ENHANCING COMPETITIVENESS OF KENYAN APPAREL

Trade and Competitiveness Global PracticeNairobi, September, 2015

Today’s Discussion: Kenyan Apparel

• Current situation worldwide and in Kenya• Constraints to Kenya’s competitiveness• Opportunities and green manufacturing• Green manufacturing implementation strategy• Progress to-date

WHO IS DOING WHAT IN THE WORLD

2

• Considered a key ‘stepping stone’ sector, apparel is overwhelming dominated by China which is not only large but has grown fast over the past 10 years.

• However, other developing countries are also developing a presence and showing similar signs of strong growth led by Bangladesh, Vietnam and India.

• Aside from these three, Cambodia is in the top 10 on value for knit apparel. But the fastest growing countries (in knit apparel) come from central America, with impressive 10-year growth rates: Nicaragua, 122%; Guatemala, 58%, El Salvador 55% (compared to Vietnam’s growth of 20%).

Source: Trade Map, International Trade Commission: http://www.trademap.org/.

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Billi

ons

China

0

2

4

6

8

10

12

14

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Billi

ons

Italy

Germany

Bangladesh

Vietnam

India

Knit apparelValue in US$ of top 10 exporters (2013)

GLOBAL APPAREL : TIGHTLY INTEGRATED VALUE CHAINS BRING MANUFACTURERS CLOSER TO END CONSUMERS

3

• Steady decline in apparel as % of total household consumption in EU and US• Annual growth rate by 2020: World (4%); Japan, EU, US (2%); Brazil, China, India (8%)• Buyers/manufacturers looking to capitalize on trade preferences like duty-free entry• Fast-Fashion’ and ‘Hyper-supply chain management’ focusing on adding value through

increased use of technology in design, and closer control over production innovation, branding, small batch production and sales to protect margins

• Growing trend towards a fully integrated ‘Farm-to-Fashion’ production system where buyers/manufacturers work closer to the entire supply chain to eliminate waste and improve overall efficiencies, and traceability.

• Growing consumer interest towards products produced in sustainable - ‘green’ manufacturing factories

Changing Trend in Relationship between Consumers and Manufacturers

PRODUCTION TRENDS IN THE APPAREL SECTOR

4

•Labor (low skill)

•Electricity•Imported fabric -supplied by buyer

CM

•Labor (low-semi-skill)

•Electricity •Imported-local fabric

FOB

•Labor (low-semii-specialized skill)

•Electricity•Imported-local fabric

Original Design

• Labor (low-semi-specialized skill)

• Electricity • Imported-local fabric• Local yarn/tread

Farm-to-Fashion

Current Production Trend in Kenya's Garment Sector

Current Production Trend in Asia and Africa (incl. Ethiopia and Uganda)

Majority of training activities in Kenya's training institutions focused on design/fashion

Source: Global Development Solutions, LLC.

GLOBAL TRENDS IN THE APPAREL SECTOR

5

Traceability: Growing consumer demand for traceable products increasing pressure on buyers and brand leaders

KENYAN EXPORT APPAREL: USA IS LION’S SHARE, BUT HEADROOM TO CAPTURE MORE GAINS FROM AGOA

Source: UN Comtrade, 2014 (2010 was most recent year for data availability

6

US dominates as destination for Kenyan apparel• Decline in exports to the US during 2009 & 2010• Now picked up to over US$379 m in 2014• 70% of Kenyan apparel firms have a US-dominant market orientation (i.e. at least 80% of

their output is sold to US markets through AGOA)• In 2014 Kenya captured just 0.17% of the US apparel market (US market USD 225 billion)

US Apparel import market share (2014)Kenyan Apparel Top 5 export markets (2006-’10)

Source: US ITC trade dataweb, 2015

China56%Vietnam

17%

Indonesia9%

Bangladesh9%

Mexico 7%

Kenya1%

Lesotho1%

Mauritius0% Swaziland

0%Madagascar0%

USD millions

CURRENT STATE OF THE GARMENT SECTORKENYA’S APPAREL EXPORT PRODUCTS

7

Currently Kenya’s largest apparel export to the US is women’s and girls’ cotton trousers/slacks/shorts

Source: Office of Textiles and Apparel, International Trade Administration, US Department of Commerce (2014) http://www.otexa.ita.doc.gov/scripts/tqads2.exe/catpage

6 of Kenya’s top 10 exports are cotton products; 4 are manmade fiber products

CURRENT STATE OF THE TEXTILE/GARMENT SECTORS KENYA’S TEXTILE SECTOR

8

52 textile mills, of which only 15 are currently operational at less than 45% capacity utilization

Majority of export quality fabric manufactured in Kenya is made from imported fibers due to poor quality and high trash content in local lint

Composition of a Cotton Fabric in Kenya

Labor: ≈12% Electricity: ≈25% Material: ≈24% Maintenance: ≈6% OH: ≈33%

• Cost of electricity as a major cost driver• High maintenance and OH costs due to old

equipment• Low labor skills and productivity• High cost of imported material and low quality

of local fiber requiring additional processing

CURRENT STATE OF THE TEXTILE/GARMENT SECTORS KENYA’S GARMENT SECTOR

9

Approximately 21 large apparel companies operating in the EPZ, and 170 medium and large companies operating outside the EPZ , with over 70,000 small- and micro-enterprises in the sector

The export oriented garment sector employs an estimated 37,758 workers through the EPZ

• High cost of imported material (fixed cost due to absence of export quality fabric in Kenya)

• Only areas where cost and quality can be managed to improve competitiveness are in labor and electricity costs

Composition of a Standard T-Shirt in Kenya

Labor: ≈8% Electricity: ≈5% Material: ≈64% Maintenance: ≈2% OH: ≈21%

KENYA’S COST AND SKILLS CHALLENGE: COMPARING WOMEN’S JEANS PRODUCTION IN KENYA AND CAMBODIA

10 Source: Trade Map, International Trade Commission: http://www.trademap.org/.

Not quite making the cutComparative production and delivery costs ofwomen’s jeans

Low technical skills and high cost of labor

High trade logistics costs AGOA

effect

KENYAN APPAREL: CONSTRAINTS TO COMPETITIVENESS

11

• Exorbitant cost for work permits and time required to recruit expatriate managers (Kenya: $2,400; Ethiopia: $62)

• Cost of energy too high compared to regional and global competition

• High cost and time associated with logistics

• Low productivity of local labor force (change over takes 2 – 4 days in Kenya versus 2 hours in Bangladesh)

• Need for task specific training, including multi-tasking skills

• Long order-to-delivery times (30-90 days)

• Low energy efficient factories (opportunity to reduce energy consumption by up to 26% and cost by 49%)

Physical infrastructure

Kenyan Apparel Competitiveness

Skills and capabilities

Policy and Regulations

Innovation and

technology

• High cost of labor ($165/mth for a sewing operator in Kenya vs $48 in Ethiopia)

• Costs increased 30% in the past three years

CONSTRAINTS TO COMPETITIVENESS: PHYSICAL INFRASTRUCTURE

12

- 1,000 2,000 3,000

Kenya

Ethiopia

Lesotho

South Africa

China

Bangladesh

India

Vietnam

Cost to import(USD/container)Cost to export(USD/container)

- 5 10 15

Kenya

Ethiopia

Lesotho

South Africa

China

Bangladesh

India

Vietnam

Documents to import(no.)Documents to export(no.)

Comparison of the Number of Documents Required for Import and Export among Competitors

Comparison of Import/Export Costs among Competitors (USD/Container)

Country USD/kWh

China 0.07

Ethiopia 0.06

South Africa 0.04

Kenya 0.13

Comparative Electricity Costs

More than 2 times the cost in Ethiopia

Doing Business Annual Report, 2014.

Doing Business Annual Report, 2014.

http://www.numbeo.com/common

0 20 40 60 80

India, Kolkata

India, Mumbai

Kenya, Nairobi

South Africa. Pretoria

China, Shanghai

Vietnam, HCMC

Time Required for One‐Way Job Commute

Time Index (in minutes)

CONSTRAINTS TO COMPETITIVENESS: INNOVATION AND TECHNOLOGY

13

Average Time Elapsed between Order and Delivery of Imported Fabric

Source: Global Development Solutions, LLC.

Sample Energy and Cost Savings from Equipment/Technology Upgrade:  Integrated Textile‐Garment Factory 

Total  Savings % Savings1 Energy Consumption (kWh) 626,439          160,968                    25.7%2 Cost (Ksh) 27,200,000    13,411,713              49.3%3 Cost (USD) 320,000$        157,785$                  49.3%

4 Other Savings HFO (liters) Fuel wood (tons) Savings5 Consumption (liters) 174,051          649                           6 Cost (Ksh) 10,652,842    2,100,578                8,552,264

7 Cost (USD) 125,328$        24,713$                    100,615$    Global Development Solutions, LLC (GDS)

Type of equipmentAge (yrs)

Capacity Improvement

1 Warper Machine Ezd 38 100%2 Sizing Machine –Sucker Lc3 39 400%3 Folding machine  38 150%4 Packing machine 38 167%5 Carding machine 38 300%6 Drawframes 38 380%7 Speed frame 38 355%8 Ring frames 38 1567%9 Twister 38 100%

Examples of Capacity Improvements Associated with Equipment Upgrading in Textiles Equipment in Kenya

Operating Outdated and Inefficient Equipment

Source: Global Development Solutions, LLC.

Potential Energy and Cost Savings

CONSTRAINTS TO COMPETITIVENESS: SKILLS AND CAPABILITIES

14

Kenyan labor: low value for money reflecting poor skill level given current wage rate

• Difficult to find qualified management staff

• Need to rely on high cost foreigner

• Available training courses not geared towards training qualified managers

71%

29%

33%

86%

14%

57%

43%

50%

14%

14%

14%

57%

17%

0% 20% 40% 60% 80% 100%

Administrative

Management

Floor supervisors

Line workers

Repair/maintenance

Difficult to find

Possible to find locally

Readily available

Perceived Availability of Labor

0 0.2 0.4 0.6 0.8 1

Kenya

Ethiopia

Lesotho

South Africa

China

Bangladesh

India

Vietnam

Ratio Minimum wage: value added/work

Ratio Minimumwage: value added/worker

Source: Doing Business, Annual Report

CONSTRAINTS TO COMPETITIVENESS: SKILLS AND CAPABILITIES (CONT.)

15

• Task specific training required in all aspects of production

• Multi-skilling (ability to operate more than one type of equipment) lacking due to equipment-specific training programs in Kenya

14%

17%

29%

29%

17%

86%

50%

71%

71%

83%

33%

0% 20% 40% 60% 80% 100%

Administrative

Management

Floor supervisors

Line workers

Repair/maintenance

Substantial training req

Task specific training req

No training needed

Perceived Labor Training Needs

57%

29%

43%

57%

50%

14%

14%

29%

14%

14%

14%

17%

0% 20% 40% 60% 80% 100%

Administrative

Management

Floor supervisors

Line workers

Repair/maintenance

Specialized training not available

Available but poor quality

Good quality training but expensive

Good quality training through localinstitution

33%

29%

43%

43%

Perceived Quality of Local Training Institutions

SAMPLE ENERGY AUDIT AND POTENTIAL ENERGY/COST SAVINGS

FIERCE COMPETITION FROM NEIGHBORING COUNTRIES FOR FOREIGN INVESTMENT AND EXPORT MARKET SHARE

17

• Market and competitiveness gap between Asia and Africa too large, but raising labor costs in China create unanticipated market opportunities for Kenya

• Immediate threat from Ethiopia, Uganda and possibly Tanzania to attract both investors and buyers

• Economic fundamentals for Ethiopia, Uganda and Tanzania (to some degree) are potentially more attractive for investors and buyers than Kenya, but these countries are expected to target medium and low end of AGOA’s market segment

• Regional competition for same pool of investors and buyers to expand production and local value added in Africa (to take advantage of AGOA and hedge against rising costs in Asia)

• Renewal of AGOA benefits signed into law by President Obama on 29 June 2015 for 10 years

• Ethiopia, Uganda and Tanzania in varying degrees can offer investors and buyers an entire integrated value chain from ‘farm-to-fashion’; Kenya has the option to do the same, but structural constraints in the supply chain make Kenya less attractive as a destination

OPPORTUNITIES EMERGE FOR SUSTAINABLE, GREEN PRODUCTION TO CAPTURE PREMIUM MARKETS

1818

Need for a paradigm shift in developing the textile and garments sectors• Develop a unique country and brand image • Introduces products which regional competitors

are unable to produce or lack the strategic vision and capability to develop

• Produce products which are not time sensitive but attract premium prices

Africa’s Hub for Innovation

and Green Production

Focus on low-volume, high-margin, “Green

Product” market segment

Market Opportunities• Global Green Market Segment expected to reach US$3.5 trillion by 2017• US green apparel market reached $5 bln in 2013. UK eco-fashion industry: £150 million• Small batch mass customization, particularly through e-commerce market to reach $327

billion in the US by 2016 (Forrester Research, Inc.)

SETTING THE PACE FOR GREEN MANUFACTURING IN KENYA

“Mr. Speaker, Kenya has been recognized as a global leader on clean energy with over 80 percent of the energy mix being green. It is, therefore, imperative that we position our economy as a green industrial hub, leveraging cheaper and cleaner geothermal power, steam and water to competitively produce goods of high quality for the region as well as the global market.”

Recent Budget Speech

WHAT IS ‘GREEN’ MANUFACTURING?

‘Green’ Manufacturing (two definitions):1

• Manufacturing of ‘green’ products used in renewable energy systems and clean technology equipment

• ‘Greening’ of manufacturing – reducing pollution and waste by minimizing resource use, recycling and reusing waste, and reducing emissions

1. Renewable Energy & Clean Technology: Key to a Revitalization of US Manufacturing & Job Creation. Clean Technica, April 15, 2012.

WHY ‘GREEN MANUFACTURING’

Fastest Growing Premium and Niche Market Segment • ‘Green’ consumer market estimated at 15 – 24% of consumers

in developed markets• US Green apparel and accessories market ≈USD 5 billion

annually1

• Annual revenue of major global apparel brands between USD 1.5 billion to USD 27 billion moving towards ‘green’

• Now is the time to take advantage of ‘first-mover’ benefits in this growing niche

• Due to increasing stakeholder scrutiny and in order to meet internal CSR goals, global apparel companies require measurable, traceable, and verifiable vendor practices

• Most global value chain greenhouse gas (GHG) emissions are outside an apparel company’s direct control

• Apparel companies now focusing energy and emissions reduction efforts on company-owned offices, stores, distribution warehouses, transportation, and direct factory facilities

• Next step is to focus on energy and emissions efficiency among suppliers 1. http://www.usatoday.com/story/money/business/2013/04/28/the-rise-of-green-fashion/1996773/

WHO ARE THE LEADERS IN THE ‘GREEN’ MARKET SEGMENT?

23

KEY CHARACTERISTICS REQUIRED FOR DEVELOPMENT BRAND-KENYA

Key characteristics required to develop Brand Kenya:

Best raw material for fabric and trims and packaging with lowest environmental impact

UtilitiesStable source of electricity at competitive prices

Minimum water and energy input and usage High internet connectivity Minimum pollution and GHG emissions during manufacturing Stable and cost competitive Use of renewable resources Manage manufacturing process and controls from fabric‐to‐garmentTight control over wastewater, discharge, pollutants and energy useThird party monitoring of environmental and social complianceMinimize GHG emissions and environmental impact Optimize transport routes and use of rail, truck and air, and consolidated shipment

Global Development Solution, LLC

Design

Manufacturing

Transportation

Internet

Key Characteristics for Developing a Hub for Green Products and Crowd Design Market Segment 

IMPLEMENTATION STRATEGY: OVERVIEW

24

1. Re-branding Kenya Through Innovation and Competitivenessa. Kenya, Africa’s Hub for Innovation and Green Production b. Supporting Sector Competitiveness through Improved Electricity Pricing and Quality

2. Labor Skills Development and Productivity Improvementa. Training levyb. Center of Excellencec. Term limits on expatriate work permit

3. Institute for Textile and Apparel Development (ITAD)a. Defining the role and mandates of the ITAD

4. Buy Kenyan Program a. Public sector procurement of Kenyan products

5. Performance Monitoring and Impact Assessmenta. Program performance and impactb. Performance of service providers

6. Draft Budgeta. Implementation activities excluding program management costsb. Recalibrated subsidy rate after equipment/technology upgrading

RE-BRANDING KENYA THROUGH INNOVATION AND COMPETITIVENESS

25

1. Kenya, Africa’s Hub for Innovation and Green Production (1)a. Prepare draft policy statement b. In collaboration with SUNREF/KAM, finance

implementation of energy audit for entire sectorc. Prepare business plan to upgrade key equipment and

technology d. Engage marketing/media agency to promote policy

targeting consumers in US and European marketse. Invite major buyers/producers to Kenya to showcase

program2. Access Concessionary Development and Commercial

Financinga. In collaboration with SUNREF/KAM, and the World Bank,

identify and negotiate access to concessionary financingb. Through ACTIF and SUNREF/KAM develop a sector-wide

promotion program to upgrade equipment and technologyc. In collaboration with SUNREF/KAM, develop standard

business plan package to support sector stakeholders apply for concessionary financing

(1): Premium products produced under ‘green production ‘ label can fetch more than twice the price of conventional products

SUNREF Program ‐ AfD:  Funding Phase 1 2012 ‐ 2014

1 Nature of funding TA (grant)and credit line2 Total distursement $40 million 3 No. of loans made 7 (1)

Highest:   $10 million Lowest:  $1 million (2)

5 Lending intermediary  Cooperative Bank

Phase 2 2014 ‐ 2016 (3)1 Nature of funding TA (grant)and credit line

€80 ‐100million USD108 ‐ 135 million

3 Lending intermediary  Cooperative Bank (4)(1) Energy sector (5); dairy (1); textile (1)(2) Minimum about is $100,000, but negotiable with lending bank (3) Funding expected to be available by Oct 2014(4) KAM in negotiation with two other local banks Source:  Global Development Solutions, LLCbased on interview with KAM

4 Loan amount/project

Total fund 2

LABOR SKILLS DEVELOPMENT AND PRODUCTIVITY IMPROVEMENT

26

1. Training Levy a. Redefine conditions for approval and timing of rebateb. Define range of training to be covered by training levyc. Partner with buyers, key investors, and leading textile/garment training institutions to

develop mentoring programd. Develop and implement training audit program

2. Center of Excellencea. Textile/apparel sector currently represented by Kenya Association of Manufacturers

(KAM) which covers entire manufacturing sector with limited knowledge of and network in the industry

b. Need exist for sector-specific organization that can respond to changing needs of the sector with strong industry experience

3. Term Limits on Expatriate Work Permita. Identify range of specific skills not available in the Kenyan labor marketb. Prepare recommended list of labor skills required to create innovation and green

production hubc. Match expatriate labor needs with list for training levy scheme to utilize training levy

to mentor local workersd. Reduce cost and time required to issue work permit (define default period for

automatic approval)e. Place term limit on recruitment of expatriate on condition that sufficient skills is

developed through training levy within timeframe of work permit

INSTITUTE FOR TEXTILE AND APPAREL DEVELOPMENT (ITAD)

27

Need to institutionalize program support functions to ensure sustainable support and growth of the sector

1. Defining Role and Mandates of the ITADa. Draft framework and organization structure, roles and mandate of ITADb. ITAD to be a public-private institutionc. Prepare draft budget required to support the institutiond. Develop consensus regarding ITAD with sector stakeholderse. Invite foreign manufacturers, buyers and key sector leaders to serve on the board

of ITAD to help guide the development and promotion of the innovation and green production hub

Sector Support Program

Country Branding

PR‐MarketingInvestor/buyer 

awareness raising

Int’l Board Incl. investors/ 

buyers

ITADInstitutionalize program 

activities to ensure sustainability

International investors and partnerships

Access to information on int’l market and technology trends

Product and market targeting/diversification

Global Development Solutions, LLC (GDS)

BUY KENYAN PROGRAM

28

1. Public Sector Procurement of Kenyan Products for public service agencies (1)a. Draft policy with conditional restrictions on import of uniforms by all public

service agenciesb. Identify demand for uniforms by all public service agenciesc. Sponsor contest among local design companies to develop new uniform designd. Public service agencies to select design and quality of uniformse. Public tender for local companies to compete for contract

(1) To help avoid price fixing, local suppliers would be required to supply uniforms priced within 20% of the price of currently imported uniforms of equal quality. In addition, a sunset clause is recommended where import restrictions will be lifted after five years, where public service agencies will have the option of purchasing imported uniforms, but only through a public tendering process which includes local Kenyan companies.

PERFORMANCE MONITORING AND IMPACT ASSESSMENT

29

1. Program Performance and Impacta. Number of direct and indirect jobs createdb. Increase in sales (volume and sales)c. Market and product diversification d. Improved energy efficiency

2. Performance of Service Providers Prepare database to monitor performance of service providers

PROGRESS TO DATE

Benefits for Participating Textiles/Apparel Companies• KAM supervised energy audit of entire factory • Recommended changes specifying equipment type, potential

energy and cost savings, and return on investment• Free business plan preparation assistance to apply for

concessionary loan • Access to concessionary loan• Facilitation and matchmaking with potential buyers

Implementing Kenya’s Green Manufacturing Strategy • Factory level energy audit• Improving the energy audit process • Engaging local commercial banks to access concessionary loan • Business plan preparation

Energy auditsEnergy audits

DONOR FUNDS

Technical support

Financial support

(SUNREF) Textile & apparel firms

Program Partners and Support

Progress Report: • 4 energy audits

completed• 1 operational

with bank loan• 2 completing

business plan• 4 companies in

pipeline for energy audit

MARKET OPPORTUNITIES AND POTENTIAL SPILLOVER EFFECTS

Textiles/ApparelEnergy Efficient/’Green’ Manufacturing : - Reduced electricity use/waste- Conversion to biomass boilers - Environmental conservation - Cost savings/competitive prices- Increased demand for local lint

Green Product Markets- Global green marketing segment:

≈USD 3.5 trillion by 20171

- US ‘green’ apparel market: ≈USD 5 billion

- Market share: 15 – 24% of consumers in developed markets

Ginning Sector- Increased demand for

local cotton cloth- New investments to

revitalize sector- Increased employment

Cotton Sector- Increased demand for local

cotton- Increased employment- Introduction of new seed

varieties, incl. long fiber variety (fine shirting material)

Domestic and Foreign Investments

Spillover Effect

1. Promotional activities aimed at transforming consumer perception about brand. Global Marketing: A Global Strategic Business Report, Global Industry Analyst, Inc. April 14, 2011.

Thank you