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The textile projection

CAIRO: Textiles, garments and cotton cultivation employ a substantial portion of the Egyptian labor force. These sectors have benefited substantially from the Qualified Industrial Zones (QIZ) protocol under which Egyptian goods with a minimum level of inputs from Israel are allowed tariff-free access to the United States. It stands to gain further from last December …

CAIRO: Textiles, garments and cotton cultivation employ a substantial portion of the Egyptian labor force. These sectors have benefited substantially from the Qualified Industrial Zones (QIZ) protocol under which Egyptian goods with a minimum level of inputs from Israel are allowed tariff-free access to the United States. It stands to gain further from last December s World Trade Organization deal on cotton, in which developed countries agreed to eliminate export subsidies on cotton by the end of 2006.

However, such mammoth producers as China and India continue to compete aggressively with the elimination of U.S. quotas on textiles last year. In light of these developments, Shamsi Group Chairman Ammar Shamsi gave his assessment of the textile industry and his group s plans for going forward.

Shamsi Group was founded in 1958 and today employs some 3,000 people. The group supplies ready-made garments to several established international brand names including Gap and Marks & Spencer. It also sells approximately 40 percent of its output in the local market through retail chains under the brands of Dalydress and 2play. The group will shortly expand its retail operation to Dubai and Abu Dhabi.

In the late 1990s, the Shamsi Group began producing fabrics for furniture, making use of its existing manufacturing facilities and catering to the untapped market of modern furniture for a growing hotel industry. All the local competitors were only producing the very traditional, shiny, damask look you see everywhere, Shamsi explains. That was the only product available to the hotel industry and they were just using it. We started with more contemporary, modern, young, beach-like designs which were very successful.

Most of the company s exports are to Europe, although it s sales to the United States have grown since the implementation of the QIZ protocol last year. The QIZ protocol was critical to the industry. Without the QIZ – not only for us but for all the local producers – the Egyptian ready-made garments manufacturers would have been in a very difficult situation, says Shamsi. They wouldn t have been able to compete with the Chinese producers, because there are no longer [U.S. textile] quotas starting 2005.

The elimination of tariffs under the QIZ protocol essentially protects Egyptian garment producers from competition from China and India. With the global trend of trade liberalization, however, this protection is unlikely to be a viable solution in the long-term. The QIZ protocol nevertheless provides an opportunity to boost production to a new level. With this help of the QIZ, Shamsi explains, and with the increase of production and exports, these local suppliers will become, in a matter of three to five years time, able to compete with international producers without having this extra help with the QIZ.

Egypt also has two specific competitive advantages over East Asia: its proximity to Western markets and the availability of long-staple cotton. We can ship products to Europe in three to four days, says Shamsi, versus 21 days to 30 days [for products] coming from the Far East.

Long-staple cotton, which is cultivated only in the United States and Egypt, is used in very fine textile products such as high quality shirts and bed linen. The technology to spin the highest quality long-staple cotton fibers, however, is not available in Egypt. Such cotton is instead exported to Switzerland and Japan, where the technology is available. This represents a significant lost opportunity for local industry, because consumers pay a premium price for the final product.

This lack of technology is the result of underinvestment in the spinning industry, which is dominated by government-owned companies. Shamsi anticipates that the planned privatization of spinning companies will stimulate investment and improve the state of the local spinning industry.

The government has been lobbying for a free trade agreement with the United States for several years, anticipating such an agreement to eventually replace the QIZ protocol. With the U.S. government s disapproval of the arrest of opposition figure Ayman Nour, it is unclear whether negotiations for a free trade agreement will commence in the near future. The QIZ protocol provides sufficient support, says Shamsi, because all that we want is to enter the American market tariff-free, and that s happening now.

The only condition of the protocol is that a minimum of 11.7 percent of the total cost of exported products should be procured from Israel. While the inputs procured from Israel – which are primarily dyes, fabric softeners and other chemicals – may be purchased at a lower cost from other countries, the price of Israeli inputs is not prohibitive.

Furthermore, the method of assessing the Israeli input requirement is straightforward and convenient. It is an easy system, explains Shamsi, because you don t have to have this percentage in each product or in each shipment; you just have to have it in the quarter.

Shortfalls in the proportion of Israeli input in one shipment can therefore be made up in another during the same quarter.

Competition from East Asia will continue to pose the greatest challenge to the industry. In addition to the larger scale of production in China and India, Shamsi says that the governments of these countries indirectly subsidize their industries by providing land for free and long-term loans at low interest rates.

China and India also benefit from workers who earn 60 to 70 percent less and are simultaneously more efficient than their Egyptian counterparts. The lower level of efficiency is the result of inadequate supervision and middle management. We have this problem of middle management [and] supervisors, says Shamsi. We lack this level because of the education system.

Shamsi explains that students graduate with no vocational skills and require a minimum of five years of on-the-job experience to be prepared for a supervisory role. You pay a lot either by having your training center, Shamsi explains, or by having a lot of defects and downtime in production because they are not up to the standards.

If allowed, Shamsi says that textile producers would fill their supervisory levels with workers from East Asia.

While government programs such as the Industrial Modernization Center (IMC) are helpful, they fail to provide a long-term solution to the shortage of trained supervisors. We tried to use all these programs, says Shamsi. We have worked with the IMC. We made use of it; it was beneficial for us, but I couldn t say that we have achieved a project that will consistently supply the industry with these kinds of workers.

The Shamsi Group recently resolved a long-standing issue of unpaid debt to Banque du Caire in a transaction with Oasis Capital, a private equity fund. Under the deal, Oasis Capital purchased Banque du Caire s loan to Shamsi Group at a discount in exchange for a majority stake in the group.

The loan dates back to the late 1990s and unpaid interest on the debt had compounded – as a result of a stalemate with Banque du Caire for a number of years – to such an extent that it placed a heavy financial burden on the group.

In retrospect, Shamsi says that the lack of transparency in the market was the root cause of the issue. Shamsi Group, as well as many other businesses, borrowed money with the support of the government in 1996 to fund expansion. The loans were available to everybody, Shamsi explains, so everybody went to build factories and new facilities. Because of the absence of transparency, everyone ended up competing with each other.

In addition to expanding their retail outlets to the Gulf, the group is currently building a plant in the Nasr City Free Zone. The output of this facility will be dedicated for export, and Shamsi expects his company to grow to 5,000 employees by the middle of next year.

Topics: FJP

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