MADAGASCAR: AGOA PRODUCTION CONTINUES PENDING ELIGIBILITY

UNCLAS ANTANANARIVO 000784 STATE FOR AF/E - MBEYZEROV STATE FOR AF/EPS - GMALLORY STATE FOR EEB/TPP/BTA - AHOLMAN AND JWADELTON STATE PLEASE PASS TO USTR FOR CHAMILTON AND WJACKSON DEPT OF COMMERCE FOR RTELCHIN AND KBOYD TREASURY FOR FBOYE AND AIERONIMO E.O. 12958: N/A TAGS: AGOA ECON EAID EAGR ETRD PHUM MA SUBJECT: MADAGASCAR: AGOA PRODUCTION CONTINUES PENDING ELIGIBILITY DECISION ¶1. (U) SUMMARY: The approximately forty garment factories that are producing clothing in Madagascar for export to the U.S. under the terms of the African Growth and Opportunity Act (AGOA) have reduced production and workforce by an estimated 15 to 20 percent since the coup last March, but only one factory has closed thus far. One additional factory is considering closing in December due to a variety of factors. Most plan to increase production again if AGOA is maintained and many, particularly those focused solely on the U.S. market, plan to close if it is not. END SUMMARY. Overall State of the Sector -------------- ¶2. (U) During 2008, there were 48 companies that exported garments from Madagascar to the U.S. under AGOA. Several export only during particular seasons. This number has not significantly changed; for example, for the month of September 2008, 30 companies exported under AGOA, while in September 2009, 31 companies did. ¶3. (U) For the first three quarters of 2009, AGOA exports were down 13 percent compared to the same time period in 2008 (USD 164 million versus USD 189 million). However, exports in Sept 2009 were actually 15 percent higher than those of Sept 2008. Export figures are not yet available for November, but overall production is down by an estimated fifteen to twenty percent. Main American Investments Continue At Full Speed -------------- ¶4. (U) MKLEN/Jordache accounted for 46 percent of AGOA exports in Sept 2009. MKLEN closed its factory in Antsirabe, which employed 1,200 workers, in May 2009. The local manager of the company told Emboff Nov 12 that MKLEN had not laid off any staff from its larger factory in Antananarivo and had full orders through the end of the year. He said orders are low for January and February, and the company is concerned about potential liability for duties of around USD 1 million, but explained that the American company, which has invested tens of millions of dollars, will await a final decision on AGOA before altering its business plan. MKLEN now directly employs 3,200 workers and works with a sub-contractor to employ an additional 1,000. ¶5. (U) Mazava, with investment from the American company Winds, accounted for 5.4 percent of AGOA exports in Sept 2009. The manager told Emboff November 17 that the company still employs 1,600 workers and has not yet laid anyone off. In fact, the workers are now working overtime in order to fill orders for January and February before the end of the year. He expects that production will be quite low in January and February, but will pick up again in March if AGOA is extended. If AGOA is lost, the company, whose products would be subject to 30 percent duties, would be forced to close its factory. This year, Mazava decided to expand its operations in Tanzania and Mauritius, rather than Madagascar, due to the political crisis here. ¶6. (U) Cottonline, an American investment which accounted for 2.3 percent of AGOA exports in Sept 2009, told Emboff November 17 that it continues to employ 1,850 workers and has not laid off anyone. Around 45 percent of Cottonline's exports are to the US, with the rest going to Europe and South Africa. If AGOA eligibility is lost, the company will look for additional buyers in those markets, but will likely have to reduce its staff. As of November, the factory is in full production as this is typically a high season. They have already taken some orders from the U.S. for January and February in the hopes that AGOA will be maintained. The Problem Cases -------------- ¶7. (U) Nova Knits, owned by an American citizen, told Emboff November 17 that it had reduced its production by 50 percent and dismissed permanently a large percentage of its workforce. (Other sources in the sector reported that Nova had in fact ceased operations and may permanently close soon.) According to Nova, however, the company will increase production again if AGOA is maintained. Grove, which accounted for 1.7 percent of AGOA exports in Sept 2009, has laid off approximately 50 percent of its workforce, but still employs 1,100 workers. Prime View, which accounted for 2 percent of AGOA production in Sept 2009, possibly plans to close in December due to a fire in the factory earlier this year and the global slowdown which has impacted demand for its products. They have already reduced production by 50 percent and plan to dismiss 2,500 workers in December. If AGOA eligibility is revoked, both Grove and Prime View plan to close. ¶8. (U) Comment: Although the uncertainty related to AGOA renewal, as well as the dual international financial and local political crises, have already had an impact on Madagascar's garment sector, most companies continue to produce and remain in wait-and-see mode. If a definitive decision is made to suspend AGOA for 2010, those companies that are producing solely for the U.S. market will close their doors. However, the vast majority of the sector's workforce is still in place and companies are ready to increase production to prior levels if AGOA is renewed and global demand strengthens. End comment. MARQUARDT