Global and local policy framework

Clothing factory in South Africa

Multilateral agreements

Multi-Fibre Agreement (MFA): On December 31, 2004 the MFA came to an end and with it the termination of all quotas on textiles and clothing trade between WTO member states. This is likely to significantly affect the apparel industries in southern Europe, as well as those developing economies’ apparel and textiles industries that have grown as a result of access to quotas, rather than genuine competitiveness. One of the major concerns is how China will behave after the removal of quotas. There is consensus that China is the nation that is most likely to benefit, with its clothing exports having already increased significantly since it joined the WTO in 2001, whilst it has the ability to produce a growing range of items, and has improved its capacity to meet international quality standards. In a quota-free world, experts predict that China’s share of world clothing exports may double in less than five years. Along with India, China is therefore expected to dominate global production, with preliminary evidence from early 2005 confirming their threat. India’s overall clothing and textiles exports increased 33% in January 2005, when compared against January 2004 figures, whilst China experienced an even more astounding 546% increase.

African Growth and Opportunities Act (AGOA): This is a US programme that allows certain non-reciprocal tariff preferences to 37 Sub-Saharan African (SSA) countries covering 6,000 product lines to 2015. Clothing is governed by a separate set of conditions and rules of origin. These rules stipulate that clothing has to be made from US fabric, yarn and thread, or from fabric, yarn and thread that is produced in an AGOA-beneficiary SSA country. However, a special rule applies to LDCs, allowing these countries duty-free access for apparel made from fabric originating anywhere in the world until September 2007. With the single exception of South Africa (and Mauritius until mid 2004), all 19 AGOA-beneficiary SSA countries that qualify for the clothing provision also qualify for this rule. Therefore, while clothing exports to the US from South Africa require triple-stage transformation to qualify for AGOA, all other eligible countries are only subject to a single-stage transformation 12 . This places South Africa in a disadvantaged position. Rules of origin tie the domestic textiles industry into the clothing production process and therefore any weaknesses in the textiles sector have a marked impact on the success of clothing exports.

National government policy

Duty Credit Certificate Scheme (DCCS): This is an export-incentive programme for the textiles and clothing industries that ostensibly ended on the 31 st of March 2005, to be replaced by an Interim Clothing and Textiles Scheme to run until the 30 th of September 2006. The DCCS was designed to encourage the outward orientation of the clothing and textiles industries by allowing firms to claim a remission of duty for proven exports 13 .

Alternatively the rebates earned could be sold to any other importer of garments or textiles. This resulted in the majority of credits being sold to retailers who paid as much as a 30-40% discount, which they then used to import garments, thus reducing demand for domestically produced apparel and ultimately hurting domestically oriented clothing firms. Despite DCCS benefits, the appreciation of the Rand through 2003 placed enormous pressure on clothing manufacturers, resulting in most firms being uncompetitive in their principle export markets by 2004. Additional pressure was also placed on the local market due to the surge in garment imports – facilitated in small part by the access of retailers to DCCS benefits. Prior to the expiration of the DCCS on the 31 st of March 2005 the clothing and textiles industries submitted a joint proposal requesting that the dti put in place a two-year Interim Development Programme for the two industries, with this programme retaining the core elements of the DCCS. The response thus far has been confusing, with verbal agreement given on the introduction of an Interim Clothing and Textiles Scheme that replaces the DCCS and terminates on the 30 th September 2006. To date, however, no official confirmation has been given to the two industries, creating widespread uncertainty as to whether it will, in fact be implemented, and what particular form it will take.

Market and trends of South Africa

The liberalisation of the clothing sector internationally has been controversial due to its significant socio-economic contribution in both developed and developing countries alike. However, clothing manufacture in most developed countries has already severely contracted and changed its focus. For example, the US, EU and Japan are the largest consumers of apparel worldwide, but while there is still an important apparel industry left in Southern Europe, in the US and Japan 85% to 90% of apparel is now imported.

The actual production of apparel has therefore moved away from developed to developing countries, with the commercial buyers that remain in the developed countries now controlling extended global value chains and becoming much more demanding. They insist on lower prices, shorter lead times and smaller minimum quantities, with this directly linked to the increasing sophistication of consumer markets in developed economies, as well as increasing market segmentation. The result of this is that as markets become more differentiated and fashion changes become more frequent, so manufacturers need to improve their responsiveness in respect of meeting these buyers’ demands.

The scale and scope of global clothing trade is illustrated by a number of important facts:
• Global clothing trade totalled $462 billion in 2003 and has grown at a compounded annual rate of 6.6% since 1990
• The US alone imported clothing worth $71.3 billion in 2003, up from $27.0 billion in 1990
• China and Hong Kong, which together totalled 33% of global clothing exports in 2003, increased their clothing exporting levels from $25.1 billion in 1990 to $75.2 billion Given the scale of clothing production globally, it is important to note that the South African clothing industry was built up under isolation with the domestic market driving production.

As such, it was never able to achieve scale economies. Furthermore, the industry was protected by an import substitution strategy and now that the economy is exposed to international competition it is comparatively inefficient, lacks capital, technology and innovation, and has high labour and management costs in relation to output. Liberalisation and the restructuring of the industry in the 1990s resulted in large decreases in employment, while productivity has increased through cost-minimisation and downsizing rather than production growth. Even the recent explosion in domestic retail sales amongst the major retail groups that dominate the clothing value chain has had limited impact on the sector due to the propensity of the retailers to import cheaper wearing apparel in an attempt to bolster their margins and market share. Moreover, whilst certain retailers appear to be guiltier of this approach than others, the trend is evident across all major retail groups. This is reflected in the fact that clothing imports increased 58% on 2003 levels through 2004. Conversely, South African clothing exports have generally been modest and primarily to the EU and US markets. The bulk of exports are basic, commodity items (such as T-shirts) produced because of preferential trade agreements that have provided South Africa with duty and tariff-free access, where competitor countries have generally been restricted. However, even under these conditions South Africa’s higher cost structure means that firms have found it difficult to compete with low-cost competitors, such as China, India, Indonesia, Turkey and Pakistan. Furthermore, with the end of the Multi-Fibre Agreement (see Section 4) these countries will no longer be constrained, placing South Africa in a precarious position, unless it is able to upgrade and improve its competitiveness.

Table 3 presents data on selected competitiveness indicators, comparing the performance of the domestic clothing industry relative to a sample of international clothing, South African textiles and South African automotive component firms. The data shows that not only is the clothing industry faced with major international challenges, but that it also has inherent competitive weaknesses. For example, compared to the international firms, South African firms perform poorly in relation to output per employee and total inventory holding levels. Compared to the domestic automotive component firms’ average, the clothing firms’ performance is weak in relation to total inventory, customer return rates, domestic customer lead times, delivery reliability and absenteeism. Moreover, the data illustrates that the sector lags many of the comparative indicators by a significant margin. Positively, that there is substantial scope for firms to improve their performance and thus bolster their competitive position.

Analysis of sector dynamics

The South African clothing industry is concentrated in three provinces: Western Cape, KwaZulu-Natal and Gauteng. According to National Bargaining Council statistics, as of June 2004 there were 827 clothing firms in SA, with 327 located in the Western Cape, 239 in the Northern areas, 219 in KwaZulu-Natal and 42 in the Eastern Cape 5 . Nationally, the sector comprises a number of well-established large firms, SMMEs and home industries. There is also a large cut-make-and-trim (CMT) industry in the Western Cape and KZN that range from large, well-established firms to small home industries. In addition, many of the smaller enterprises form part of the informal economy. Similarly, there is a diversity of fabrics that are used across the provinces, ranging from natural fabrics to synthetics and synthetic mixes. However, higher value-added fabrics (e.g. wool) tend to be used mainly in the Western Cape. Even though the clothing sector is concentrated in only a few areas, primarily the Western Cape and KwaZulu-Natal, there are some major differences between the industries in these provinces, as outlined in Table 2. 

Table 2: A comparison of the Western Cape and KwaZulu-Natal clothing sectors


The single most significant input into the clothing sector is fabric, which accounts for approximately half of the cost to produce a garment. This clearly ties the domestic clothing and textiles industries together, and even more so with various trade agreements stipulating rules of origin requirements for clothing exports (see Section 4). A constraint to the clothing industry is the shortage of domestically produced fabrics, as well as the limited variety of fabrics produced locally. These factors inhibit the ability of firms to meet the rules of origin requirements for exports under preferential trade agreements, and forces firms to import fabrics that are not produced locally. Furthermore, because these rules of origin tie the domestic textiles industry into the clothing production process, any weakness in the textiles sector has a marked impact on the success of clothing exports. A recent survey on the SA textiles industry 7 revealed that although the industry does have operational strengths, there are numerous competitive weaknesses that remain: Long lead times, poor delivery reliability and deteriorating quality performance. Without an efficient, supportive textiles industry, clothing industry expansion is constrained. Additionally, expansion in the export-oriented clothing.

industry should have a positive impact on the textiles industry – at least the part that supplies clothing production (about 48% of the SA textiles industry). 

Clothing is a labour-intensive sector, contributing 1.8% of overall employment in SA. Combined with textiles, it contributes about 13.4% of total manufacturing employment. As a result, overall employment is relatively large, while output per employee is low compared to more capital-intensive industries. Furthermore, the clothing sector requires a relatively unskilled labour force, with 82.2% of employment in the sector attributed to semi and unskilled workers, 13.4% to mid-level skill occupations, and only 4.4% to jobs requiring high-level skills. Nevertheless, there is a serious need to develop skills, particularly middle-to-upper management skills. Although the CTFL SETA through its Centres of Excellence programmes at the Durban and Peninsular Technikons, as well as Johannesburg University, support the skills base of the industry, these institutions are finding it difficult to secure sufficient support from industry to effect positive transformation. The clothing industry is particularly important to the economy because of its labour absorptive capacity and its ability to offer entry-level jobs for unskilled labour. However, the rapid pace of job losses is a major concern. According to a recent Western Cape clothing industry report (the Ralis report), if employment trends continue the sector will disappear by 2012. While this is clearly an overstatement, the general principle is correct: This is a sector the South African economy is slowly losing. Based on current trends we estimate that the two industries are set to lose between 50,000 and 75,000 jobs in the formal and informal sector over the next nine years.

A number of institutions support the SA clothing sector. However, these institutions are fragmented and often act as lobbying associations. Institutions include:

SACTWU: Southern Africa Clothing and Textiles Workers Union   Clothing Manufacturers’ Association (CMA): Employers organisation that is the bargaining council partner to SACTWU  

CMT Employers’ Association: Employers association in the clothing industry

Bargaining Council for the Clothing Industry: Employer–employee regulatory council for the clothing industry  
CloTrade: The Clothing Trade Council of SA (previously Clofed) was formed in 2003 by clothing manufacturers to be the collective voice of members to interact with government and other stakeholders in respect of trade related matters

Industrial Development Corporation (IDC): The IDC has a Textiles, Clothing, Leather and Footwear Strategic Business Unit that is committed to playing an active role in accelerating the development of this industry

Garment Manufacturers’ Association: Association of larger Western Cape CMTs

Clothing Industry Export Council: An initiative of TISA to assist exporters. In collaboration with EMIA, it provides funding for initiatives such as trade missions and exhibitions  

CTFL SETA: Clothing, Textile and Footwear Sector Education and Training Authority  

CSIR: Supports clothing and textiles through, for example, the National Fibre, Textile and Clothing Centre, which promotes growth and global competitiveness of the South African textiles pipeline.

A Strategic Assessment of the South African Clothing Sector

1. Overview of sector trends
TIPS data, as presented in Table 1, shows that the South African clothing sector has performed poorly. By comparing the average of the indicators for the period 1994-8 with the average for the period 1999-2003, it is clear that the sector’s performance has deteriorated. In particular, there has been deterioration in r
eal value added at basic prices (10.4%), real exports (4.4%), employment (0.6%), output per employee (11.9%), remuneration per
employee (6.8%) and gross mark-up (7.8%). Interestingly, both exports and employment increased (by 1.8% and 1.1% per annum respec
tively) from 1994 to 1998, but declined (by 8.0% and 1.1%) from 1999 to 2003, while real value added declined consistently over the two periods. Real output per employee declined from R67,935 to R60,716 between the two periods, whilst remuneration per employee also fell (from R18,935 to R17,224).

In contrast, there has been an improvement in the GDFI output ratio, the fixed capital stock output ratio and productivity indicators between the two periods. Although the GDFI output ratio grew by 50%, this growth in investment was from only 0.02% to 0.03% of output.

Average fixed capital stock similarly grew from an extremely low 0.11% to 0.13% of output (or 18.18%). Over the 1994 to 1998 period, the average productivity of labour, fixed capital and multi-factor productivity were all exceptionally low, with less than zero units of output produced by each. For the 1999 to 2003 period, the productivity index for each indicator was positive, although still low. Labour productivity reached an average of 0.67 units of output
per employee, fixed capital productivity rose to 0.6 units and multi-factor productivity improved to 0.58 units.  Regarding imports and exports, Table 1 shows an increase in the export-output ratio, import leakage (the amount that is imported to satisfy local demand) and the import minus domestic demand ratio (import penetration). The data show that exports increased from 11.27% to
19.97% of output over the 1994-8 to 1999-2003 period, whilst imports as a proportion of local demand declined from 10.26% to 9.11%. In summary, the performance of the sector over the two periods under review has been poor. Not only has real value added and real exports declined, so has employment.

These overall trends (although not the absolute values) are supported by additional statistics from Statistics South Africa and the dti database. According to these data sources nominal clothing sales increased from R10 billion in 1995 to R13 billion in 2003, but the real value of sales actually declined from R11.8 billion in 1998 to R10.4 billion in 2003, a 12% decline. Employment in the clothing industry has followed a volatile, negative trend, falling by 11.5%, from 125,181 employees in 1994 to 110,739 in mid-2004 – a loss of 14,442 jobs. However, it is important to note that official statistics are likely to underestimate total clothing industry employment due to the large number of informal, micro and home industries that are not captured. Based on the proportional breakdown of formal versus informal clothing sector employment in the September 2003 Labour Force Survey and then extrapolating this across to formal employment levels as indicated by Stats SA, we estimate total clothing employment to be 158,879. In contrast to the data presented in Table 1, output per employee levels calculated using Stats SA data also provides a higher average of R80,001 per employee for the 1999 to 2003 period, and an annual average growth of 3.48%, reflecting a positive trend.  The clothing sector performs well in terms of capacity utilisation, with average utilisation rates of 85% over the 1990-2003 period. Nevertheless, capital expenditure on new assets has been exceptionally low at an average 1.4% of sales from 1992 to 2002 3 . Although the clothing sector is labour-intensive, it is still necessary to invest in capital, technology and innovation to become internationally competitive, especially in light of the constantly changing global environment. Lastly, there has been an increase in the export propensity of firms, as well as an increase in import penetration. Although the industry’s export performance has improved since the early 1990s, it remains modest, reaching 1.4% of total manufactured exports in 2003. Additionally, the demand for clothing is price elastic and therefore the recent appreciation of the Rand has resulted in a loss in export volumes. With regards to imports, the nominal value of clothing imports nearly tripled from 2000 to 2004, reaching R3.9 billion 4 .