KZNCTC Yearbook 2014 by B&M Analysts

Contents Section 1: introduction............................................3 Section 2: international & local trade data.............9 Section 3: retailer report........................................33 Section 4: sa industry benchmarking....................55 Section 5: the quick response model.....................77 Section 6: policy .....................................................83

introduction We are pleased to present the 2014 KwaZulu-Natal Clothing and Textile Cluster (KZN CTC) yearbook, which outlines key global and South African trends with regard to the clothing and textile industry.

The 2014 KZN CTC yearbook is structured to commence with an analysis of global, macro trade trends and end with an analysis of the requirements for competitiveness at the micro, firm level. Ultimately, the appropriateness of current South African policy support for the clothing and textile industry is considered, specifically with regard to textile supply, which affects the flexibility and reliability of the entire pipeline. The contributions of Ethekwini Municipality, KZN Department of Economic Development, Tourism & Environmental Affairs (EDTEA), Edcon as well as the South African Department of Trade and Industry (DTI) to the work of the KZN CTC, and the publication of this yearbook, are gratefully acknowledged. The support of these organisations has contributed to the transformation of an industry that was considered to be in its sunset years less than eight years ago. Specific wins achieved by KZN CTC and members between 2012 and 2014 include: •

The successful promotion and implementation of the quick response model, which relies on local manufacturing capabilities to achieve a 42 day lead time from concept to shop floor;

•

The creation of some 500 jobs in member firms, but numerous more in projects that have spun off from the KZN CTC;

•

An average sales increase of 5% above inflation for member firms;

•

The facilitation of numerous strategic partnerships between retail and manufacturing;

•

A total of R20,987, 120.00 leveraged into the NPC for industry support from government and private sources;

•

Localisation of key activities (e.g. fabric printing) and

•

Major operational improvements and direct skills development of more than 5 000 individuals.

4. Section 1: Introduction

The major findings of the KZN CTC 2014 Yearbook are summarised in Table 1. All findings point to the validity of industry development requirements identified at the Fifth Retail-Clothing-Textiles Imbizo held at Devonvale Golf and Wine Estate from the 16th to the 17th of August 2013. In particular however, the major considerations that emerge from this yearbook are as follows: •

South Africa is a net importer of finished clothing and textile products. Without any major export focus, local manufacturing firms are subject to the cyclical demand of local retail customers and the domestic economy, and are under increasing pressure from nearby competitors such as Mauritius and Madagascar.

•

South African retailers are adopting quick response strategies although they have come under recent pressure because of the decline in access to consumer credit. While there have been clear, measurable successes in developing local quick response sourcing relationships, which have had a significantly positive impact on the bottom line relevant manufacturers, there is still more to be done in embedding this within the local retail environs.

•

South African manufacturers have made significant strides towards the implementation of lean best practice, although their flexibility and reliability is hampered by the small scale and scope of local fabric supply;

•

The scale of demand for fabrics by local retailers is large – specifically with regard to medium-weight synthetic fabrics. Investment in the local production and conversion of these fabrics could seriously enhance the competitiveness of the local industry.

.5 Section 1: Introduction

Table 1: 2014 Yearbook Summary Trade Data

Finished Textile Products •

South Africa is a very small exporter of finished apparel and household textile products (0.04% of global trade).

•

South Africa is a net importer of finished goods with 2012 imports 9.2 times higher than exports.

•

Finished household textile products are a relatively big component of total South African export of textile products (41% of total)

Textiles

Retailer Report

•

SA only contributes 0.22% to total global exports of textiles in 2012.

•

Imports are more than double exports in South Africa in 2012.

•

40% of South African textile exports are destined for China, with Zimbabwe coming in a distant second (3.7%)

•

Almost 80% of South African exports are of unprocessed fibre and yarn.

Consumer Trends •

From a consumer perspective, we see that there are huge geographic shifts in global apparel demand away from traditional markets to emerging markets, and new technology is having an impact on retail business models and access to markets. In South Africa, shrinking access to credit is undermining retailer growth and increasingly savvy customers are demanding a quick response to trends at affordable prices, as well as looking at online buying options.

Retailer Trends •

From an international performance perspective, Inditex and H&M remain the front runners in terms of Gross Margin Return on Inventory Investment (GMROII) and growth. Interestingly GMROII is declining year on year for most major international retailers. In South Africa, Woolworths and Mr. Price perform best in terms of GMROII and growth, but this has more to do with margins generated from their specific product offering than the flexibility of their sourcing practices. The Foschini Group (TFG) and Truworths have suffered as a result of the decline in access to consumer credit – specifically since they target the youth market with limited liquidity.

Benchmarking

Economic Performance

Data

•

Cape and KZN Clothing and Textile Cluster members have seen rapid sales increases between 2011 and 2013, without commensurate employment increases. This indicates that firms are moving towards improved productivity along with higher value added products.

Operational Performance •

From an operational perspective, South African manufacturers tend to hold high levels of raw materials to account for the unreliability and inflexibility of fabric supply. In general South African clothing and textile manufacturers are making successful efforts to improve internal quality management and to improve flexibility and reliability. Labour instability in the form of high employee turnover is of concern, and combined with the raw material supply constraints are increasingly undermining the overall competitiveness of the value chain both domestically as well as export opportunities that are emerging as the exchange rate weakens.

6. Section 1: Introduction

Lessons from 2014 Turkey

Quick Reponse Defined

Study Tour

•

The KwaZulu-Natal Clothing and Textiles Cluster, in association with its sister organisation, the Cape Clothing and Textiles Cluster, has worked tirelessly on the development of the Quick Response (QR) retailing, and associated supply chain management and manufacturing model since 2007. QR can be defined as: “The reliable and flexible supply of in-demand products to an unpredictable market based on actual Point of Sale (POS) intelligence, within a maximum time frame of 42 days from the raising of a monthly Purchase Order (PO) to the in-store display of the product.”

Achieving Quick Response •

A recent study tour to Turkey highlighted that the above lead times are only possible through the adoption and alignment of lean production capabilities across the supply chain – from knitting/weaving operations, to dyeing and finishing operations to garment assembly. It is on the back of these capabilities that the Turkish suppliers are able to meet the 28 day pre-production and production lead time target, while at the same time:

•

Assuring the quality of supply to their customers (all vendors are on self-audit to AQL 2.5 standards),

•

Delivering 100% on time and in full and

•

Managing their operating costs as effectively as possible (Turkey’s base factor costs are higher than evident in South Africa – labour and overhead costs).

Policy Section

South African Clothing and Textile Policy Support •

South African government support for clothing, textiles, and footwear is designed to boost competitiveness from a predominantly supply-side perspective. The primary support instrument by the Department of Trade and Industry (DTI) is the Clothing and Textile Competitiveness Programme (CTCP), which is intended to develop the internal competitiveness of manufacturing firms, whilst also promoting inter-firm collaboration and clustering.

Chinese Policy Instruments •

In comparison to South Africa, Chinese trade and industry policy is more multi-faceted. There is a clear focus on developing overall value chain alignment, in developing local technical ability and in creating a stable cost environment as the industry matures. However the sustainability (and WTO compliance) of some mechanisms, such as cash grants and artificial discounting of raw material inputs, is questionable.

Feedback on South African Support •

Key players in the South African value chain believe that the CTCP has had an undeniably positive impact in terms of developing world class manufacturing standards and “re-industrialising” the industry. There is some concern that funds could have been used more strategically to build up local value chains around key retail customers and that the development of technical skill in production and pre-production should be a focus in the future.

Specific Concerns •

Two significant concerns are that attention has been recently diverted from the well-studied and understood mechanism of regional (or ordinary) clusters to large, resource hungry national clusters despite there being no evidence that such a construct is a suitable mechanism for industrial development. Also, limitations in fabric supply continue to hamper the overall competitiveness of the local industry and despite this there is no evidence of a clear strategy to develop and support textile manufacture and conversion (specifically with regard to medium weight synthetic fabrics) despite extensive industry support for the adoption of recommendations made in a major textile mapping and policy briefing exercises conducted for the DTI in 2012 (Barnes, 2012).

.7 Section 1: Introduction

international & local trade data In this section of the yearbook we use United Nationsâ&#x20AC;&#x2122; Comtrade data (2012) to review trade trends for finished apparel and household textile products and well as textiles. In both cases we analyse data and trends at the global and South African national level.

Clothing & Finished Household Textile Products GLOBAL TRADE ANALYSISÂš Clothing and finished household textiles are a significant component of overall international trade. Figure 1 shows over R6.6 trillion was traded globally in 2012, with exports and imports reaching R3.3 trillion each - almost a return to the pre-global crisis levels in 2008.

Figure 1: Total Aggregate Global Exports & Imports : 2007 - 2012 (rm)

Table 1 captures the growth rates in import and exports over the period 2007 to 2012, as exhibited in Figure 1. It reveals highly fluid trading conditions, with strong growth from 2007 to 2008 (48.2 per cent for imports and 59.5 per cent for exports), followed by a severe contraction from 2008 to 2009 (declines of 29.4 per cent and 27.9 per cent respectively), stasic from 2009 to 2010 (growth of 0.5 per cent for exports and a decline of 2.3 per cent for imports), and then resurgent growth from 2010 to 2011 (37.3 per cent and 40.1 per cent respectively). However, the period 2011 to 2012 yields low growth once again. The average annual growth rate of 12.2 per cent for global exports and 8.5 per cent for imports over the 2007 to 2012 period is therefore very misleading. The global trade of clothing and household textiles is clearly susceptible to broader market conditions (both positive and negative) and has been highly unstable over the recent period. 10. Section 2: International & Trade Data

ÂšAll data is sourced from the United Nationsâ&#x20AC;&#x2122; Comtrade database. All 2012 data will be reviewed again in 2013 in order to verify the accuracy of the 2012 data.

Table 1: Year-on-Year Clothing Export and Import Growth (Global) Year on year growth rate

Total growth rate

Ave. Annual growth rate

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

2007-2012

2007-12

Exports

59.49%

-27.94%

0.50%

37.32%

1.60%

61.13%

12,23%

Imports

48.23%

-29.40%

-2.25%

40.06%

-0.68%

42.31%

8.46%

Sector exports are highly concentrated in a few economies. As revealed in Table 2 below, China is a behemoth with respect to clothing and household textiles exports, responsible for R1.3 trillion in export sales, and contributing 40.1 per cent of all exports. The table shows China as the dominant global player, indeed, no other country contributed more than 6 per cent of global exports. There were also no African countries in the top 10 list of exporters. South Africa’s contribution to global exports represented a mere 0.04 per cent of global exports at a value of only R1.48 billion in 2012. Table 2: Ranking of Global Exporters - 2012 (Rm) ² Rank

Country

Export Value

Export %

China

R 1 361 706

40.55%

Bangladesh

R 194 233

5.78%

Turkey

R 146 790

4.37%

India

R 136 411

4.06%

Italy

R 134 850

4.02%

Vietnam

R 130 681

3.89%

Germany

R 84 032

2.50%

Indonesia

R 80 004

2.38%

Pakistan

R 62 466

1.83%

France

R 59 087

1.76%

South Africa

Other

R 1 488

0.04%

R 967 393

28.81%

² Data limitations create a slightly distorted picture of global exports in this GVC. Bangladesh and Vietnam do not appear in the table above because Bangladesh last reported statistics to UN Comtrade in 2007, Vietnam in 2010. According to the WTO, Bangladesh exported R 161,100 million of clothing in 2011 and Vietnam exported just over R 106,300 million; they ranked 4th and 8th respectively. While the WTO’s GVC definition varies from the one that we have constructed, these two countries should feature in the top ten exporters of clothing and finished household textiles in 2011.

.11 Section 2: International & Trade Data

Notwithstanding the Chinese dominance, substantial export values were recorded in a number of other economies, including high labour cost locations such as Italy, Germany and France. However, while still important as large players, these European economies are exporting lower values when compared to 2007 and have not rebounded since the 2008 global meltdown. Of significance is the recent growth in exports from Bangladesh, Vietnam and Indonesia shown in Figure 2 below. Figure 2: Breakdown of Global Exports by Country (Indexed to 2007)

While the clothing and finished household textiles global value chain (GVC) is composed of finished goods, it is still a useful exercise to segment the overall trade data into distinct segments. It becomes clear from Table 3 that a vast majority of global exports and imports accrue to the apparel node of the GVC, 88.7 per cent of exports and 89.8 per cent of imports. Table 3: Breakdown of Global Clothing Data by Node (RM) GVC node and direction of trade Exports

Apparel Household and Other End-Market Articles of Fabric

Imports

2007

2012 R1 900 497

% of sector 2012 R2 979 373

88.72%

R 183 564

R 378 668

11.28%

Total

R2 084 061

R3 358 041

100.00%

Apparel

R2 098 411

R2 968 737

89.82%

R224 288

R336 623

10.18%

R2 322 699

R3 305 359

R100.00%

Household and Other End-Market Articles of Fabric Total

12. Section 2: International & Trade Data

Table 4 provides a breakdown of global clothing and finished household textiles by product category in 2011 and 2012. It is immediately clear from the data that total export values are thinly spread over many product categories with the top ten categories only representing 33 per cent of total exports in 2012. At 5.2 per cent of total export values t-shirts, singlets and other vests of cotton were the most significant product category exported with a value of R172,237 million. The balance of the top five categories of major global exports have shuffled ranking between 2011 and 2012 and as of 2012 were as follows: 1. T-shirts, singlets and other vests, of cotton (R172,237 million) 2. Men’s or boys’ trousers etc. of cotton (R153,475 million) 3. Women’s or girls’ trousers, etc. of wool or fine animal hair, not knitted or crocheted (R150,823 million), up from fifth place in 2011. 4. Jerseys, pullovers, cardigans and similar articles, of man-made fibres, knitted or crocheted (R147,076 million), up from fourth place in 2011. 5. Jerseys, pullovers, cardigans and similar articles, of cotton, knitted or crocheted (R144,435 million). Down from third place in 2011 and down from R147,975 in 2012. Table 4: Breakdown of Exports By Product Category - 2011 & 2012 (Rm) Rank

HR Code

Product Category

Export Value 2011

Export Value 2012

Product category % total exports

SA export value

SA as % of Global exports

610910

T-shirt, singlets and other vests, of cotton

R 172 237

R 174 823

5.21%

R 32

0.02%

620342

Men’s or boys’ trousers, breeches, etc. of cottong

R 153 475

R153 301

4.57%

R 41

0.03%

620462

Women’s or girl’s trousers, etc, of wool

R 141 022

R 150 823

4.49%

R 18

0.01%

or fine animal hair, not knitted or crocheted 4

611030

Jerseys, pullovers, cardigans and similar articles, of man-made fibres, knitted or crocheted

R 141 920

R 147 076

4.38%

0.00%

611020

Jerseys, pullovers, cardigans and similar articles, of cotton, knitted or crocheted

R 147 975

R 144 435

4.30%

0.00%

610990

T-Shirts, singlets, and other vests, of other Textile Materials

R 86 480

R 96 517

2.87%

R 36

0.04%

620520

Men’s or boys’ shirts of cotton

R 82 601

R 80 492

2.40%

R 21

0.03%

630790

Made up textile articles (incl. dress patterns)

R 58 109

R 63 982

1.91%

R 106

0.17%

610462

Women’s or girls’ trousers, etc, of cotton,

R 49 515

R 59 066

1.76%

0.00%

620193

Men’s or boys’ cloaks, anoraks, wind-cheaters & similar articles, of manmade fibres, not knitted or crocheted.

R 51 020

R 53 922

1.61%

0.00%

R 2 220 962

R 2 233 602

66.52%

R 1 220

0.05%

Total

R 3 305 315

R 3 358 041

100.00%

R 1 488

0.04%

.13 Section 2: International & Trade Data

The profile of major global clothing and finished household textile importers is distinct from the list of exporters. This is clear in Table 5, which ranks the ten largest global importers of clothing and household textiles by their 2012 import value. With a total value of R647,898 (down from a reported R754 billion in 2011), the United States remains by far the most significant importer of clothing and finished household textiles in 2012, representing almost a fifth of all imports that year. Germany (8.42 per cent), Japan (7.72.3 per cent), the United Kingdom (5.7 per cent) and France (5.3 per cent) represented the remainder of the top five importers, who collectively accounted for almost half of global imports in 2012. African importers remain insignificant as importers of clothing and textiles, with South Africa importing just less than half a per cent (0.4 per cent) of global totals in 2012.

Table 5: Ranking Global Importers - 2012 (Rm) Rank

Country

USA

R 647 989

19.60%

Germany

R 278 473

8.42%

Japan

R 255 168

7.72%

United Kingdom

R 188 288

5.70%

France

R 175 958

5.32%

Italy

R 122 220

3.70%

Spain

R 108 006

3.27%

Netherlands

R 95 420

2.89%

Russian Federation

R 91 425

2.77%

China, Hong Kong SAR

R 85 093

2.57%

South Africa

Other

Total

14. Section 2: International & Trade Data

Import Value

Import Percentage

R 13 725

0.42%

R 1 243 595

37.62%

R 3 305 359

100.00%

Of greater importance than absolute values of trade in a particular year are trade trends. Global imports of clothing and finished household textile are overall, still below the 2008, pre-financial crisis levels. The United States, while still by far the largest individual importer, has only grown a net of 5% since 2007, while European country imports (Spain, Italy, France) remain largely flat. (Figure 3). The Russian Federation is a new addition to the top ten importers list, with a massive four-fold growth since 2007, although this is from an extremely low base.

Figure 3: Breakdown of Global Exports by Country (Indexed to 2007)

.15 Section 2: International & Trade Data

Table 6: Breakdown of Imports by Product Category - 2012 (Rm) Rank

HS Code

Product Category

Import Value 2011

Import Value 2012

Product category & of total importa

SA import value

SA as % of Global Imports

620342

Men’s or boys’ trousers, breeches, etc., of cotton

R 187 375

R 184 859

5.59%

R 1 092

0.59%

610910

T-shirts, singlets and other vests, of cotton

R 202 058

R 183 429

5.55%

R 949

0.52%

611020

Jerseys, pullovers, etc., of cotton, knitted or fine animal hair, not knitted or crocheted

R 199 899

R 179 459

5.43%

R 265

0.15%

620462

Women’s or girls’ trousers, breeches, etc., of cotton

R 163 379

R 167 535

5.07%

R 675

0.40%

611030

Jerseys, pullovers, etc, of manmade fibres, knitted

R 159 027

R 160 600

4.86%

R 538

0.34%

620520

Men’s or boys’ shirts of cotton

R 99 293

R 97 252

2.94%

R 491

0.51%

610990

T-shirts, Singlets, and Other Vests, of Other Textile Materials

R 73 394

R 80 956

2.45%

R 462

0.57%

630790

Category

Value

% total

SA % global imports

imports 1

520100

Cotton, not carded or combed

940490

Other articles of bedding and similar furnishings

R 162 484

R 166 015

10.73%

R 556

0.34%

R 63 248

R 65 120

4.21%

R 270

0.42%

(Quilts, cushions) 3

550320

Synthetic staple fibres, of polyesters, not carded

R 20 649

R 36 762

2.38%

R 175

0.47%

540233

Textured yarn of polyesters, nprs

R 29 045

R 30 343

1.96%

R 124

0.41%

590320

Textile fabrics impregnated....with polyurethan

R 25 899

R 27 488

1.78%

R 132

0.48%

510111

Greasy shorn wool, not carded or combed

R 27 436

R 25 418

1.64%

0.01%

590320

Textile fabrics impregnated...with plastics

R 23 232

R 25 332

1.64%

R 106

0.42%

520512

Uncombed single cotton yarn, with ,=85% cotton

R 20 321

R 25 192

1.63%

R 45

0.18%

570330

Tufted floor coverings of man-made textile materi-

R 18 885

R 20 730

1.34%

R 29

0.14%

als 10

570320

Other

Tufted floor coverings of nylon or other polyam

Total

26. Section 2: International & Trade Data

R 25 899

R 20 653

1.34%

R 72

0.35%

R 1 106 478

R 1 103 800

71.36%

R 6 869

0.62%

R 1 523 575

R 1 546 853

100.00%

R 8 380

0.54%

SOUTH AFRICAN TRADE ANALYSIS As highlighted in Figure 9 and Table 18, South Africa has a textile trading profile similar to that of clothing, in that the country is a net importer of textiles. The import values of 2012 were R8.3 billion and far outweighed the export value of textiles R3.8 billion. As with the global profile, traded textile volumes appear to have fallen in the period 2011 to 2012 following a sharp recovery from the lows of 2009. Interestingly, South Africa experienced a decline in trade in 2009, a year after the global economy experienced this. A concerning trend for the textiles value chain in South Africa is that, while exports have grown since the rapid fall of 2009/10, import growth has been higher, signifying that textile producers did not capitalise on the rebounding domestic market over this period. The period 2011 to 2012 mirrors that of global trade with a decline in exports and imports.

Figure 9: Total Aggregate SA Exports & Imports: 2007 - 2012 (Rm)

Table 18: Year-on-Year Textile Export & Import Growth (SA) Year on year growth rate

Total growth

Avg. Annual

rate

Growth rate

2009 - 2010

2010-2011

2011-2012

2007 - 2012

2007-12

-28.90%

-3.47%

63.90%

-2.23%

31.04%

6.21%

-31.11%

11.21%

52.44%

-7.74%

42.87%

8.57%

2007-2008

2008 - 2009

Exports

19.16%

Imports

32.60%

.27 Section 2: International & Trade Data

Figure 10 highlights the importance of non-developed economy trade for South African textile producers as the traditional markets of the USA and the EU continue to decline. The Indonesian data is questionable and is most likely an anomaly or error. Figure 10: Breakdown of SA Exports by Country (Indexed to 2007)

Representing nearly 40 per cent of all exports, China was the most significant export destination by value, at R1,5 billion in 2012 (Table 19). No other country represented more than 10 percent of export values and only one African economy, Zimbabwe (3.7 per cent) is represented in the top ten export destinations. The Czech Republic (R360 million), India (R285 million) and Italy (R239 million) are small but important destinations for South African textiles.

28. Section 2: International & Trade Data

Figure 19: Ranking of South African Textile Exports - 2012 (Rm) Rank

Country

Export Value

Export Percentage

China

Czech Rep.

R 1 517

39.42%

R 370

9.62%

3 4

India

R 285

7.41%

Italy

R 239

6.22%

Germany

R 167

4.33%

Zimbabwe

R 141

3.67%

USA

R 106

2.76%

Indonesia

R 78

2.03%

Australia

R 78

2.02%

United Kingdom

R 71

1.86%

Other

Total

R 795

20.67%

R 3 848

100.00%

As outlined in Table 20 and Table 21, the majority (80 percent) of export trade from South Africa is made up of fibre and yarn, which itself consists of largely unprocessed wool (HS Chapter 51). This product could be argued to be an agricultural product instead of a textile – effectively rendering South Africa a non-exporting country in terms of textiles. This is particularly striking when noting that the majority (63 per cent) of imports are value-added “fabric and other intermediate goods used in apparel and textile products” (namely predominantly finished fabric).

Table 20: Breakdown of Textile Data by Node (Rm) GVC node and direction of trade Exports Imports

2011

2012

% of sector 2012

R 1 962

R 3 074

79.89%

Fabric and other intermediate goods used in apparel and textile products

R 691

R 483

12.55%

Final apparel and other fabric goods

R 283

R 291

7.56%

Total

R 2 936

R 3 848

100.00%

Fibre and yarn

R 1 892

R 2 400

28.64%

Fabric and other intermediate goods used in apparel and textile products

R 3 571

R 5 250

62.65%

R 402

R 730

8.71%

R 5 865

R 8 380

100.00

Fibre and yarn

Final apparel and other fabric goods Total

.29 Section 2: International & Trade Data

Table 21: Breakdown of Textile imports by Product Category - 2012 (Rm) Rank

HS Code

Product Category

510111

Greasy shorn wool, not carded or combed

510529

520100

4 5

Export value

Export breakdown

2011

2012

by product category

R 2 251

R 2 300

59.77%

Wool tops and combed wool (excl. in fragments)

R 302

R 234

6.07%

Cotton, not carded of combed

R 109

R 153

3.98%

510130

Carbonised wool, not carded or combed

R 104

R 86

2.23%

570320

Tufted floor coverings of nylon or other

R 81

R 76

1.97%

591190

Textile articles for technical uses

R 88

R 65

1.70%

940490

Other articles of bedding and similar furnishings (Quilts, Cushions)

R 66

R 60

1.56%

510820

Combed yarn of fine animal hair

R 57

R 55

1.43%

540710

Woven fabrics of high tenacity yarn of nylon

R 39

R 48

1.25%

570490

Floor coverings of felt, nes, not tufted

R 13

R 42

1.10%

Other

R 826

R 728

18.92%

Total

R 3 936

R 3 848

100.00%

While China represents the largest single destination of exports, it also represents the largest single source of imports (34.1 percent) by value. Again, as with exports, no other single country accounts for more than 10 percent of imported value, although Pakistan (9.5 percent), India (6.7 percent) and Germany (5.5 percent) remain important sources of textiles.

Table 22: Ranking of Top South African Imports by Country of Supply - 2012 (Rm) Rank

Country

Import Value

Import Percentage

China

Pakistan

R 2 858

34.11%

R 792

9.45%

3 4

India

R 560

6.68%

Germany

R 460

5.49%

Other Asia, nes

R 401

4.79%

Zimbabwe

R 294

3.51%

Zambia

R 264

3.15%

Rep. of Korea

R 262

3.12%

Japan

R 229

2.73%

Turkey

R 216

2.58%

Other

R 2 043

24.38%

Total

R 8 380

100.00%

30. Section 2: International & Trade Data

Figure 11 highlights how all the economies (except Zambia) supplying textiles to South Africa experienced a decline in their export values in the 2011 to 2012 period, following several unstable years. Overall, Zambia, China and India have experienced the largest growth in their exports to South Africa over the five year period.

Figure 11: Breakdown of SA Imports by Country (Indexed to 2007)

.31 Section 2: International & Trade Data

As per Table 23, South African textile imports appear to be thinly spread over many product categories, with the top ten categories representing less than one third of total textile imports. Uncarded and combed cotton was the most significant import in 2012 at R556 million (6.64 percent). The rest of South Africa’s top ten textile imports were predominantly synthetic-based (HS Chapter 55) textiles. Limitations in the HS code data and the fact that most of the entries are classified under ‘other’, limits visibility into the nature of the imports using the Comtrade database.

Table 23: Breakdown of Textile Imports by Product Category - 2012 (Rm) Rank

HS Code

Product Category

Import Value

Imports by

2011

2012

product category

520100

Cotton, not carded of combed

R 328

R 556

6.64%

540752

Dyed woven fabrics of synthetic filament yarn

R 245

R 341

4.06%

940490

Other articles of bedding and similar furnishings (Quilts, cushions)

R 258

R 270

3.23%

551321

Dyed plain weave fabrics, <85% polyester fibres

R 146

R 236

2.81%

540220

High tenacity yarn of polyesters, nprs

R 158

R 222

2.65%

591190

Textile articles for technical uses, nes

R 186

R 208

2.48%

551511

Woven fabrics, <85% polyester stable fibres

R 124

R 196

2.34%

550200

Artificial filament tow

R 130

R 193

2.30%

590210

Tyre cord fabric of high tenacity yarn of nylon

R 110

R 176

2.11%

550320

Synthetic staple fibres, of polyesters, not carded or combed

R 137

R 175

2.08%

R 7 261

R 5 807

69.30%

R 9 083

R 8 380

100.00%

Other

Total

32. Section 2: International & Trade Data

retailer report In this chapter we analyse the global and South African apparel industry from the perspective of consumer trends and comparative retailer strategies and performance.

Introduction

In this chapter we analyse the global and South African apparel industry from the perspective of consumer trends and comparative retailer strategies and performance. From a consumer perspective, we see that there are huge geographic shifts in global apparel demand, and new technology is having an impact on retail business models and access to markets. In South Africa, shrinking access to credit is undermining historical retailer growth strategies and increasingly savvy customers are demanding a quick response to trends at affordable prices, as well as looking at online buying options. Retailer strategies in South Africa and abroad seem appropriate in light of the major consumer trends. From an international performance perspective, Inditex and H&M remain the front runners in terms of Gross Margin Return on Inventory Investment (GMROII) and growth. Interestingly GMROII is declining year on year for most major international retailers. In South Africa, Woolworths and Mr. Price perform best in terms of GMROII and growth, but this has more to do with margins generated from their specific product offering than the flexibility of their sourcing practices. The Foschini Group (TFG) and Truworths have suffered as a result of the decline in access to consumer credit â&#x20AC;&#x201C; specifically since they target the youth market with limited liquidity.

34. Section 3: Retailer Report

Global GLOBAL CONSUMER TRENDS Major trends in global consumer demand for apparel are explored below.

Static Demand

Global Apparel Demand is Growing Far More Rapidly in Emerging Markets Figure 2 provides a breakdown of global apparel demand in traditional versus developing markets. Between 2000

Global growth in demand for apparel since 2008 has re-

and 2010, emerging and â&#x20AC;&#x153;other marketâ&#x20AC;&#x2122;sâ&#x20AC;? share of the

mained fairly static with compounded annual growth be-

market began to grow in size and by 2010 their combined

ing only 2.8%, as is indicated in Figure 1 below. The expec-

size was only slightly smaller than the traditionally dom-

tation is that growth will recover slowly to 5.1% in 2017

inant developed economies as the major locations of

(Marketline, 2013).

apparel consumption. It is forecast that demand in the emerging economies will outstrip the developed economies by 2020.

Figure 1: Size of the Global Apparel Industry

Figure 2: Global Apparel Percentage Market Share

.35 Section 3: Retailer Report

INCREASING OMNI-CHANNEL CONSUMPTION In general, the growth in online retail is exponential in all regions. Internationally, growth in online retail sales was above 14% between 2006 and 2011 (see Figure 3 below).

Figure 3: Growth in Online Retail (US$ Bill)

Spurring online demand is the increasing access to smart mobile devices. Estimates show that access to mobile internet will increase from 1.06 billion people in 2012 to 2.73 billion people in 2018 (www.emarketer.com, 2013). Shoppers are increasingly using these devices to not only make purchases, but also to enhance their physical shopping experience by, for instance, comparing prices with competitor retailers or looking for style information. The growth in internet adoption is having a strong impact on marketing. The Nielsen Global Trust in Advertising Survey (Q3, 2011) shows that consumers are increasingly looking to online recommendations from people they know as well as online consumer opinions to inform their purchasing decisions. Traditional print and television advertising trail significantly in terms of peopleâ&#x20AC;&#x2122;s trust, but still surpass trust in online banners and search engine suggestions.

36. Section 3: Retailer Report

GLOBAL RETAILER STRATEGIES

International retailer strategies are clear and convergent as can be seen on the following page. They consist predominantly of global expansion, growth of online retailing

and innovation in consumer

engagement through

omni-channel (including

mobile internet) offerings.

There is minimal commentary on revamping existing store formats suggesting that while still important, this is not the major strategic thrust in terms of driving sales.

.37 Section 3: Retailer Report

Table 1: International Retailer Strategic Objectives

International Clothing Retailer Strategic Objectives American Eagle (USA)

The GAP (USA)

Stage Stores (USA)

•

• •

Grow North American presence in USA, Mexico Grow e-commerce platform Greater focus on transforming company to omni-channel retailer both domestically and internationally

• •

Increase store footprint internationally through franchising Strengthen e-commerce platform Continue developing omni-channel customer offering

•

Open stores in new small to medium-sized markets with strong long-term growth potential Invest in expansion, relocation and remodelling of existing stores

Wet Seal (USA)

M&S (UK)

FCUK (UK)

•

Improve marketing and strengthen customer engagement using social media Expand e-commerce

•

Increase store footprint internationally through flagship stores in prime shopping malls Extend multi-channel retailing opportunities internationally

Continued growth of multi-channel retailing

NEXT (UK)

Inditex (Spain)

H&M (Sweden)

•

Maintain targeted growth of new stores between 10-15% Continue expanding online retailing in new markets Continue developing flagship stores in prime locations

•

Develop the Next brand, improving design across all ranges Invest in online growth by developing new overseas markets and improve online ranges

• •

38. Section 3: Retailer Report

Continue opening new stores as well as refurbishing existing stores with eco-friendly criteria Continue developing multichannel retail model Launch online sales platforms in new markets

.39 Section 3: Retailer Report

GLOBAL RETAILER PERFORMANCE

All data in this section is extracted from company annual financial statements. For comparative purposes, we have categorised financial data according to the calendar year rather than financial year; that is, the calendar year in which most of the financial year occurred.

Sales Growth vs GMROII As has been the case in previous years, the correlation between sales growth and GMROII remains strong for international retailers. GMROII is an indicator of the gross profit a firm generates per rand it has invested in inventory. Firms that proactively reduce inventory in their supply chain through the implementation of quick response practices tend to have higher GMROIIs. As in previous years, quick response exemplars, Inditex and H&M, continue to experience strong growth, whilst JC Penney is notable for its poor GMROII and related negative sales growth.

Figure 4: International Retailer: Sales Growth v GMROII 2013

source: company annual reports 40. Section 3: Retailer Report

GMROII TRENDS

Given the correlation between growth and GMROII, it is useful to study GMROII trends in international retailers. Interestingly, GMROII seems to be declining for most retailers. This is most likely a result of the pressure on retailer margins. H&M, Wet Seal, M&S and Inditex remain the front runners in terms of GMROII. Wet Seal has, however, experienced a significant GMROII decline in the last two years, with related sales contraction. Next and American Eagle have both achieved their strongest recent GMROII in the last two years and generally maintain steady year on year growth. JC Penney is a poor performer with the worst recent deterioration in terms of GMROII. The firm also has the weakest sales growth performance in our sample.

Figure 5: International Retailer: GMROII Trends

.41 Section 3: Retailer Report

COMPARITIVE PROFIT MARGINS A comparison between gross and net profit margins enables us to respectively analyse the cost effectiveness of a retailers sourcing arrangements and the efficiency of their internal operations. Despite sourcing a greater proportion of their goods from high cost European locations, H&M and Inditex still leverage the greatest gross profit from their products. JC Penney, Stage Stores and Wet Seal are the worst performers. Despite moderate gross margins, Next appears to have very lean internal operations and achieves similar net margins to the best performers, Inditex and H&M. Those organisations with very low or negative net margins (Wet Seal, Stage Stores, FCUK, American Eagle and JC Penney) are also those with negative sales growth performance. This would seem to indicate that sales growth is a function of GMROII and internal operational efficiency, which in turn are useful proxies of speed to market capabilities.

Figure 6: International Retailer - Profit Margin Comparisons (2013)

source: company annual reports

42. Section 3: Retailer Report

EMPLOYMENT TRENDS

Figure 7: International Retailer - Employment Trends

source: company annual reports

Internal employment trends are a good indicator of the firmâ&#x20AC;&#x2122;s performance as well as their strategic ambitions. Inditex, H&M and M&S are bullish with regard to employment as they eye out international and online expansion opportunities. In light of the difficulties discussed above, JC Penney has recently downsized, but this has not bolstered profitability.

.43 Section 3: Retailer Report

South Africa SOUTH ARICA CONSUMER TRENDS General demain static reward Clothing and footwear demand in South Africa is similar to that of the global markets in that it is also fairly static and tracking inflation. As seen in Figure 8 the expectation is that it will remain so through to 2018. As housing and utility costs rise, it is expected that clothing and textiles will become an increasingly smaller percentage of household retail spending.

Rapid Urbanisation Urbanisation is increasing at a rapid rate in South Africa and is expected to rise by 3 percent between 2011 and 2018 (Business Monitor, 2014). The knock-on effect is likely to be that the demand for more fashionable, as opposed to functional, clothing will rise. This might be welcome news to a number of local retailers, but structural changes in the economy and the industry will mean that radical innovation is required to remain competitive.

More Fashion For Less Cash The most notable structural change impacting on retail sales is that retail credit availability is shrinking and only grew by 7.4 percent per annual to February 2014 (South African Reserve Bank, 2014). This is down from approximately 23% in June 2009. Credit retailers such as TFG, Edcon and Truworths have felt the pinch, whilst Mr. Price, as largely cash retailer, has maintained stable growth since 2008. Along with the decline in credit availability, a number of international fashion retail chains, such as Zara, Cotton-On, H&M, MNG, Gap and Banana Republic, have entered the country in the last few years. Whilst these brands remain largely aspirational, they do provide the consumer with direct access to global trends and consumers are requir-

44. ing more innovation with regard to non-branded apparel. Section 3: Retailer Report

Figure 8: South African Clothing & Footwear Consumption

e = estimate

f = forecast

source: Business Monitor, 2014

Most South African retailers still, however, predominantly operate according to traditional long lead time merchandising models and have conservative local sourcing patterns, which negatively impacts on responsiveness to market.

Figure 9: South African Retailer Sourcing Patterns

source: HSBC Global Research, 2014

.45 Section 3: Retailer Report

SOUTH AFRICAN RETAILER STRATEGIES

South African Clothing Retailer Strategic Objectives EDCON

TFG

1. Continue African Expansion:

1. Accelerate African Expansion, with targeted 300

•

Increase number of stores in existing footprint

•

Expand into new markets (Ghana)

2. Strategic partnership with African Bank Limited to form strategic partnership as a secondary credit provider to boost declining credit sales.

stores in teh rest of Africa by 2018 2. Continue growth of cash sales (through rewards programme) 3. Launch online trading platform in stages across all retail brands

Mr Price

Truworths

1. Strengthen position as a leading omni-channel re-

1. Expand retail presence in South Africa and select Af-

tailer 2. Invest to improve operational weaknesses •

Large capital expenditure on new ERP system

rican markets 2. Improve supply chain efficiency •

and DC 3. Continue African expansion focusing on value and

Reduce lead times for internationally sourced merchandise

•

strengthening channels to markets

Implement QR model through alliances with local suppliers

3. Adopt and invest in leading information technologies Woolworths

Rex Truform

1. Focus on becoming an omni-channel retailer

1. Expand product offering

2. Continue growth into Africa

•

Growth in existing brands as well as new brands

•

Expand cautiously to reduce risk

(new internally generated brands as well as ex-

•

Develop supply chains to these markets

ternally - owned brands) 2. Increase trading space •

New Stores in South Africa

•

New franchise stores in the rest of Africa

3. Improve information technology systems •

Roll out ERP system Table 2: South African Retailer Strategic Objectives Source: Company Annual Reports

46. Section 3: Retailer Report

This table outlines South African retailer strategies as stated in their most recent annual reports. Across the board, retailers are focusing on: •

African expansion.

•

Growth in their online and offerings through desktop and mobile devices (omni-channel).

•

Implementation of quick response models and associated innovation with regard to value chain operations and efficiencies.

•

In light of credit pressures, TFG is driving its cash offering through a rewards programme.

.47 Section 3: Retailer Report

SOUTH AFRICAN RETAILER PERFORMANCE

As with international retailer performance data, all data in this section is extracted from company annual financial statements.

Sales Growth vs GMROII As with international retailers, the correlation between sales growth and GMROII is strong for South African retailers. Truworths bucks the trend by performing well in terms of GMROII, but with stagnant growth. This might raise queries relating to supply chain stability, while the decline in access to credit is clearly having an impact.

Figure 10: SA Retailer - Sales Growth v GMROII 2013

source: company annual reports

48. Section 3: Retailer Report

SALES GROWTH TRENDS Sales growth is highly variable for South African retailers. As a result of some internal turnaround initiatives, Edcon has improved sales growth year on year since 2009. This growth does not, however, exceed average inflation. Mr. Price and Woolworths are the star performers in terms of growth trends. Mr. Price because of the increase in demand for low cost, fashionable products and Woolworths because of brand innovation and the popularity of their high-quality, core product in a less credit sensitive segment of the market. Along with Truworths, TFGâ&#x20AC;&#x2122;s sales growth has been negatively affected by the recent decline in access to credit as well as sluggish supply chain

Figure 11: SA Retailer - Sales Growth Trends

.49 Section 3: Retailer Report

GMROII TRENDS

In line with their consistent increase in sales growth, Mr. Prices, GMROII has also improved year on year since 2009. Whilst Woolworths displays strong sales growth, GMROII remains fairly static, which calls into question the firms future ability to sustain sales growth on a relatively inflexible supply base. Truworths has not shown strong growth in GMROII, but has noted the intention of speeding up international supply chains while shoring up their local sourcing, both of which should reflect in future GMROII and sales growth.

Figure 12: SA Retailer - GMROII Trends

source: company annual reports

50. Section 3: Retailer Report

COMPARITIVE PROFIT MARGINS There is some consistency with regard to gross margins achieved by South African retailers. Truworths achieves the highest results in terms of gross and net margin, but it is uncertain if this margin position is sustainable in the current market climate. Mr. Price and TFG balance moderate gross margin with net margins that match those of better performing international firms. While Woolworthsâ&#x20AC;&#x2122; net margin is on the lower end, the scale of the organisation means that this translates into substantial Rands. Edconâ&#x20AC;&#x2122;s net margins are on the lower end of sustainability and will have the effect of undermining liquidity as well as the ability to reinvest and achieve their respective growth strategies. There is a high differential between Rex Truformâ&#x20AC;&#x2122;s gross and net margin. Classic interpretation would be that this is a result of small economies of scale as the firm must carry its internal overhead over a far smaller sales base than comparator firms. However, the company reports have been short on content in the recent years and internal issues and politics must account for at least some of this underperformance.

Figure 13: SA Retailer - Profit Margin Comparisons (2013)

source: company annual reports

.51 Section 3: Retailer Report

EMPLOYMENT TRENDS Most South African retailers (except for Rex Truform and Edcon) have grown their internal employment base since 2008. In most cases this growth is strategic as retailers focus on expanding internationally and increasing their scope of activity. Mr Price is managing impressive sales growth from a relatively stable employment base and major international expansion is occurring through online channels. Whilst it is not reported in annual figures, Edcon began a significant employment downsizing initiative in May 2014 (Moorad, 2014).

Figure 14: SA Retailer - Employment Trends

source: company annual reports

52. Section 3: Retailer Report

References Business Monitor International - South African Retailer Report (Q3, 2014) Global Online Retailers Market Size and Forecast to 2016 (June 2012). http://www.marketresearch.com/CanadeanLtd-v132/Global-Online-Retailers-Size-Forecast-7125473/ Marketline Industry Profile: global apparel retail (February 2013) Moorad, Z (2014). Edcon to begin retrenching at Edgars from May. http://www.bdlive.co.za/business/retail/2014/02/18/ edcon-to-begin-retrenching-at-edgars-from-may Nielsen Global Trust in Advertising Survey (Q3, 2011) Singhal, Arvind (1 November, 2012). Global Changes in Clothing Consumption by 2020, And their Impact on Fibre Manufacturer Supply Chains. ITMF Hanoi Conference South African Reserve Bank (2014). http://wwwrs.resbank.co.za/webindicators/MonthlyIndicators.aspx?DataType=MRDMA South Africa Retailers â&#x20AC;&#x201C; HSBC Global Research (12 March 2014) Worldwide Smartphone Usage to Grow 25% in 2014 (June 2014). http://www.emarketer.com/Article/Worldwide-Smartphone-Usage-Grow-25-2014/1010920 .53 Section 3: Retailer Report

sa industry benchmarking In this section we explore macro trends in the South African clothing, footwear & textile industry and analyse the performance of local firms in relation to international peers.

Introduction

In this section of the yearbook we explore some macro trends in the South African clothing, footwear and textile industry - specifically with regard to employment and productivity. Thereafter we analyse the performance of South African companies against their international peers through the analysis of benchmarking data collected between 2011 and 2013. South African benchmarking data is sourced from clothing and textile cluster member firm benchmarks. International data has been collected directly from producers in Turkey, Madagascar, and Mauritius. Cape and KZN Clothing and Textile Cluster members have seen rapid sales increases between 2011 and 2013, without commensurate employment increases. This indicates that firms are moving towards improved productivity along with higher value added products. From an operational perspective, South African manufacturers tend to hold high levels of raw materials to account for the unreliability and inflexibility of supply, but are managing to produce and deliver off very low levels of work in progress and finished goods. Textile manufacturers are performing specifically well in this regard. In general South African clothing and textile manufacturers are making successful efforts to improve internal quality management and to improve flexibility and reliability. Performance in a number of such areas is converging with international firmsâ&#x20AC;&#x2122; performance. Labour instability in the form of high employee turnover is of concern, and combined with the raw material supply constraints are increasingly undermining the overall competitiveness of the value chain both domestically as well as export opportunities that are emerging as the exchange rate weakens.

56. Section 4: SA Industry

Macro Trends Employment and Productivity According to Jeppesen and Barnes (2011), the South African textile and clothing industry employs approximately 127,000 people, or 11% of the total manufacturing workforce, and represents about 0.6% of the countryâ&#x20AC;&#x2122;s GDP. More recent data from the National Bargaining Council (below) shows that total formal employment in the industry declined between 2010 and 2014, with the Cape being the most impacted. KwaZulu-Natal data reflects and actual increase (20,818 to about 23,269 employees).

Figure 1: South African Clothing Manufacturing Employment Trends 2010 - 2014

source: National Bargaining Council, 2014

.57 Section 4: SA Industry

58. Section 4: SA Industry

Drawing on Stats SA data, the graph below illustrates trends in production volumes in clothing, textiles and footwear between 2010 and 2014. All data is indexed to 100 in 2010. Overall, production volumes declined to 2012, but are on the rise again. Increases in clothing and footwear are particularly marked, but there is a sharp decline in textiles.

Figure 2: Average Production Volumes for Clothing, Footwear and Textiles

STATS SA, 2014

.59 Section 4: SA Industry

A Review of 2011 – 2013 Competitive Performance The data in this section is presented in a number of broad categories as described in the table below. It should be noted that South African clothing manufacturing data excludes footwear firm data, but CIP data includes relevant footwear firm data. Table 1: Categorisation of Manufacturers Category

Contents

Number of firms in each sector and cluster

SA Manufacturers

Clothing manufacturers who are members of the Kwa-Zulu Natal and Western Cape Clothing and Textile Clusters (KZNCTC & CCTC)

KZNCTC Clothing: 8 CCTC Clothing: 11 Total: 19

International

Clothing manufacturers based mostly in Turkey, Madagascar, and Mauritius

Total : 43

Manufacturers CIP

Clothing, Textiles, and Footwear manufacturers who are members of teh Kwa-Zulu Natal and

KZNCTC: 10

Cape Clothing and Textile Clusters (KZNCTC & CCTC) participating in the Industrial Develop-

CCTC: 10

ment Corporation’s (IDC) Competitive Improvement Programme (CIP). This is an intensive pro-

Total: 20

gramme run by the KZN CTC and CCTC SA Textiles

Textiles manufacturers who are members of the KwaZulu-Natal and Western Cape Clothing and Textiles Clusters

KZNCTC : 8 CCTC Textiles: 9 Total: 17

International

Textiles Manufacturers based mostly in Turkey, Madagascar and Mauritius

Total: 14

Textiles

The data used in this section is collected using a methodology which assesses firm performance in five broad market driver categories – cost control, quality, flexibility, reliability and human resource development. As is outlined in the table below, specific performance indicators allow firms to assess their relative strengths and weaknesses in each of these market driver categories from the perspective of their suppliers, internal operations and customers. Definitions of all performance indicators can be found in an appendix to this chapter.

60. Section 4: SA Industry

Source: B&M Analysts, 2014

Table 2: Firm Level Market Drivers and Associated Performance indicators Market Driver

Input/Suppliers

Internal/ Operations

Output/ Customers

Cost Control

Raw Material holdings

Work in Progress

Finished Goods holdings

Quality

Supplier Return Rate

Internal Reword Rate

Customer Return Rate

Flexibility Reliability

Changeover downtime External material unavailability

Machine Breakdowns Internal Material Unavailability

Human Resource

Employment

Development

Absenteeism Labour Turnover Rate Staff Turnover Rate Management Turnover Rate source: B&M Analysts, 2014

EMPLOYMENT AND SALES Employment and sales provide a useful overview of the economic performance of companies, as well as their contribution to economic development through job creation. In the era of rapid globalisation, the textiles industry remains the hardest hit and continued to shed employees between 2011 and 2013. Employment in the clustersâ&#x20AC;&#x2122; clothing manufacturers appears to have grown slightly.

Figure 3: Total Employment

source: KZN CTC and CCTC Benchmarking Database

.61 Section 4: SA Industry

Figure 4: CPI Adjusted Sales Indexed (2011 =100)

source: KZN CTC & CCTC Benchmarking Database, 2014

Averages sales for KZN CTC and CCTC member firms has steadily increased since 2011 in real terms. This is potentially a result of economic recovery, but is also directly related to strategic partnerships that are forming throughout the domestic value chain â&#x20AC;&#x201C; a necessity in the shift to quick response retailing practice. Those firms participating in the CIP programme have shown very positive sales growth over the period 2011-2013.

62. Section 4: SA Industry

INVENTORY Inventory levels in terms of raw materials, work in progress and finished goods are a useful measure of firmsâ&#x20AC;&#x2122; ability to control their costs. South African manufacturers hold significantly more raw materials than international clothing and textiles manufacturers who are either vertically integrated or have a greater domestic source of inputs. Worryingly this has been increasing since 2011, largely due to the unreliable supply of raw materials from predominantly offshore suppliers. From the data below it would appear that international firms have a significant competitive advantage due in terms of low raw material holdings (and therefore tied up working capital and risks). They are able to maintain these low levels because of their proximity to flexible raw material suppliers and because of strong strategic partnerships between fabric mills, garment assemblers and design-houses.

Figure 5: Raw Material Inventory Holding (Days)

source: KZN CTC and CCTC Benchmarking Database, 2014

.63 Section 4: SA Industry

Figure 6: Work in Progress Inventory Holding (Days)

source: KZN CTC and CCTC Benchmarking Database, 2014

It is encouraging to note that the clustersâ&#x20AC;&#x2122; clothing and textile manufacturers have significantly lower work-in-progress levels compared to international counterparts indicating that improved production flow and flexibility is being achieved. This is specifically true for textile manufacturers. This leaner approach will assist in the identification of other unnecessary costs drivers (such as high reworks or unnecessary movement) that would otherwise be masked by a mass of inventory on the factory floor.

64. Section 4: SA Industry

Figure 7: Finished Goods Inventory Holding (Days)

source: KZN CTC and CCTC Benchmarking Database, 2014

In an attempt by retailers and wholesalers to ensure product availability for customers, South African clothing manufacturers are often required to hold high levels of finished goods. On average, domestic clothing manufacturers held about three days more finished goods than their international comparators in 2013. South African textile manufacturers, on the other hand, significantly outperform international textile firms in that low levels of finished goods are held.

.65 Section 4: SA Industry

QUALITY Supplier return rates, internal rework rate, and customer return rate are all measures which provide insight into the emphasis placed on quality assurance throughout a value chain. They are also an indication of the speed at which the value chain works, as speed requires almost perfect quality performance through each link in the value chain. CIP member firms have had particular success in accurately quantifying and then substantially decreasing supplier return rates, which now match international comparators. Generally, however, South African clothing manufacturers appear to underperform in this area. This is because fabric qualities are undermined in an effort to meet tightening price points and increased fabric importing limits at-source quality inspections. South African textile manufacturers have particular problems with regard to supplier return rates in comparison to international textile firms although recent indicators suggest improvements.

Figure 8: Supplier Return Rate (%)

source: KZN CTC and CCTC Benchmarking Database, 2014

66. Section 4: SA Industry

Internal reworks are a major manufacturing waste, which could be caused by various mechanical, human or process related problems. South African clothing manufacturer performance in this regard has remained largely consistent and in line with international performance. South African textiles manufacturers have made significant gains in reducing internal rework rates to draw closer to international comparator performance.

Figure 9: Internal Rework Rate (%)

source: KZNCTC and CCTC Benchmarking Database

.67 Section 4: SA Industry

High customer return rates are an indication of poor quality management in upstream parts of the value chain. International clothing manufacturers enjoy low customer return rates in comparison to local clothing firms, although CIP firms have made significant progress between 2011 and 2013. A counter-argument often heard is that local firms can be subjected to different standards by customers which vary depending on trading conditions. Whether accurate or not, self-auditing capability (and hence zero returns) is increasingly an order winning criteria. South African textiles manufacturer customer return rates have remained consistently low and are on par with international firms.

Figure 10: Customer Return Rate (%)

source: KZNCTC and CCTC Benchmarking Database, 2014

68. Section 4: SA Industry

FLEXIBILITY The fashion industry is well known to be a fast changing industry that requires quick response to style and quantity trends. Clothing, footwear and textiles manufacturers are therefore under pressure to flexibly respond to customer demands. Changeover downtime, representing the total production time that is lost to resetting machines or changing line layouts, is a useful proxy measure of a factoryâ&#x20AC;&#x2122;s flexibility. South African clothing and textile manufacturers outperform international manufacturers in their ability to changeover quickly and efficiently. CIP firms, in particular, have reduced changeover downtime significantly between 2011 and 2013 as they aim to take on smaller orders in order to compete more effectively. (See Figure 11 on overleaf)

RELIABILITY Delivering orders, on time and in full, is of crucial importance in the clothing, textiles and footwear industry. Most of the larger local retailers are striving to develop a quick response trading model and pressure is being passed onto manufacturers to reliably supply full product orders on time despite extremely short lead times (99 percent OTIF). This offers significant opportunity to local manufacturers to be competitive on proximity to the market, rather than only price. There are however a number of pipeline blockages that undermine overall reliability. Machine breakdowns, in particular, can have serious downstream implications, but can be overcome if manufacturers systematically assure the reliability of machinery through a rigorous total preventative maintenance programme. Total productive downtime due to machine breakdowns in South African Clothing and Textile manufacturers have reduced significantly â&#x20AC;&#x201C; specifically between 2012 and 2013 - and now nearly matches levels seen in international firms. (See Figure 12 on overleaf) .69 Section 4: SA Industry

Figure 11: Changeover downtime (%)

source: KZN CTC and CCTC Benchmarking Database, 2014 Figure 12: Machine Breakdown (%)

KZN CTC and CCTC Benchmarking Database, 2014

70. Section 4: SA Industry

International clothing manufacturers generally have lower levels of downtime due to external material unavailability in comparison to South African clothing manufacturers. As speed to market requirements escalate through demands placed on the supply chain by retailers attempting to meet market demands, so the need for agile supply chains amplify, and the potential for downtime to occur increases. An increasingly weak domestic fabric base will likely be one of the primary factors inhibiting cost-effective quick response implementation as manufacturers buffer materials stocks to overcome supply issues, but in doing so inadvertently raise the cost of production and associated risks of buffering on finished fabric inventories. The increasing external materials unavailability to the CIP firms, most of whom are driving a speed to market service offering, clearly exhibits the reality of this risk.

Figure 13: External Material Unavailability (%)

source: KZN CTC and CCTC Benchmarking Database, 2014

.71 Section 4: SA Industry

HUMAN RESOURCE DEVELOPMENT In the labour intensive clothing industry, more than elsewhere, people are the core of a firmâ&#x20AC;&#x2122;s productive and strategic ability. High labour, staff and management turnover can therefore have a knock on effect on all the market drivers mentioned above. Labour turnover in local clothing manufacturers is mostly better than international competitors except for CIP firms which have remained slightly outperformed in this regard. The pressures associated with converting an operation into a dynamic, lean operation may somewhat account for the initial increase in labour turnover in CIP firms. International textile manufacturers enjoy significantly lower labour turnover than local textiles manufacturers, although international firms may benefit from a very different labour supply system such as migrant labour living on-site. Overall these turnover levels are at reasonably healthy levels, enabling the introduction if skills and energising the labour force.

Figure 14: Labour Turnover (%)

source: KZN CTC and CCTC Benchmarking Database, 2014

72. Section 4: SA Industry

Salaried staff members often possess the tacit and technical knowledge required to ensure optimal productivity. They are the people who ultimately hold the production floor in check and ensure that discipline and motivation is maintained. International clothing and textile manufacturers continue to enjoy substantially lower salaried staff turnover rates compared to local firms. South African clothing manufacturers and CIP firms have, however, made significant improvements in this regard since 2011 and are attaining healthy levels of staff turnover. Again the international system of importing management skills from less developed economies and the international ties of global firms is likely to have a positive impact on management stability amongst international firms, a system not enjoyed by local operators.

Figure 15: Staff Turnover (%)

source: KZN CTC and CCTC Benchmarking Database, 2014

.73 Section 4: SA Industry

As the South African clothing and textile value chain re-aligns to the demands of quick response, a strong management base is required to spot opportunity and guide change. High management turnover reduces this ability. Management turnover has reduced significantly since 2011 in South African clothing manufacturers and is now below international averages. The South African textile industry tends to perform on a par with international firms and management turnover has reduced significantly since 2011. A future risk for domestic firms is securing a skilled management team from a diminishing pool. Companies that are able to grow talent will likely be hard pressed to retain that talent as this pressure escalates, while those that do retain their skills will certainly outcompete those that cannot.

Figure 16: Management Turnover (%)

source: KZN CTC and CCTC Benchmarking Database, 2014

74. Section 4: SA Industry

Absenteeism in South African clothing and textile manufacturers tends to track consistently above international firm averages. The effects of absenteeism can be lessened by multi-skilling staff, but one should not ignore that high absenteeism might indicate a more general problem with morale and commitment. Absenteeism higher than 3% can be considered to reflect a problem with morale.

Figure 17 : Absenteeism (%)

source: KZN CTC and CCTC Benchmarking Database, 2014

.75 Section 4: SA Industry

APPENDIX INDICATOR

DEFINITION

Sales

Manufacturing sales and sales from other activities

Employment

Total employees including contract labour

Raw Material Holdings

Average operating days per month divided by Average Monthly Raw Material Stock turns = Raw Material Holding in days

Work in Progress

Average operating days per month divided by Average Monthly Work in Progress stock turns = Work in Progress in days

Finished Goods holdings

Average operating days per month divided by Average Monthly Finished Goods stock turns = Finished Goods holdings in days

Supplier Return Rate

Number of on time & in full deliveries from suppliers out of the total number of deliveries from suppliers

Internal Rework Rate

Number of manufactured units reworked due to defects out of the total units manufactured during year

Customer Return Rate

Number of units sold returned by custermer out of the number of units sold during the current year

Changeover Downtime

Average time taken from last good unit of previous style to first good unit of new run

External Material Available

External materials unavailability is due to suppliers not delivering on time or order not being placed to supplier in time resulting in materials not being available for production when required

Machine Breakdown

Number of hours of production lost due to â&#x20AC;&#x2DC;machine breakdownsâ&#x20AC;&#x2122; out of the total number of production hours available

Internal Material Unavailability

Internal material unavailability results from internal supplier or process not providing materials when needed for the next stage of production due to poor line balancing or oversight or capacity issues

Absenteeism

Number of hours lost during year due to employees not being at work out of the total number of hours available during year. This includes compassionate leave, sick leave, late-coming, and unpaid leave, but excludes holiday leave.

Labour Turnover Rate

Number of labourers dismissed & resigned during year. Number of labourers includes medium and long-term contract labour but excludes casuals

Salaried Staff Turnover Rate

Number of salaried staff dismissed & resigned during year

Management turnover rate

Number of management dismissed & resigned during year

76. Section 4: SA Industry

the quick response model In this section we discuss findings from the 2014 quick response (QR) best practice visit to Turkey and build on the existing KZNCTC & CCTC QR model.

Introduction The KwaZulu-Natal Clothing and Textiles Cluster, in association with its sister organisation, the Cape Clothing and Textiles Cluster, has worked tirelessly on the development of the Quick Response (QR) retail, and associated supply chain management and manufacturing model since 2007. The work completed has been translated into numerous research reports, presentations and training courses; as well as active engagements with South African retailers and selected suppliers on the actual implementation of the QR model, which can be defined as: â&#x20AC;&#x153;The reliable and flexible supply of in-demand products to an unpredictable market based on actual Point of Sale (POS) intelligence, within a maximum time frame of 42 days from the raising of a monthly Purchase Order (PO) to the in-store display of the product.â&#x20AC;?

78. Section 5: Case Studies

The traditional apparel retailing model is strongly based

Table 1

on margin optimization: at the point of purchase, as well as sale. In conjunction with tight controls to ensure retail operating costs are effectively managed, these parame-

Average sales

Average

growth

GMROI

JC Penney

-2.2%

2.18%

FCUK

-2.2%

2.35%

ters have been viewed as central to the success of any

Wet Seal

-0.3%

3.75%

apparel retailer, hence the import focus of most South

American Eagle

0.9%

3.20%

The GAP

0.4%

3.60%

2.1%

3.20%

Columbia Sportswear

2.2%

2.15

Average

2.4%

3.33

Stage Stores

3.7%

1.28

8.3%

5.50

11.3%

6.13

African retailers who have aggressively been sourcing their merchandise from low cost vendors in a variety of distant locations since the opening up of the South African economy in the late 1990s.

H&M Inditex

However, the purchase of ever cheaper imported merchandise has resulted in the decline of local apparel and footwear manufacturing, whilst also not delivering superior trading results for the retailers who have followed

As highlighted in Table 1, one of the great ironies of the

this strategy. International evidence generated through

global apparel, footwear, textiles and leather products

the activities of the KwaZulu-Natal and Cape Clothing

retailing industry is that the retailers who exposed them-

and Textiles Clusters over the last six years has consis-

selves the least to the Asian purchasing model have per-

tently highlighted that such a strategy actually results in

formed the best. The Northern Hemisphere retailers who

declining retail performance, as retailers purchase goods

have grown the fastest, and generated the highest levels

from locations on extended forecasting models that are

of profit over the last few years, give greater weight to the

generally out of sync with actual consumer preferences.

speed and flexibility of their supply chain than they do the

This is particularly the case where product lifecycles are

drive to secure input margins. This has resulted in high-

extremely short, i.e. in more fashionable market seg-

er Gross Margin Return on Inventory Invested (GMROII)

ments. In such cases, retailers are better served purchas-

performance levels, which has positively correlated with

ing their merchandise from suppliers in close proximity

strong compounded annual growth rates (CAGRs).

to themselves (i.e. in South Africa) who can manufacture small orders, quickly, and at the required quality and authenticity levels demanded by the final consumer.

.79 Section 5: Case Studies

The QR RETAILING MODEL Termed “in-season” trading, the critical market challenge for successful retailers is to read point of sales (POS) data in the retailing selling space and to then convert this sales information into new products designed on the basis of the market intelligence secured; and then to convert the newly designed products into store delivered orders. The very short lead times required for QR retailing, throws up numerous operational challenges for the entire QR supply chain, requiring as it does advanced product design, pre-production, production, distribution and logistics, and Information Technology and measurement systems. These systems have been studied by the clusters in a variety of international locations over the last few years, and most recently in Turkey and Mauritius. As consistently highlighted from this successfully completed research, implementation is a major challenge in a South African environment. The reason why the QR model is so difficult to implement is because it comprises a set of inter-linked processes, as summarized in Figure 1, which captures QR model Cluster learnings from the most recent study tours to Mauritius (March 2014) and Turkey (April 2014). As a continuously repeating system The QR model depicted in Figure 1 has no starting, nor end point, with each stage feeding into the next in a self-perpetuating cycle that develops over time on the basis of the commercial successes achieved. To explain the inter-linked components of Figure 1, one does however have to start at a point, and so I will start with the creation of the merchandise plan, as this represents the point at which the QR model is “given life”. Basically, for any money to be spent on QR orders a retailer needs to first define the amount of money it is going to allocate to the monthly cycle of QR expenditure as opposed to spending the money on long lead time orders that are typically placed 6-9 months before the start of 80. Section 5: Case Studies

a season. The money retained for QR monthly orders is termed the “Open To Buy” or QR OTB. This is the financial commitment upon which the entire QR model operates. The QR OTB is released monthly (creating a cadence or “drum beat” upon which the entire QR supply chain operates in concert with.) The QR OTB is released on a monthly basis at the interception point of two monthly preparation cycles, the first demonstrated as X in Figure 1 focuses on reviewing POS data and any other customer intelligence gathered from stores or other consumer sources, and the second, demonstrated as Y in Figure 1 focuses on preparing monthly QR design capsules that respond directly to the POS (and other) intelligence gathered, as well as the prepared fabrics, trims, design blocks and supplier capacities prepared for QR supply on a seasonal basis. The first of these elements is the responsibility of the retailer that owns the relationship with its final customers, and that needs to accurately share market intelligence with its QR suppliers. The second element is however the responsibility of the QR Design House or clothing manufacturer (DHM) that has partnered with the QR retailer. Once a month the retailer sends a team to the DHM to review the QR capsule that has been prepared (Z in Figure 1); the buying team will typically take 2-3 days to review the assortment shown and select the products they believe will secure high clearance rates in their stores. At the end of the three days the OTB is released into a set of purchase orders (POs) derived from styles shown as part of the QR capsule. It is then up to the manufacturing portion of the supply chain to undertake all necessary pre-production and production activities within a four week period (two weeks each – A in Figure 1), with a further two weeks allocated to getting the POs from the end of the factory’s production lines to the selling floors of the retailers, so as to initiate the next round of Point-of-Sale analysis, and the continuation of the monthly QR cycle.

Monthly OTB Cycle and Associated Quick Response Model Figure 1

.81 Section 5: Case Studies

QR Manufacturing challenges – Turkish lessons

The Future of QR in South Africa

How does one ensure factories deliver on the extremely

The development of Turkish QR capabilities has matured

tight 28 day pre-production and production lead time?

to the point where major European retailers are shifting

Based on lessons derived from the KZN CTC’s most recent

more of their seasonal purchases from the East to Turkey

study tour to Turkey, the answer is clear: The adoption

(and other proximate locations), precisely because they

of lean production capabilities across the supply chain –

are capable of delivering QR orders within retailer-spec-

from knitting/weaving operations, to dyeing and finishing

ified “in season” lead times. Evidence from the Turkey

operations to garment assembly. It is on the back of these

study tour completed in April 2014 indicated that major

capabilities that the Turkish suppliers are able to meet the

European retailers were sourcing anywhere from 20 per-

28 day pre-production and production lead time target,

cent to 65 percent of their seasonal merchandise on a QR

while at the same time:

basis. It is this spread that lies at the heart of the QR op-

•

Assuring the quality of supply to their customers (all

portunity for KZN CTC members. Will South African retail-

vendors are on self-audit to AQL 2.5 standards),

ers place a substantial portion of their future purchases

Delivering 100 percent on time and in full (to ensure

on a QR model as per the framework depicted in Figure 1

accurate SKU delivery per PO, thereby guaranteeing

(40 percent is the figure being targeted by the KZN CTC)?

the accuracy of the next POS review process – see Fig-

Or will they settle on a substantially reduced amount (po-

ure 1), and

tentially as low as 20 percent)?

•

Managing their operating costs as effectively as possible (Turkey’s base factor costs are higher than evident

Evidence suggests that the QR level retailers settle on will

in South Africa – labour and overhead costs).

ultimately be determined by the development of (a) their own QR system capabilities and (b) the QR capabilities of their South African suppliers. Assuming that each South African retailer focuses on developing their own QR system capabilities at the pace they are comfortable with over the next few years, the major challenge for the KZN CTC going forward is the provision of support to members for the development of QR system capabilities. The QR 28-day challenge is clearly not insurmountable, but as highlighted, the quality of manufacturing operations required for QR is very demanding, necessitating a focus on cost control, quality, operational flexibility, operational reliability, human resource development and ongoing innovation at cluster members.

82. Section 5: Case Studies

policy update In this section we introduce South African policy in support of the clothing, textile & footwear sector, compare with Chinese policy & gain feedback on the efficacy of South African policy from key stakeholders.

Introduction The South African clothing, textiles and footwear sector has not benefitted from globalisation, but has contracted significantly in recent times. In this challenging liberalised era, government has sought to protect and develop the industry with a number of trade and industry programmes and policies. In this chapter, we provide an introduction to these programmes and contrast these domestic programmes with the known Chinese support mechanisms. Input from key industry representatives regarding the impact of the South African government interventions and areas for improvement are also discussed. In summary, South African industry support for clothing, textiles, and footwear is designed to boost competitiveness from a predominantly supply-side perspective. The focus of the primary support instrument by the Department of Trade and Industry (DTI) is the Clothing and Textile Competitiveness Programme (CTCP), which is intended to develop the internal competitiveness of manufacturing firms, whilst also promoting inter-firm collaboration and clustering. From the demand perspective, relatively high import duties on clothing and textiles coming into South Africa are intended to create artificial local price competitiveness. In addition, the government recently gazetted regulations under the Preferential Procurement Policy Framework Act (PPPF) of 2000, which promote government procurement of goods with a higher degree of local content in a number of priority sectors including clothing, textiles, leather and footwear. In comparison to South Africa, Chinese trade and industry policy is more multi-faceted. There is a clear focus on developing overall value chain alignment, in developing local technical ability and in creating a stable cost environment as the industry matures. Similarly, risk reducing incentives such as land and infrastructure development and provision for industrialists, along with several tax and levy exemptions, has been an important driver of desirable investments. However the sustainability (and WTO compliance) of some of these mechanisms, such as cash grants and artificial discounting of raw material inputs, is questionable. It is clear that the industry is being used to drive the current phase of industrialisation and economic development as part of a larger plan of global expansion. Key players in the South African value chain believe that the CTCP has had an undeniably positive impact in terms of developing world class manufacturing standards and â&#x20AC;&#x153;re-industrialisingâ&#x20AC;? the industry. The clustering approach has enhanced the overall impact of programme with specific mention of the positive contribution of the KZN and Cape Clothing and Textile Clusters. There is some concern that funds could have been used more strategically to build up local value chains around key retail customers and that the development of technical skill in production and pre-production should be a focus in the future. Two significant concerns are that attention has been recently diverted from the well-studied and understood mechanism of regional (or ordinary) clusters to large, resource hungry national clusters despite there being no evidence that such a construct is a suitable mechanism for industrial development. Also, limitations in fabric supply continue to hamper the overall competitiveness of the local industry and despite this there is no evidence of a clear strategy to develop and support textile manufacture and conversion (specifically with regard to medium weight synthetic fabrics) despite extensive industry support for the adoption of recommendations made in a major textile mapping and policy briefing exercises conducted for the DTI in 2012 (Barnes, 2012), the findings of which were further supported in a more recent study conducted by the Cape and KwaZulu-Natal Clothing and Textile Clusters quantifying the specific fabric demand patterns of local retailers. 84. Section 6: Policy

South African Government Support for Clothing, Textiles and Footwear TRADE POLICY The table below summarises the trade policy environment in which South African clothing, footwear and textile firms operate including local import tariff rates and bi-lateral trade agreements. Table 1: South African Clothing, Textile and Footwear Trade Policy Trade Policy

Countries involved

Terms

Products Involved

Customs and Excise Tariff

South African and most of the rest of

Clothing textiles and footwear predominantly at a rate of

All products

the world

duty of 40%, unless specified below

Southern African Cus-

South Africa, Botswana, Lesotho, Na-

Duty free movement of goods with a common external tar-

toms Union (SACU)

mibia and Swaziland

iff on goods entering any of the countries from outside the

South African Develop-

Between 12 SADC Member State

A free trade agreement, with significant duty-free trade

Most products

Trade, Development and

South Africa and the European Union

A free trade agreement, wiht significant duty-free trade;

Most products

Cooperation Agreement

(EU)

clothing textiles and footwear predominantly at a SA rate of

All products

SACU ment Community (SADC) Free Trade Agreement

(TDCA) Free Trade Agree-

duty of 20% and EU rate of duty of 0%

ment Africa Growth and Oppor-

Granted by the US to 39 Sub-Saharan

Preferential access to teh US market through lower or no

Duty free access to teh

tunity Act (AGOA)

African (SSA) countries

tariffs

US market of approximately

7,000

product

tariff lines source: The dti (www.thedti.gov.za)

.85 Section 6: Policy

PREFERENTIAL PROCUREMENT POLICY Regulations under the PPPFA were first promulgated in 2001, but were revised in 2009 and enacted in 2011. New regulations are in line with South Africa’s Industrial Policy Action Plan (IPAP2), specifically the objective to “leverage public and private procurement to raise domestic production and employment in a range of sectors, including alignment of B-BBEE and industrial development objectives, and influence over private procurement”. Essentially, preferential procurement regulations stipulate that most public sector entities must prioritise the procurement of goods in key sectors with a high proportion of local content. In clothing, textiles, leather and footwear, the local content threshold is set at 100 percent. Namely, only locally manufactured goods made from local raw materials or inputs will be considered. If raw material or inputs are not locally available, written permission to import would need to be sought from the DTI and included in any tender submissions. A small weighting is also given to suppliers with higher B-BEEE rankings. Whilst relatively little information is available on the scale of increased localisation through preferential procurement, the total value of advertised transversal tenders (pooled inter-departmental tenders) in clothing, textiles, leather and footwear in April 2012 was R225mil, which is thought to have sustained or supported 800 jobs (Economic Development Department, 2013). Anecdotal evidence would indicate that a limited number of preferential procurement tenders are filtering down to KZN CTC members.

INDUSTRIAL POLICY The Clothing and Textile Competitiveness Programme (CTCP) falls under IPAP and comprises two flagship programmes, namely the Competitiveness Improvement Programme (CIP) and Production Incentive Programme (PIP).

Competitiveness Improvement Programme (CIP) The CIP aims, through the cluster approach, to create a group of globally competitive companies in a sustainable business environment able to retain and grow employment levels. CIP funds are won through a competitive process and clusters can exist at a national, sub-national, and ordinary level. “[An] ordinary cluster is a group of at least five manufacturing companies or a combination of manufacturing and related organisations (e.g. retailers, design houses, component manufacturers) that are collaborating towards improving the competitiveness of each cluster member both individually and as a cluster…. A National Cluster is a sector or sub-sector wide development initiative coordinated by a national structure that is responsible for facilitating and managing national shared resources and projects as well as overseeing sub-national cluster projects where applicable” (CIP guidelines vs6). Ordinary clusters can receive cumulative funding of up to R25million although 25 percent of project costs should be contributed by participating firms. National cluster budgets can be far higher and government contributed to project expenditure on a sliding scale of 100 percent in year one of the project to 70 percent in year five of the project. Several hundred million Rand has been allocated to the “National and sub-national clusters”, with a far smaller amount being ring-fenced for ordinary clusters. The industry or employment creation benefits derived from the National and Sub-national Clusters that have utilised funding remain largely unclear. 86. Section 6: Policy

Production Incentive Programme (PIP) The main objective of the PIP is to assist the textile industry in upgrading processes, products and people in order to be more competitive. It consists of an upgrade grant and a working capital facility that can be applied for by individual companies. The incentive benefit is limited to a maximum of 7.5 percent of the companiesâ&#x20AC;&#x2122; manufacturing value add (MVA). This incentive runs for a period of 5 years until 31 March 2015, whereupon it may be further extended to 2017 based on funding availability. The PIP has been almost universally welcomed and has received significant credit for supporting the re-industrialisation of the industry. Some industrialists have indicated that PIP needs to remain in place for an extended period as the initial support provided enabled firms to replace aged and obsolete equipment, but further support is needed in order to support firms in gaining a technological advantage over their international competitors and to expand production to meet demand. A summary of CIP and PIP grants already approved, as well as forecast funding, appears in the table below.

Table 2: PIP and CIP and forecast expenditure

Actual

Forecast

Total

Competitiveness Improvement Project

Production Incentive Programme

Year

Value

2010

R 27 679 004.37

2011

R 72 602 060.95

R 635 231 117.50

2012

R 132 695 270.20

R 577 790 955.75

2013

R 139 647 449.00

R 599 531 286.27

2014

R 260 729 502.00

R 650 485 968.08

2015

R 98 887 791.00

2016

R 74 940 273.20

2017

R 65 368 910.80

2018

R 33 826 902.00 R 906 377 163.52 source: The dti (www.thedti.gov.za)

.87 Section 6: Policy

Chinese Government Support for Clothing, Textile and Footwear It is difficult to gain a complete picture of trade and industry support provided to the clothing and textile industry in China, but the World Trade Organisation provides an overview in the document, “China – measures relating to the production and exportation of apparel and textile products” (15 October 2014). This document clarified that certain measures are contingent on the use of Chinese goods and/or upon export performance, but summarises the dominant support mechanisms as follows: •

Income tax exemptions, reductions, offsets, and refunds for certain groups of enterprises;

•

Exemptions, refunds, and reductions of import duties and Value Added Tax for purchases of equipment by certain groups of enterprises and those located in designated geographic regions, such as economic development zones;

•

Exemptions from certain municipal taxes for certain enterprises;

•

Low-cost loans, extended loan repayment periods, and debt forgiveness provided by state owned banks, including both policy banks and nominally commercial banks, to key industries and enterprises;

•

Policies that call for sub-national governments to provide guarantees and loan interest subsidies, the latter of which appear to be cash payments to enterprises intended to cover the interest expense of loans made in connection with government policies;

•

Preferential prices for land use rights and refunds of associated fees for enterprises that are located in designated geographic regions including special economic zones;

•

Discounted electricity rates for enterprises that are located in designated geographic regions including certain special economic zones;

•

Support to cotton farmers, transporters, processors, millers, and spinners through tax breaks, cash payments, loans from state-owned banks, and the distortion of domestic supply volumes through the use of state-trading enterprises, tariff rate quotas, and other means. Producers and exporters of certain apparel and textile products benefit directly to the extent that their operations are integrated, and indirectly through the lower prices for raw materials in China that result from these measures;

•

Pursuant to government policies, state-owned producers sell chemical fibres in the Chinese market at below-market prices that constitute less than adequate remuneration

88. Section 6: Policy

•

Cash payments from Chinese government agencies at all levels to enterprises active in designated industries or undertaking activities encouraged by the government in its industrial policies for reasons including that they: •

Are owned at least in part by the Chinese government;

•

Operate in the apparel and textile industry;

•

Operate in an industry designated by China as “key,” have been designated as a “key” enterprise, or make a “key” product, and upgrade technology;

•

Engage in research related to issues identified in China’s industrial planning documents;

•

Have a brand or product designated by China as “famous” or “well-known”; or

•

Export or otherwise “expand” into foreign markets.

As noted previously in this chapter, Chinese industry support seems to focus on developing overall value chain alignment, developing local technical ability and creating a stable cost environment as the industry matures. The industry is clearly being used as a springboard for broader economic development and global expansion.

.89 Section 6: Policy

The Critical Issues as Stated by Industry Leaders of significant South African clothing, textile and footwear manufacturing plants and retail houses were interviewed to explore their views on the current government support mechanisms. All three respondents agreed on the positive impact and effectiveness of the CIP and PIP, but provided a number of compelling proposals for government support into the future. Whilst all commented that the industry had experienced somewhat of a turnaround, a key message was that there is no room for complacency. In this section we summarise findings from interviews and provide empirical evidence in support of stated opinions.

1. What has the impact of the CIP and PIP been on your company and industry at large? “This past year was fantastic, in large part due to these incentives. They were an absolute game changer.”

John Comley, CEO, Celrose Clothing

“[The] CIP created awareness of the targets we should be aiming at and allowed Celrose to see where it stands globally. Lots of training has taken place and employment grew significantly.” “[The] PIP definitely helped Celrose achieve… improved productivity, alleviation of the skills gap and improved product quality … It also freed up money to make non-capital investments … , to expand, invest our own money and open satellite plants amongst other investments.”

“The production incentive has had a major positive effect on our company. In 2010 we had decided to use the programme to upgrade our plant. At that stage we produced approximately 120 000 metres per month. We wanted to renew Imraan Bux, Director, Imraan

old machinery and increase output volume to 220 000 metres per month. …

Textiles

Over a period of three years the average age of the machinery was reduced to five years …” “With regards to the CIP, we had begun a number of projects of which the first one was training for world class manufacturing and systems …. With the systems training we have discovered a number of hidden factors that were increasing our costs …. We are delighted with the results and plan to continue

90. Section 6: Policy

with the training and consulting.”

“If you look back we have almost re-industrialised ourselves through the PIP, following a lack of investment … But I am not sure if as a country we have maximized the PIP investments. I think that the IDC could have asked more probing questions to really understand the needs of applicants and assist so that it was not just a shopping exercise but rather fitted with a clearer overall strategy for

Graham Choice, Director, TFG

re-investment.” “In terms of the CIP there have also been definite wins and with clearer and simpler monitoring and evaluation we can ensure that the strategic objectives set are met. Sometimes these strategic objectives are unclear and then there’s definitely misalignment between the real need and expectations. A rigid ‘one size fits all’ approach may have been pushed onto industry in some instances, whereas the essence of clustering is flexibility and innovation. There is definitely also a need for curriculums and manuals to be updated for various technical skills that are lacking, such as production planning and machine maintenance.”

“As far as Durban Overall is concerned, both the PIP and CIP incentives have exceeded all our expectations. I will explain briefly: •

Our adoption of lean manufacturing resulted in us eliminating waste in handling and improving production flow. This caused an increase in productivity from 145 garments per person to 360 garments from June 2011 to current, which equates to 250 percent just in garments produced per

Steve Tandy, Director, Durban Overall

person; •

At the same time we have used less electricity, less water, less space and less effort per garment which combined would easily equate to a 300 percent increase in productivity;

•

By making use of the both the KZN and Cape clothing and textile clusters we have driven a culture and mind set change to continually reduce waste…;

•

We have upgraded machinery and technology to become more competitive;

•

We have undertaken training across the board; from shop floor staff to management. An onsite training school has been opened;

•

We have undertaken significant time and motion study work;

•

Operator needle point efficiency has improved and a culture of ownership of quality has begun.”

.91 Section 6: Policy

2. Would you say that the industry has experienced a turn around?

“Despite all the doom and gloom it is going through a turnaround phase. Big industries don’t reverse a 20 year turnaround overnight. The decline has defiJohn Comley, CEO, Celrose Clothing

nitely been arrested which can only indicate that a turnaround is in place. The PIP specifically is really well structured for the place that the industry is at right now.” “The true results will only be seen in the future as there have been many investments made in the recent past across South Africa.”

“I am not sure what an industry turnaround really is. Are there more manufacturers than there were yesterday? As clusters we measure ourselves but we have not measured the state of the industry at a national level … I see and sense that many large manufacturers and large CMTs have closed and in their place a number of small CMTs have sprung up. However they don’t have the Graham Choice, Director, TFG

management ability or scale and aren’t necessarily sustainable in the long run.” “To be scalable and sustainable we just need to build supply chains around the five big retailers, then around the remaining large manufacturers who can act as a hub for larger CMTs. Investing piecemeal in small CMTs is not going to rebuild the industry so the future PIP needs to be more nuanced and give more support to those who are aggressively growing.” “I can say that, in pockets, the TFG supply chain has experienced a turnaround which is sustainable and will grow and naturally we are very pleased with that result.”

92. Section 6: Policy

“The industry has lost a great deal of ground over the past two decades. Creating a turnaround was to be no easy task. My belief though, is that there has been the start of a turnaround. I say this because the number of manufacturing casualties seems to have cooled … I think that the PIP has re-energised the industry. There may not have been new factories springing up everywhere but Imraan Bux, Director, Imraan

existing factories have been gradually upgrading their plants. There are defi-

Textiles

nitely more enquiries for local clothing manufactures as exchange rates and rising costs abroad keep narrowing the gap … The procurement of local product for government requirement is also having a positive effect, although very slow.” “What we need however is to reach a point where we regain the critical mass required to sustain growth. What I think we are seeing is that businesses that were not sustainable anyway are giving way to businesses that have the model to meet future requirements.”

“I have to say yes, a positive turnaround has occurred as far as our core business is concerned, which is the manufacture of workwear. The same cannot be said for the fashion industry which is only now starting to turnaround. The PIP Steve Tandy, Director, Durban Overall

has [laid] the foundations for recovery of [textile] mills that were damaged. Unfortunately, for some mills the rescue came too late and they did not survive. The following areas have, and will, continue to influence any positive turnaround in the industry: •

Rand-dollar exchange rate;

•

The resolution and finalisation of a local procurement act that satisfies all stakeholders;

•

Availability of local raw material suppliers.”

.93 Section 6: Policy

3. What is the next big step change that industry needs to take in South Africa to remain competitive?

“Manufacturing has to change its area of emphasis. While we need to continue to work on labour productivity and quality, huge efforts should be placed on improving design, development and pre-production skills. We need to keep investing in technology and put the science back into the industry.” “Due to the lack of efficient and effective textile industry we’re often reliant on John Comley, CEO,

long lead time raw material, but we’re living in a fast world and can’t continue

Celrose Clothing

in the current manner. Manufacturing will be held back if textile production doesn’t keep up.” “I’d also say that we mustn’t be held hostage by the mind-set of a generation of older executives with fixed ideas as to what can be done with a relatively low skilled work force. Our past year has proved that there are good returns to be made.”

“We need to constantly focus on efficiency. I don’t think we can point fingers at input costs; our wage rates are not incompatible with the East, but our hours of work are vastly different … Efficiency is rooted in the basics of World Class Manufacturing which is still not as widely implemented as it should be.”

Graham Choice, Director, TFG

“Training is definitely not as much of a focus that it should be. Too few firms have dedicated training lines. It is every firm’s responsibility to be training.” “In terms of government’s role we need a properly facilitated policy that can only be delivered via real dialogue between industry leaders and government. To date a number of options put to government seem to have gone nowhere. To export and to counter imports we must develop large manufacturers; we need to rebuild these as small CMTs will never compete effectively or sustainably drive down the price of a garment.”

94. Section 6: Policy

“It is important that our industry understands that, at some point, incentives and grants will have to be reduced or come to an end. We cannot base our business plans on incentives forever as we have to take ownership of our own fate. It could be argued that we spent the last few years coming off a low base and the next few years have to be vigorously spent firmly getting machinery, Imraan Bux, Director, Imraan

people and businesses to a competitive world class standard ... The mind-set

Textiles

needs to change from one of re-fashioning and copying to the creation of our own unique identity.” “In the textile industry we have unfortunately lost most of our spinning capacity. This portion of the industry is quite difficult to sustain due to its scale requirements. We cannot really control our own destiny if we do not have the vertical pipeline in the country. The availability and capability of producing cotton in our region is a potential advantage. This could create the opportunity for restarting some spinning capacity but it would be a bold step. This will have to be a “leap of faith’’ investment but a very necessary one.” •

“We are currently focused on the training of mechanics on new machinery and technology where we specifically feel there has been a lack, specifically in automated technology…;

Steve Tandy, Director, Durban

•

Adoption of world class manufacturing is a must. It is a continuous process that will assist industries survive and compete in an increasingly compet-

Overall

itive world; •

Sharing of intercompany knowledge has vastly improved the mind-set within Durban Overall. Our staff interact with other companies within the cluster and implement their findings for the betterment of the company. These activities also increase staff morale and I strongly advise others to pursue this methodology;

•

Another positive aspect of the KZN & Cape clothing and textile clusters is the yearly benchmarking exercise which enables one to compare oneself with the industry countrywide as well as worldwide…”

.95 Section 6: Policy

4. What other government policy can support this step change?

John Comley, CEO, Celrose Clothing

“Government has developed some great supportive policies but now needs to just police, enforce and bring to book those [who are] under-invoicing. Government must also ensure that retail supports its initiatives to assist the sector. An incentive around design development, like the PIP for manufacturers should be considered.” “I am absolutely excited for the future. In recent history there’s never been such a good time for the industry. Clothing and footwear are the only industries that can quickly and radically change the South African unemployment factor. Turkey employs over 1 million people in the sector. Tens of thousands of Chinese make shoes for South Africa and we only employ 15 000. There is no reason South Africa can’t manufacture our way out of its jobs crisis.”

Graham Choice, Director, TFG

“We have two industry-led regional clusters doing their best but they seem starved of the funding that they need to be really effective. A huge amount of money is being pumped into questionable National clusters that are not well aligned with the direction industry needs to go in as recorded through recent research and the value chain Imbizos. I would propose that as industry we should write our own policy and show how it will support national policy. A week-long workshop with Deputy Generals, industry leaders and unions could then fine tune this, ensuring that it meets the various objectives best and then commit to seeing it through.”

96. Section 6: Policy

Imraan Bux, Director, Imraan

“The PIP needs to continue for at least four additional years or more for the tex-

Textiles

tile industry … Perhaps this was one of the weaknesses of the PIP model that it [treated the clothing and textile industry equally]. The textile industry is capital intensive and the clothing industry labour intensive. The textile industry still requires more capital funding to unlock growth as current funding is adequate to only repair past damage, not take us forward.” “The new Duty Rebate Mechanism scheme has been debated long enough. It must now be implemented to incentivise the clothing industry as well as create local capacity demand. To be fair the old DCC has not been replaced and the clothing industry needs some relief. This may also help to ease the tension between textile and clothing and create much needed cohesion.” “I also think that an effective and representative working committee made up of government and the private sector is a vital requirement. It does exist in a fragmented state at the moment but this group needs to have real power with direct access to relevant government departments and businesses to effectively and quickly tackle challenges as they occur ... This committee can review issues like tender fraud, illegal imports and other related issues thus allowing the enabling environment for the macro-economic plan to fall into place.” “The textile and clothing divisions at the SABS and the CSIR need a serious review. They need to be re-capacitated immediately. There must also be a review of the clothing and textile related tertiary institutions to encourage the flow of young people into a sector that can provide opportunities.”

Steve Tandy, Director, Durban

“I would have to say that government must maintain both the PIP and CIP in-

Overall

centives for at least another three to four years to build on the foundations already in place and for the textile industry to grow and sustain its future. Another aspect that needs some serious thought is the textile raw material industry which is a major constraint. Currently we have no choice but to import 90% of our core materials. This brings to the table the issue of duty rebates policy which is still a bone of contention in that is not clearly defined. Government needs to clearly define this as a means of promoting local manufacture of both raw materials and finished goods.”

.97 Section 6: Policy

Textiles - The Policy Gap A major recurring theme in the interviews above is that underdevelopment in textile production as well as conversion continues to be a major constraint to the overall competitiveness of the South African clothing and textile industry. It is the opinion of numerous industry stakeholders that government policy instruments are not adequately supporting the development nor specific requirements of the textile industry. Studies undertaken on behalf of the DTI and the two regional clusters have highlighted very specific development requirements for the local industry and associated policy recommendations.

MAJOR FINDINGS FROM DOMESTIC SUPPLIER CAPACITY STUDY (BARNES, 2O12) In a report entitled “Status quo of the textile industry in South Africa, SACU and Zimbabwe”, Barnes (2012) provides a comprehensive review of the status quo of the regional textiles industry, encompassing South Africa, its SACU partners (Botswana, Lesotho, Namibia, Swaziland), and Zimbabwe. The purpose of the report was to understand the regional textile industry’s present capacities and capabilities, and inform policy in support of the development and growth of the South African textile industry. Major findings from this report included: •

There is a clear level of misalignment between the demand profile of apparel retailers, design houses and manufacturers, and the supply capability of regional textile manufacturers;

•

The weaving portion of the value chain has very limited capability, in respect of synthetic fabric supply, especially when demand relates to lighter weight synthetic fabrics.;

•

The regional textiles industry is most competitive in cotton knits, with the major threat to South African suppliers coming from Mauritius, rather than the East;

•

The two most notable deficiencies in synthetic apparel and household textiles capability relate to (a) the lack of water jet weaving capacity in the industry, despite this being the most cost efficient weaving technology for synthetic fabrics, and (b) the lack of dispersion and/or reactive printing capabilities;

•

The dyeing and finishing sub-sector of the textiles industry has failed to develop more advanced capabilities in respect of dyeing and (most importantly) printing light weight polyesters and other synthetic fabrics;

•

Without the above mentioned capability there would appear very little reason for South African retailers, design houses and manufacturers to source local polyester and/or polyester/cotton knits or wovens. This is the reason for the disproportionate level of importing of these fabrics into the region;

•

Specific policy recommendations made in this textile study are summarised in Table 3.

98. Section 6: Policy

Table 3: Summary of Textile Policy Recommendations Recommendations

Major Objectives

Level of impact on SA textiles industry

Cost to Government

Introduction of DRM for

•

RDHMs •

Support for potentially competitive

Potentially very substantial, in-

•

R605m to R787m annually

parts of the textiles industry sup-

creasing employment in the indus-

•

High levels of administration com-

plying RDHMs

try, as well as at downstream man-

Support for RDHMs who necessarily

ufacturing customers

have to purchase imported fabrics

•

plexity at ITAC

May be benign if textiles manufacturers do not invest in more RDHMaligned product capabilities

•

Employment stabilisation to 1,188 new jobs

•

Un-quantified growth in downstream employment

Investigate establishment

•

of synthetic printing plant •

Scope business case for advanced

•

Potentially, very substantial, espe-

synthetic fabric finishing plant in

cially if SA retailers establish large

scale QR trading models that have

Ensure the SA clothing-textiles val-

proved successful in Europe

•

Not calculated as IDC investigation needs to be completed first

•

Potential for private sector involvement

ue chain is QR capable More focused resources

•

Levelling of competitiveness play-

•

Potentially very substantial, but

•

None – self-financing as increased

to reduce under-invoiced

ing field for SA textiles manufac-

impossible to quantify as extent of

duties secured will more than off-

and illegal fabric imports

turers

fraud not quantifiable

set investigation and administra-

•

Levelling of competitiveness play-

tion costs

ing field for SA RDHMs Alleviation of government

•

Stabilisation of government ad-

•

Indirect - industry cost stabilisation

•

Substantial, but dependent on

administered service cost

ministered service costs for 5 year

will allow other critical elements

municipal service cost movements

movements at textiles

period through national govern-

of the recommendation basket to

over next 5 years

manufacturers

ment subsidisation of municipal

have a positive impact on the in-

services

dustry

•

Additional PI and/or CIP support for textiles manufacturers using support to reduce energy and water consumption

Maintenance of PI for at least 5 year period

•

Recapitalisation of the SA textiles industry

•

Based on 2011 industry investment levels, very substantial

•

As per existing annual PI funding, although extended for additional period source: Barnes (2012, p260)

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MAJOR FINDINGS FROM DOMESTIC RETAIL DEMAND STUDY (BARNES, 2014) In the “South African Retailer Fabric Demand Survey”, Barnes (2014) summarises and analyses fabric demand from four participating South African retailers over two seasons (2012-2013). The table below summaries total fabric demand for the four retailers and disaggregates the data according to place of origin and fabric type.

Table 4: Aggregated Fabric Use by Type and Country of Origin Sum of Fabric Meters Cotton

South Africa

SACU

other Africa

Rest of the World

Don’t know

Grand Total

203 548

62 979 066

11 748 176

3 052 551

14 384 044

33 590 748

Poly-cotton

3 245 107

2 714 047

2 092 103

30 899 036

Cotton - other syn-

3 464 863

3 439 040

2 464 627

13 908 380

38 950 294 10 751

23 287 662

thetics Cotton - other natural

248 246

fibres Polyester

4 196 992

42 696

49 346

17 267 330

Polyester - other syn-

3 570 207

192 271

114 953

11 714 627

13 512

21 569 876

5 066

10 126

61 153

435 695

3 618

515 658

2 950 846

121 935

1 293 448

11 669 217

42 704

16 078 149

20 840

3 107 649

15 569 059

thetics Other natural fibres Other synthetics Other Don’t know Total

668 459

3 796 948

490 343

60 474

953 545

2 958 681

3 074

4 466 118

30 340 060

9 633 140

21 434 059

125 799 608

277 207

187 484 074 Source: Barnes (2014)

A wide breadth of fabric construction is used by domestic retailers with an almost 50 percent split between woven and knits. Cotton and poly-cotton dominate the types of fabric supplied, constituting over 55 percent of all fabrics used. Across the fabric types, substantial variances occur between light, medium, and heavy fabric requirements, although medium weight fabrics (161g-240g) clearly dominate at nearly two thirds of the total fabric demand. The source of supply for woven and knit is fundamentally different. South African manufacturers supply only 7 percent of total woven supply, with 83 percent sourced from outside Africa. South Africa supplies 23 percent of the knit requirements, with 19 percent from Africa (excluding the South African Customs Union), and 52 percent is supplied from outside Africa. Based on the findings of the two reports mentioned above, it is pertinent to re-table the recommendations made by Barnes (2012) to rejuvenate the local textile industry as both studies supported these original findings and conclusions. References Barnes, J. (2012) Status quo of the textile industry in South Africa, SACU and Zimbabwe: Mapping exercise and strategic South African textile industry considerations. On behalf of the DTI. Barnes, J. (2014). South African Retailer Fabric Demand Survey. On behalf of the KwaZulu-Natal and Cape Clothing and Textile Clusters.

100. Section 6: Policy

For information on the KZNCTC visit www.kznctc.org.za Tel: +27 (0) 31 764 6100

.101 Section 6: Policy