Technology upgrading in East Africa’s Textiles and Apparel Sector (continued – Part 2)

This is the second part of the joint report Technology upgrading in East Africa’s Textiles and Apparel Sector based upon a joint study by the International Trade Center, India ITME Society, ITME Africa and UK Aid. Today’s TextileFuture Newsletter will cover the state of the art of Textiles and Apparel sectors of Kenya, the United Republic of Tanzania, Uganda and Rwanda.

We likely add to the series another feature on Africa’s Urbanisation process. This will take place in TextileFuture’s Newsletter of next week.

Here starts Part 2:

CHAPTER 4 KENYA

Introduction

Textile and apparel is a key sector.

The textiles and apparel sector is an important contributor to Kenya’s overall economy. It is estimated to account for 6% of the overall manufacturing sector and to contribute 0.6% to Kenya’s GDP.6

In 2018, Kenya unveiled its Big Four Agenda, which focuses on manufacturing, universal health care, affordable housing and food security. The agenda is aimed at boosting Kenya’s development and creating wealth and employment for youth over the next five years. Textiles and apparel is a priority sector under the agenda’s manufacturing pillar.

With a large and well-established apparel subsector, Kenya has become a leading exporter in Africa and top exporter to the United States under the African Growth and Opportunity Act (AGOA). Kenya’s apparel exports plateaued during the past several years from a high of $373 million in 2014. During the course of the next three years, there was a steady decline, reaching a low of $334 million in 2017, but exports spiked again in 2018 to a high of more than $391 million.7

Kenya produces and exports garments in all of the major textile and apparel categories under Harmonized System (HS) headings 61, 62 and 63. Its greatest exports by volume are in men’s and women’s trousers.

Export-oriented apparel dominates

Kenya has continued to focus largely on the cut, make and trim (CMT) production model that defines most large EPZ companies operating within the country. As a result, Kenya’s value chain is fragmented and uneven. Limited downstream investment has led to capacity constraints and relatively weak productivity and quality in the spinning, weaving and fabric finishing segments.

Kenya’s value chain structure is one in which the apparel sector is still heavily dependent on imports of fabrics and other inputs. Textiles are imported primarily from China, India, Pakistan and Thailand. It is estimated that local textile manufacturers supply only 45% of the Kenyan textile market requirements. This is mainly for the factories producing for domestic and regional markets; export-oriented apparel factories import the majority of their fabrics.

The cotton subsector is underdeveloped and does not currently contribute in a substantial way to the overall value chain, despite the efforts of the Government of Kenya to revamp cotton production. Currently, there are three active ginneries, and cotton production is negligible. Indeed, the majority of cotton needs within the textiles and apparel sector are imported, including virtually all cotton for export-oriented production.

Textile mills are old and largely operate with outdated machinery. As a result, the quality of fabrics produced in Kenya is not up to the standards required for garments produced for export, and the cost of the locally produced fabrics are high relative to imported fabrics.

High level of worker productivity

There is generally good access to labour and retention rates are quite good within the textiles and apparel sector in Kenya. High unemployment rates and stable work and good compensation offered by factory employment create a situation where employees tend to remain in their jobs. What turnover does occur is generally in the seasonal and contract work segments. This contrasts with Ethiopia, where labour retention is an issue.

Note:

6 World Bank

While labour costs are high (the average wage rate is UDF 175/month, compared to approximately USD 65 in Ethiopia), worker productivity is also high. One EPZ-based company reports that one of its production lines is currently operating at 80 % efficiency – more productive than Asia – and that for its plant overall, the efficiency rate is 65 % (as compared to its Ethiopian-based factory, which is much lower at 50%). While productivity levels are high and generally compare favourably to most African countries, they still lag behind Bangladesh, China and other Asian competitors.

In contrast with Ethiopia, Kenya is interesting for apparel manufacturers that require higher productivity and more skilled workers to handle more advanced garment production. This is reflected in the types of companies that have invested in the EPZs. A Sri Lankan manufacturer of intimate wear recently announced an investment of nearly USD 15 million in a new factory in Kenya. Based in the Athi River EPZ, the investor is expected to become the largest apparel manufacturer in the country.

Recent trends

The government, however, in contrast with Ethiopia, has had limited success in setting up industrial parks. It has recommitted to plans that have long been in place to rejuvenate the sector through establishment of such parks. These include the Naivasha textiles park that will benefit from low energy costs (estimated at five cents/kw) due to the existence of adjacent geothermal reserves. Land has already been acquired and it is hoped that the industrial park will be operational within two years. Kenya’s ability to establish industrial parks and bring foreign direct investment to them will largely determine whether it can match Ethiopia’s success in this area – and, in the long run, not be overtaken by Ethiopia as the country continues to ramp up.

There has been a recent major upgrade of the Rivatex factory, a $29 million investment using Indian technology and made possible by a line of credit from the Government of India. The government is, as with Rivatex, also seeking to revive two more moribund textile mills, in the Mount Kenya and Lake Victoria regions. It is estimated that $100 million in new machinery will be needed to revamp these two factories.

Ease of doing business in Kenya is high relative to its neighbours (its World Bank Ease of Doing Business rank in 2018 is 80, versus 161 in Ethiopia). However, high and rising operating costs – especially labour and energy costs – have severely hindered the companies currently operating in the textiles and apparel sector. For apparel companies in particular, where labour costs can comprise up to 70% of overall operating costs, rising wage rates continue to be a challenge. The government sets the minimum wage annually. This rate increased by 18% in 2017 and a further 5% in 2018.

High energy costs have hurt, being a continuing hurdle. Energy costs in Kenya are at approximately 18 cents/kw (2017), as compared with three cents/kw in Ethiopia. The government is looking at ways to bring energy costs down within the sector, including through the planned industrial parks. According to the companies interviewed in Kenya, energy costs typically represent 10 %–15 % of an apparel company’s overall operating cost. The percentage is even higher (approximately 25 %) for textiles manufacturers. Lower energy costs are, therefore, essential for the textiles subsector to survive and effectively compete.

There is a strong movement within the region for policies, that mandate local content, particularly in the textiles and apparel sector. In 2018, in Kenya, a presidential directive mandated that all military uniforms are to be sourced locally, provided quality standards are met. Kenya’s Build Kenya, Buy Kenya initiative to support local suppliers in government tenders has the potential to drive new technologies. Indeed, several factories have invested in new machinery to supply local government. The government is also considering a “negative list” of imported products within the sector that are competing with locally produced items. The idea is to protect inputs through some combination of taxes and restrictions on imports so that factories can invest in technologies to produce these inputs locally.

The future of AGOA is also a factor given that AGOA will expire in 2025. Kenya’s over-reliance on the USA market could be a severe challenge for the sector should AGOA not be extended. A bilateral free trade agreement (FTA) between the United States and Kenya is under consideration, in line with the USA’s current trade policy preference of bilateral trade agreements over multilateral, non-reciprocal agreements. As the only country in the East African Community (EAC) without least developed country (LDC) status, Kenya would indeed be a good candidate for an FTA.

There is some thinking that Kenya needs to begin to diversify to other markets. By doing so, it would become less reliant on CMT production, and to accomplish this would mean technology upgradation to allow for shifts to new products and markets.

Technology upgrades needed across value chain

Kenya’s textiles and apparel sector is older and more established than, for instance, Ethiopia. As such, there is a need for upgradation across the board, from spinning through to sewing. The spinning and textiles segments in particular are in need of revamping, to replace machinery that, in some cases, is more than 20 years old.

Key findings

Well-established sector, with limited new investment

While Kenya’s textiles and apparel sector is large and well established, only 11 of the 38 interviewed companies have entered the sector since 2000. This finding suggests that Kenya has not been able to attract a large number of foreign investors in the sector. This contrasts with Ethiopia, where many new investors have established operations. Survey results show that, in Ethiopia, more new companies (18) have entered the sector in just the past five years than has been the case in Kenya in the past 20 years.

The oldest company was established in 1951 while the most recently established company was created in 2018. The majority of companies in the sector are limited or share companies (Figure 12).

Seventy-nine per cent of the companies are exporting

The majority of interviewed companies in Kenya are exporting (79%). This is reflective of an industry that has been largely oriented towards production for export to take advantage of duty-free opportunities in end markets. EPZ-based garment factories export mainly to the USA market under AGOA. The USA represents 90% of Kenya’s worldwide apparel exports.8 Other markets include Canada and Germany and, in Africa, Tanzania and Uganda. All of these markets, however, are small in comparison to the USA, representing less than 5% of Kenya’s total apparel exports.

The picture is more diverse in textiles articles – the types of products made by the factories producing for the domestic and regional markets. In these product categories, the chief export markets are in East Africa (Uganda, Tanzania and the Republic of South Sudan), plus the Democratic Republic of the Congo.

Figure 13 shows the export destinations of the companies surveyed for this report, many of which are in these product categories. The top four export markets in rank order are: Uganda, Tanzania, Rwanda and the United States. It must be noted that the cross-section of companies surveyed was more heavily weighted towards non- EPZ factories; hence, the different picture presented when volume apparel exports are largely not accounted for.

The majority of companies have more than one production unit across the value chain

Most companies have more than one production unit within their business (Figure 14). Sewing operations are the most common. In total, there are approximately 70 active textile and apparel manufacturing companies in Kenya, of which 38 were interviewed in preparation of this report, including 15 major textile companies; 14 of the estimated 38 apparel companies producing for local and regional markets, and six of the 17 export-oriented apparel companies are based in export processing zones (EPZ).

Eighty-two per cent of companies are interested in upgrading their technology

A large percentage (82%) of companies surveyed have an interest in upgrading their technology (Figure 15). Ten per cent of the interviewed companies currently have no interest in upgrading their technology.

Garment-making machinery highest in demand

Kenyan companies have a similar interest in the type of machinery they want to upgrade as Ethiopian companies. Garment-making machinery is in highest demand, followed by finishing machinery (printing and digital printing, washing and dyeing), spinning machinery and weaving machinery (Figure 16).

The appetite for technology upgradation seems to be greater in the textiles subsector. Companies operating in this subsector are looking to upgrade their machinery across the operating segments. The high demand for garment-making machinery appears to reflect a move on the part of companies to increase their apparel production, perhaps to capture more export markets and capitalize on the government’s local sourcing mandate.

Companies’ key motivations for upgrading their technology

Companies’ key motivations for upgrading their technology, in rank order, are: to improve resource utilization efficiency, comply with quality requirements, diversify to new products, comply with quantity requirements, and diversify to new markets (Figure 17).

Challenges within the operating environment

With high interest rates (averaging 15 %), access to finance for technology upgradation is a serious hurdle. Additionally, banks in Kenya are risk averse and do not lend easily. This applies to both short-term working capital and to financing of capital expenditures. This has hindered the ability of companies to invest in new machines. Several factories noted that, while they can access capital through banks in Kenya, the loan interest rates are prohibitively high. This turns companies away from using local financing and forces them to fund priority capital investments internally.

Energy costs are a burden, particularly to the textiles companies. Energy costs average 18 cents/kw. One large textile mill and apparel producer in Kenya says that it costs USD 32/day to operate one machine versus USD 18–USD 20/day in Ethiopia. This is largely due to the higher energy costs in Kenya and lack of government commitment to bring the costs down within the sector.

One large apparel factory stated that the efficiency of its workforce is decent and performs well in comparison with other countries in Africa, but is slower than in Asia. Based on companies surveyed, productivity rates average 70 %. This is higher than the average productivity rate of 50 % in Ethiopia, but lower than the 80 %–85 % efficiency rates achieved in, for example, Bangladesh. Training raises the productivity of workers, but more efficient machines, it was noted, would also help to bridge this gap. Several interviewed companies noted the need to strike a balance between workforce training and automatization that replaces workers in some production areas.

Illicit imports is a key problem in the sector. Many companies cite the rampant importation of products that come into the country illegally. Many products enter Kenya undeclared or mis-declared, avoiding taxes. Factories are then at a price disadvantage in the local market. This has been observed in imported products such as fabrics, accessories and inputs.

Challenges associated with technology upgrading

Interviewed companies referred to the high cost of finance restricting their ability to invest in machines as part of their expansion or upgradation plans. Some companies also mentioned the skills gap in Kenya whereby qualified technicians with the ability to service machinery are lacking.

A manufacturer of machines and technology for the textiles and apparel sector noted the support given to an investor in Uganda in the areas of energy costs and cotton preferences (both through subsidies), as well as machine upgradation support, resulting in marked efficiency improvements at the factory. The company stated that Kenya needs to likewise support the sector specifically in the area of technology upgradation.

Outlook for sector: Does technology play a role?

All of the interviewed companies recognized and expressed the importance of technology to their businesses. Approximately 56% of the companies believe that there is a very high difference between the technologies available globally and those that they use within their factories (Table 10). A further 36% express that there is some difference, while approximately 8% (three companies) say that there is no difference. These findings suggest in part that companies do not have access to information about what is available from suppliers or technologies that could be obtained.

Significantly, of the companies that believe there is a very high or some difference between the technologies available globally and those that they use, more than 90% are interested in upgrading.

Both of these findings demonstrate the high motivation on the part of companies to upgrade their technologies.

Only 36 % of Kenyan companies are positive about the future of the sector

Companies were also asked about their outlook on the sector, as well as their views on the future prospects of their businesses. Thirty-six per cent believe that the sector will evolve and grow as existing companies expand their operations (Figure 18). Interestingly, 23 % believe that the sector will contract. Another 21 % believe that the sector will maintain at current levels of production, while 8 % believe that new entrants will come into the market, driving competition.

Many companies are taking a “wait and see” approach to investment in new technology. While there is generally a favourable outlook on the sector, this is balanced by uncertainty about the lack of government support and political will to tackle ingrained problems such as illicit imports that are harming local producers.

Efficiency gains from technology

Productivity gains can be achieved through improvement of both labour and machine efficiencies. One large buyer noted that one of the factories it sources from has been able to bring up its efficiency rate to more than 70% from 55%. This has been in large part due to greater efficiency of the machines within the factory as it has steadily invested in new technologies.

Conversely, this same buyer noted that another large factory that recently closed did so because the company failed to invest in new technology and the quality of the products suffered. This was coupled with the fact that many of the technical managers left, leaving the company ill-prepared to effectively manage the technologies.

Environmental concerns are driving new technologies

Environmental concerns are increasingly becoming an important consideration within the sector. Many of the large companies sourcing from Africa are driving the push toward environmentally friendly practices and technologies that are better for the environment. This can be seen in such areas as:

–              Use of lasers for the sanding of jeans and denim products;

–              Effluent treatment plants;

–              Reverse osmosis (RO) technology.

A large textiles and apparel factory can discharge as much as one million litres per day. In their push for the dual goal of better operating efficiencies and technologies that are better for the environment, many companies sourcing from Africa are demanding that they invest in these processes as prerequisites of a business relationship.

The results of this push can be observed through recent investments within the sector. Some examples include:

–              An integrated factory recently brought in new machinery for water treatment.

–              Another company that is currently able to treat water, but not recycle, recently brought in technology that will accomplish the latter through reverse osmosis. The RO technology is from India.

Two buyers mentioned that they will only start working with the recently modernized Rivatex factory once an effluent treatment plant has been installed for the same.

On the financing side, and in tandem with energy efficiency, there is an initiative in place under the French aid agency programme, Sustainable Use of Natural Resources and Energy Finance (SUNREF), which has had some success with its lending programmes in Kenya. The fund seeks to boost financing for investments committed to sustainable natural resource management, with a focus on clean energy. SUNREF’s primary stipulation to access the financing is that machinery purchased operates in an energy saving manner. In return, it backs loans at concessionary rates, as low as 3%. SUNREF has supported several operators in the textiles and apparel sector to upgrade their machinery, which, in turn, has improved both process and energy use efficiencies.

Identifying the right technologies is critical

From a product standpoint, for instance, shirting is a challenge in Kenya. One large buyer noted that a factory with which it works has old technology for shirting, so it does not deal in those products with the factory. Should it invest in new machines to upgrade its shirting capabilities, it would consider adding this product line to the other products it currently sources from the factory.

Similarly on the fabric side, a textile company noted that shirting fabric is not available locally or in the region, so it must be imported from China. Investment in new technology by textiles factories would help to capture this potentially lucrative business.

Technology can drive product diversification

This raises another issue that is frequently heard in Kenya: the prevalence of non-differentiated products. Expanding to other product categories to satisfy buyer demands is seen as critical for Kenya continue to evolve beyond basic production. This requires investment in new technology.

Companies are hearing the call. As industry trends are evolving and moving away from basic production, companies cite the need for more automation as critical to remain competitive.

Technology upgradation can be undertaken for speed and efficiency of machines as well as to automate in order to reduce workforce and, therefore, labour costs. However, some companies have an interest in not displacing employment. In these instances, companies seek out semi-automatic machinery to strike a balance between cost, efficiencies and workforce retention.

The need for technology upgradation can also be observed on the IT side. Kenya has a small, but growing fashion design community, with small and medium-sized producers catering to the direct to consumer market. This has increased the demand for technologically advanced IT solutions, including such areas as software for consumer customization and technologies to enhance connections with customers on current designs and styles.

Technology considerations by industry subsector

Capacity utilisation

The average capacity utilization by interviewed companies is approximately 64%. Of the 38 surveyed companies, half of the companies are operating below the average capacity utilisation rate, while the other half is operating above the average capacity utilization rate. Five companies claim a capacity utilization of 90% to 100%.

Capacity utilization rates vary across the value chain, with high rates in sewing (79 %) and knitting (69 %), and comparatively lower rates in spinning (46 %) and weaving (43 %) (Table 11).

While capacity utilisation rates are high in processing, companies are looking to expand, particularly in printing, so good opportunities exist to sell technology in this area.

The low levels of utilization in the spinning and weaving segments suggest that significant upgrades are needed so that these segments can become more integrated with the robust apparel subsector. It bears repeating also that the spinning and weaving segments in particular have ageing machinery that need to be replaced.

Characteristics of machinery

Age of machines – spinning, weaving and processing segments have comparatively older machinery

The majority of the textiles and apparel machines currently used in Kenya are more than 20 years old (Figure 19). Weaving, spinning and finishing machinery in particular have large percentages of machines that are old and in need of either upgrading or replacement.

In the spinning segment, more than half of the machines (61 %) are more than 20 years old. There have been more recent upgrades: 28 % of the machines are less than five years old. This is perhaps reflective of the investments undertaken in Rivatex, which were primarily machines from India.

The picture is similar in the weaving segment: 74 % of the machines are more than 20 years old, with the balance less than five years old. This reflects very old machinery overall, with some new investments due to recent upgrades, at Rivatex in particular.

The knitting segment has comparatively newer equipment, with 45 % of the machines being less than five years old – again reflective of recent textile mill upgrades. In contrast to the spinning and weaving segments, a lesser, though still significant, percentage of the machines (36 %) are more than 20 years old.

Dyeing and finishing equipment, as with spinning and weaving, is quite old: 62% of the machines are more than 20 years old. Printing machinery is comparatively newer: 40% of the machines are less than five years old.

In the sewing segment, more than half of the machines are less than 10 years old, and only about one-quarter of the machines are more than 20 years old. This picture suggests that apparel producers replace their machines more often.

These findings track with some of the more recent upgrades within the sector, but also highlight the age of machinery – indeed, some machines are probably at the upper end of their useful capacity.

There is a clear opportunity for the supply of machines and new technology to the spinning and weaving segments, but also dyeing and finishing.

Origin of machinery – Germany and China dominate

A look at the entire value chain shows that Germany and China lead the way as suppliers of technology, followed by Japan, India and Italy. In the spinning segment, the two leading countries are Germany and India. Approximately 80 % of the spinning machines are supplied by, and evenly split between, these two countries. The top two suppliers of weaving machinery are Switzerland and Italy, which account for 65 % of the machinery. Germany and China are the lead suppliers in the knitting segment, accounting for just more than half of the machines. In sewing, Japan dominates, supplying nearly half of the machines (predominately Juki). China is also a major player, as it is able to supply cheaper sewing machines. In the processing segment, Germany and China are the top suppliers, followed by Japan and India.

Germany is well established as a supplier of technology across the value chain and, to a lesser extent, China as well (though interestingly, not in spinning). Again, it is Germany and India that dominate here. Switzerland is strong in the weaving segment, as is Italy, which has also managed to supply all segments within the value chain.

While India is a key supplier of spinning machines, it also supplies the weaving and knitting segments, albeit on a smaller scale.

Good opportunities exist for Indian suppliers to supply the weaving segment in particular, as ageing machinery from Switzerland and Italy are in need of upgrading. Indian technology within the sector in Kenya, perhaps to a greater extent than in Ethiopia, is viewed as strong and a viable option. This is reflected in the high percentage of companies that are interested in sourcing machinery from India.

The majority of companies are interested in sourcing from India

The majority of interviewed companies are interested in sourcing from India, including technology, fabrics or chemicals. Forty-six per cent of the companies are actively seeking to source from India, while another 44% would consider India is a sourcing market.

One large CMT apparel factory noted that only 10% of its machinery currently comes from India (the rest from China and Europe). India is viewed as having good technology, but pricing is not as favourable as China. This is perhaps due to the fact that, in contrast to India, the Chinese Government has incentive schemes in place that support its exporters.

Other companies operating in the textiles subsector see India as an attractive sourcing location, noting that India often offers good quality at prices more attractive than some of the more advanced European technologies offer.

Indian suppliers of technology perhaps have an opportunity to capitalize on the high interest on the part of companies to source form India – particularly in machinery that is more technologically advanced than what is available from China, but at more reasonable costs than what is offered by leading European suppliers.

Yarn manufacture

Common spinning machines used in Kenya include: Saurer Zinser, Autocon and Saurer Schlafhorst (Germany), Lakshmi (India), Cogitex (Italy), and NSC (France). Germany and India (each at 39%) are the top countries of origin for spinning machinery, followed by Japan (11%), and Italy and France (each at 6%). The majority of spinning machines (61%) are more than 20 years old, while 28% of the machines are less than five years old. The remainder (11%) are 10–20 years old.

Figure 20 shows the installed and available spinning capacity and actual production in tons. The installed spinning capacity per year is approximately 13,368 tons, with 12,368 tons of available capacity. Actual production in 2018 was 6,200 tons, which is approximately a 46% capacity utilization rate.

Underutilisation of capacity in spinning may suggest the idling of some older machinery in this segment.

There are opportunities for suppliers of new technologies in spinning as factories continue to modernize their machines.

Fabric manufacture

Weaving

Switzerland (35 %), Italy (30 %), and Germany and China (10 % each) are the top countries of origin for weaving machines. Common brands of weaving machinery used in Kenya include: Sulzer (Switzerland), Nuovo Pignone, Vamatex and Somet (Italy), Brandles (China), and Saurer Schlafhorst (Germany). The majority of the machines (74 %) are more than 20 years old, with the balance (26 %) less than five years old.

Installed weaving capacity is nearly 37 million linear metres, while actual production in 2018 was nearly 16 million linear metres. This shows a low capacity utilization rate. Only 43 % of the weaving capacity is currently being used (Figure 21).

While weaving capacity and production levels are higher in Kenya than in Ethiopia, the underutilisation of capacity is equally pronounced in both countries.

This points to the low levels of integration within the sector. Weaving capacity is not being absorbed by apparel manufacturers, which are instead importing fabric for their needs. Better technology is needed in this segment to bring the quality of fabrics up to the standard and requirements of these companies.

The buy local mandate has some implications here, with potential for the weaving segment to increase capacity utilization for the supply of uniforms to the government.

Knitting

The top countries of origin for knitting machinery are Germany and China (26% each), followed by Italy and Taiwan (13% each). Popular knitting machines used in Kenya include: Karl Meyer, Stoll, Bruckner and Universal (Germany), Jinke, Yalond and Butterfly (China), Busi, Komet and Rimach (Italy), Pailong and Mayers (South Korea), and Flying Tiger (Taiwan). Forty-five per cent of the machines are less than five years old, while 36% are more than 20 years old.

Installed and available knitting capacity is 4384 tons. Production in 2018 was 3032 tons (Figure 22). Capacity utilisation in the knitting segment is relatively high – production was at 69 % of installed capacity.

The machines are comparatively newer than is the case in the weaving segment and, therefore, perhaps less in need of upgradation. However, more than one-third of the machines are more than 20 years old – suggesting the need for new machinery.

Processing of textiles

Germany (28 %), China (20 %) and Japan (17 %) are the largest suppliers of processing equipment, including dyeing, printing and finishing machinery. India supplies 14 % of all processing machinery to Kenya, in particular printing technology – which is mainly sourced from Japan, followed by India, China and Germany. Germany, China, Italy and India are the largest suppliers of dyeing and finishing equipment.

The majority (62 %) of dyeing and finishing machines are more than 20 years old; 19 % of the machines have been upgraded during the past five years. For printing machinery, the picture looks different – 40 % of the machinery has been acquired during the past five years, while 27 are more than 20 years old, and 33 % are 10– 20 years old.

These findings suggest that there are opportunities for supply of new dyeing, finishing and printing machinery to Kenyan companies.

Garment manufacture

Japan supplies 47 % of the sewing machines used, followed by China (35 %). Juki (Japan) is by far the most widely used sewing machine in Kenya. Others include Brother and Singer. Age of the machines are relatively evenly split, with most (35 %) being 5–10 years old.

According to the survey, installed sewing capacity across the interviewed companies is 2.75 million pieces, while actual production in 2018 was 2.17 million pieces (Figure 23). It bears noting that, in this survey, the volume of apparel exporters were under-represented; hence, the capacity and production levels are actually higher.

The capacity utilisation rate is quite high, at 79 %. This is reflective of an established garment segment where, in many cases, companies have long-standing accounts with buyers. The uniform business is a good example, where there is a consistent stream of business and, in many cases, factories are producing for one or two clients.

Unlike in Ethiopia, there have not been many significant new investments in the apparel subsector in Kenya, so perhaps the opportunity for the sale of new machines is limited. However, it is anticipated that new investors will begin to come into the new market as Kenya’s strategy to attract more FDI progresses.

Regional sourcing and the role of technology

The majority of fabrics used in the export-oriented garment segment is imported. When asked if local and regional textiles companies meet their requirements, nearly half of all apparel manufacturers in Kenya said only sometimes. Main challenges Kenyan apparel companies face when sourcing inputs locally or regionally are: unreliable supply (86 %) and inferior or inconsistent quality (83 %). Interestingly, 78 % of the interviewed companies in Kenya say that prices of locally available inputs are too high (Figure 24).

Indeed, most companies (nearly 60%) say that, if textiles factories were to acquire new technologies that improve the quality of the fabrics, and those fabrics ultimately meet their requirements, they would consider purchasing locally.

Conclusion

●            Companies in Kenya recognize that technology upgradation is necessary to remain competitive and meet the demands of an evolving sector;

●            There is a clear motivation on the part of textiles and apparel factories in Kenya to invest in new technologies;

●            The government is perceived, by industry, as not supporting the sector effectively;

●            Key challenges are the high interest rates and lack of access to finance, as well as a lack of spare parts in-country and lack of technical expertise to service machines locally;

●            The general consensus among apparel producers in Kenya is that local supply of fabrics is poor due to inconsistent quality and price. The belief is that technology can play a critical role in improvement;

●            The need to evolve and grow beyond CMT production to meet the needs of large brands that are increasing their sourcing from Kenya is evident;

●            New technologies to meet the needs stated above are required. This includes energy efficient and environmentally friendly technologies that are being increasingly demanded by companies sourcing from Kenya;

●            Companies by and large know what their needs are, but are not always sure about what is available on the market or what technologies are best for certain production processes, pointing to a lack of actionable information; and

●            Companies want to link with suppliers, including from India to bridge the gap stated above.

The lack of integration whereby textiles are not supplying the apparel companies in Kenya is seen as hindering the sector’s potential.

Apparel companies were also asked to rate the role of technology in affecting the extent that local and regional companies are complying with their requirements. While there was a low rate of response, for those that did respond, one-third believed that technology “very much” plays a role.

CHAPTER 5 TANZANIA

Introduction

Priority sector and a move towards industrial park development

Textiles and apparel is a priority sector in Tanzania as evidenced in the country’s current Five-Year Plan for Industrialization and its National Cotton-to-Clothing Strategy. Given the importance of the sector, the Ministry of Industry and Trade launched the latter, the Cotton-to-Clothing (C2C) Strategy 2016–2021. This is essentially the government’s blueprint to develop the cotton, textiles and apparel industry, which targets annual exports of

USD 150 million and 10000 jobs by 2021. As with other countries in the region, Tanzania is also interested in building a competitive sector to reduce its reliance on imports of second-hand clothing.

Strategic efforts within the sector have focused largely on the production and export of unprocessed cotton, while cotton productivity has been declining relative to major competitors. As there has been limited focus on developing downstream activities, the textiles and apparel segments are comparatively small, though there is some evidence of growth in the knitted segments (both fabrics and apparel).

The textiles and apparel sector faces constraints in terms of capacity, product differentiation and value chain integration. It also has a challenging business operating environment, with high energy costs relative to its competitors, comparatively low labour productivity rates and a lack of access to finance due to high borrowing costs.

Imports of textiles for use in garment production for export markets are cheaper and of better quality than those produced domestically. All of this has hampered value chain integration. Indeed, as with other countries in the region, exported apparel still uses fabrics largely sourced from outside Africa, while domestically produced fabrics feed the local and regional markets. While apparel production has increased in recent years, its capacity trails competitors in the region, including neighbours Kenya and Ethiopia.

Recent trends

While the government has renewed its effort to attract foreign investment, it has had limited success to date. The country is keen to match Ethiopia in its ability to bring in new investment in the sector, including to attract new textiles mills and apparel producers in designated industrial zones. Tanzania has established its first special economic zone (SEZ) for textiles and apparel manufacturing. The Tanzanian Government is finalizing plans that will pave the way for implementing the construction of the Bagamoyo SEZ and the Bagamoyo port. It is believed that the zone will potentially be ready to accommodate investors by approximately 2025.

The momentum seems to be gaining traction, with hopes that new investors will come, especially in the textiles subsector. To support the investment push, a new investment policy is being developed and is expected to be released soon.

On the other hand, 2020 is election year, so there is some unease about how the country will proceed. Will the sector continue to receive priority status and is there political will to see the necessary policy changes through? These are important questions, ones that are very much on the minds of current operators, but also new investors as both consider future prospects for the sector.

The move into backwards linkages, from spinning through to weaving and knitting, of course requires major capital investments – and the political will and vision to make it happen. This means policies that ease operations and begin to address major hurdles such as high interest rates and a lack of access to finance.

There have been some early positive signs. One company in Tanzania is now fully integrated, from ginning to garmenting. The company upgraded its technology recently and modernized its factory with new machines, enabling it to secure business with a large global brand for exports to the USA, but also to the European Union. This is significant, as it is a first for Tanzania and an indication that the country is heading in the right direction if it wants to become a major player alongside Kenya and Ethiopia in East Africa.

Major cotton producer; knitted fabric and apparel production rising

Like Uganda, Tanzania is a significant producer of cotton. Tanzania is Africa’s fourth-largest producer of cotton after the Republic of Mali, Burkina Faso and the Arab Republic of Egypt. Tanzanian cotton production accounts for 28 % of East African production and 7 % of production in Sub-Saharan Africa.9 After coffee, cotton is Tanzania’s largest export crop. The government plans to boost cotton exports to USD 150 million by 2020, up from USD 102 million exported in 2013 according to Tanzania’s National Bureau of Statistics.

Tanzania produced approximately eighty one thousand tons of cotton lint in 2014, and 4330 tons of cotton yarn in 2015.10 Production, however, has remained relatively stagnant during the past several years. The sector’s competiveness has steadily been decreasing, as the productivity gap with other significant cotton-producing countries has widened.

Tanzania’s value chain is incomplete and fragmented. Most cotton (approximately 70 %) is exported, and a handful of textiles mills and apparel manufacturers produce for local and regional markets and for export markets – primarily to the United States under AGOA.

Notably, while cotton production has largely declined in Africa relative to the rest of the world, the Tanzanian spinning sector has actually performed quite well. Indeed, as indicated in Tanzania’s Cotton-to-Clothing Strategy (2016–2020), Tanzania is only one of two countries in Africa (the other being Ethiopia) where cotton mill use increased during the period 1990–2014, from 14000 to 34000 tons.11

Rising apparel exports

Tanzania’s apparel exports, while larger than both Rwanda and Uganda, are below those of Kenya and Ethiopia. The majority of Tanzania’s apparel exports are to the United States under AGOA. Tanzania’s exports to the USA have been steadily rising since 2014, reaching nearly USD 42 million in 2018. Other key export destinations include: Kenya, Mozambique and South Africa, the latter two due in large part to Tanzania’s Southern African Development Community (SADC) membership.

Tanzania’s worldwide textile and apparel exports were nearly USD 83 million in 2018 (Table 13). More than half of exports in the sector are of made-up textile articles and other products in HS Code 61. This includes such products as bed linens and mosquito nets, the latter of which Tanzania is a major producer. The rest is split between articles of apparel and clothing, both knitted and woven (HS Codes 61 and 62), with higher volumes in knits.

For EPZ-based factories, 100 % of the apparel is exported. For factories outside of the EPZs, approximately 53 % is for export sales, with the balance sold to the local market.

Notes:

9 Tanzania Cotton-to-Clothing Strategy, 2016/17–2020/21.

10 Tanzanian National Bureau of Statistics.

11 Tanzania Cotton-to-Clothing Strategy, 2016/17–2020/21.

Key findings12

There are currently nine active textile and apparel companies

There are a larger number of textiles and apparel manufacturing factories in Tanzania, but currently only nine are active. The nine active textiles and apparel factories employ approximately 14,000 workers.13

Two factories have closed recently with the possibility of reopening, and a further five factories have shut down and are unlikely to reopen.14 This is reflective of the current perceived risk within the sector in Tanzania, as well as overall consolidation within the industry. It is hoped that, through the government strategy to revitalize the sector and bring new investment, new entrants – including foreign direct investment – will come into the market and drive competition.

The majority of companies have more than one operation

The majority of companies have more than one operation: five of the factories have spinning units, four have weaving units, three factories have knitting units and five factories have sewing units.15

Fifty-five per cent of companies invested in machinery in 2018–2019

The 2019 study by the Institute of Development Studies (IDS) shows that 70 % of the manufacturing apparel and textile companies say that they have invested in some sort of machinery in 2018–2019 (including second- hand machinery); the majority of the machinery was imported. Fifty per cent of the interviewed companies say that they have purchased advanced machinery, equipment and software from outside the business (innovation investment).16

Investment in technology upgrading spread across subsectors

The interest in upgrading technology appears to be strong and spread relatively evenly across the subsectors (Figure 25). As previously mentioned, 40 % of the interviewed companies recently invested in advanced machinery, equipment or software; approximately 15 % were done in each of the subsectors – spinning, knitting and weaving, dyeing and printing and sewing.

During the past 10 years, all of the garment units have invested in sewing and garment-finishing machinery. There have also been some investments in new technologies within the knitting and spinning segments (Figure 25). Spinning, weaving and fabric processing machinery is relatively old, and there is need for technology upgradation.

There appears to be an interesting correlation between recent investments in new technologies in the knitting segment and increased production in that subsector, as well as increased production of knitted garments. The assumption is that these new investments in machinery increased efficiencies and capacity, enabling greater production in this segment. Supply of these larger volumes of fabrics to companies exporting knitted garments is also a positive sign and a move towards greater value chain integration.

The need for upgradation clearly exists in the spinning, weaving and fabric processing segments. Similar new investments in technology in these segments could likewise bring greater efficiencies and increased output, perhaps further integrating the value chain.

Notes:

12 Note: Companies in Tanzania were not interviewed directly. Information presented in this section was mainly gleaned from a company survey and related analysis by the Institute of Development Studies for the International Growth Centre (Saha et al, 2019), which allowed the use of its anonymized survey data and some of its findings. They interviewed 20 companies, including both larger-scale manufacturing units as well as small companies with 20 or less employees. Some of the information shared originates from the work by the Textiles Development Unit in the Ministry of Industry and Trade, based on Tanzania’s 2018 Annual Survey of Industrial Production.

13 Survey of Textiles and Apparel Factories in Tanzania (2018), Textile Development Unit (unpublished).

14 Ibid.

15 Ibid.

16 Own analysis based on Institute of Development Studies (IDS) data (2019), only considering companies with more than 60 employees or manufacturing units.

Motivation for innovation

The motivation by Tanzanian textile and apparel manufacturing companies to innovate, including through technology upgradation, is driven by several factors.17 Replacing outdated products or processes is among the key factors that companies identified – 60 % of the companies consider it of high importance. Other key factors include improving quality of goods and services, improving capacity for producing goods and services, meeting regulatory requirements and standards, reducing environmental impacts, and improving health and safety.

Challenges associated with innovation and technology upgradation

While companies have an interest to innovate and upgrade their machinery, there are factors constraining the innovation activities by Tanzanian textiles and apparel companies (Figure 26). Excessive perceived economic risks (60 %), government regulations (60 %) and direct innovation costs are the major challenges (high or medium) that hamper innovation and technology upgradation. Availability of finance, cost of finance and lack of qualified personnel are also perceived as constraints to innovation and technology upgradation by half of the companies.

To put the above challenges into context, the excessive perceived economic risks can be attributed in part to the fact that Tanzania is at a crossroads as it seeks to build the sector. With a large competitor as its direct neighbour in Kenya, and another developing giant in Ethiopia in the region, Tanzania faces uncertainty. There are solid strategies in place to attract investment and grow the sector, and a generally favourable outlook on prospects for the sector moving forward.

On the other hand, the business environment is challenging and there are very real hurdles that operators face. Average interest rates according to the Word Bank are 16 % and have historically been quite high, making local financing very challenging. This is coupled with the fact that banks in Tanzania are risk averse in their lending practices, so access to finance is an issue. Energy costs, too, are relatively high, averaging 11 cents/kw. This is lower than in Kenya, but higher than Ethiopia’s very low rates.

Note:

17 Own analysis, based on Institute of Development Studies (IDS) data (2019); only considering companies with plus 60 employees or manufacturing units.

A main reason for capacity underutilization is the lack of access to regional markets; chiefly the East African Community (EAC) and Southern African Development Community (SADC) were also identified as a reason for underutilization of capacity (on average 35 %). Despite unrestricted access to both regional markets as well as some success in exporting to individual countries (e.g. Kenya, Mozambique and South Africa), companies feel that they have not been able to fully exploit these markets.

Companies also report that they face plant maintenance challenges due to a shortage of skilled labour (Figure 27). This is particularly true in the apparel subsector. As has been observed in other countries in this study, maintenance issues must often be handled remotely. This adds time and cost and is particularly challenging when machines become idle, effectively shutting down operations for extended periods of time. Inadequate (old) equipment and technology was also mentioned by companies as a key reason that capacity is not fully being used within the sector. The lack of spare parts locally contributes to this problem.

Some industry stakeholders refer to the challenges the sector is currently facing, such as the high levels of imports of fabric and apparel that are either undeclared at customs, or not correctly invoiced, resulting in tax evasion. According to these voices, investment in innovation and technology upgradation is discouraged by these cheap imports.

Why is this relevant? If Tanzania is successful in its drive to bring foreign direct investment and build the value chain, it has an opportunity to leapfrog older technologies, to bring in new machinery that is more efficient and environmentally friendly. This is, in fact, what has started to happen in Ethiopia. However, the technologies must be operated and maintained, and Ethiopia faces this challenge as well. A commitment to training is required to manage the next generation of technology.

There has been some positive movement in this area. Both the International Finance Corporation country office and the Ministry of Industry and Trade through the Textile Development Unit are focused on skills development within the sector.

Outlook for sector: Does technology play a role?

All of the companies surveyed viewed technology as essential to remain competitive and grow. The Textile Development Unit (TDU) study reveals that, while there has been some trepidation about the future of the sector

– including the perceived risks within the industry and questions about the future of the USA market when AGOA ends in 2025 – a number of factories have expansion plans in place. In many cases, these factories have delayed their expansion and planned investments in new technology due to operating constraints within the country. Others have made investments, as we have seen, in upgraded technology for knitting.

The study conducted by the International Growth Centre (IGC) found that a firm’s decision to innovate is mainly based on product quality enhancement, increased productive capacity, and concerns regarding health and safety regulations (which are related to compliance with mandatory standards). That is, companies seek to upgrade their technology to meet buyer demands in terms of product quality and volume, but also to meet required product safety standards.

Other factors cited include: reducing the cost of production, reducing environmental impacts and generally replacing outdated technology as a means to remain competitive.

The most important sources of information for such innovation include: within a company’s own business group (internal), suppliers of the technology themselves, and customers (both public and private sector). In the latter instance, buyers often dictate the types of machines necessary to meet orders. Conferences and exhibitions were also identified as important sources of information on the most up-to-date technologies available globally.18

Note:

18 Saha et al, 2019, Technology demand and the role of the south-south trade in Tanzania’s Textiles and Apparel.

Technology considerations by industry subsector

Capacity utilisation

The average capacity utilisation of Tanzanian textiles and apparel manufacturing units is approximately 67.8 %.19 According to the Textile Development Unit (TDU) survey, the average capacity utilization in the knitting segment is highest (83 %), while the capacity utilization in the sewing segment is 74 %.20 This picture differs largely from Kenya, where capacity utilization in the spinning, weaving and knitting segments is low, while it is relatively high for processing and sewing.

Characteristics of machinery

Machinery is mainly manual or semi-automated

Textiles and apparel factories in Tanzania mainly use manual and semi-automatic machinery (Table 14). Only 13 % of the textiles manufacturing companies and 19 % of the apparel manufacturing companies use fully automated machinery. The comparison of the 2015 versus 2016 data from the Annual Surveys for Industrial Production suggests that some of the manual machinery for garment manufacturing was replaced by semi- automated machinery.

China is the main supplier of machinery – from manual to fully automated machinery, for both textile and garment manufacturing. India is also an important supplier, in particular for semi-automated and fully automated textile machinery.

China and India, top technology suppliers

According to interviews conducted in 2019, China (50%) and India (25%) are also the top two import markets for advanced machineries acquired by Tanzanian factories during the past three years.21 Approximately one- third of the machines used in spinning come from China, as do nearly all of the sewing machines (Table 15). Approximately one-third of the knitting and weaving machines are imported from India. India also supplies approximately one-third of the dyeing and printing machines.

Goods and services imported from India

Machinery accounts for nearly 20 % of all goods and services imported from India by Tanzanian textiles and apparel companies (Table 16). India is also viewed as an important source for chemicals. Nearly 55 % of Tanzania’s imports from India are in this product category. Yarn and fabric make up more than 18 % of Tanzanian imports from India. A further 9 % is comprised of technical training from India.

Yarn manufacture

According to National Bureau of Statistics (NBS), 4330 tons of cotton yarn was produced in Tanzania in 2015, dropping from a peak of 11442 tons in 2005 (Table 17). The eight-year compound annual growth rate from 2005–2013 was 11.7 %.

Note:

21 Saha et al, 2019, Technology demand and the role of the south-south trade in Tanzania’s Textiles and Apparel.

Fabric manufacture

Production of woven fabrics in Tanzania has declined over the years, while knitted fabric production has increased (Table 18). In 2013, Tanzania produced 86.6 million square metres of woven fabric, which represented a 1 % decline during the previous eight-year period. Production decreased again during the next two years, dropping by 7.5 % in 2015.

Similarly, knitted fabric production decreased by nearly 3 % during the same eight-year period, with production totalling just more than 9 million square metres in 2013. Production increased markedly (by 125 %), rising to

20.3 million square metres in 2015. Capacity utilisation rates have also increased and are quite high, with an average utilization rate of 83 % according to a study done by the Ministry of Industry and Trade’s Textile Development Unit (TDU). This appears to reflect increased demand due to some product diversification by apparel producers.

Garment manufacture

Production of apparel in Tanzania has also experienced high rates of growth. According to the National Bureau of Statistics (NBS), in 2015, Tanzania produced 5446000 pieces of knitted garments, and gross output of apparel was USD 16.5 million. This is a 43 % increase in production levels during 2013, which follows a compound annual growth rate of 38 % in 2005–2013.

There is a similar picture in the trend of exports, as exported apparel has increased steadily during the past several years, rising to USD 64.2 million in 2018 from USD 38 million in 2014.

According to the Textile Development Unit (TDU) study, installed sewing capacity in 2018 was 61.4 million pieces with an average utilization rate of 74 %.

Snapshot of growth rates within the value chain

A summary of production rates in the various operating units in 2013 versus 2015 is shown below. While production of woven fabrics has decreased and cotton yarn production has increased marginally (2.5 %), knitted fabrics and garments have increased substantially, by 125 % and 43 %, respectively.

A summary of production rates in the various operating units in 2013 versus 2015 is shown below. While production of woven fabrics has decreased and cotton yarn production has increased marginally (2.5%), knitted fabrics and garments have increased substantially, by 125% and 43%, respectively.

It appears that the woven segment is ripe for investment in new technology to grow that subsector and bring production levels of fabrics and garments up to the levels and growth experienced in the knitted segment.

Conclusion

•             Tanzania, in line with its national sector strategy, is committed to value-added cotton production and increasing investment in the textiles and apparel value chain, particularly in the textiles subsector;

•             The country is committed to the development of industrial parks that will bring foreign direct investment into the sector;

•             Old plant machinery has hindered the sector, particularly in textiles, compounded by lack of both spare parts and of locally based technical experts;

•             As with other countries in the region, the textiles subsector has largely been unable to meet the needs of apparel producers. Investments in new technology will begin to create the backwards linkages necessary to drive the overall sector forward;

•             Availability of finance and cost of finance are perceived as constraints to innovation and technology upgradation by half of the manufacturing companies, while the other half does not perceive this as a barrier to innovation;

•             Tanzania has established ties with India, with approximately 25% of advanced machinery, equipment and software currently coming from India. These are concentrated in the knitting, weaving and finishing (dyeing and printing) segments;

•             There is strong motivation to upgrade machines and technology. Replacement of outdated processes (and, hence, machinery) or products is a key factor driving innovation;

•             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; and

•             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.

CHAPTER 6 UGANDA AND RWANDA

Introduction

Uganda and Rwanda are both small, landlocked, countries without direct access to a major port. Their textiles and apparel sectors are both small and underdeveloped, heavily weighted toward production for domestic and regional markets. Uganda has a long tradition in producing cotton; two of the few integrated textile mills in the region are based in Uganda. Rwanda is not a cotton-producing country; some export-oriented CMT production can be found in Rwanda solely.

Both countries view the sector as keys to their economic development and have accordingly prioritized them in their respective strategic plans. As such, both governments are seeking to expand the sectors through the attraction of foreign direct investment, including textile mills and job-creating apparel factories serving export markets. At the same time, both governments are seeking to build local capacity through greater local procurement of textiles and apparel and a domestic market that is less reliant on imported second-hand clothing.

Uganda

Uganda’s textile and apparel value chain is small and disjointed. The country does produce large volumes of good quality cotton, but it only has a handful of fully integrated factories producing textiles and apparel. Unlike Ethiopia and Kenya, it does not have large numbers of volume apparel producers operating in exporting processing zones, though the government is moving in this direction. Uganda is the second-largest cotton producer in East Africa after Tanzania. Uganda currently produces approximately 150000 bales of cotton per annum. However, more than 85 % of the cotton is exported without local value addition.

The government maintains a “buffer stock fund” of cotton for use by companies locally. The government buys the cotton and puts it in bonded warehouses, and companies pay for what they process. This locally processed cotton amounts to less than 15% of Uganda’s total cotton production; the rest, as stated above, is exported.

There are only two operational spinning mills, but these are not standalone facilities; both are part of integrated textile plants producing yarn, fabric and garments. The majority of production is for domestic and regional markets and is concentrated in basic garments (T-shirts and uniforms). Fabrics are produced for in-house use as well as exported regionally.

Uganda’s success in exporting apparel to the United States under AGOA has been limited since passage of the Act in 2000. Indeed, there’s been frustration in the country over its inability to effectively take advantage of the preference programme. Uganda exported a mere USD 62000 worth of apparel to the United States in 2018. Even at its peak in 2005, Uganda exported only USD 5 million.

The total value of Ugandan apparel exports was nearly USD 14 million in 2018 (Table 19). Most exports of apparel are to Europe (60 %). The two largest export markets currently are Germany (80 %) and the Kingdom of Denmark (20 %).

A large percentage of this total (USD 9.67 million) is in made-up textiles articles (HS Chapter 63). The balance is in apparel, with knitted clothing accounting for USD 2.75 million and woven apparel accounting for USD 1.5 million.

Exports of textiles and basic garments (uniforms, etc.) to the region make up approximately 15% of Uganda’s sales, including the Democratic Republic of the Congo, Rwanda, South Sudan and, more recently, Kenya. The rest is for the local market (some of which become cross-border exports).

The value chain is still highly focused on local and regional markets, e.g. basic products that use locally produced fabrics. There has been some more recent success in volume exports of apparel to European Union markets by one integrated textile mill. The product range is heavily weighted towards knits, e.g. T-shirts (85 %), as well as sports pants, leggings and ladies’ dresses.

Uganda, through its Buy Uganda, Build Uganda (BUBU) initiative, seeks to promote consumption of locally produced products. This includes procurement by government institutions of uniforms for the police and military, etc., which is opening up opportunities for increased production and sales to the local market.

Uganda has completed the development of a strategy for its cotton, textiles and apparels sector. Produced under the National Planning Authority, the strategy proposes to revive the cotton value chain and calls for increased investment in garment production, including export-oriented apparel factories. The strategy envisions 50000 new jobs and USD 650 million in additional export revenues during the next eight years. In addition to increasing the value of Uganda’s cotton output, the strategy seeks to establish five new vertically integrated textile mills.

Rwanda

Rwanda has a relatively small and underdeveloped textile and apparel value chain, with negligible cotton production and one fully integrated factory that largely serves the domestic and regional markets for uniforms. There are no stand-alone textile mills outside of this factory, and the textiles produced there largely do not meet the demand of local apparel producers producing for export in terms of quality or price. There are several smaller companies and one large export-oriented factory. There is an industrial zone – the Kigali Special Economic Zone – where a handful of new investors across different sectors operate. One company under previous Chinese ownership had established itself with the goal of exploiting the USA market, but with the loss of AGOA eligibility in 2018, production by a new company (which recently bought the old company) now focuses on other export markets in Europe and Asia.

Rwanda’s total worldwide exports of apparel in 2018 were less than USD 5 million, and were zero to the United States due to its current status as an AGOA-ineligible country for apparel exports. This compares to the almost USD 400 million that Kenya exported to the United States alone in 2018.

Total textiles and apparel exports were nearly USD 22 million in 2018 (Table 20). Made-up textiles articles make up a large percentage of this total (nearly USD 17 million).

As part of the government’s strategy to build up its textiles and apparel sector, Rwanda currently maintains a ban on the importation of second-hand clothing. The government has identified textiles and apparel as a priority sector and has provided incentives to the industry, particularly geared towards foreign investment in export- oriented apparel production, where the potential for employment is also the greatest.

In the area of technology upgradation, the government also has programmes that target small and medium- sized operations. The Ministry of Trade and Industry maintains a facility through the Business Development Fund (BDF) that assists companies with machinery upgradation. Successful applicants to the facility receive exemption of import duty and VAT on the imported machinery.

There is also a Skills Development Fund (SDF) under the Workforce Development Authority (WDA). Successful applicants receive support to train its workers. The programme involves six months of training by company identified trainers, and the fund covers the cost of bringing the trainees to Rwanda and expenses for the duration of the training. This facility is directly tied to technology upgradation in that upgraded technology is a necessary prerequisite; an applicant must have the technology in place to access the facility, and the training specifically covers technical training on the new machines.

Key findings of stakeholder engagement

In Uganda and Rwanda, there are currently two active textile and garment manufacturing companies each, some of them targeting international markets.

One company sees its labour force doubling by March 2020 via expansion with its new factory. This will require new technologies to meet growing demand. The company also recently acquired a major new international client, which requires production schedules and turnaround time that very much define the “fast fashion” model. To service this client, the company would need to import new automatic machines that will increase its productivity and meet efficiencies demanded for seasonal business.

Another company has plans for expansion and has identified specific technology needs, i.e. where the priorities are in the production process and which specific machines are needed.

One company noted that it is only operating at 40% capacity. The reasons for falling short of full capacity are a lack of customers beyond current clients and a move into new product ranges. New products will bring new buyers, for which new machines will need to be procured. Some of the machines can be anticipated through planning, while in some cases the buyers themselves will dictate new technologies.

Uganda – interest in upgrading technology and outlook for sector

Technology is unquestionably a factor for companies operating in Uganda, particularly given the size and structure of the value chain. Given that Uganda is a large cotton producer and would like to add more value in- country than is currently the case, one priority area for upgradation is in spinning. Currently, only 10% of Uganda’s produced cotton is used for value addition – there is a need to strengthen value addition.

One stakeholder referenced the need for Uganda to follow the Republic of Uzbekistan’s model of using the cotton sector to drive investment in the whole value chain.

As the full value chain develops and Uganda increases its base of textiles and apparel production through new investment, new technologies will be needed. A sampling of some of the priority needs identified by stakeholders follows.

The outlook for the sector is mixed. Stakeholders in Uganda are cognizant of the fact that apparel exports have been limited and, while there is some level of integration within the value chain via vertically integrated factories, the companies are few and the base of production remains small in comparison to, for instance, Kenya. Attracting foreign investment, which is dependent on a conducive business environment, is critical.

There have been some new investment commitments recently in both textiles and garmenting, including a Chinese textiles investor in the Kampala Industrial Zone and an Indian textiles investor in the Jinja Industrial Park. The latter has been ginning for many years, but has plans to expand to spinning, textiles and garments. The new investors coming are mainly from India and China.

In terms of expansion by current factories, there have been investments made during the last five years in both the textiles and apparel subsectors. All of these investments were made to upgrade the technology and increase capacity. Other new investments have been made in order to expand into new product categories, for example medical uniforms, which have brought new technologies to Uganda. These have included the printing and dyeing machines.

Rwanda – interest in upgrading technology and outlook for sector

All of the respondents to this survey noted a strong interest in upgrading their technology and indicated that the acquisition of new technology will enhance their global competitiveness. Upgraded machinery and new technology will improve two fundamental areas: capacity and price.

Finishing equipment was identified as a priority. These machines provide the critical “hand feel” to cotton-based apparel. Dyeing equipment for textiles is seen as equally important. These technologies will allow local fabric production (and lesser reliance on imports) of a wider range of fabrics both for local production and, ideally, for use in exported garments.

Apparel producers, on the other hand, are generally content with their machinery and have access to the most current technology on the market through their foreign headquarters. In order for the value chain to develop and for backward linkages to take place, the critical need is within the textiles subsector.

Below is a snapshot of the current technology needs of textile and apparel companies in Rwanda.

The outlook for the sector among stakeholders is mixed. On the apparel side, views are generally favourable. Companies noted the initiatives being undertaken by the government, which views textiles and apparel as a priority sector and key driver of economic development. It is generally believed that garment production will continue to expand due to incentives, both for current operators and new investors. Respondents believe that new entrants will come into the market, driving competition.

A new investor in the country has a strong outlook for its own operations, as well. It believes that, through continued investments in machinery and new technology, it will become one of the premier apparel producers on the continent.

Conversely, stakeholders have a more measured view of the prospects for textiles. It was noted that there have been no notable new textile investments, and any new entrants in this capital-intensive subsector would struggle to survive and compete against the installed capacity in the region.

Uganda – challenges within the operating environment and related to technology upgrading

Low labour productivity: While labour costs are low relative to other countries in the region, labour productivity is also seen as comparatively low. A minimum of three months (and ideally 4½ months) of training is required at the front end in a typical factory, supplemented by ongoing trainings. One company explained the steps towards workforce development in its factory: after the first month, 80% of the trainees will demonstrate their competencies and advance; after the second month, their productivity level will be 30%; finally, after 4½ months, workers will achieve efficiency levels of 50%. This is still below the 70% efficiency levels achieved in Kenya.

Lack of skilled technicians: It was noted that there are no training programmes available through government or other facilities in Uganda. Consequently, factories do all training in-house. The lack of skilled technicians to service machinery was identified as a major constraint.

Cost of finance is a major constraint. At interest rates of 21%–24%, many companies simply do not have the means to borrow locally to support investments. Lack of access to finance is, in fact, the major hurdle to technology upgradation in Uganda.

Energy costs are not an appreciable challenge, as the government subsidizes energy costs within the sector (3 cents/kw, compared with 11 cent/kw in other industries).

Rwanda – challenges within the operating environment and related to technology upgrading

Time and cost of transport: The time and cost of transport has historically been a challenge for operators in Rwanda given its landlocked status, but stakeholders noted that these challenges have been reduced markedly with government subsidization of transport costs in recent years. This is particularly true for companies that operate in the industrial zone and produce for export markets. With the subsidies, these companies – which use both the ports of Mombasa, Kenya, and Dar es Salaam, Tanzania, for its export (and importation of inputs) – are able to mitigate their otherwise daunting transport costs. It is important to note, however, that these same incentives are not extended to local producers, so inland transport costs continue to be a hurdle for these companies.

Labour skills gap: Labour is not seen as a major challenge from a cost perspective. However, most stakeholders noted a skills gap and the need for training as a critical variable. One company noted that the efficiency of its workforce was 45% when it started operations (as compared to an average of 75% in Kenya). However, through intensive in-house training of its operators, it was able to bring this efficiency variable up to 80%. The company noted that workers are trainable and it requires a 6–12-month period to achieve satisfactory operating efficiencies.

Lack of technical expertise locally to service machines: Several companies cited productive days lost due to idle machines and time required to obtain the necessary servicing from overseas.

Lack of local supply of spare parts: The lack of spare parts in Rwanda creates time delays when parts must be imported, contributing to factory downtime.

Government incentives unevenly applied, causing pricing distortions: One textiles manufacturer noted that it is being priced out of the market by government incentives (tax exemptions on imports) extended to garment exporters operating in Rwanda, which are able to import cheaper fabrics than what the company can produce.

Challenges specifically related to technology upgradation can be found in five areas, starting with identifying and sourcing from the right supplier. Then there is the issue of lack of access to finance and the high cost of borrowing, which can hinder companies’ ability to finance such investments. There are time and cost issues to bring in the technologies and, once obtained, the available technical support to service the machines can often be lacking. Finally, there is very little local technical capacity regarding machine usage, presenting challenges in terms of training.

Technology considerations by industry subsector

Capacity utilisation

Capacity utilisation in Ugandan and Rwandan factories varies from 40 %–100 %. Capacity utilisation is highest for the sewing segment.

One company noted that it is only operating at 40 % capacity. The reasons for falling short of full capacity are a lack of customers beyond current clients and a move into new product ranges. New products will bring new buyers, for which new machines will need to be procured. Some of the machines can be anticipated through planning, while, in some cases, the buyers themselves will dictate new technologies.

Characteristics of machinery

Main sources of machinery are Germany, India, Japan and China

Factories in both countries use similar technology within the textiles and apparel sector. The main sources of technology across the value chain are:

Europe (Germany; Italy): 50%

India:                                   20%

Japan:                                 15%

China:                                 15%

On the apparel side, the current installed machinery is primarily from Japan and China. In other areas of the value chain, from spinning through to finishing, the machinery comes primarily from the European Union and Japan (70 %), China (15 %) and India (15 %).

One of the interviewed companies noted that its main investments have been in machinery for efficiency gains (e.g. semi-automatic machines) and that it plans additional investments during the next two years.

Yarn manufacture

Approximately 75 % of the spinning capacity in both countries is currently being used. Spinning technology comes primarily from India, Germany and Japan and machines are generally 10–20 years old, with some less than 10 years old. The main constraint to full capacity utilization in spinning is the age of the machines. Indeed, several companies interviewed in both countries believe that they need to upgrade their spinning machinery to achieve higher utilization levels.

Fabric manufacture

In both countries, approximately 40 % of the inputs in weaving are sourced in-house, while 60 % is imported due to unavailability in-country. Between the two countries, looms are currently operating at approximately 75 % capacity. The machines – rapier, air jet and water jet looms – are 2–10 years old and primarily come from Japan and Italy, while others from Switzerland are more than 20 years old. The main constraint to greater weaving capacity is access to spare parts and time lags (including idle time when machines are down due to lack of spare parts). As with spinning, companies in both countries noted that they need to upgrade their technologies to approach higher levels of utilization. In both countries, 100 % of the inputs in knitting are sourced in-house and knitting production is operating at approximately 80 % capacity utilisation.

Processing of textiles

Dyeing and printing are done in both Uganda and Rwanda. Printing machines include Stenters from Germany and have an average age of six years. Dyeing machines come primarily from Italy, and are mostly new and not more than five years old. Capacity utilization is quite high at 80% on average, though it is only approximately 30 % at one factory interviewed. The company reports that technology constraints – chiefly old machines (more than 30 years old) that need upgrading – are a major reason for low capacity utilization.

Garment manufacture

Garments produced for local and regional markets in Uganda and Rwanda are largely T-shirts and uniforms. Both countries are ramping up production for export markets and expect exports to rise significantly as expansion plans are completed. Average capacity utilization is 85 %. Most machines are from Japan (Juki) and the majority of the machines are less than 10 years old.

Summary of challenges and opportunities:

Uganda

In Uganda, the main constraints to full capacity utilization are:

•             Rampant illicit and undeclared imports;

•             Under-invoicing;

•             Inferior products coming into market;

•             Hyper price sensitivity of products produced in-country;

•             Need for new markets;

•             Recent expansion into new products.

Specific technology related constraints to full capacity utilisation include:

•             Ageing machinery, which also brings higher energy costs than newer, more energy efficient technologies; and

•             Poor access to spares and long lead times to obtain spare parts.

Rwanda

In Rwanda, the main constraints to full capacity utilization are:

  • Availability of raw materials – entirely imported;
    • High energy costs (12 cents/kw);
    • Labour costs; and
    • Lack of skills.

Regional sourcing and the role of technology

Apparel companies producing for exports markets mostly import their fabric needs, most of which come from China. Fabrics must be imported not so much due to cost, but rather there is a lack of availability due to an inability of local producers to meet both volume and quality requirements. There are also integrated textile mills that produce their own fabrics.

One factory noted that it does not need to buy textiles locally, as it already meets its needs through in-house capacity; a full 80% of which is used for its apparel produced for export markets. The rest (20%) is imported and used for local market production. This company has plans for expansion and has identified specific technology needs; i.e. where the priorities are in the production process and which specific machines are needed.

The primary challenge for both countries’ textile producers has been lack of markets. One company is only producing less than half its installed capacity. While fully integrated, it imports fabrics (mainly polyesters) from India, the Republic of Indonesia and South Africa.

While companies are interested in using fabrics from local or regional suppliers, currently these suppliers simply are not able to comply with their requirements. Companies cite as the main factors: inferior or inconsistent quality, unreliability, and inability to meet technical specifications.

When asked to what extent it believes lack of technology is a factor, several companies stated “very much”. The belief is that local and regional textile producers are woefully behind the curve in terms of technologies that would produce the kinds of fabrics needed for use in garments made for export markets. When asked whether it would be more likely to buy from local suppliers if they acquire the necessary technologies that would allow them to meet its specifications, respondents overwhelmingly said yes, as long as the price is comparable to imported products.

Conclusion

  • Both countries are small players in the sector globally. But, both have clear plans to build and expand their textiles and apparel sectors. This requires more machines and the latest technologies for operating efficiencies;
    • Both countries’ base of production and value chain is small relative to bigger players in the region. While the textiles and apparel sector is dominated by just a handful of large companies, both countries have renewed their effort to bring more investment;
    • The push by the government in both countries to buy locally has implications for local producers supplying the domestic market – particularly the uniform market (police and military uniforms, and school uniforms), as well as textiles producers supplying the local market;
    • The established companies are in expansion mode, which is indicative of a favourable outlook within the sector;
    • There are good prospects for supply of machines and new technologies to support this growth; and
    • Further, if increased production of garments for export markets continues – in particular, capture of the lucrative USA market – this will act to “pull” the rest of the value chain, effectively to energize and reorient the value chain, from cotton to textiles, to service production for export markets beyond the current base of local and regional markets.

CONCLUSION

Common themes across countries and stakeholders

●            Most textiles and apparel sectors in this study are at a crossroads. Some countries such as Kenya have capitalized on investments since 2000 to take advantage of AGOA and have managed to become leading exporters of apparel to the USA, while others such as Ethiopia have entered the scene in recent years and become emerging sourcing locations.

●            Still, all of these countries have fragmented and incomplete value chains, whereby apparel production is largely based on CMT and textiles production largely supplies local markets. This paradigm has stunted backwards integration and necessary investments in the critical textiles subsector. Constraints have begun to place strains on the sector, while the global industry continues to rapidly evolve.

●            Facing these realities, uncertainty in the operating environments has led to some hesitation by companies to undertake needed upgrades in technology. Yet machine upgradation is recognized as essential for the sector in East Africa to survive and grow. Business as usual will not be sufficient to meet the demands of the new dynamics within the industry.

●            Service provision and technology maintenance issues are critical. Currently, very few service providers are located in the region. Hence, maintenance around issues must often be handled remotely or, for more involved issues, technical expertise must be brought in from abroad.

●            There is a shortage of skilled labour, especially in mechanical and electrical; capacity in this area lags behind countries such as India and Bangladesh.

●            That said, the sector in East Africa is ripe for investment and modernization. Companies in the region largely have a positive outlook on the sector and believe that it will continue to evolve through expansion, upgradation and new entrants in the market.

●            While many companies within the textiles and apparel sector believe that their access to information on available and up-to-date technologies is very good, a fair amount also feel that their access to such information is limited. Many use online resources to identify trends and latest technologies within the sector. Others use technologies that are identified by their corporate headquarters (in the case of foreign investors). Finally, some attend networking events and trade shows catering to textiles and apparel machinery and technology. These latter avenues are an important resource for factories in the region to identify the right machine suppliers – ones that are able to supply the proper mix of cost and efficiency.

●            The motivation on the part of individual factories to innovate and invest in new technologies is strong. Companies are seeking technologies that will help them penetrate new markets, expand to new product offerings, achieve efficiencies, cut operating costs, meet demanding buyer specifications, and help them operate in a more sustainable and environmentally friendly way.

●            Suppliers of technologies that meet the unique needs of the textiles and apparel value chain in East Africa will find good opportunities and an industry ready to use technology to grow the sector.

Key areas for technology upgrading

●            While this report has identified specific areas for technology upgradation across the value chain, it is clear that the greatest overall need is in the textile subsector. The need for greater local capacity in fabric production is apparent.

●            Needs also appear greatest among apparel companies that are located outside of export processing zones, ones that are primarily targeting domestic and regional markets and that often have local ownership.

●            However, there is strong demand across the value chain and in all of the countries surveyed.

Perceptions of Indian technology and interest in sourcing from India

●            It is difficult to define perceptions across a wide area of countries and companies, but, in general, India is seen as a viable and interesting sourcing option.

●            Indeed, a large number of companies in this survey expressed a desire to consider importation of technology from India or are actively seeking to source machinery from India.

●            Generally speaking, India is regarded as a good option for machinery that, in some cases, is perhaps less advanced than European technologies, and accordingly priced lower, but better in quality to Chinese machinery.

●            Needs also vary within the value chain, with weightings more skewed towards spinning, weaving and knitting machinery, but also some areas of finishing.

●            Overall, companies are interested in learning more about technologies on offer from India that might provide unique solutions.

REFERENCES

Ethiopian Textiles Industry Development Institute (September 2017). Ethiopia Textile Industry Profile.

International Finance Corporation. World Bank Group (2018). Mapping and Analysis of the Textile and Apparel Sector in Kenya.

International Trade Centre (2016). Kenya Textile and Clothing Value Chain Road Map. http://www.intracen.org/uploadedFiles/intracenorg/Content/Redesign/Projects/SITA/Kenya- Value%20Chain%20Road%20Map%209_web.pdf.

International Trade Centre (2016). Tanzania Cotton-to-Clothing Strategy. http://www.intracen.org/uploadedFiles/intracenorg/Content/Redesign/Projects/SITA/Tanzania%20C2C%20Str ategy%205-3_web.pdf.

International Trade Centre (2016). Uganda Cotton, Textile and Apparel Sector: Investment Profile. http://www.intracen.org/uploadedFiles/intracenorg/Content/Redesign/Projects/SITA/SITA_Uganda_CTA_bookl et_final_web_page.pdf.

McKinsey & Company (April 2015). Sourcing in a volatile world: The East Africa opportunity. https://www.mckinsey.com/industries/retail/our-insights/sourcing-in-a-volatile-world-the-east-africa-opportunity.

Ministry of Industry and Trade; Textile Development Unit, Tanzania (July 2019). Survey of Textile & Apparel Factories in Tanzania (2018). Unpublished.

National Planning Authority, Government of Uganda/Msingi East Africa (June 2019). Uganda Cotton, Textiles and Apparel Sector Plan. Draft.

Neil Balchin and Linda Calabrese (May 2019). Comparative country study of the development of textile and garment sectors: Lessons for Tanzania. Overseas Development Institute. https://www.odi.org/sites/odi.org.uk/files/resource-documents/12694.pdf.

Saha et al (2019). Technology Demand and the Role of South-South Trade in Tanzania’s Textiles and Apparel Sector: Examining Linkages with India.

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The TextileFuture Newsletter of last week

Technology upgrading in East Africa’s Textiles and Apparel Sector (Part 1) https://textile-future.com/?p=34862

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