logo logo

Made for the USA

Business Today, Egypt, September 2005

Made for the USA

Nine months into the first experiment in free trade with the United States, few participating manufacturers have reported a jump in production - most haven’t shipped unit one. Export leaders took stock of progress and made recommendations at the first Qualified Industrial Zones Conference.

ANY GARMENT BOSS’ high-flown dreams of quickly beating a restrained China at its own game have quietly settled to earth since the December 14, 2004 signing of the Qualified Industrial Zones free-trade agreement with the United States and Israel.

The QIZ deal allows Egyptian manufacturers in designated zones to export any goods to the United States duty free, provided an Israeli company furnishes one third of the required 35% content of local origin (11.7% in total) and both manufacturers finance a minimum 20% of the costs of production.

These costs can include wages and salaries, original content, research and development and marketing and advertisement.

Nine months after the creation of a joint committee to regulate membership and enforce the rules, however, few of the hundreds of clothing manufacturers that quickly signed up have started exporting. Other promising industries, most notably the overlooked agribusiness sector, remain hindered by logistical difficulties and an inadequate supply of mandated components.

On June 22, twelve major players in the manufacturing sector gathered to discuss implementation problems, provide guidance to prospective QIZ members and explore strategies for future growth at the first Cairo QIZ Conference, organized by MarkStrI, a leading Egyptian marketing and event-organizing firm, and sponsored by the Ministry of Foreign Trade and Industry.

Panelists included policy experts as well as companies whose operations are directly affected by the agreement. Dr. Ali Awni, director of the QIZ Unit at the Ministry of Foreign Trade and Industry, offered a brief sketch of active companies, most of which operate in the Alexandria area.

(Minister of Foreign Trade and Industry Rachid Mohamed Rachid announced last month after returning from a trip to Washington, DC, that US trade officials had agreed to add Mahalla El-Kobra and Ismailia to the list of QIZ zones.)

“At the moment, garment exports to the States are at around $500 million.We expect this to be tripled in thenext two years.”

“Remember, the impetus for us signing the QIZ was the end of the [multi-fiber] quota, so you can expect most companies to be from [the] textile apparel [manufacturing industry], mainly ready-made garments. Eighty percent of the companies are from [the] ready-made garment [sector],” Awni said. “What we are trying to do is promote more companies from other industries that could benefit from the QIZ to register with us. Unfortunately, only 40% of the companies had previous exporting experience, so that obviously [poses] challenges regarding upgrading and raising the export readiness of the export companies.”

Awni referred to the biggest obstacle to rapid statistical growth of QIZ exports: the fact that only 173 out of the 464 companies that the authority had licensed by August have ever exported to the United States. The remainder will need time to reorient their production for the American market and negotiate logistics; many are still setting up in the new zones.

The practical advantages for US retailers extend to more than just cost-cutting; Egypt’s location has proven particularly useful in the rapidly changing ready-to-wear market.

According to Mohamed Kassem, chairman of the World Trading Co., who was previously a top Egyptian trade official, “Transit time from Egypt to the East Coast is anywhere from 15-20 days, while it takes an Indian exporter about 30 days to reach the US, and it also takes China that long.”

Within Egypt, the sector faces some inherent problems. Kassem identified the interaction of more nimble clothing manufacturers with the slow-moving textile makers as a serious obstacle.

“We have a very old - by old I mean old in age and old in appearance and everything else - spinning and weaving industry that is still predominantly owned by the government and we have a garment industry that’s young, energetic, very dynamic but unfortunately is totally dependent on the importation of yarn and fabric from overseas, because our upstream industries are not capable of supporting the garment industry’s needs,” Kassem said.

Bassem Sultan, the managing director of Dyetex, confirmed the impact that the agreement has already had on textile manufacturers in Alexandria, and subsequently, on other companies that conduct business with the manufacturers. He is confident that the industry will continue to expand, even in the face of other manufacturing heavyweights such as China and India.

“We are planning to double our production capacity within one year. We already started on the expansion plan, also we are upgrading in investing in our dyeing facilities.” For the industry as a whole, he said that, “At the moment, garment exports to the States are at around $500 million. We expect this to be tripled in the next two years.”

In order for this growth potential to be met, in the textile industry or any other, the public and private sectors will have to address a common stumbling block: an inadequate supply of quality, attractively-priced Israeli components.

“Most of the factories at the moment have difficulties [when it comes to finding] enough material that can cover the 11.7[% Israeli components required by the agreement],” Kassem said.

His suggested solution: that the US “lower the percentage needed from Israel or that the Israeli manufacturer increase their [production] capacity to be able to meet the increasing demand from the Egyptian side, which will increase more in the future,” an approach that echoed several complaints from attending manufacturers that Israeli components are too few in number -and are disproportionately overpriced.

The agribusiness industry, representing no more than 7% of QIZ participants, is hindered by problems much closer to home, particularly in creating a sophisticated response to the demands of US consumers. According to Doug Anderson, an industry veteran with long experience in Egypt through the Agriculture-Led Export Business program and now vice-chairman and CEO of Kato Group, success lies in identifying particular commodities and keeping a sharp eye on the cost of doing business.

The olive business, for instance, is likely to see exponential growth in the next five years. Egypt is currently the eighth-largest olive grower in the world. According to Anderson, there are now enough trees cultivated that by 2010, Egypt will be the third-largest grower of olives in the world. Because of the extended growing season, the yield is about three times larger than those in Southern European countries that border the Mediterranean.

Local table olive and olive oil producers have found some success in selling 18 kilogram and larger containers for wholesale and restaurant use - Egypt gets $3.98 a kilogram, while the world average is $3.30. But of the $329 million that the US imports in retail packaging, Egypt only exports $34,000. The problem? Unattractive packaging.

Anderson explained, “Packaging is an issue here: glass bottles that might look good on a retail shelf are just not available here in Egypt.” He added that producers could buy more expensive bottles without erasing their profit margins. He assured that even with “increased cost of packaging, [producers would still have] plenty of room to increase exports of olive oil.”

Anderson pointed to the seed registration process as an institution that has not kept pace with the government’s trade reform initiatives. He cited the delays caused by the seed variety registration process as a limiting factor in the ability of local agribusiness to begin cultivating vegetable strains for the US.

Of the process, he said, “I’ve never seen it anywhere else - it makes it difficult to grow processing varieties [as opposed to ones for the table].” Anderson added that businesses fail to adapt to US consumer tastes and recognize that “consumers are picky: they don’t like starchy peas that are the size of a marble.”

Anderson urged anyone in attendance with governmental leverage in agriculture to help address the problem.

Also at the conference, Awni implied that the QIZ deal was a step in the right direction toward a free-trade agreement (FTA) with the United States, but Jerry Mallory, a trade policy officer from the US embassy in Cairo, spoke in more cautious tones.

“There is no timeline right now [for an FTA]. There have been talks at very high levels about this, but I think you can safely assume that the QIZ will be operational, or will be advantageous, for a number of years,” Mallory said.

He went on to warn attendees that the arrival of a FTA would not necessarily be beneficial to all exporters, and that the QIZ may even have its advantages. “Even if an FTA were to happen in the near future, again, the United States would possibly be keeping higher levels of tariffs on FTA exports to the US in apparel and garments than it would under the QIZ,” he said.

He advised clothing manufacturers to take advantage of the present opportunities in the US market. In January 2005, after the end of the Multi-Fiber Agreement, Chinese exports flooded the US market. Under the WTO, countries including the United States and European Union members took measures in May 2005 to safeguard their markets because the surge from China had been so high. For example, the import of cotton pants from China had increased 1,500% in the first five months of 2005.

Mallory urged an interested audience that “US retailers are now looking for alternatives to Chinese-produced garments, because they don’t want to put all their eggs in one basket So, retailers are looking to other countries and Egypt has that natural advantage of the duty-free system under QIZ.”

The consensus of the panelists and participants was that trade relations were moving in the right direction, but that businesses need to take advantage of available information to make sophisticated plays for the US market.

In December, the conference’s organizers plan to check the progress of the agreement again with the next installment of the Cairo QIZ Conference Series. Says Ashraf Naguib, chief commercial officer of MarkStrI, “Egypt will not be marginalized, be it socially, culturally or economically, and we will benefit greatly from the QIZ initiative and globalization. Moreover, Egypt has proven that it understands the importance of reliable economic frameworks, predictable economic policies and open commodity and finance markets for all parties involved.

“The private sector is the driving engine of economic development, and the QIZ will play a vital role in that.”

With attendance at the day-long conference at well over 200, Naguib says demand is strong for the second round, which will be “all about business matching, not just for the 11.7% Israeli content, but from other nations including China and Turkey.”

 source: Business Today