capacity utilisation and relative age of the spinning machinery indicate that upgrades in this segment are needed. Good opportunities exist, therefore, for machine suppliers to sell new technologies across the spinning segment. The lack of spare parts locally and lack of skilled maintenance experts suggest that future suppliers should address these items in their offers to factories.
There are 20 interviewed companies that have weaving units in their business operation. The average number of installed weaving looms is 98, with almost all running. Water jet is the most widely used weaving loom, followed by air jet and rapier. There are three companies using other types of weaving looms such as circular and tappet weaving looms.
Commonly used brands of weaving looms include Sulzer, Somet and Toyota. More than 57% of the weaving machinery is less than 10 years old.
Figure 8 shows the weaving installed and available capacity and the actual production in the last fiscal year. The average installed weaving capacity is approximately 10.5 million linear metres, while the available weaving capacity is approximately 8.7 million, which is lower than installed capacity by approximately 17 %. The actual production in 2018 was limited to 4.6 million linear metres. This accounts for approximately 44 % of the installed capacity.
As with spinning, the main technology related constraints to full weaving capacity are:
● Lack of accessories and spare parts supply;
● Lack of technical experts;
● Use of outdated technology.
Capacity utilisation levels are, as with spinning, quite low. The fact that less than half of the installed weaving capacity is being used highlights the lack of integration with the apparel segment. The relative age of the machinery also points to the need for upgraded technology. Suppliers wishing to sell weaving machinery will find demand for new technology.
There are 16 companies with knitting production units, of which one is a stand-alone. The top three types of knit fabric produced are single knit jersey, plain knit and rib. The majority of the companies produce fabric density ranging from 100 up to 300 grams per square metre (GSM), though the maximum range reaches up to 600 GSM.
The average installed knitting capacity of nine companies is approximately 200 tons, while the available capacity and actual production in 2018 is lower by about half (Table 9).
The picture of underutilized capacity mirrors that of the weaving segment, again pointing to a lack of integration with the apparel segment and lack of local and regional markets. As with the weaving segment, machines are relatively old and in need of upgrading. Given that actual knitting production is low relative to installed capacity, suppliers will find good opportunities to sell new technologies.
Processing of textiles
Finishing or processing is usually performed in combination with other textile and/or garment unit productions. Twenty-two companies are engaged in dyeing and printing, which accounts for one-third of the total companies surveyed.
The most commonly used dyeing method is direct dyeing, followed by yarn dyeing. Stenter is the most commonly used dyeing machine. In printing, screen printing is most widely used, followed by roller printing. More than 40 qu% of the finishing machines in Ethiopia are 5–10 years old, while more than one-third are less than five years old. China is the main origin of the machines. Technology related challenges to full finishing capacity utilization are similar to those experienced in other production processes above.
One company noted that two of their shipments were rejected recently due to poor quality of finishing. As a result, it lost that account. The company plans to invest in finishing technology to regain the buyer and obtain others. Another company that engages primarily in dyeing and bleaching noted that its machinery is obsolete. It wants to move from acrylic to jacquard fabrics and, in order to do so, must expand its dyeing facility. This means procurement of new technology, but again, lack of access to foreign exchange is hindering the company’s ability to import the machines.
The two examples above highlight the opportunities that exist for the sale of finishing machinery in Ethiopia as companies seek to move into new product categories and satisfy buyers’ quality requirements.
The majority of the companies surveyed operate in the apparel subsector. In total, 45 companies are engaged in sewing, of which 19 of them are stand-alone apparel units. Fabric is, of course, the main input for the apparel subsector. Fabrics sourced from local suppliers account for approximately 13%. The majority of fabric is imported or produced in-house. For garment companies that do not produce in-house and produce for export markets, almost all of their fabric needs are met through imports. The main reasons for importing are lack of availability and poor quality of fabric supply locally.
The main source of sewing machines for 47.4 % of the companies is Japan, followed by China (35.1 %). Approximately 79 % of the companies are using sewing machines that are less than 10 years old. The majority of interviewed companies use Juki (Japan) sewing machines solely or in combination with other kinds of sewing machines.
Figure 9 depicts the installed and available capacity of the sewing machines and the actual production in 2018, expressed in terms of pieces. It is worth noting that the pieces produced by one company might not be directly compared with the other companies, as the nature of the garment products differs. However, simple comparison might be made between the installed capacity, available capacity and actual production in 2018. The available capacity is approximately 84% of the installed capacity. The actual production in 2018 was 36% and 43% of the installed and available capacities, respectively.
The main technology related challenges to full sewing capacity utilisation include:
● Use of old and outdated machinery and technology;
● Lack of spare parts;
● Lack of other units of production for integration;
● Poor technical and innovative skills.
Sewing capacity is, perhaps surprisingly, quite low. This may partially be due to the more recent entrance of investors in this segment that are still finalizing business relationships with buyers. Machine suppliers will find opportunities for sale of sewing machines as the sector expands. However, the opportunities seem to be less apparent than in the textiles subsector – though interviewed companies expressed highest demand for garment machinery.
Regional sourcing and the role of technology
As indicated, the majority of fabrics used for garmenting are sourced from abroad. The main reasons are a lack of adequate supply and lack of quality (unavailability of fabrics produced locally that meet the demands for export markets). Indeed, more than 90% of the apparel companies surveyed say that local and regional textile companies either do not or only sometimes comply with their requirements. Only 6% of the apparel companies say that the local and regional textile companies comply with their requirements.
The main reasons why apparel companies must import their fabrics include: inferior or inconsistent quality, unreliable supply, and inability to meet technical specifications by local and regional textile companies. Notably, in comparison, price is not considered a main reason that apparel companies are bypassing local fabric producers in favour of imports (Figure 10).
Apparel companies were also asked to rate the role of technology in affecting the extent that local and regional textile companies are complying with their requirements. As shown below, approximately two-thirds of the companies rate this extent as “much” and “very much” (Figure 11). This demonstrates that apparel companies clearly see technology upgradation on the part of textiles companies as key to their ability to meet technical specifications and quality requirements and, therefore, would be an impetus towards future local sourcing of fabrics. Indeed, approximately 97% of the apparel companies would be more likely to purchase from local and regional textile suppliers if those factories acquire new technologies that help them to comply with their requirements.
● There is a clear need, and desire, on the part of textiles and apparel factories in Ethiopia to upgrade their technology;
● Suppliers of these technologies will find strong demand as companies seek to improve their competitiveness and move into new products and markets;
● Key challenges are the foreign exchange controls that effectively restrict import of new technology, as well as a lack of spare parts and local technical and service expertise; and
● The demand for new technology will only increase as the sector expands and new entrants come into the market via foreign direct investment, which continues to be a strategic priority for the government.
The TextileFuture Newsletter of last week
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