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Companies take advantage of better access to US markets

Published date:
Friday, 23 August 2002
Financial Mail

Five years ago, CMT Clothing (Bophuthatswana) was a small player in the SA clothing manufacturing industry, having been rescued from liquidation a few years earlier.

Today, CMT's prospects look much brighter. It employs 38% more workers and their jobs have never been more secure. That is largely thanks to the Africa Growth & Opportunity Act (Agoa), the US government's trade and investment policy for Africa. And though Agoa has faced stern criticism from some economists, for CMT and many other SA companies it is a boon as the domestic market shrinks.

Agoa permits sub-Saharan African countries that meet certain criteria, including the ratification of the International Labour Organisation's convention on the elimination of child labour, to export more than 1 800 products duty-free to the US market. The Agoa programme runs until 2008.

Some economists have questioned the net benefits to African countries. They point to the potentially high cost of the administrative preconditions, such as an effective visa system and country-of-origin requirements, that countries must meet to qualify for Agoa benefits. They also cite the fact that when the World Trade Organisation's (WTO) agreement on textiles ends in 2004, it will probably be replaced by a system that will reduce the Agoa benefits to African countries. But Agoa, which came into effect in March 2001, is already making its impact felt on the economies of African countries, including SA.

A study funded by the US Agency for International Development (a government agency) says the impact of SA exports to the US under Agoa contributed R10bn to SA's GDP of R975bn in 2001. This impact is projected to increase to R14bn this year, according to the study by Conningarth Economists, a Pretoria-based economic research and consulting firm.

The study finds that SA industries exporting under Agoa in 2001 employed 19 395 workers. Including indirect and induced jobs, Conningarth puts the total number of jobs falling under the Agoa umbrella at 62 380. Induced jobs refer to those created when workers spend their increased disposable incomes on buying more goods and services.

This year total (direct, indirect and induced) jobs supported by Agoa will reach 89 505, of which 29 801 will be jobs directly attributable to industries exporting to the US under Agoa.

The study adds that SA exports falling under Agoa require, on average, more labour than non-Agoa exports.

CMT is one of the many SA clothing companies benefiting from increased US export opportunities. It is based in the Babelegi industrial township, about 80 km north of Pretoria and near the Carousel casino complex in the North West province. The township was created by the homeland government of Bophuthatswana through incentives such as rental and wage subsidies. Babelegi, like most industrial zones in remote areas, is now almost a ghost town. Hence the significance of the additional jobs created by CMT, which now employs 750 people, up from 544 before Agoa exports.

CMT manufactures men's and women's jackets and men's trousers. It produces about 1 000 jackets and 2 200 pairs of trousers a day. "Before Agoa came into effect, the clothing manufacturing industry was in the doldrums. We used to work five days a week, finishing at midday on Friday. We now work six days, sometimes seven," says CMT MD Nicky Fine. Before Agoa, CMT sold about 20% of its turnover in the US market. Since March last year, exports to the US have increased to 75% of overall sales.

It took CMT about six months of preparation to meet the stringent quality and working-conditions criteria of US clothing retailers. CMT invested R2,5m-R3m in a new production line and machinery upgrade. It hired a clothing manufacturing expert from Italy to help improve quality at the factory.

Founded 40 years ago, CMT went into liquidation in 1991, when Fine, then an executive director of Pals Clothing (the JSE-listed clothing manufacturer), negotiated the purchase of CMT. Pals bought 63% and Fine 37% of CMT. Fine led a management buyout of CMT in 1997.

The growth in exports, which are more profitable than sales to the domestic market, has helped offset CMT's high cost of operating in Babelegi, far from major markets. Fine says the cost is about 40% higher than in Durban or Cape Town, the two main clothing manufacturing nodes.

One reason is the high cost of transporting goods to the Durban port. CMT must also pay more to attract managers and other professionals to work in Babelegi, where it is the only remaining clothing manufacturer.

Exports are more profitable than domestic sales because of the depreciation of the rand against the US dollar. Export profit margins also benefit from the duty credit certificate scheme, which allows exporting companies to import goods duty-free up to 35% of export turnover. Exporting companies that do not import large quantities can sell their duty-free import credit certificates to other companies for 60%-70% of their face value.

In SA, CMT sells to big clothing retail chain stores. In the US, it sells to wholesalers and retailers that target middle-income consumers, the broadest band of consumers in the US market.

CMT has sold all of its production until the end of the year. Financial director Philip Symanowitz says the company can easily increase production capacity by a further 400 jackets and 1 500 pairs of trousers a day.

Other Southern African countries are also benefiting from Agoa. A recent report on Agoa by Standard Bank's economics division shows Lesotho gaining a bigger share of textile and apparel exports to the US under Agoa. Lesotho accounted for 39% of textile and apparel exports under Agoa, up from 36% in 2001.

The share of Madagascar, which has been experiencing political instability, fell from 26% last year to 23% in the first quarter of 2002.

A report to the US congress on Agoa prepared by the US trade representative in May says apparel exports to the US by African countries rose by 60% in 2001. Yet they still represented less than 1,6% of total US apparel imports for that year.

It adds that three countries - Nigeria (US5,7bn), Gabon (938,7m) and SA (923,2m) - accounted for 92% of African exports to the US under Agoa. The lion's share of the Agoa exports was attributable to energy, mainly oil, products.

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