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Tuesday, May 30, 2006

Africa Held Back from Manufacturing Success

Mail & Guardian -- Anug Shah is a happy man. He makes bed nets at his factory in Tanzania and business is booming. Production at the A to Z Textiles plant has increased tenfold in the past 18 months and a new factory is needed for a further trebling of output by the end of the year. The workforce of 3 200 -- 90% of them women -- will double.

A to Z Textiles is an African success story. It is evidence that it can break out of a reliance on primary commodities and compete with Asia in low-cost manufacturing. That's the good news. The bad news is that Shah is a rarity. There are not enough firms like his to generate a big leap forward to the next stage of development, and in some countries the giant global shadow cast by China means things are getting worse not better.

Shah's family has been in business in Arusha for 40 years, but the big breakthrough came with the launch of a joint venture with Japanese firm Sumitomo to make bed nets impregnated with insecticide. These ward off mosquitoes for five years and A to Z is the only company in Africa making them.

The company is upbeat about its prospects. "In the 21st century it is up to Africa to find a solution to Africa's problems. This is the continent that has the problem with malaria. This is the continent that should get the jobs." He plans five or six satellite plants across the continent.

He admits the company has needed a big helping hand along the way. The potential of the bed nets to combat malaria came to the attention of the international community, which saw that the $7 price for each net put them out of the range of most of the people who needed them. Bodies such as the Global Fund to Fight Aids, Tuberculosis and Malaria have acted as guaranteed buyers for everything A to Z can produce. The nets are then either given away free or sold at heavily subsidised rates.

Less promising
"We rely heavily on the donor community," Shah said. "If we increase capacity we have to know whether there is going to be continued support for Africa."

Cash flow from the bed nets has allowed Mr Shah to branch out. He has invested in new American machinery to improve the quality of his T-shirts and polo shirts and is convinced that with the right marketing partner he can take on the Chinese in the United States. "But we need to have big enough economies of scale. If you talk about 100 000 units, people laugh at you. They want you to be producing 20-million or 30-million."

Elsewhere, the outlook is far less promising. Textiles and clothing account for one-fifth of Africa's manufactured exports (and in a country such as Lesotho, well more than 90%), but competition has intensified since the scrapping of the multi-fibre agreement (MFA) in 2005 removing the quotas that had limited China's exports.

While countries such as Lesotho, Madagascar and Kenya have been affected, a study by Raphael Kaplinsky, of the Institute for Development Studies at Sussex University, and Mike Morris, of the University of Cape Town, concluded that the impact had not been as bad as it might have been.

Many African countries have been helped by the US's willingness under the Africa Growth and Opportunity Act (Agoa) to allow firms in the poorest nations to import raw materials from the lowest-cost sources. Those countries not handed preferential treatment -- such as South Africa -- have seen production of textiles halved.

"This rate of subsidy is required for Agoa clothing producers to compete in the US market," Kaplinsky and Morris said. "This is because scales [of production] are low in sub-Saharan African plants, and many producers suffer from poor bureaucratic and physical infrastructure. But there is pervasive evidence that many SSA plants suffer from low levels of productivity arising out of organisational procedures, low levels of skill and inadequate management within plants."

All these factors are evident in Mali, one of Africa's biggest producers of cotton, which -- in theory -- could turn the raw material into finished garments. Yet Mali is one of the poorest 10 countries in the world. At a ginning factory an hour's drive south of the capital, Bamako, 97% of the cotton is exported to be turned into clothes. Marks & Spencer arrives next week to look at the potential for sourcing organic cotton from Mali, but will almost certainly take the raw material out of the country for processing.

Over-production
The country, according to Sally Baden of Oxfam, has multiple problems that would deter any potential investors. Its basic infrastructure -- water, roads, electricity -- is primitive. Fewer than half its children are in school, and there is a dire lack of industrial skills and know-how.

She pinpoints three other factors. The first is that Washington's subsidies to US cotton producers mean over-production that keeps the world price low. Estimates suggest that eliminating the US handouts -- a main demand by West African cotton producers in the present trade round -- would raise the price by 12%, giving Mali extra revenue to invest in physical and human capital.

Secondly, the structural adjustment programmes foisted on Mali exposed its fragile clothing firms -- producing almost entirely for the domestic market -- to foreign competition. Finally, since the end of the MFA there has been the China effect. This has less of an impact on Mali, where production was low, but has accelerated the decline in West Africa's three biggest clothing manufacturers -- Nigeria, Ghana and Côte d'Ivoire.

Halting Africa's relative decline as a manufacturing force will not be easy. Skills, management and industrial organisation are all lacking; the boom in commodity prices has mainly benefited foreign investors and in countries such as South Africa pushed up the exchange rate, making industrial goods less competitive. Most countries are too vulnerable to make it on their own.

Jamie Drummond, director of Debt Aids Trade Africa, the campaign organisation co-founded by U2 singer Bono, said African countries might need to band together in blocks to promote regional champions that would have a chance of exploiting economies of scale.

Bono is hopeful that Motorola will set up a plant in Africa, perhaps in Rwanda, to take advantage of Africa's boom in cellphone usage. That would be a coup. But just like Shah's bed nets, it would represent the winning of a skirmish in a long, long war.

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