TANZANIA TEXTILE AND APPAREL INDUSTRY STRUGGLING TO

UNCLAS SECTION 01 OF 03 DAR ES SALAAM 000333 SIPDIS DEPARTMENT FOR AF/E JLIDDLE; INR/RAA FOR FEHRENREICH; AF/EPS STATE PASS USAID/EA, USTDA, USTR, USITC E.O. 12958: N/A TAGS: EAID ECON ETRD PREL TZ SUBJECT: TANZANIA TEXTILE AND APPAREL INDUSTRY STRUGGLING TO COMPETE REF: A) 2004 Dar es Salaam 407 B) 2006 Dar es Salaam 1638; C) Dar es Salaam 164 D)Dar es Salaam 154 ¶1. Summary and Comment. Tanzania's once successful textile and apparel industry is floundering, unable to capitalize on advantages such as abundant supply of raw materials and preferential trading agreements, including AGOA. Recent interviews with various sector stakeholders in Tanzania revealed that internal challenges deter investment and hinder competitiveness. Development challenges in infrastructure, human resources, and access to finance prevent Tanzanian mills from being cost and quality competitive with other producers around the world. Additionally, the mutually reinforcing problems of a capital intensive textiles sector and a small garment sector prevent the industry from expanding to reach economies of scale. Although the GOT recognizes the obstacles to the sector's growth, it has taken few measures to address them. End Summary and Comment. Note: This cable is based in part on interviews conducted during a visit by officials from the U.S. International Trade Commission (ITC) to review African textile and apparel industries. The ITC report is available at http://www.usitc.gov/publications/332/pub4078 .pdf. Context -------------- ¶2. At its peak in the late 1970s, Tanzania's textile industry was the largest manufacturing sector in the country in terms of employment and second largest by gross value of production. It employed about 25 percent of the manufacturing labor force and contributed 25 percent of the manufacturing sector GDP. Although the industry appeared successful, it was being kept alive only through government protection and subsidies. In the mid-1990s, with the shift toward economic liberalization, the industry collapsed and all but two mills went out of business. ¶3. Over the course of a decade, the textiles industry grew slowly and in 2004 had 12 significant textile producers employing 6,000 workers(See ref A). The sector was dealt another blow in 2005, however, when the expiration of the Multi-Fiber Agreement exposed it, along with all of Africa's textile producers, to competition from the strong and well-established Asian producers - especially China, Bangladesh and Cambodia. As a result, one major producer closed its doors that year and another was forced to cease operations for several months and produce far below capacity upon reopening (See ref B). The volume of textiles produced in Tanzania dropped 14 percent from 2004 to 2005. Since 2005, the industry has seen increased investment and today, 20 local companies employ about 13,000 workers (almost half of which are employed by one company, A to Z, which produces anti-malaria bednets). The majority of companies focus on the local market, producing mainly traditional clothing and bedsheets. Only half a dozen Tanzanian mills produce for export, and only two are vertically integrated operations. Despite Advantages, Sector Struggling -------------- ¶4. Tanzania produces sufficient high-quality cotton to support local textile manufacture. Tanzania's second largest export crop, cotton contributes some USD90 million to export earnings annually and provides employment to about half a million rural households (though see ref C for troubles in the sector). In addition to Tanzania's domestic market of 40 million people, Tanzania's international market access is bolstered by preferential trading agreements benefiting the sector. Under the Everything But Arms agreement (EBA),Tanzania enjoys duty and quota-free access to the EU. Under the U.S. African Growth and Opportunity Act (AGOA),Tanzania is one of a small group of countries eligible for all benefits in the apparel and textiles sector: it is one of only 5 eligible for ethnic printed fabric provisions. [Note: Regional trade in textiles is minimal because of East African Community tariffs that protect local producers. End note.] ¶5. Despite these advantages, the Tanzanian textile and apparel sector is floundering. According to Dr. Joe Kabissa, Director General of the Tanzania Cotton Board, 80 percent of the country's cotton is exported raw - mostly to China, Bangladesh and other Asian nations. Additionally, Tanzania registers a large trade deficit in textiles and apparel. In 2007, USD 131 million in imports of textile and apparel inputs far outpaced the USD 20 million in exports. Tanzania has been unable to take advantage of trade preferences such as AGOA. In 2007, U.S. imports of Tanzanian woven DAR ES SAL 00000333 002 OF 003 and knit apparel were worth USD 2.8 million, compared to USD 1.3 billion from Sub-Saharan Africa as a whole. Nearly all U.S. imports came from a single company, Sunflag. Development Challenges -------------- ¶6. Access to finance - Representatives from the Ministry of Industry, Trade and Marketing indentified local access to finance as the most important hindrance to the sector. Loans are difficult to come by - particularly on the scale required to start up a capital intensive operation like a textile mill which generally requires an initial investment of more than USD100 million - and interest rates are high at about 15 percent. Many mill and factory owners brought financing from family-owned businesses in countries like India and Pakistan rather than raising it domestically. Many of the mills in Tanzania use outdated equipment, being unable to purchase newer and more efficient machines. A 2007 report by the Tanzania Gatsby Trust notes that the majority of machines in Tanzanian factories were 30 or more years old and poorly maintained. Moreover, most factories suffer from a shortage of spares and opt to run down old equipment rather than reinvesting and upgrading it. For example, less than 7 percent of Tanzania's spinning machinery has been updated in the past 10 years. ¶7. Infrastructure - Every company interviewed in connection with the ITC visit commented on the challenges posed by Tanzania's weak infrastructure. Most cited congestion and delays at the port of Dar es Salaam as their primary concern, noting that it regularly prevented them from receiving and shipping goods on time (See ref D). When asked about alternatives to sea routes, they complained that inadequate roads and railways provided them with a lack of other options. New Tabora Textiles Managing Director Bharat Patel noted a 35 day minimum transport time from factory to customer - including 6 days to move goods 600 miles by road from factory to port. ¶8. Another major infrastructure challenge is the lack of reliable power and water. According to several of the mill workers interviewed, a cut in power means a broken thread, making it necessary for a worker to completely stop a machine to repair the thread or even to start all over again. A water shortage at a textiles plant doing bleaching and dying means delayed production of all products. Unreliable electricity and water supplies also force manufacturers to invest in expensive generation equipment. ¶9. Human resources - In addition to financial and physical resources, most of the companies interviewed complained about challenges related to human resources. As there are no formal training programs in Tanzania for textiles and apparel production, mills must fully train all workers. A to Z, an Arusha-based company which manufactures mostly mosquito nets and employs some 6,000 people, spends 6 to 9 months training workers in stitching but has had problems with trained workers leaving to work elsewhere. Most of the companies interviewed complained of low labor productivity in Tanzania - especially compared to that in Asian countries. ¶10. Low levels of investment and the resultant outdated technologies, problems with power and water, and difficulties finding skilled labor all inhibit production of high quality goods. As a result, Tanzanian textiles are less competitive in export markets, particularly the U.S. and Europe. The Director for Industrial Development at the Ministry of Industry, Trade and Marketing, the Deputy General Manager of the Urafiki Textile Mill, and the President of the Tanzanian Chamber of Commerce all cited poor quality as a barrier to entry into the American and European markets. Even if Tanzanian factories wanted to export bed sheets and niche products made of traditional fabrics to such markets, their current products do not meet Western standards. Economies of Scale; A Chicken and Egg Problem -------------- ¶11. Textile production is capital intensive, requiring large output volume to bring down unit cost to competitive levels, and the existing garment industry in Tanzania is too small and fragmented to justify the large-scale investment required to build the textiles sector. Simultaneously, lack of an adequate domestic supply of textiles prevents the growth of the garment industry. This "chicken and egg" problem deters investment on both sides. As most stakeholders agree, vertical integration of the industry is important in order to make use of locally available cotton and to benefit from adding value locally rather than exporting raw DAR ES SAL 00000333 003 OF 003 materials only to re-import finished products. However, the challenges noted above are clear disincentives for the significant investment required to build a vertically integrated operation. GOT Support Minimal -------------- ¶12. The GOT is aware that the lack of value addition to Tanzanian raw materials deprives the economy of revenue. The GOT attempted to promote processing and the manufacturing of products from locally available raw materials. One important step toward this goal was the 2002 establishment of Export Processing Zones (EPZs). Licensed EPZ projects are entitled to a number of incentives including an export credit guarantee scheme, remission of customs duty, VAT, and other taxes on certain items, inspection facilitation, and access to reliable services (such as water and power) within the EPZs, among other things. By definition, however, EPZs only focus on enterprises producing for export and therefore do not assist the majority of companies in the sector. Of 21 firms under EPZs, only 3 are in the textiles and apparel sector. ¶13. Although in numerous interviews GOT officials voiced their concerns about the lack of value addition in Tanzania generally, and the advent of EPZs certainly benefits the textiles and garments sector, GOT has taken no actions aimed specifically at reviving the failing industry. There are no specific tax incentives to promote vertical integration or attract foreign investment, no industry-specific training programs (in engineering or design),and no official body or unit dedicated to guiding the growth of the sector. ANDRE