International Conference Manufacturing-led Growth for Employment Equality

1. International Conference Manufacturing-led Growth for Employment Equality “The challenges to reversing the decline of the apparel sector in South Africa”Mike Morris, School of Economics, University of Cape TownandJustin Barnes, Development Studies, University of KwaZulu-Natal

2. Introduction • Central focus - is there a labour intensive path for SA? • Unpack apparel sector dynamics over the past 15 years • Identify domestic industry key drivers • Establish fit between these drivers and policy levers • Examine previous policy faults • Draw on Turkish experience lessons • Suggest differentiated policy alternatives to build a sustainable SA apparel industry at both market ends

3. Apparel GVC dynamics • Buyer dominated GVCs shaped by Northern Hemisphere retailer, own-brand, and technical market movements • China supply dominance - bifurcation of industry: • Long-lead time, highly price sensitive supply – China, India, Bangladesh, Vietnam, etc. (+ slide) • Short-lead time, less price sensitive supply, driven by OTIF delivery, QA, small batch runs, technology rich supply chain linkages – Turkey, Morocco, Southern Europe, Mauritius (+slide) • SSA marginal but apparel production NB to Mauritius, Madagascar, Lesotho, Swaziland, Kenya (++ slide) • SSA benefits: EPZs, AGOA, EU GSP • Important dynamic:SA market very meaningful (R30bn)

4. Top apparel exporting countries

5. SSA Exporters to US and EU

6. SA apparel : 1st Period ISI driven (+/- 2000 – 2009) • AGOA – Local manufacturers renege domestic retailers • Rand strengthens 2003 – local manufacturers renege US • Retail big imports from China - $95m (2000) to $558 (2005) to $961m (2011) so 74% of imports in 2005 • Exacerbated by illegal imports and crime syndicates • Globalisation impacts – labour/production (+ slide) • Policy response contradictory - ISI mindset dominates

7. South African apparel demand & production

8. Policy Response of Industry and Government • Manufacturers – ignored competitiveness issues • Called for increased protection • Union – retailers not globalisation are major cause • Demanded 75% local and quota on Chinese imports • Rigidify labour market: central bargaining, close metro/non metro wage gap, punish non compliant firms • State – Contradictory but supported union • Slashed tariffs/import controls • Imposed Chinese quotas and raised tariff to 45% • Supported union in CSP negotiations

9. South African apparel industry response • Industry caught in contradictions between the strategic positions of the past and the requirements of the future • Paralyzed its ability to respond: • Lack of firm-level and broader supply chain competitiveness • Misplaced government policy • Unions as victims of their own ISI-era success • All failed to take account of globalisation • Look at own role and responsibilities in transition • Instead marshalled resources & ideological frameworks from the past to deal with the challenges of the future Result: Substantial decline

10. SA apparel : 2nd Period (2009 – now) Regional market dynamics change fundamentally with PTA opportunities (SACU/SADC) • Huge jump imports from Lesotho/Swaziland (low to middle market segment) (+ slide) • Rising imports Mauritius/Madagascar (middle to top market segment) (++ slide) This is a new major threat to local firms and labour • Cant solve with ISI policy agenda

11. Apparel Exports to South Africa

12. Major apparel exporters to SA

13. South African apparel industry response • Apparel manufacturers at lower market end response: • Relocated to Lesotho and Swaziland - generally flourished • Ignored bargaining council, paid a wage workers would accept • Informalised – competing by being “below the radar” • Demonstrated old ISI policy model restricts competitive & employment basis for this low market segment • Their legal status excludes from DTI support • So limits ability to define a competitive advantage, limits ability to upgrade, and create decent employment

14. Differential Response of Local Industry Mid to higher market abandoned ISI mindset to focus on firm and systemic competiveness • Build firm capabilities - clusters (+ slide) • Value chain cooperation - retailers joining clusters • Industrial policy alliances - strategic industry alignment • Supply chain alignment – created retail supplier clusters to build quick response systemic competitiveness

15. Operational performance - CCTC/KZNCTC

16. What is Quick response (QR)? • Principle - use geographical nearness to provide retailers with speed & flexible supply (follow Turkish model to EU) • QR pilots with retailers key suppliers supply - demonstrated the positive impact of model • Retailers made 14% more relative to Asian long lead time orders WHY? • Because local QR products, with point of sale information took 56 day delivery meeting requirements demanded by customers. • Item sold at full price – retailers higher retained margin than from Asian imports, latter required discounts to be cleared

17. South African apparel industry response • QR pilots demonstrated potential for a vibrant domestic industry that provides labour intensive employment. • Industry could potentially sustain 110,697 formal sector jobs by 2022 on the basis of SA retailers shifting 40% of their total purchases to the QR model • Key is developing the manufacturing performance attributes that align with QR retailing requirements: • Product flexibility - requires product upgrading • Production versatility - requires production upgrading • Supply chain management capabilities - needs retailer upgrading

18. South African government response DTI • 2010 incentives (PI and CTCIP) large number of firms upgrading (PI - R2.5bn, CTCIP R633m) • Support initiated textiles re-capitalisation • Support QR retail supply clusters – e.g. 1 retailer/7 firms, employment grew 12.6% • Support clusters – marginal employment growth BUT • Labour influenced institutions still ISI mindset – (Department, Bargaining Council, union)

19. General Conclusion • SA apparel sector faces extreme competition: Asia to SSA • Entire sector threatened • Old ISI defensive mindset of protecting insiders & punishing non-compliant is recipe for continued competitive decline, shrinking employment, and industry contraction • Policy must move from ‘one size fits all’, centralised, inflexible mode, and accept have different industry needs • Policy supported compliant firms but narrow focus trapped non compliant firms in downward spiral

20. What can we learn from Turkey? • National minimum wage (± $100 per 45 hour week) • Metro firms pay 50-100% above this level - drives productivity and sweating overheads • Flexible working environment - firms can extend to 54 hours at a 50% premium which allows for sweating overheads, and adjusting production output to variable market demand • Entire industry competes on a differentiated QR model with seamless linkages between high value adding metro firms, design centres and less advanced, lower cost rural firms

21. South Africa Policy Conclusion Need a differentiated policy for the sector • On one hand, support more advanced firms to meet the domestic retailer QR demands, (and perhaps export to EU QR retailers) • On other hand, support rather than punish lower end market segment – small firms, non-metro, long lead time, unsophisticated, “commodity-type” producers

22. And manufacturing employment generally? • Industrial policy needs to be “tied up” - upgrading support is required, but treating an ISI-based labour market as sacrosanct, which limits competitiveness, hamstrings resuscitating labour-intensive industries • Manufacturing informalisation has to be reversed – but firms need incentivises to advance their operational capabilities. Competing on low labour productivity, and old capital, can only lead to a “race to the bottom” • “Forcing” demand for SA-made products is short-term, but the underlying uncompetitive basis needs to be dealt with if employment is to be created

23. Thank you