The figure below shows that there are distinct stages in the cotton to clothing value chain starting at the farm level with the cotton growing. Indeed the supply chain from cotton to clothing is unusually long, with a series of stages, inputs, processes and additions necessary. Everything starts on the farm with the growing of cotton which involves two major inputs, labour and agro-chemicals. Labour is very cheap but the quality of labour and productivity tend to be low. Chemicals on the other hand tend to be expensive. At the level of cotton growing there is a choice between organic or non-organic cotton. From this stage the cotton goes on to the ginning where there is separation of lint and seed– resulting in cotton bales that go for spinning. As this is a machine driven practise it requires factories that depend on energy, labour and machinery. Once the spinning has taken place the yarn goes on for weaving or knitting, depending on the end product desired. This stage again depends on a factory based system with energy, labour and machinery the key aspects. The finished fabrics will be assembled for wholesale or retail customers and sold locally or exported.
The Cotton to Clothing Supply Chain
Source: COMESA ‘Regional Strategy for Cotton to Clothing Value Chain’ page 6
A number of points need to be made about this supply chain as they will be important at later stages. The first is how labour intensive the chain is, with labour a major driver of the whole chain from farm to processing of fabric at the very end. This means that labour costs and quality as well as productivity are key drivers in the industry. Secondly there is a heavy reliance on machinery in the chain, even from the level of the farm, so the quality of the machinery will again be an important factor of costs. Finally the supply chain depends significantly on its supply of energy, making a cheap and reliable source of energy an important determinant of the cost structure.
It is possible to go one step further in this supply chain analysis with the aid of the following figure;
The Cotton to Clothing Supply Chain in Detail
Source: Organic Exchange
This figure shows the series of stages of the value chain from organic cotton seed to the export of clothing. It is a production chain that can also be extended to non-organic cotton. Every stage of this process is a potential supply chain cost or benefit and the whole chain is in a state of constant flux as different parts of the chain reduce or increase costs. The objective of regional integration is to create a regional supply chain so that the most efficient and cost-effective regional producer and supplier of all the stages above integrate into one efficient regional supply chain. The ability to do this depends on a series of factors such as transport, government protection, local demand, and the basic knowledge of who does what in the region. These issues will all be revisited later in the report.
A further point that is worth making is that this extended supply chain has had a number of consequences on African textile production and export- notably that the majority of firms have remained particularly small. This factor may help to explain why so few African firms export. The fact that exporting requires an initial large sunk cost in terms of investments in market information and product compliance with the requirements of foreign markets may also explain why small firms self-select out of the export market. This cost argument also justifies the persistence of exporting: breaking into export markets is so costly that exporting firms tend to remain active in the export markets once they have entered them.
It is not just the fragmented nature of the supply chain, and the size of the companies that are operating in it, that is posing problems for the African, and EAC, textiles industry at the moment.
From the overview of the cotton to clothing supply chain it is important to address the biggest cost drivers in the chain– those factors that will be most likely to determine the competitiveness of an industry. The objective here is to identify where the challenges for competitiveness exist, an issue that can then be dealt with in the next section on regional integration. At a meeting of African Cotton & Textile Industries Federation (ACTIF), a regional umbrella organization for trade associations in the cotton, fibre, textile and apparel sectors from across sub-Saharan Africa, in April 2010, the following cost drivers were identified in the cotton to clothing supply chain;
The Main Cost Drivers in the EAC Textile Industry (2010)
Source: ACTIF Workshop, Nairobi, April 2010
The issues listed above represented the main cost drivers for the EAC textile industry in 2010. The issues can be divided into the following categories:
- Cost of inputs: cotton, dyes, chemicals
Subsequent questions need to be asked from where these inputs come and why their costs are rising, or causing problems.
- Cost of power/fuel taxes
The cost of power varies enormously across the EAC region, as does the reliability of supply. Some factories continue to operate via wood burning because this is deemed cheaper and more effective. In addition to these power issues fuel is taxed heavily as a source of government revenue.
- Cost of labour
The cost of labour in the EAC region is very cheap by international standards and represents one of the main cost advantages over competitors in the global market. However the differential appears to be reducing over time – provoking competitive issues.
- Logistics and freight
The ability to move goods around the EAC region, especially to the ports for export, is suboptimal and a major cost to local producers. There is no real infrastructure that links the region, which is a burden for intra-regional trade as well as exports. In addition freight costs are above average given that the frequency, and volume, of freight traffic to and from the region is low.
The ability to move goods around the EAC region, especially to the ports for export, is suboptimal and a major cost to local producers. There is no real infrastructure that links the region, which is a burden for intra-regional trade as well as exports. In addition freight costs are above average given that the frequency, and volume, of freight traffic to and from the region is low.
Whilst the report will come back to the issue of infrastructure, as it is a major issue to develop, it is important to highlight, having just listed these key industry drivers, that pro-competitive measures are fundamental to the development of a regional supply chain. The drive to regional integration is built on a drive towards increased competition and competitive industries. Putting this into practise will entail liberalisation measures and end of a number of monopoly situations. This is particularly the case in key sectors such as energy where monopoly positions are frequent. The region will need to develop a pro-competitive regulatory environment that helps break down existing monopolies, duopolies and cartels that currently operate in many sectors.
The COMESA strategy of 2009 set out to identify the competiveness challenges in the industry, and to create a roadmap and plan to overcome them and make the industry globally competitive. Part of this process was to identify the other side of the coin from cost-drivers, by identifying the factors of success in the textiles industry. The table below sets out a non-exhaustive list of some of the most important ones;
Factors for Success in the Textiles Industry
- Productivity
- Quality
- Creativity
- Speed
- Innovation
- Reliability
- Meeting retailer standards (CSR)
- Supply Chain Management
- Enabling tariffs
- Absence of NTBs on internal trade
- Exchange rate management
- Proximity to markets
- Fast lead times/turnaround times
- Flexible and efficient production lines
- Good infrastructure to support exports
- Construction of dry ports
- Export processing zones
- Financial/Tax incentives
- Efficient Customs Clearance
- Abolition of export duties
- Business Advocacy to sensitize government to issues
- Integration into the supply chain of major retailers
This list elaborates a number of critical success factors for a textiles industry, covering all elements of the supply chain from the farm to the end user. The factors above are not in any specific order, and excellence in only one of the factors could be sufficient to ensure a competitive advantage, but to maintain an advantage all of the factors need to considered and improved on. One final addition at this point is to consider what buyers want/need – which can be summed up through a short list as follows;
Buyer Priorities in Textile Markets
- Price
- Quality
- Compliance with CSR + standards
- Service reliability
- Low lead times
Because the market for textiles, in all their forms, is such a competitive one buyers are able to be very demanding with respect to their requirements. Having outlined the supply chain and the factors that generate success and buying priorities it is time to turn to the competitiveness issues in the EAC supply chain.
Related articles:
- Part 1: The benefits of regional integration for African Industry
- Part 2: Analysing Business Implications
- Part 3: Customs Union to Common Market: What Business Needs to Know
- Part 4: Framework for Business Engagement with Regional Integration
- Part 5: Analysis of EAC Textiles Sector