JONES APPAREL: EGYPT'S QIZS ARE GOOD FOR BUSINESS

UNCLAS CAIRO 001225

SENSITIVE
SIPDIS

DEPT FOR NEA/ELA
DEPT PLEASE PASS TO USTR/SONIA FRANCESKI
TREASURY FOR BRYAN BALIN AND FRANCISCO PARODI

E.O. 12958: N/A
TAGS: ECON ELAB EINV PGOV ETRD EG
SUBJECT: JONES APPAREL: EGYPT'S QIZS ARE GOOD FOR BUSINESS


1. (SBU) KEY POINTS

-- Compliance Officers from Jones Apparel Group told us that
labor conditions in the factories of their Egyptian suppliers
are generally good.

-- Jones Apparel has not seen evidence of worker mistreatment
in QIZ factories.

-- As a result of the QIZ and proximity to U.S. markets,
Egypt continues to gain market share over its Southeast Asian
rivals.

-- There are some signs of a slow recovery in apparel demand.



2. (SBU) As part of Post's program of monitoring labor
conditions in Egypt's Qualifying Industrial Zones (QIZ),we
met with the Kesavi Murali, the Senior Compliance Specialist
in the Middle East for Jones Apparel Group and Mohamed
Husseiny, the company's representative in Egypt. Murali told
us that his company remains very focused on compliance issues
and labor conditions in the wake of a 2006 labor abuse
scandal in the QIZs in Jordan. He was clear that there were
no signs that Egyptian QIZs had any major labor issues.


3. (SBU) Jones Apparel has 16 factories in Egypt, most of
which are located in the Port Said free zone. These factories
produce women's clothes under the Jones New York, 9 West, and
Anne Klein labels. Murali told us that Jones Apparel
produces 60% of its denim products in the Middle East, half
in Jordan and half in Egypt. All of Jones Apparel's
production in Egypt takes place in the QIZs, and Murali told
us he expected that Jones would buy between $90-$100 million
in product from Egyptian factories this year. He added that
the company had added two new supply factories in Egypt in

2009.


4. (SBU) Over the past year, Jones has increased its presence
in Egypt and now has a full time production team based in
Egypt. According to Murali, they visit each of the factories
they work with once per month. Their strategy, Murali told
us, was to ensure that they were the largest customer of each
of the factories they work with in order to guarantee what
they felt was a proper level of attention to their issues.


5. (SBU) Murali told us that the apparel industry in general
had experienced a slowdown earlier this year, but that he saw
orders picking up. In addition to favorable customs
treatment under the QIZ, he said production in Egypt provides
cost advantages and efficiencies in production lead time
since Egypt is located closer to the U.S. than most other
suppliers. While other producers such as Bangladesh,
Madagascar and Sri Lanka have lost market share, Egypt has
gained market share. He told us Egypt was a better producer
than countries who use migrant labor, though Egypt does
suffer from high worker turnover which damages operational
efficiency. He said that from his standpoint, there were no
labor issues with local labor. He said that the main issues
in Egyptian factories are qualitative management issues and a
lack of health and safety awareness.


6. (SBU) When asked about migrant workers, Murali told us
that a few factories that employed Bangladeshi workers, but
that the number of workers was not substantial, and always
within legal limits. He also said that he had heard that the
GOE was imposing an "unofficial ban" on new work permits for
Bangladeshi migrant workers. Murali told us that contrary to
some media reports he had seen no evidence and any factories
relocating from Jordan to Egypt.


7. (SBU) Comment: Jones Apparel Group has been very active in
monitoring conditions in QIZs and we feel that the evaluation
of their factories they work with is reliable and tracks with
what we have seen in our own factory visits. We have not
been able to independently verify Murali's claim with respect
to the GOE unofficially tightening up on foreign workers,
though it makes sense that the GOE would be disinclined to
import foreign workers when the country has high levels of
domestic unemployment. As with many we've spoken to, Murali
was unaware of the new QIZ designations in Upper Egypt since
the GOE has yet to publicize the expansion. Of note also is
the somewhat upbeat analysis of market conditions, which is
the first sign of optimism that we've seen. This may be
evidence of a coming recovery in the apparel sector or simply
an indication of the lower elasticity of demand for women's
apparel than for men's.
SCOBEY