Faced with the liberalisation of world textile trade next year, Egypt is speeding up efforts to modernise its textile and clothing industry. Even so, the general feeling seems to be that unless a free trade agreement can be signed with the US, most companies are likely to lose markets to their Chinese, Indian and Pakistani competitors. Jozef De Coster reports from Cairo.

Egyptian textile and clothing industrialists have every reason to be nervous about the rapidly approaching quota-free period post-2004.

Around 50 per cent of Egypt's textile and clothing exports go to the EU and more than 40 per cent to the US. With quotas lifted, Egyptian exporters will have to compete head-to-head with their Chinese, Indian and Pakistani competitors. And although the sector is hurrying to prepare itself for 2005, several huge problems remain unresolved.

At first glance, Egypt has everything needed to flourish as a textile and clothing exporter. It has the best cotton in the world, a complete supply chain from fibre to garments and made-ups, very low labour costs, a well developed free zone system, easy access to the US and EU market (existing quotas don't seem to have hampered exports, except in 1998 when Egyptian manufacturers were lining up to export cotton T-shirts), and as far as the European and Middle East markets are concerned, a favourable geographic position.

As the textile and clothing industry is the cornerstone of Egypt's industrial and economical infrastructure (employing 400,000 workers, cotton farmers not included, and accounting for 25 per cent of total Egyptian non-petroleum exports), the Egyptian government is willing to adapt its policies to the needs of the sector.

In 2003, the Egyptian Pound was devaluated by 42 per cent which made exports to the US and EU much easier. Since 21 January 2004, textile machinery and spare parts, dyestuff and chemicals have been exempt from import duties, and tariffs on yarns and fabrics have been slashed to 12 per cent and 22 per cent respectively.

No wonder that Marks & Spencer, Carrefour, Kaufmann, Gap, JCPenney, Wal-Mart, Kmart, and others are sourcing from Egypt. Benetton has acquired the shares of its former Egyptian partner and the French company Rodier has a partnership with Belladonna Egypt.

The British couple Derek and Lorraine Marsden, who left the UK one year ago to start up a firm producing designer swimwear for the Egyptian market (80 per cent tourists, 20 per cent locals), are bullish about future export chances.

Don Feeney (left), senior consultant at Werner International, and some of his staff who are involved in the TCTC upgrading project

Derek Marsden explains: "Europe is only four hours' flight away. Our best [factory] girls cost us less than 100 euros per month. We're licensed to produce Solar swimwear, beach wear and towels for the Egyptian market. We built a small factory, employing around 20 people, in Nasr City near Cairo. But we will expand.

"Solar has offered us a contract for the production of 900,000 pieces of swimwear. We also think that other swimwear companies will take advantage of our production know-how and low production costs. Our ambition is to develop Egypt into the world's swimwear capital."

Growth possibilities
Rapid growth is not impossible in Egypt as the Glass Company for Ready Made Garments shows. Four years ago, Osama Heba started this pants factory in Cairo, operating from a private free trade zone. Today, he employs 900 people and every month exports 12,500 dozens pairs of pants of which 80 per cent go to the USA and the rest to Europe.

Thanks to the important Hong Kong agency Li & Fung, which has an office in Cairo, Glass Company quickly acquired US customers such as Wal-Mart, Gap, Oskosh, Sears, Van Heusen and European customers such as Carrefour, Intraport and Premark.

At the Egytex 2004 fair, organised last month by Sahara Group, several successful Egyptian clothing exporters exhibited. The A-Arafa Group, whose annual turnover exceeds US$100 million, is a supplier to Marks & Spencer, Target and Federated. The group also produces licensed Guy Laroche and Pierre Cardin clothing as well as Lois jeans and jackets for the local market.

Nounou Brothers makes garments for companies such as C&A, Intersport, Wal-Mart and is the sole manufacturing and distributing agent in Egypt for Diadora (Italy) and Le coq Sportif (France).

On the whole, however, the recent export performance of the Egyptian textile and clothing industry is not impressive. According to research carried out by the Egyptian Centre for Economic Studies (ECES), since 1995 the share of Egyptian textiles in EU imports has fallen from 2.2 per cent to 0.5 per cent.

Though Egyptian clothing exports to the EU are growing, they are still a meagre 0.3 per cent of EU clothing imports. Textile and clothing exports to the US remained more or less constant at a level of 0.9 and 0.6 per cent of US imports.

Structural weaknesses
The Egyptian textile and clothing industry is not achieving its full potential due to several structural weaknesses.

A large part of the sector is still run by the state, via the Cotton & Textile Industries Holding Company. President Nasser's 'socialist' policies made Egyptian textile companies internationally uncompetitive, overstaffed and difficult to adapt to technology and market changes.

CEO Hany El Habibi and marketing director Gerta Mamaj of Sahara Group

Egyptians are proud of Misr Spinning & Weaving Company, situated in Mahalla El Kubra, 80 km from Cairo. It's undoubtedly the largest enterprise of its kind in Africa and the Middle East. It reportedly still employs 23,000 workers (down from more than 30,000) and has an annual production of 46,000 tons of cotton yarn, 150 million m² of fabrics and 5 million garments (of which 45 per cent are exported to Europe and the US). The question is, of course, whether such a giant can survive in these hectic times.

The privatisation process, which started in the mid-90s, is slow. The public sector still dominates the spinning (70 per cent), weaving and finishing (50 per cent) of cotton. The private sector has, on the other hand, a majority in the knitwear (80 per cent) and woven clothing industries (75 per cent).

The Egyptian textile supply chain has three weak spots. Egypt has no manmade fibre industry (polyester production starts at POY-level). The dyeing and finishing industry is underdeveloped and needs massive investment. And though Coats (sewing thread) and YKK (zippers) produce in Egypt, the clothing accessories sector is still underdeveloped. Not surprisingly, several Turkish and Asian suppliers of zippers, buttons, ribbons etc were exhibiting their products at Egytex 2004.

The excellent Egyptian cotton is not exclusively a blessing for the domestic industry. Much of it is exported as raw material to Switzerland, Italy, India and China. The Egyptian spinning industry is also a major exporter (more than 40,000 tons of yarn in 2003). Because of the high price of Egyptian cotton, domestic producers, who don't need a very fine yarn count, are using imported cotton fibre or yarn, mostly from India, Pakistan and China.

Other obstacles that prevent the Egyptian textile and garment industry from expanding are the poor state of machinery, the difficulty in finding skilled workers, unpredictable government policies, high interest rates, the lack of hard currency, the reluctance of banks to extend credits and high custom tariffs.

The Egyptian market (70 million consumers) is still relatively well protected. In January 2004, import duties were reduced to 35 per cent for home textiles and 40 per cent for apparel. The western brands found in Cairo (12 million inhabitants) and Alexandra (7 million) are produced under license in Egypt. Domestic manufacturers complain that up to 80 per cent of the cheap clothing offered on the street markets is smuggled from China.

Facing the liberalisation of world textile trade, Egypt is desperately speeding up its efforts to modernise its textile and clothing industry.

A style presented by Nounou Brothers

The consultancy Werner International is engaged in a two-year programme, signed in February 2002, with the Textile & Clothing Technology Centre (TCTC) to upgrade 100 companies. The European Commission is sponsoring this programme with €5 million.

Don Feeney, senior consultant at Werner International, stresses that the aim of the programme is to strengthen not only the technical competitiveness of the sector but also its marketing capabilities.

Another important player is the Sahara group, which acts as a think-tank and consultant, an organiser of training courses, high profile congresses and the Egytex fair, and a partner for foreign traders and investors.

It will inevitably take some time before the Egyptian textile and garment sector is privatised, liberalised and modernised. In their current state, most companies are likely to lose markets after 2004, against the Chinese, Indian, Pakistani and other competitors.

Most sector observers think that in the short term, Egyptian exporters need preferential treatment. Thanks to an association with the EU and the so-called Agadir Free Trade Agreement of February 25, 2004 (between Egypt, Jordan, Tunisia and Morocco), Egypt's cotton-based industry is favourably positioned to play a pivotal role in the region.

However, according to Mr Hany, the CEO of Sahara Group, from January 2005 Egyptian woven apparel exports to the US have no chance of survival, unless Egypt manages to sign a Free Trade Arrangement (FTA) with the USA before the end of this year.

Egyptian apparel exporters, backed by their government, have begun exploring co-operation with Israel. They are inspired by the FTA which the USA recently has signed with Jordan and Morocco.

The FTA between Egypt and USA will probably be based on sourcing at least 8-13 per cent from Israel, which in the past seemed to be unacceptable by Egyptian officials. Egyptian apparel exporters point out that the Qualifying Industrial Zones (QIZ) programme that was set up between USA and Jordan boosted Jordanian apparel exports from virtually zero to over US$400 million.

By Jozef De Coster.