Textile

International market access and low cost

Between 2000 and 2004, the value of world exports of textile products grew at an average annual rate of 4.4 percent. With exports from emerging economies growing at a slightly higher rate, their share of world exports increased by 1.5 percentage points to 46.7 percent in 2004. Currently, the major players in the global textile market are China, the US, the EU, India, Pakistan, Japan, Republic of Korea and Turkey. Low cotton prices provide cheap inputs to textile operations worldwide. According to the EIU, estimated global consumption of cotton in 2004/05, at 23.4m tons, is slightly higher than expected and represents an increase of almost 10 percent over the last year. Overall, world cotton consumption in 2005/06 is forecast to reach 24.35m tons, an increase of 4 percent.

The elimination at the end of 2004 of quantitative import restrictions under the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC) has greatly affected the textile industry (see Table). A recent study predicts the following trends as a result of the elimination of quotas on textiles: an increase in the share of world exports for textiles emanating from emerging economies; a considerable gain in the export shares of countries with low labor costs, such as China, India and Pakistan; heightened competition among suppliers in low-cost countries; and increased specialization of products among source countries.

The textile industry is usually characterized as capital intensive and highly automated, with a reliance on unskilled labor. Although labor costs in Africa are generally competitive with those in China or India, the main factor decreasing the competitiveness of Africa in the global textile trade is high utility costs, particularly for electricity and water, coupled with supply unreliability. A number of successful textile producing countries, such as China and India, rely on strong backward linkages for production inputs, and textile industries in Africa have yet to create such linkages to the local economy.

A number of countries benefit from AGOA's third-country fabric sourcing allowance, which permits African countries, exporting under the AGOA agreement, to source raw material inputs from non-AGOA countries. This arrangement is slated to expire in 2007, which will increase the need for AGOA countries to source inputs from local suppliers. African textile exports under AGOA totaled USD 1.4 billion in 2005, which represents a 12 percent decline from the previous year, due to increased global competition, brought about by the elimination of the multi-fiber agreement (MFA). Africa has had little success thus far in attracting FDI into the textile sector. According to Loco Monitor, an online FDI tool, Africa receives just 2 percent of global FDI, while Asia Pacific and Europe together account for almost 80 percent. The largest share of FDI in Africa in the textile sector is from the EU, followed by North America and Asia Pacific, while Africa and the Middle East account for many small-scale projects.

Sub-Saharan Africa does possess a number of advantages that increase its attractiveness as an investment location, particularly its low labor costs and abundance of unskilled labor. Investors in Africa can also benefit from preferential access to a number of global markets, including AGOA, and large and still developing regional trade zones. A number of sub-Saharan African governments are putting increased emphasis on developing EPZs that provide improved access to global markets and infrastructure. Successful EPZ investments are evident in African countries such as Mauritius and Lesotho.

Textile Sector Survey Profiles

*13 firms also produced apparel

Textile Brief

• Textile production levels in Madagascar are at only five percent of their level ten years ago. Political crisis in 1992 caused large clients of Malagasy textile firms to seek other global suppliers.
• The textile industry showed signs of recovery in 2004 with an increase in external demand (particularly from the US) and the depreciation of the local currency.
• FDI in this sector mainly comes from France (25 percent), Asia (China and Sri Lanka, 30 percent) and Mauritania (30 percent).
• Sixty percent of Malagasy textile products are shipped by sea and thirty percent by airfreight. The majority of exports are destined for the US, the EU (primarily France), and other countries.
• Within Madagascar, textile firms prefer to locate in free zones or near apparel manufacturing plants.
• Textile firms in Madagascar employ an average of 870 workers, whom they expect to speak Malagasy and French, and English for some commercial employees.
• The country's low operating costs (including low cost labor) good market access, tradition in textile production, and recent currency depreciation, will help Madagascar to become competitive in the global market.

The elimination of the Multi-fiber Agreement

The MFA was set up in 1974 to protect the European and American textile and apparel industries from low-cost products from Asian countries. In time, the MFA developed into a complex system of quotas and restrictions on various products. In order to cope with these restrictions, exporting countries became adept at shifting production to less restricted product categories and countries when they reached their quotas on specific products. Since quota allocations were usually based on historic export performance, there was a further incentive to increase exports to unrestricted markets, even when it was not profitable, in order to increase subsequent years' quota allotments. As a result, the quota system provided many developing countries with access to markets they otherwise would not have accessed. These countries are being adversely affected by the phase-out. In addition, in order to avoid quotas a number of countries moved up into higher value-added production, sourcing out low-cost production to less quota-restricted countries. This encouraged the fracturing of the global value chain and developed textile and apparel firms in developing countries. During the Uruguay Round of WTO negotiations, the ATC called for the phase-out of quotas on textiles and apparel over a 10-year period, beginning in January 1995, and ending in January 2005. There is general agreement that the elimination of textile and apparel quotas will immediately benefit a small handful of developing countries - those that possess a strong and diversified mix of textile and apparel products, engage in full-package production, produce high-quality, high valueadded products, and possess diverse markets outside the US and the EU. These countries include China, India and Pakistan.
(Source: UNCTAD 2005)

Comparative SWOT Analysis for Textile in Madagascar

Breakdown of cost motivations reported by textile firms

Breakdown of quality motivations reported by textile firms

Total annual cost to employer per function in USD (millions)

Estimated yearly cost of water for textile factories