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How Africa can attract China's investors in the apparel industry

How Africa can attract China's investors in the apparel industry
Published date:
Thursday, 28 November 2013
Tang Xiaoyang

The apparel-making industry is crucial to many developing countries' economies, for it can create a large number of jobs and contribute to a country's economic growth. As making garments does not require sophisticated technology and machinery, it is a manufacturing sector that can be relatively easily installed in an under-developed country.

Therefore, African countries have been eager to develop their apparel manufacturing capacity for long time, but the results have not been satisfactory so far because manufacturers in Asian countries, particularly China, are much more competitive and dominate global production.

However, as production costs in China have been rapidly growing in recent years, some economists say that the time is coming for Africa to take over.

China will move out its labor-intensive and low value-added industries sooner or later, just like all other industrialized nations did. Yet, Chinese investors are not newcomers in Africa's apparel sector. In fact, as early as in the 1980s, attracted by the preferential policies offered by host countries, investors from Taiwan, Hong Kong and later from the mainland set up factories in southern Africa, including in Mauritius, South Africa, Lesotho, Swaziland and Botswana. However, the arrival of these investors did not necessarily bring sustainable industrialization.

When there were attractive incentives, numerous factories opened like mushrooms after rain. Yet, when the tax holidays ended, investors retreated and moved to other destinations with more attractive incentives. The most obvious example was the surge of investment in Africa's textile sector after the African Growth and Opportunity Act (AGOA) came into effect 2000 and the contrasting decline after the expiry of Multi-Fiber Agreement (MFA) 2005. The drastic fluctuation begs some questions: Does such fleeting foreign investment truly contribute to Africa's development? How can Africa realize long-lasting industrialization through interaction with Asian investors?

In order to understand the dynamics behind the movement of Asian apparel makers, I conducted field research in southeastern Africa in July and August. Based on interviews with nearly 100 entrepreneurs, officials and workers, the findings show a complicated picture. In South Africa, where Asian manufacturers arrived first, investors from Greater China set up numerous small and medium-sized cutting-making-trimming (CMT) or cutting-making-packing (CMP) factories. The number of workers in the factories usually ranged from 100 to 800.

The earlier Chinese investors in the 1980s and 90s were attracted to the country through generous local government incentives and booming domestic markets, as South Africa tried to build up a manufacturing sector. In the early 2000s, more Asian companies, in Botswana, Lesotho and Swaziland, began to export to the U.S. market under AGOA. The amount of Chinese investment in southern Africa fell significantly after the mid-2000s. It is estimated that the size of Chinese investments in southern Africa's apparel sector today is only one-third of that at the peak.

The expiry of MFA was not the sole factor. A number of companies complain that U.S. clients' requirements on garment imports were so stringent that they actually lost money. Others report that governments have cancelled most of their preferential policies for foreign investors. In addition, rising labor costs, perennial infrastructure deficiency, lack of suppliers and other factors push many Chinese businessmen to wrap up and relocate.

Though some Chinese investors still remain in southern Africa, most of them focus on the domestic market of South Africa, as the "fast fashion" business model there requires quick delivery, and local suppliers have advantages in this respect. There are still factories exporting to the United States. Some companies can retain certain incentives such as housing leases so that they have a competitive advantage, and others have moved within the region to find the location with lowest production costs or most favorable policies. In general, the number of Chinese apparel makers is shrinking.

There are hardly new investors coming from China to southern Africa. The new Chinese garment factories in some countries just come from other African countries or are established by former Chinese employees of the factories in the region. 

While southern Africa's traditional garment clusters continue losing investors, a notable garment manufacturer settled down in Tanzania in 2011. China JD Group has over 28,000 employees and operations in China and Cambodia. It primarily produces garments for the U.S. market. As the labor costs rise in both China and Cambodia, the group, together with its U.S. clients, began to seek a new place for future production. They chose Tanzania because of its stable political situation, good relationship with China and a new special economic zone.

Within a year after the CEO's first visit in May 2011, the group opened its first factory, in Dar es Salaam. By August this year, the factory had hired over 1,000 local workers. All products are exported to the U.S. market under AGOA.

What makes JD different from previous investors in the sector is its sheer size. The small and medium-sized companies, some of which have investment of as little as US$ 100,000, are so flexible that they can detect small market opportunities and respond quickly, but this also means that their impact on local industrial development is limited. They may rush to relocate their factories as well when the investment environment changes. By contrast, the establishment of JD group in Tanzania aims at long-term development.

In August this year, the group's manager admitted that the factory in Dar es Salaam had been losing money, but the group was prepared for this. According to the plan, the current factory was just an experiment to gather experience. The lessons learned will soon be applied to setting up many more factories. These gigantic factories with tens of thousands workers will not be short-term investments, but will operate for at least 20 to 30 years.

This shows that there are different types of calculations among Chinese garment makers. Small-scale investors seek short-term profits and are sensitive to preferential policies offered by host countries' government. In fact, quite a few Chinese apparel companies' profitability depends on tax rebates or other incentives, for the fierce market competition cuts margins to a very low level. Large-scale garment factories (with over 10,000 workers) are not attracted by temporary subsidies, but rather stress the evaluation of a long-term investment environment and structural production costs.

In this connection, the arrival of JD group in Tanzania implies that heavyweight players in the international manufacturing sectors began to consider Africa as a suitable place for production. To be sure, few large manufacturing enterprises have made such decisions so far, but JD group is not an isolated case. In Ethiopia, one of the world's largest shoe-making groups, Huajian from Guangdong Province, set up a factory in 2011. Later, the company announced another plan to invest US$ 2 billion over the next 10 years to build a manufacturing zone in Ethiopia.

Corresponding to various types of investment, African governments should specify their goals for industrial development and adopt differentiated policies. If a country wants to build up a garment industry for the short term, it can provide generous financial subsidies for foreign investors. Particularly, local governments can set up a cluster or an industrial park to attract small and medium-sized Asian enterprises. If a country prefers long-term development, temporary tax holidays will not help much.

The emphasis ought to be on political structure, such as security, diplomatic relations, labor regulations and openness toward foreign investment. Small investors have more advantages in developing local markets, whereas large ones have the experience and economy of scale to serve the global value chain.

For any kind of investments, local government attitudes and services plays a big role in attracting Chinese businessmen. As Chinese investors often have communication and cultural barriers in Africa, they are eager to get support from officials.

The author is an assistant professor in the Department of International Relations at Tsinghua University. The research trip related to this article was supported by the German Boell Foundation.

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