Growing the local textiles industry

WiIlie Fourie, strategic business unit head of clothing and textiles at the IDC. (Lisa Skinner)

WiIlie Fourie, strategic business unit head of clothing and textiles at the IDC. (Lisa Skinner)

These range from producing natural or synthetic fabrics, to creating home décor, from leather goods to manufacturing clothes.

Specifically, the unit focuses on synthetic fibre production; spinning yarn, knitting and weaving fabrics; dyeing, printing and finishing fabrics; non-woven textiles; home textiles; clothing manufacturing; footwear; leather tanning, and leather products.

Willie Fourie, strategic business unit head of clothing and textiles at the IDC, says that historically this has been a difficult sector in South Africa.

"There are a number of challenges that have negatively impacted the sector for many years. These include both legal and illegal imports, under-invoiced goods or incorrectly declared items, and cheaper products from the East."

The IDC is working with government and looking at areas the country should compete in. For Fourie, the apparel side of the industry has many exciting opportunities.

"Our clothing companies are doing relatively well.
There are quite a few who are making a profit and they are the ones that can typically supply goods to retailers at short notice, have quick turnaround times, are flexible to make changes to designs, and have close relationships with the retailers."

Competitive drive
Fourie feels that the industry should be competitive on government contracts in terms of the Preferential Procurement Policy Act that oversees uniforms, overalls, and other items from local suppliers. The fabrics used also need to be locally produced.

He adds that the footware sector is also doing well for similar reasons. "It is easier to do business with a retailer that is just down the road as opposed to 12 hours away by plane. These retailers are willing to pay a small premium for the convenience and flexibility that come from working with local manufacturers."

But one needs to look at why the South African commodity products are not competitive with those supplied by companies from the East. Labour costs seem to be one of the biggest areas of concern.

"Looking at the direct costs of labour per hour and how long employees work are two key areas. However, the indirect costs also need to be taken into account.

"Many countries receive subsidies because the clothing sector is the cheapest one to create jobs. Currency fluctuations also result in larger orders being placed when the rand is strong and when those Asian manufacturers are in a position to create the economies of scale to produce items quicker and more cost-effectively," he says.

He admits that a portion of items will always be imported, but says the split needs to be more focused on local. And although it is difficult to give exact numbers, he estimates that currently only 25% of all products used come from local manufacturers.

Another problem is the informal and illegal trade sectors that are impacting on retailers.

"More formalisation and more legal trade need to come in. The IDC is working closely with retailers, government, and other industry players to see how we can assist on this front. Currently, the IDC is in talks with the industry to create a compliance centre that will assist officials with valuations on imported goods quickly and effectively."

The greater good
According to Fourie, there are a number of economists who feel that South African manufacturers are not competitive in this sector. But, he points out, one needs to look at the sector and see why South African retailers are essentially creating jobs in other countries by continuing to import in such high numbers instead of buying local.

"Essentially, stakeholders need to work together for the greater good of the industry. And while people across retail, manufacturing, and labour are prepared to collaborate more, there are still issues with non-compliant manufacturers in South Africa. This is impacting on those people who want to do things right but they have to compete against cheap imported products and local operators who only want to make money quickly."

Fourie admits that this is not an easy problem to solve and one that has the potential to result in job losses if non-compliant manufacturers are simply closed down.

Getting funding right
"From our perspective, we will only fund companies who are compliant. Companies are selected based on economic merit in terms of sustainable profitably or their ability to become profitable on a sustainable basis. And while we have funded a number of businesses in distress, they have all ticked the right boxes."

These boxes include having a strong management team and access to the right markets. With the IDC focusing on development finance there is always a mix between successful businesses and ones that are struggling.

"We want to see commitment of the owners of a company in terms of the investment they are prepared to make. The balance sheet must also be robust enough to withstand shocks. Retail is a cyclical sector and local manufacturers need to be able to go through the lows of the cycle especially when the currency falls to the R7.50 level."

The IDC takes a holistic view when it comes to the funding process. It sends a team to an applicant and typically spends three to five days with management, goes through the factory, speaks to customers, and interrogates the financial statements. While the turnaround times vary depending on the complexity of the transaction, the IDC aims to have completed the process within 15 days of receiving all the information.

"From receipt of the application to the transfer of funds we do not want to take longer than six weeks. Our main strategic focus is on job creation. If a manufacturer has the potential to create a lot of jobs then we will examine how best to assist them," says Fourie.

The South African prognosis
The IDC is also working closely with the department of trade and industry to ensure the funding happens as it should. The aim is to assist local companies to become more competitive thereby increasing the competitiveness of the entire industry.

"We also provide funding for the modernisation of factories to make them more efficient. Being government-owned, we feel that our strategy is aligned to what government wants to accomplish in the sector. There is real potential to create a regional value chain into the rest of Africa, for example, cotton that is grown in other African countries can be converted to garments and sold within the region."

Fourie also says that within the sub-Sahara Africa region, South Africa is the leader in terms of technology used in the sector and the initiatives in place around equipment, factories, methodologies, and so on.

"In terms of textiles, South Africa has good manufacturing plants and equipment but factors such as rising fuel costs and high electricity prices are still impacting prices in the end. We have seen local manufacturers evolve and be more open to suggestions of how to adapt to different market conditions. The companies who are doing well are the ones willing to change and learn from the changing environment," he concludes.

Who should apply for finance?
New or existing companies within the textile and clothing sector that need funding of between R1-million and R1-billion. Funding can be structured utilising an array of instruments including:

• Debt/equity
• Quasi-equity
• Guarantees
• Trade finance
• Bridging finance
• Venture capital

The funding will be structured in the most appropriate manner to meet the business. Structuring options include:
• Funding term: short-, medium- and long-term loans are payable; and
• Payment holidays: this can be negotiated where applicable, allowing for periods where no payment need to be made on either capital or interest.

Application for funding should be in writing, including an executive summary and a business plan. The minimum requirements for being considered for financing are:
• Security. The form and nature of which will relate to the specific circumstances;
• Compliance with international environmental standards;
• Shareholders/owners are expected to make some financial contribution;
• The project/business must exhibit economic merit in terms of profitability and sustainability; and
• The IDC does not re-finance fixed assets since because it aims to expand the industrial base.

This article was supplied and approved by the Mail & Guardian's advertisers. It forms part of a larger supplement.

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