Textile firms’ share prices are surging, but the industry is still in the doldrums, reports Jacques Magliolo
MARKET experts play down last year’s 80 percent increase in textile industry share prices, saying the sector has “seen its good times and must now face the real world of Gatt, higher competition, strained profit margins and much-needed improvements in efficiencies”.
Says Lenco Holdings financial director Stanley Stubbs: “The sector’s rating dropped to a record low during the recessionary years and, therefore, last year’s share price movement was off an extremely low base.” He adds that it has taken a long time and much change for the companies to “look lean and mean”.
Since 1990 directors have implemented group restructurings, merged subsidiaries or with competitors, consolidated operations, mechanised to offset the effects of labour unrest, hired new management teams and reassessed product ranges to reduce the high cyclical nature of textile products.
By the end of that year, promises of a streamlined industry prompted numerous analysts to recommend the sector as “containing companies which should be regarded as recovery stocks with strong potential for high growth”. But it took another three years before share prices reacted and now the “fight to obtain concessions is being conducted to delay the implementation of Gatt”, says Stubbs.
Clothing analysts are, rightly, a worried bunch. Despite South Africa’s signing of the Gatt accord and thus the inevitable implementation of the agreement, most textile company directors are not changing strategies or even recognising that these could affect their companies.
One industry spokesman said:”The sector is in such an appalling state that businessmen are (or should be) embarrassed to admit that they are part of that industry.” To make matters worse, these directors have tried to adjust to years of economic and political instability through a number of major structural changes.
However, changes generally proved ineffectual. Despite all these alterations, industry problems mostly remain the same. Debt levels and interest payments continue to climb, share prices are under pressure and risk profiles worsen.
In essence, the expected synergistic benefits, economies of scale and greater cost efficiencies did not materialise and textile companies could find themselves the target of takeover attempts in the near future.
Experts say that the predicament directors find themselves in was initiated as far back as 1963, when import substitution policies were introduced.
From 1963 to 1974 the policies, not surprisingly, worked — the average annual growth in textile products was nine percent a year. However, latest figures released by the Textile Federation show that annual growth rates have since fallen; from 1975 to 1983 rates fell to three percent a year and subsequently declined to an annual two percent to 1991. From 1991 to end 1993 the rate fell even further, to a dismal -2 percent growth a year.
“The very nature of protective tariffs is an initial boost to the market it protects, but this causes quality standards to fall,” says a stockbroking-based economist. In turn, consumers either move to more expensive imported items or to cheaper synthetic products.
Other Federation statistics reveal that, between 1989 and end-1993, the volume of total fabrics produced in South Africa dropped from 652-million square metres to 455-million square metres.
Yet these figures do not seem to register as important. There are still experts who are adamant that the answer lies in increasing and not eliminating protection. They are advocating that import duties and quotas be raised, to “re-establish a reasonable domestic base from which to meaningfully launch a committed export drive”.
In addition to a tariff quota system the industry has recommended to government “to limit domestic price increases and to preserve the domestic textile and clothing market”.
“The improvement in share prices is indicative of a recovery in the sector and should not be tampered with,” says an industry expert, adding that “government should delay Gatt for at least two years or the sector will revert to a recessionary, second-rated one”.