By Kim Piper Textile industry players will need to band together if they plan to hold a share of the American market after 2008 News Focus Achilles Heel The crisis in Greece, and the collapse of the euro, could scuttle Egypt’s plans for economic growth. River of Strife A new agreement among East African countries may spell the end of Egyptian control over the Nile . On the Block Foreign investors buy up African farmland, sparking fears of a new colonialism. Chamber of Textiles Industry board member Adel El Azaby advocates a collaborative approach By Kim Piper Vertical integration could benefit the industry by increasing speed and accuracy of production — if we get it right

By By Andrew Bossone

Sometimes, it’s not just about technology. Instead of spending their time calculating thread counts or sitting at a spinning wheel, the nation’s leading textile players are debating issues including vertical integration and adding value to cotton while simultaneously bracing themselves for what many analysts think will be a revolutionary change in the industry.

And that change will be spurred by foreign developments: In 2007, the European Union will completely open its markets to textiles and ready-made garments. The United States is set to follow suit by the end of 2008, a pledge US President George W. Bush affirmed during his recent trip to Asia. The result: Western consumers will be inundated overnight with Chinese goods, and no one expects other industries to be competitive with China and its 47 million textile workers.

As matters now stand, the Qualified Industrial Zone (QIZ) agreement with the US is helping prop up the domestic textile industry by eliminating tariffs to the US provided the Egyptian goods made by qualified companies contain at least 11.7% Israeli content and 35% local value-added.

“When I say ‘Egypt’ now, in the textile field, what is the perception?” asks Adel El Azaby, board member of the Chamber of Textile Industries. “QIZ,” he answers with a loud laugh. “Nothing. It’s just QIZ. This is not good. We have to cooperate to change the perception of Egypt, not by talking and blah-blah, but through effort and work, something solid.”

The value of QIZ to the textile industry is evident in the numbers: The vast majority of QIZ companies — 79%, according to Ministry of Trade and Industry figures — are in textiles, although only 41% of the companies that signed up for QIZ are actually exporting to the US.

Clothing exports under the QIZ rose 306% in the first eight months of 2006 compared to the same period last year, rising to $397.67 million from $97.94 million. In the same period, total QIZ sales grew 305% to $412.01 million. Clothing and textiles accounted for 96.54% of all QIZ exports in the first eight months of this year, down slightly from 98.6% the year before.

According to the Ministry of Trade and Industry, the number of companies exporting through QIZ in the third quarter of 2005 to the same period of 2006 rose to 136 from 70, a 94% increase. Furthermore, total textile exports to the US grew 35.6% through 3Q06 compared with the same period in 2005, topping out at $609.3 million.

But barring any changes to Bush’s plans to liberalize the textiles market — and with Democrats now controlling Congress and a presidential election in the offing, it’s not impossible to imagine a new wave of American protectionism — Egyptian players have barely two years left to solidify their relationships with US buyers before they face massive Chinese competition.

That imperative makes cooperation and communication between local industrialists more important than ever, say participants at last month’s seventh annual Egytex conference. The high-profile gathering was not just to discuss the issues and make a few deals with foreigners; the more important focus was on increasing communication between players in the textile industry. Attendees say industry leaders will have to work together to pull up the industry as a whole if local textile companies plan to hold on to their American market share after QIZ expires.

“I think it’s a matter of mentality,” says Gerta Mamaj, international marketing manager at Sahara Group and the organizer of Egytex. “They do not really talk to each other. A garment manufacturer does not know which the best companies are or the second best companies at producing certain fabrics. They do not touch the sample that the factory produces, for example. You don’t usually find a manufacturer of apparel going to a weaving company or dying and finishing to see the fabrics.”

“There has to be cooperation,” says Samer Riad, president of Riad Group and the former president of El-Nasr for Spinning and Weaving, or Salemco, as well as Alexandria Spinning and Weaving (better known as Spinalex). “That’s why we have this conference, to introduce ourselves to each other. And we have to have transparency. You have to know mister so and so, who has this operation and these machines that will enable me to do a better job.”

Of course there are already associations within the business, but insiders say that at the end of the day, it’s every man for himself. Only a few manufacturers are really looking inside their factories and making a commitment to improvement. Privatization has helped, and so have demands from foreign importers that expect zero defects, but the industry is now in a testing period to see whether production is up to global standards.

“Now Europe is testing Egypt,” Mamaj says. “There are plenty of orders being put in Egypt. That’s why we are trying to explain to [manufacturers] that quality and delivery on time are the most important things. They have to first learn how to be punctual. I’ll say my goods will be delivered on the first of January, and they will be delivered on the first of January. For no reason will my goods be delayed by one or two days.”

Quality and punctuality will make or break the industry. Although Egypt has one of the lowest labor costs at $60 to $100 per month, the industry lags far behind in productivity and indicators such as per-minute costs. Much of the poor efficiency is a throwback from the days of public ownership, but with the vast majority of textile companies now in the private sector, many of the painful measures to improve should be in the past.

A national sense of teamwork might help save the industry: Today, your competition isn’t the factory down the road, but groups of factories half way across the globe.

Mamaj says part of the problem has been the investment by development agencies to improve manufacturing facilities, which have largely ignored the small operations that account for the lion’s share of domestic production. What happens, for example, is a medium-size company — about 1,000 employees — takes an order from a foreign company, assuring the order requirements can be met, although it might not have the capacity or ability. It then sub-contracts the work to a small company (about 100 to 250 employees), but because the small company has not upgraded its technology or know-how, it either produces a sub-standard product or does not meet the deadline.

The deal falls through, and the reputation of both the company and the industry suffers.

Egypt has major agreements with 25 EU members and 10 Mediterranean states through the Euro-Mediterranean Partnership (EuroMed), with 19 African countries through the Common Market for Eastern and Southern Africa, with 16 Arab countries through the Greater Arab Free Trade Area and with America and Israel through QIZ, in addition to a number of bilateral and multi-lateral agreements on the side.

The most successful agreement — in the textile industry, at least —has been QIZ. The rest have been mostly talk.

“We have a very good competitive advantage,” El Azaby says. “But unfortunately, until now we are not able to use it.”

To have tariff-free or limited-duty access to such potentially massive markets should make the country an extremely attractive place for foreign investment and trade, but quality and competence issues have been barriers. What’s more, regional demand has been primarily for low-cost or second-hand goods, an area in which no one can compete with China.

“It has to be a coordination between neighboring countries,” says Mamaj. “Sometimes Egypt cannot compete in CM [cutting and making] prices. Tunis and Morocco can compete in CM, so why not let the fabrics go to Tunis and Morocco? So [there] can be a better use of the agreements that governments have been signing since five years ago and they only keep on signing. They’re not being materialized.”

In addition to regional cooperation in manufacturing, Europeans seem eager to establish relationships here to offset China’s dominance. The cheap Chinese products could make European businesses over-reliant on China, which in the long run could be used as a leverage for political pressure. Additionally, several European countries have a historical friendship with Egypt, which helps smooth out cultural differences.

Despite the amicable relationship, in the last year textile imports to the EU have actually gone down: The EU received 85,391 tons in the first half of 2006, down from 87,656 tons in the previous year, according to a report from the European Commission in Egypt.

Still, manufacturers need to keep pushing their competitive advantages, and in the case of Europe, that’s largely proximity. Lead-time for orders is a key element in international trade, particularly in large textile orders requiring shipments over water. But if the manufacturers cannot make the products quickly, lead-time becomes a moot point.

Cotton, the country’s other big advantage, remains underdeveloped. Critics of investing in Egyptian cotton say the long-staple commodity only produces a narrow range of goods, including bath towels and bed sheets. Clothing, such as shirts and pants, usually require cheaper short-staple cotton, meaning long-staple cotton can only support limited industrial growth, those detractors claim.

While this may be true, there is room for tremendous expansion in production of long-staple cotton.

About 70,000 tons of raw cotton went to India and Pakistan last year alone, according to research by the textile consulting firm Sahara Group. Not coincidentally, much of the complaints coming from the industry regarding violations of the cotton logo and its guarantee of 100% Egyptian cotton are directed at these two countries. People say little, if anything, is being done to protect this logo, in addition to properly marketing it.

“Each and every country in the world relies on strengths that makes it different from other countries,” says Mamaj. “Well, Egyptian cotton is only in Egypt. You don’t find it anywhere else in the world. So why not use it as one of our strengths, instead of putting it in the shadows?

“At one point last year, so much cotton was exported, local manufacturers couldn’t find the cotton,” she says.

Experts often disagree on which cotton is the best, the Egyptian or the American Pima. Surveys often come out announcing the Pima’s superiority, but when analyzed, the Egyptian performs better in terms of length, strength and color. But ever since cotton was nationalized, the precious commodity was mistreated and the industry declined. Still, it’s a shame to buy Egyptian cotton with a label that says “Made in India.”

“All of [the cotton businesses] were transferred from good management, good marketing, to the government, which does not know anything about how to market these kinds of businesses,” says El Azaby.

The government limited the ownership of land to 50 acres for one person and 100 acres per family, with the rest in the hands of the state. In 1961, the government assumed total control of production, prices and exports, according to the geographer D.W. Fryer. Although the industry flourished since Mohamed Ali first imported seeds from America in the early nineteenth century, the country’s status as the biggest producer of long-staple cotton vanished in a heartbeat. At the time, Egypt had the ability to supply two-thirds of the world’s demand for long-staple cotton. One year later, in 1962, Sudan cotton farmers out-produced Egypt.

Today, the biggest issue is getting the cotton to stay in the country long enough to add value to it. Growers will bemoan the unfair advantage foreign farmers have by receiving subsidies from their governments. This is one of the major issues for the G20 group of nations, a group of developing nations of which Egypt is a steering committee member, but few signs suggest subsidies may become a thing of the past.

“Let’s start with what we have, and then let’s grow,” Mamaj says. “We can’t just hope for removal of subsidies or we can’t just hope for whatever miracle to happen. Until then we’ll see what happens. No. We should go on this path now. I mean we’re late already. We should have done this a long time ago.”

What can the industry do within the next two years to establish itself as a leader? What can be done to solidify relationships with existing importing companies after it is liberalized? Some will say the problem lies in the spinning and weaving sectors.

The US Department of Commerce measures three types of textile imports: apparel, textiles and fabrics and textile mill products. Of the three, only textiles and fabrics, which includes yarns and threads (the two byproducts of spinning and weaving), decreased, dipping 18.9% to $11.9 million from $14.7 million. This could mean that either the demand for textiles and fabrics to America went down, or that the Egyptian industry was not up to par. If demand went down, then the industry might want to consider focusing its resources on other areas such as dying and finishing, which has its share of complaints. If the industry is at fault, then it will need to improve this sector. Either way, it is clear there is no perfect sector, but that there has to be investment across the board.

Vertical integration, in which one company manages the entire process from cultivating the raw product to generating the fabric to completing the final merchandise, has so far been a successful investment model. It has the benefit of reduced shipping costs and insures oversight over the handling. But it requires large investments by a single entity. And a company might branch out from its area of expertise. A spinner, for example, likely knows little about fabric dying.

Specialization, the opposite of vertical integration, reduces waste — when done right. But there is no guarantee for one manufacturer that another will do it well. The best solution could be a mix of specialization with a partial vertical integration, combined with cooperation.

“We have two schools all over the world,” El Azaby says. “One school says, ‘I begin with this factory then I make it vertical.’ India and Turkey did it better than this. In both these countries they have the two schools with each other. But if you go in depth, you will see that two-thirds are integrated not for individuals, but as a country or as a cluster.”

Specialization will help the more technical aspects of the industry like dying and finishing, which require advanced technical knowledge of chemicals and machineries. Integration will help the parts that require speed and accuracy like spinning and weaving. If done soon, it could save the industry. It could also engender a fashion industry, which is practically non-existent.

There are a handful of companies doing fashion on their own, and then a smaller number within that group doing it well. Tina Antaki, the head of sales for Or, a new chain of stores that opened this year, is taking foreign talent and adapting designs to the local market. “Most of the local brands, some hire a designer who hasn’t really studied fashion design. And others build based only on what they see. We get professional sketches followed by line sheets and by style sheets for the factory,” she says.

Her uncle, Paul Antaki, made a name for himself in the business by getting the licensing agreement for United Colors of Benetton and then for fostering the brand Mexx, which has grown internationally. He opened Or with the idea that he could make the clothes here, and get original clothes from independent designers in Los Angeles. Antaki is probably about ten years ahead of the rest the pack, but if the manufacturing side improves, most believe we’ll buy our clothes locally made and locally designed.

“People go abroad and they find trendy stuff and they want it here,” Tina Antaki adds, “So I have to find this stuff and bring it here to the people who don’t have the means to go abroad.”  bt