ENHANCING COMPETITIVENESS OF KENYAN APPAREL
Trade and Competitiveness Global Practice Nairobi, September, 2015
Today’s Discussion: Kenyan Apparel • • • • •
Current situation worldwide and in Kenya Constraints to Kenya’s competitiveness Opportunities and green manufacturing Green manufacturing implementation strategy Progress to-date
WHO IS DOING WHAT IN THE WORLD • Considered a key ‘stepping stone’ sector, apparel is overwhelming dominated by China
which is not only large but has grown fast over the past 10 years. • However, other developing countries are also developing a presence and showing similar
signs of strong growth led by Bangladesh, Vietnam and India. • Aside from these three, Cambodia is in the top 10 on value for knit apparel. But the fastest
growing countries (in knit apparel) come from central America, with impressive 10-year growth rates: Nicaragua, 122%; Guatemala, 58%, El Salvador 55% (compared to Vietnam’s growth of 20%). Knit apparel
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Value in US$ of top 10 exporters (2013) 120
Bangladesh 12
100
China
10 Billions
Billions
80
60
8
Italy Vietnam India
Germany
6 40 4 20
2
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2
0 2004
2005
2006
2007
2008
2009
Source: Trade Map, International Trade Commission: http://www.trademap.org/.
2010
2011
2012
2013
GLOBAL APPAREL : TIGHTLY INTEGRATED VALUE CHAINS BRING MANUFACTURERS CLOSER TO END CONSUMERS • Steady decline in apparel as % of total household consumption in EU and US • Annual growth rate by 2020: World (4%); Japan, EU, US (2%); Brazil, China, India (8%) • Buyers/manufacturers looking to capitalize on trade preferences like duty-free entry • Fast-Fashion’ and ‘Hyper-supply chain management’ focusing on adding value through increased use of technology in design, and closer control over production innovation, branding, small batch production and sales to protect margins • Growing trend towards a fully integrated ‘Farm-to-Fashion’ production system where buyers/manufacturers work closer to the entire supply chain to eliminate waste and improve overall efficiencies, and traceability. • Growing consumer interest towards products produced in sustainable - ‘green’ manufacturing factories Changing Trend in Relationship between Consumers and Manufacturers
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PRODUCTION TRENDS IN THE APPAREL SECTOR
Current Production Trend in Asia and Africa (incl. Ethiopia and Uganda)
CM
•Labor (low skill) •Electricity •Imported fabric supplied by buyer
FOB
•Labor (lowsemi-skill) •Electricity •Importedlocal fabric
Original Design
•Labor (lowsemiispecialized skill) •Electricity •Importedlocal fabric
Current Production Trend in Kenya's Garment Sector
Source: Global Development Solutions, LLC.
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Majority of training activities in Kenya's training institutions focused on design/fashion
Farm-toFashion
• Labor (low-semispecialized skill) • Electricity • Imported-local fabric • Local yarn/tread
GLOBAL TRENDS IN THE APPAREL SECTOR Traceability: Growing consumer demand for traceable products increasing pressure on buyers and brand leaders
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KENYAN EXPORT APPAREL: USA IS LION’S SHARE, BUT HEADROOM TO CAPTURE MORE GAINS FROM AGOA US Apparel import market share (2014) Kenyan Apparel Top 5 export markets (2006-’10)
Lesotho Kenya 1% 1% Mexico
USD millions
Bangladesh 7% 9%
Mauritius 0% Swaziland 0% Madagascar 0%
Indonesia 9% Vietnam 17%
China 56%
Source: UN Comtrade, 2014 (2010 was most recent year for data availability Source: US ITC trade dataweb, 2015
US dominates as destination for Kenyan apparel • Decline in exports to the US during 2009 & 2010 • Now picked up to over US$379 m in 2014 • 70% of Kenyan apparel firms have a US-dominant market orientation (i.e. at least 80% of their output is sold to US markets through AGOA) • In 2014 Kenya captured just 0.17% of the US apparel market (US market USD 225 billion) 6
CURRENT STATE OF THE GARMENT SECTOR
KENYA’S APPAREL EXPORT PRODUCTS 6 of Kenya’s top 10 exports are cotton products; 4 are manmade fiber products
Currently Kenya’s largest apparel export to the US is women’s and girls’ cotton trousers/slacks/shorts 7
Source: Office of Textiles and Apparel, International Trade Administration, US Department of Commerce (2014) http://www.otexa.ita.doc.gov/scripts/tqads2.exe/catpage
CURRENT STATE OF THE TEXTILE/GARMENT SECTORS
KENYA’S TEXTILE SECTOR 52 textile mills, of which only 15 are currently operational at less than 45% capacity utilization Majority of export quality fabric manufactured in Kenya is made from imported fibers due to poor quality and high trash content in local lint
Composition of a Cotton Fabric in Kenya Labor: ≈12% Electricity: ≈25% Material: ≈24% Maintenance: ≈6% OH: ≈33%
8
•
Cost of electricity as a major cost driver
•
High maintenance and OH costs due to old equipment
•
Low labor skills and productivity
•
High cost of imported material and low quality of local fiber requiring additional processing
CURRENT STATE OF THE TEXTILE/GARMENT SECTORS
KENYA’S GARMENT SECTOR Approximately 21 large apparel companies operating in the EPZ, and 170 medium and large companies operating outside the EPZ , with over 70,000 small- and microenterprises in the sector The export oriented garment sector employs an estimated 37,758 workers through the EPZ
Composition of a Standard T-Shirt in Kenya Labor: ≈8% Electricity: ≈5% Material: ≈64% Maintenance: ≈2% OH: ≈21%
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•
High cost of imported material (fixed cost due to absence of export quality fabric in Kenya)
•
Only areas where cost and quality can be managed to improve competitiveness are in labor and electricity costs
KENYA’S COST AND SKILLS CHALLENGE: COMPARING WOMEN’S JEANS PRODUCTION IN KENYA AND CAMBODIA
Not quite making the cut Comparative production and delivery costs of women’s jeans
Low technical skills and high cost of labor
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Source: Trade Map, International Trade Commission: http://www.trademap.org/.
High trade logistics costs
AGOA effect
KENYAN APPAREL: CONSTRAINTS TO COMPETITIVENESS
• •
Cost of energy too high compared to regional and global competition High cost and time associated with logistics
•
Exorbitant cost for work permits and time required to recruit expatriate managers (Kenya: $2,400; Ethiopia: $62)
Policy and Regulations
Physical infrastructure
Kenyan Apparel Competitiveness
• •
Long order-to-delivery times (30-90 days) Low energy efficient factories (opportunity to reduce energy consumption by up to 26% and cost by 49%)
Innovation and technology
•
• 11
Low productivity of local labor force (change over takes 2 – 4 days in Kenya versus 2 hours in Bangladesh) High cost of labor • Need for task specific ($165/mth for a sewing training, including multioperator in Kenya vs $48 tasking skills in Ethiopia) Costs increased 30% in the past three years Skills and capabilities
•
CONSTRAINTS TO COMPETITIVENESS: PHYSICAL INFRASTRUCTURE Comparison of Import/Export Costs among Competitors (USD/Container)
Comparative Electricity Costs Country
Vietnam
USD/kWh
India
China
0.07
Ethiopia
0.06
South Africa
0.04
Kenya
0.13
More than 2 times the cost in Ethiopia
Bangladesh China
Cost to import (USD/container)
South Africa
Cost to export (USD/container)
Lesotho
Comparison of the Number of Documents Required for Import and Export among Competitors
Ethiopia
Doing Business Annual Report, 2014.
Kenya -
Vietnam
1,000
2,000
3,000
Time Required for One‐Way Job Commute
India Bangladesh China
Documents to import (no.)
South Africa
Documents to export (no.)
Lesotho Ethiopia
Doing Business Annual Report, 2014.
Kenya -
5
10
15
Vietnam, HCMC China, Shanghai South Africa. Pretoria Time Index (in minutes)
Kenya, Nairobi India, Mumbai
http://www.numbeo.com/ common
India, Kolkata
12
0
20
40
60
80
CONSTRAINTS TO COMPETITIVENESS: INNOVATION AND TECHNOLOGY Average Time Elapsed between Order and Delivery of Imported Fabric
Operating Outdated and Inefficient Equipment
Examples of Capacity Improvements Associated with Equipment Upgrading in Textiles Equipment in Kenya Age Capacity Type of equipment (yrs) Improvement
Source: Global Development Solutions, LLC.
Potential Energy and Cost Savings
Sample Energy and Cost Savings from Equipment/Technology Upgrade: Integrated Textile‐Garment Factory Total Savings % Savings 1 Energy Consumption (kWh) 626,439 160,968 25.7% 2 Cost (Ksh) 27,200,000 13,411,713 49.3% 3 Cost (USD) $ 320,000 $ 157,785 49.3%
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4 Other Savings 5 Consumption (liters) 6 Cost (Ksh) 7 Cost (USD)
HFO (liters) 174,051 10,652,842 $ 125,328
Global Development Solutions, LLC (GDS)
Fuel wood (tons) Savings 649 2,100,578 8,552,264 $ 24,713 $ 100,615
1 Warper Machine Ezd 2 Sizing Machine –Sucker Lc3 3 Folding machine 4 Packing machine 5 Carding machine 6 Drawframes 7 Speed frame 8 Ring frames 9 Twister
38 39 38 38 38 38 38 38 38
Source: Global Development Solutions, LLC.
100% 400% 150% 167% 300% 380% 355% 1567% 100%
CONSTRAINTS TO COMPETITIVENESS: SKILLS AND CAPABILITIES Ratio Minimum wage: value added/work Kenyan labor: low value for money reflecting poor skill level given current wage rate
Vietnam India Bangladesh China
Ratio Minimum wage: value added/worker
South Africa Lesotho Ethiopia Kenya 0
0.2
0.4
0.6
0.8
1
•
Difficult to find qualified management staff
•
Need to rely on high cost foreigner Available training courses not geared towards training qualified managers
Source: Doing Business, Annual Report
Perceived Availability of Labor Repair/maintenance
33%
Line workers
43%
Floor supervisors
57% 71%
Administrative
17%
14% 14%
86% 0%
20%
•
57%
29%
Management
14
50%
40%
14% 14%
60%
80%
100%
Difficult to find Possible to find locally Readily available
CONSTRAINTS TO COMPETITIVENESS: SKILLS AND CAPABILITIES (CONT.) •
•
Perceived Labor Training Needs
Task specific training required in all aspects of production Multi-skilling (ability to operate more than one type of equipment) lacking due to equipment-specific training programs in Kenya
Repair/maintenance
17%
83%
Line workers
29%
71%
Floor supervisors
29%
71%
Management
17%
Administrative
14% 0%
50%
Substantial training req Task specific training req No training needed
33% 86%
20%
40%
60%
80%
100%
Perceived Quality of Local Training Institutions Repair/maintenance
33%
Line workers
29%
50%
17%
57%
14%
Specialized training not available Available but poor quality
Floor supervisors
14%
43%
43%
Good quality training but expensive Management Administrative
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29%
43%
14%
57% 0%
20%
40%
60%
14%
14%
29% 80%
100%
Good quality training through local institution
SAMPLE ENERGY AUDIT AND POTENTIAL ENERGY/COST SAVINGS
FIERCE COMPETITION FROM NEIGHBORING COUNTRIES FOR FOREIGN INVESTMENT AND EXPORT MARKET SHARE • Market and competitiveness gap between Asia and Africa too large, but raising labor costs in China create unanticipated market opportunities for Kenya • Immediate threat from Ethiopia, Uganda and possibly Tanzania to attract both investors and buyers • Economic fundamentals for Ethiopia, Uganda and Tanzania (to some degree) are potentially more attractive for investors and buyers than Kenya, but these countries are expected to target medium and low end of AGOA’s market segment • Regional competition for same pool of investors and buyers to expand production and local value added in Africa (to take advantage of AGOA and hedge against rising costs in Asia) • Renewal of AGOA benefits signed into law by President Obama on 29 June 2015 for 10 years • Ethiopia, Uganda and Tanzania in varying degrees can offer investors and buyers an entire integrated value chain from ‘farm-to-fashion’; Kenya has the option to do the same, but structural constraints in the supply chain make Kenya less attractive as a destination 17
OPPORTUNITIES EMERGE FOR SUSTAINABLE, GREEN PRODUCTION TO CAPTURE PREMIUM MARKETS Need for a paradigm shift in developing the textile and garments sectors • Develop a unique country and brand image • Introduces products which regional competitors are unable to produce or lack the strategic vision and capability to develop • Produce products which are not time sensitive but attract premium prices
Africa’s Hub for Innovation and Green Production Focus on low-volume, high-margin, “Green Product” market segment
Market Opportunities • Global Green Market Segment expected to reach US$3.5 trillion by 2017 • US green apparel market reached $5 bln in 2013. UK eco-fashion industry: £150 million • Small batch mass customization, particularly through e-commerce market to reach $327 billion in the US by 2016 (Forrester Research, Inc.) 18
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SETTING THE PACE FOR GREEN MANUFACTURING IN KENYA
Recent Budget Speech “Mr. Speaker, Kenya has been recognized as a global leader on clean energy with over 80 percent of the energy mix being green. It is, therefore, imperative that we position our economy as a green industrial hub, leveraging cheaper and cleaner geothermal power, steam and water to competitively produce goods of high quality for the region as well as the global market.�
WHAT IS ‘GREEN’ MANUFACTURING?
‘Green’ Manufacturing (two definitions):1 •
Manufacturing of ‘green’ products used in renewable energy systems and clean technology equipment
• ‘Greening’ of manufacturing – reducing pollution and waste by minimizing resource use, recycling and reusing waste, and reducing emissions 1. Renewable Energy & Clean Technology: Key to a Revitalization of US Manufacturing & Job Creation. Clean Technica, April 15, 2012.
WHY ‘GREEN MANUFACTURING’
Fastest Growing Premium and Niche Market Segment • • • • • • • •
‘Green’ consumer market estimated at 15 – 24% of consumers in developed markets US Green apparel and accessories market ≈USD 5 billion annually1 Annual revenue of major global apparel brands between USD 1.5 billion to USD 27 billion moving towards ‘green’
Now is the time to take advantage of ‘first-mover’ benefits in this growing niche Due to increasing stakeholder scrutiny and in order to meet internal CSR goals, global apparel companies require measurable, traceable, and verifiable vendor practices Most global value chain greenhouse gas (GHG) emissions are outside an apparel company’s direct control Apparel companies now focusing energy and emissions reduction efforts on company-owned offices, stores, distribution warehouses, transportation, and direct factory facilities Next step is to focus on energy and emissions efficiency among suppliers
1. http://www.usatoday.com/story/money/business/2013/04/28/the-rise-of-green-fashion/1996773/
WHO ARE THE LEADERS IN THE ‘GREEN’ MARKET SEGMENT?
KEY CHARACTERISTICS REQUIRED FOR DEVELOPMENT BRAND-KENYA Key characteristics required to develop Brand Kenya: Key Characteristics for Developing a Hub for Green Products and Crowd Design Market Segment Best raw material for fabric and trims and packaging with lowest Utilities environmental impact Design Minimum water and energy input and usage Internet Minimum pollution and GHG emissions during manufacturing Use of renewable resources Manage manufacturing process and controls from fabric‐to‐garment Manufacturing Tight control over wastewater, discharge, pollutants and energy use Third party monitoring of environmental and social compliance Minimize GHG emissions and environmental impact Transportation Optimize transport routes and use of rail, truck and air, and consolidated shipment Global Development Solution, LLC
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Stable source of electricity at competitive prices High internet connectivity Stable and cost competitive
IMPLEMENTATION STRATEGY: OVERVIEW
1. Re-branding Kenya Through Innovation and Competitiveness a. Kenya, Africa’s Hub for Innovation and Green Production b. Supporting Sector Competitiveness through Improved Electricity Pricing and Quality 2. Labor Skills Development and Productivity Improvement a. Training levy b. Center of Excellence c. Term limits on expatriate work permit 3. Institute for Textile and Apparel Development (ITAD) a. Defining the role and mandates of the ITAD 4. Buy Kenyan Program a. Public sector procurement of Kenyan products 5. Performance Monitoring and Impact Assessment a. Program performance and impact b. Performance of service providers 6. Draft Budget a. Implementation activities excluding program management costs b. Recalibrated subsidy rate after equipment/technology upgrading
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RE-BRANDING KENYA THROUGH INNOVATION AND COMPETITIVENESS 1. Kenya, Africa’s Hub for Innovation and Green Production (1) Phase 1 2012 ‐ 2014 1 Nature of funding TA (grant)and credit line a. Prepare draft policy statement 2 Total distursement $40 million 3 No. of loans made 7 (1) b. In collaboration with SUNREF/KAM, finance Highest: $10 million 4 Loan amount/project Lowest: $1 million (2) implementation of energy audit for entire sector 5 Lending intermediary Cooperative Bank c. Prepare business plan to upgrade key equipment and Phase 2 2014 ‐ 2016 (3) technology 1 Nature of funding TA (grant)and credit line €80 ‐100 million d. Engage marketing/media agency to promote policy 2 Total fund USD108 ‐ 135 million 3 Lending intermediary Cooperative Bank (4) targeting consumers in US and European markets (1) Energy sector (5); dairy (1); textile (1) e. Invite major buyers/producers to Kenya to showcase (2) Minimum about is $100,000, but negotiable with lending bank (3) Funding expected to be available by Oct 2014 program (4) KAM in negotiation with two other local banks Source: Global Development Solutions, LLC 2. Access Concessionary Development and Commercial based on interview with KAM Financing a. In collaboration with SUNREF/KAM, and the World Bank, identify and negotiate access to concessionary financing b. Through ACTIF and SUNREF/KAM develop a sector-wide promotion program to upgrade equipment and technology (1): Premium products produced c. In collaboration with SUNREF/KAM, develop standard under ‘green production ‘ label can business plan package to support sector stakeholders apply fetch more than twice the price of for concessionary financing conventional products SUNREF Program ‐ AfD: Funding
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LABOR SKILLS DEVELOPMENT AND PRODUCTIVITY IMPROVEMENT 1. Training Levy a. Redefine conditions for approval and timing of rebate b. Define range of training to be covered by training levy c. Partner with buyers, key investors, and leading textile/garment training institutions to develop mentoring program d. Develop and implement training audit program 2. Center of Excellence a. Textile/apparel sector currently represented by Kenya Association of Manufacturers (KAM) which covers entire manufacturing sector with limited knowledge of and network in the industry b. Need exist for sector-specific organization that can respond to changing needs of the sector with strong industry experience 3. Term Limits on Expatriate Work Permit a. Identify range of specific skills not available in the Kenyan labor market b. Prepare recommended list of labor skills required to create innovation and green production hub c. Match expatriate labor needs with list for training levy scheme to utilize training levy to mentor local workers d. Reduce cost and time required to issue work permit (define default period for automatic approval) e. Place term limit on recruitment of expatriate on condition that sufficient skills is developed through training levy within timeframe of work permit 26
INSTITUTE FOR TEXTILE AND APPAREL DEVELOPMENT (ITAD) Need to institutionalize program support functions to ensure sustainable support and growth of the sector 1. Defining Role and Mandates of the ITAD a. Draft framework and organization structure, roles and mandate of ITAD b. ITAD to be a public-private institution c. Prepare draft budget required to support the institution d. Develop consensus regarding ITAD with sector stakeholders e. Invite foreign manufacturers, buyers and key sector leaders to serve on the board of ITAD to help guide the development and promotion of the innovation and green production hub PR‐Marketing Country Branding
Sector Support Program
International investors and partnerships
Investor/buyer awareness raising
Int’l Board Incl. investors/ buyers
Institutionalize program activities to ensure sustainability 27
Global Development Solutions, LLC (GDS)
ITAD
Access to information on int’l market and technology trends Product and market targeting/diversification
BUY KENYAN PROGRAM
1. Public Sector Procurement of Kenyan Products for public service agencies (1) a. Draft policy with conditional restrictions on import of uniforms by all public service agencies b. Identify demand for uniforms by all public service agencies c. Sponsor contest among local design companies to develop new uniform design d. Public service agencies to select design and quality of uniforms e. Public tender for local companies to compete for contract (1) To help avoid price fixing, local suppliers would be required to supply uniforms priced within 20% of the price of currently imported uniforms of equal quality. In addition, a sunset clause is recommended where import restrictions will be lifted after five years, where public service agencies will have the option of purchasing imported uniforms, but only through a public tendering process which includes local Kenyan companies.
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PERFORMANCE MONITORING AND IMPACT ASSESSMENT 1. Program Performance and Impact a. Number of direct and indirect jobs created b. Increase in sales (volume and sales) c. Market and product diversification d. Improved energy efficiency 2. Performance of Service Providers Prepare database to monitor performance of service providers
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PROGRESS TO DATE Implementing Kenya’s Green Manufacturing Strategy • • • •
Factory level energy audit Improving the energy audit process Engaging local commercial banks to access concessionary loan Business plan preparation
Benefits for Participating Textiles/Apparel Companies KAM supervised energy audit of entire factory Recommended changes specifying equipment type, potential energy and cost savings, and return on investment • Free business plan preparation assistance to apply for concessionary loan • Access to concessionary loan • Facilitation and matchmaking with potential buyers Program Partners and Support • •
Energy audits
(SUNREF) Technical support
Financial support
Textile & apparel firms
Progress Report: • 4 energy audits completed • 1 operational with bank loan • 2 completing business plan • 4 companies in pipeline for energy audit
DONOR FUNDS
MARKET OPPORTUNITIES AND POTENTIAL SPILLOVER EFFECTS
Spillover Effect -
Textiles/Apparel Energy Efficient/’Green’ Manufacturing : Reduced electricity use/waste Conversion to biomass boilers Environmental conservation Cost savings/competitive prices Increased demand for local lint
Ginning Sector Increased demand for local cotton cloth New investments to revitalize sector Increased employment
-
-
Cotton Sector Increased demand for local cotton Increased employment Introduction of new seed varieties, incl. long fiber variety (fine shirting material)
Domestic and Foreign Investments
Green Product Markets Global green marketing segment: ≈USD 3.5 trillion by 20171 US ‘green’ apparel market: ≈USD 5 billion Market share: 15 – 24% of consumers in developed markets
1. Promotional activities aimed at transforming consumer perception about brand. Global Marketing: A Global Strategic Business Report, Global Industry Analyst, Inc. April 14, 2011.
Thank you