Identifier
Created
Classification
Origin
05DARESSALAAM982
2005-05-19 03:50:00
UNCLASSIFIED
Embassy Dar Es Salaam
Cable title:  

Tanzania: AGOA Textile Update

Tags:  ETRD PGOV EINV EAGR TZ 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 DAR ES SALAAM 000982 

SIPDIS

STATE FOR AF/E AND AF/EPS
PLEASE PASS TO USTR BILL JACKSON
COMMERCE FOR RASHIDA PETERSON

E.O. 12958:N/A
TAGS: ETRD PGOV EINV EAGR TZ
SUBJECT: Tanzania: AGOA Textile Update

REF: A) 03 DAR ES SALAAM 2943, B) 04 DAR ES SALAAM 0407, C)
04 DAR ES SALAAM 1468

UNCLAS SECTION 01 OF 02 DAR ES SALAAM 000982

SIPDIS

STATE FOR AF/E AND AF/EPS
PLEASE PASS TO USTR BILL JACKSON
COMMERCE FOR RASHIDA PETERSON

E.O. 12958:N/A
TAGS: ETRD PGOV EINV EAGR TZ
SUBJECT: Tanzania: AGOA Textile Update

REF: A) 03 DAR ES SALAAM 2943, B) 04 DAR ES SALAAM 0407, C)
04 DAR ES SALAAM 1468


1. Summary: Tanzania's small textile industry remains
underdeveloped and faces new challenges since Multi-Fibre
Agreement (MFA) quotas ended in December 2004. Only two
textile companies in Tanzania (Star Apparel and Sunflag)
export garments to the U.S. under AGOA, and they demonstrate
two very different models for taking advantage of the AGOA
opportunity. Star Apparel is a new investment struggling to
survive, while Sunflag has operated for over forty years, is
completely vertically integrated, and has a diversified
market. Both companies illustrate that the best opportunity
under AGOA to develop Tanzania's textile industry may have
already passed.

--------------
Textile Overview
--------------


2. Tanzania's textile industry remains underdeveloped,
despite the trade opportunities under AGOA and an abundant
supply of quality cotton. Eighty percent or more of
Tanzania's cotton is exported unprocessed. Tanzania has
about a dozen significant textile and apparel producers,
employing about 6,000 workers. The garment producers cannot
begin to fill the local demand, and Tanzanians are dependent
on used clothing imports. Only two garment factories (Star
Apparel and Sunflag) have exported to the US under AGOA. In
addition, one textile factory has exported unprocessed
"grey" fabric material (canvas) to the US. Total textile
(apparel and fabrics) exports under AGOA equaled USD 3.3
million in 2004, up from USD 1.9 million in 2003. Apparel
exports equaled USD 2.5 million in 2004, up from USD 0.9
million in 2003.

--------------
Star Apparel
--------------


4. The Star Apparels Tanzania factory is owned and operated
by the Sri Lankan company that also owns Tri-Star Uganda.
Tanzanian President Mkapa had invited the company to invest
in Tanzania after his visit to a Tri-Star factory in Uganda
in 2002. The factory opened in August 2003 in the GOT's new
Export Processing Zone (EPZ). In 2003 Star Apparels
invested over USD 2 million in the Dar es Salaam factory,
and hired and trained over 600 employees. Under the EPZ

agreement, the factory is exempt from paying VAT and will
enjoy ten-years free of income tax. The factory's first
order, from American retailer Walmart, was worth over USD
300,000. The general manager had estimated that, with the
factory's current capacity, Star Apparel would be able to
export nearly USD 4 million per year. (See reftels.)


4. By late 2004, however, Star Apparels was unable to make
payments on its USD 4 million loan from CRDB Bank. Although
the factory had secured orders from the US, it faced a
number of setbacks. The privately-owned EPZ business park
charged high rents, and the government failed to keep its
promise to acquire the property and reduce the rents. Water
and electricity supplies were (and are) unreliable and
expensive. Workers went on strike for nearly three months
and the top management of the factory was replaced. Orders
went unfilled.


5. In March 2005, CRDB recalled the loan and the factory
went into receivership. CRDB appointed a receiver manager
to assess what went wrong and to identify the way forward.
In a conversation with econoff, the receiver manager was
sympathetic toward the Star Apparel management and blamed
the Tanzanian government for the factory's failure. Citing
the high costs of doing business in Tanzania (high rent,
poor infrastructure, and stifling bureaucracy),he lamented
that the EPZ has still not created an attractive climate for
manufacturing. His final report (due out this month) will
make recommendations for the way forward. He told econoff
he would recommend that the factory reopen, either with the
original or new management, if the government agrees to
further incentives, including rent and power subsidies.


6. Comment: In the post-MFA environment, it will be more
difficult to obtain orders from the US, especially since
Star Apparels has so far been an unreliable source. To
succeed, the factory will have to lean heavily on marketing
support from its sister company in Uganda. So far, there is
no indication that changing management would change the
underlying conditions that make Tanzania a difficult
environment for manufacturing. End comment.
--------------
Sunflag
--------------


7. Sunflag's textile factory in Arusha is a part of the
Sunflag group of companies with manufacturing facilities in
Kenya, Nigeria, Tanzania, Cameroon, Great Britain, United
States, Canada, India, and Thailand. Sunflag Tanzania has
been in business for over forty years and manufactures
natural and synthetic fibres, cotton and polyester yarn,
woven and knitted fabric and garments. Completely
vertically integrated, Sunflag purchases Tanzanian cotton,
spins it into yarn, weaves and knits fabrics, and sews
garments for the export market. Sunflag exports products
all along the production chain. It claims to be the only
totally vertically integrated textile factory in sub-Saharan
Africa outside of South Africa.


8. Sunflag was the first Tanzanian company to export apparel
under AGOA and continues to be the largest AGOA exporter.
In 2004, Sunflag exported goods to the US worth just under
two million dollars. Sunflag also exports to the UK,
Europe, and within Africa. Exports to the US account for
about one-fifth of its total sales.


9. Sunflag executives told econoff that the end of MFA
quotas has threatened their access to the U.S. market. Some
buyers have already switched to Indian suppliers, and new
orders are more difficult to find. The Managing Director
explained that Tanzanian companies cannot compete with India
and China because of unfair practices (citing subsidies in
general and China's currency exchange controls in
particular).


10. Sunflag's management also expressed dismay that the
provision allowing third country sourcing of yarn and fabric
was extended, noting that they had already begun to sell
Tanzanian yarn and fabric to other AGOA countries, including
Mauritius. Because of its vertical integration, Sunflag
would benefit from the expiration of the provision on two
sides: markets for its yarn and fabric would open up, and
its own apparel production would be more competitive.


11. The Sunflag management noted that the end of MFA quotas
will not kill the business, though it has impacted its sales
to the US. Because of its diversified markets and full
range of products, it is not overly dependent on the US
market. However, planned expansion of the factory will
likely slow in the near future. The managing director told
econoff that while an established factory like Sunflag can
continue to be profitable, he does not believe that new
investment in the textile industry is viable, citing the
high costs of initial capital investment and the costs of
doing business in the Tanzanian environment.


12. Comment: Sunflag is a model of what AGOA hoped to
accomplish in Sub-Saharan Africa. Its success predates
AGOA, and will likely continue with or without AGOA.
Nevertheless, Sunflag has been able to demonstrate how
Tanzania should have used AGOA to establish a strong,
vertically integrated and diversified industry.
Unfortunately, the government has failed to create a truly
attractive investment climate, and the best opportunity for
textiles may have already passed. AGOA remains an advantage
and an opportunity for the existing textile factories, but
significant new investment still seems unlikely.

OWEN