1. GROUP # 1: JORGE CARRION EDUARDO GARCIA DIEGO SIBRIAN

2. AGENDA ABOUT SOUTH AFRICA(Geography, Society, Politics) NATIONAL ECONOMICS PERFORMANCEI.- COUNTRY ANALYSIS OF NATIONAL COMPETITIVENESSANALYSIS GLOBAL TEXTILES AND APPAREL INDUSTRY TEXTILE AND APPAREL CLUSTER IN SOUTHAFRICAII.-CLUSTER CLUSTER COMPETITIVENESS DIAMOND ANALYSISANALYSIS 3. COUNTRY ANALYSIS: GEOGRAPHY 4. COUNTRY ANALYSIS: HISTORYIn 1652, Dutch settlersestablished an outpost of the Dutch East India Company at the Cape ofGood Hopean important stopover along the trade routes to the East 5. COUNTRY ANALYSIS: HISTORY The ports Cape Town andWith the construction ofDurban, are the main 2 the Suez Canal in entry points for incoming 1869, however, traffic shipments to the between Europe and AsiaSouthern Africa region,no longer needed to but are very far from navigate around southern major markets in Europe Africa.and North America. 6. COUNTRY ANALYSIS: HISTORY The discovery ofdiamonds in 1867 andNatural resources include gold in 1886 stimulated coal, ironrapid economic growth in ore, phosphates, and the 19th century, althoughcopperthe economy has sincebecome more diverse. 7. COUNTRY ANALYSIS: HISTORY 8. COUNTRY ANALYSIS: HISTORY 9. COUNTRY ANALYSIS: HISTORY 10. COUNTRY ANALYSIS: SOCIETYPopulation:49 Million peopleMedian age:24.4 years (AIDS - 18% adult prevalence rate)Urban population: 60%Human DevelopmentIndex: 125thGDP per capita:79thRacial categories: - African (80%) - Ethnic groups => Zulu, Xhosa, and Sotho - White (9%) - Coloured (9%) - Indian (2%)South Africa has a long history of racial segregation, which was institutionalized as the official state policy of apartheidfrom 1948 to 1994. 11. COUNTRY ANALYSIS: POLITICS1994:- First free election.- All residents were permitted to vote regardless of their race.- Nelson Mandela was elected President.1999:-Thabo Mbeki succeeded Mandela.2008:-Thabo Mbeki was ousted in internal party disputes.-Macroeconomic policy orientation had not improved opportunities fordisadvantaged groups.2009: -African National Congress (ANC) elected Jacob Zuma.-There is disappointment among poor Africans about the slow pace of change intheir position since 1994.-But the ruling ANC is in a long-running alliance with the Congress of South AfricanTrade Unions (COSATU) and the South African Communist Party (SACP), so there isnot a threat.- Domestically, the government will continue to confront the ongoing HIV/AIDSpandemic and persistent economic inequality. 12. NATIONAL ECONOMIC PERFORMANCE:GDP AND GROWTHGDP per capita:- $12,450 (in 2006 at PPP). (Exhibit 1 and 2)Real GDP:- $455.2 billion (PPP at 2005 prices). - Accounted for 65.6 % of the combined GDP of all economies in the Southern Africa region.1994 to 2004:- Real GDP grew at a compound annual growth rate of 3.1 percent. - The average annual growth rate in labor productivity was 5.5% - Decline of labor force in 0.6 million workers (-3.7%)2004 to 2008:- Economic growth has since accelerated to 4.6 percent - The average annual growth rate in labor productivity was 2.2% - Expansion of labor force in 1.7 million workers (+10.7%)The post-2004 acceleration in growth has been driven mainly by domestic demand and has been financed through a rising current account deficit 13. NATIONAL ECONOMIC PERFORMANCE:ECONOMIC PROFILESouth Africa Export PortfolioGDP CONTRIBUTIONService Sector IndustryAgriculture Others 2.50% 0.50% 30.00%67.00%The largest clusters in terms of value are metal- South Africa was leader in producer ofmining and manufacturing , followed by jewelryplatinum, gold, and chromium.and precious metals, hospitality and tourism, and- But retail sales had decreased by 4.4 %automotive, which have all been declining in worldand manufacturing had dropped by 4.0%market share. The clusters with the greatest(by the end of 2008)increases in world market share have been coal andfinancial services 14. NATIONAL ECONOMIC PERFORMANCE:ECONOMIC PROFILE Workers have entered the formal labor force at a faster The problems of rate than jobs have been created. high Unemployment is concentrated among low-skilled unemploymentworkers and is linked to historical racial inequality: and entrenchedOverall unemployment 25%: African 32% vs. inequality haveWhites 5% (Exhibit 5 and 6)persisted. Industries employ workers with low skill levelshave been in steady decline.The overall One of the most unequal countries in the world: Gini poverty rate wascoefficient is ranked lower than Namibia, Bolivia, Haiti and57 percent in 2001 Paraguay (2001). (Exhibit 3) 15. NATIONAL ECONOMIC PERFORMANCE:CONSTRAINTS TO CONTINUED ANDSHARED GROWTH The government haspursued the To raise the annual growth rate to 6 percent and reduceAccelerated andpoverty and unemployment by half by 2014.Shared Growth Improved competitiveness, and equality through theInitiative for South creation of opportunities for the previously Africa (ASGISA) since disadvantaged black population.2005 The robust domestic demand has been met by imports: persistent current account deficit. (Exhibit 8)Weaknesses The current condition of its transportation and energy infrastructure limits its ability to expand exports. (no investment) 16. NATIONAL ECONOMIC PERFORMANCE:ANALYSIS OF NATIONALCOMPETITIVENESS- Global Competitiveness Index : # 36 of 74 countries (2008)- World Bank data: - Government effectiveness:75% - Regulatory quality:70% - Control of corruption: 67%(Exhibit 9 16) South Africa benefits from sophisticated financial markets, but lags inprimary education, national savings, quality of infrastructure, and theincidence of serious disease, including tuberculosis and HIV/AIDS 17. Factor Conditions Three important factors negatively impact SouthAfricas competitiveness and constrain business: aninadequately educated workforce, crime andtheft, and inadequate infrastructure The efficiency of financial markets is one of SouthAfricas greatest strengths, among factor conditions.The World Economic Forum gives South Africa highscores for ease of accessing loans, availability ofventure capital and the sophistication of the financialsector 18. Context for Firm Strategy andRivalry The labor market is characterized by a lowlevel of flexibility in the labor market.According to an assessment by the WorldBank, South Africas score on an index of laborrigidity is (42/100) There are considerable constraints on hiringand firing employees, wage determination isrigid, and employer-worker relations areconsidered to be weak 19. Context for firm Strategy andRivalry South Africa does have a number of strengthsin facilitating competition in domesticmarkets. In an assessment of competitivenessacross countries, South Africa ranked high onefficacy of corporate boards (14); efficacy oflegal framework (16); protection of minorityshareholders interest (11); effectiveness ofanti-monopoly policy (10) and intellectualproperty protection (19). 20. Country Related and SupportingIndustries The availability of research and training servicesand the quality of collaboration betweenuniversities and industry research contribute tothe South Africas capacity for innovation, whichthe WEF ranks at 28 across countries . The quality of domestic Information andCommunication Technologies suppliers isgenerally high, but they have limited capacity tomeet market demand 21. Demand Conditions The domestic market benefits from anincreasing black middle class but also facesthe limitations of a extremely high inequalityand the persistence of a dual economy withthe black majority relying on work and evenconsumption in the informal sector 22. Strategic Issues Macroeconomic stability: Its real exchange rate has been volatile in the past decade and its current account deficit continues to increase as a share of GDP. Regional opportunities: The neighboring countries are poorer and have much smaller economies. The economic impact of legacy of apartheid: Deeply rooted in political, economic and social inequality, South Africa is confronting the impact of apartheid on: the structure of the economy (informal/formal; one country, two economies), the labor market (lack of skilled workers, rigidity of employment and strong unions, productivity), social indicators (poor public health and transmissible diseases; low level of education), market size (large inequalities) and the business environment (crime and violence associated in part with high levels of inequality). Infrastructure: South Africa has some important weaknesses in electricity supply, ICT, ports, and logistical infrastructure. 23. South Africa Country Diamond 24. Global Textile Industry 3.8%5.0%32.1% 4.1% 29.8% 2.9%2.9% 2.3%4.1% 1.5% 25. Global Apparel Industry 3.8%1.2%31.1%1.2% 33.2% 2.5% 1.4% 3.0% 1.7%3.0% 26. Textile Value Chain Finished FibersYarn Fabric ProductNaturalCardingWeaving ClothingMan-Made CombingKnittingHome Furnishings Spinning Bleaching Industry Dyeing DyeingFinishing 27. Trends in the Value Chain Geographical shifts. The shift of apparel manufacturing from developed to low-cost countries has been pronounced over the past decade, with China leading theway in winning market share. Transnational Corporations (TNCs). The emergence of large international retailershas come to dominate the global textiles and apparel industry, influencing thegeographical locations of parts of the value chain and putting further downwardpressure on prices because of their immense bargaining power. Lean retailing. Retailers increasingly prefer not to undertake supply chainactivities and therefore transfer these onto its suppliers. This necessitates thesupplier to offer a full package service, which can include taking responsibilityfor sourcing fabric and trim upstream and taking on logistics, transportation, anddelivery downstream. Speed-to-market. With the emergence of apparel retailers such as Zara andH&M, new standards for fast turnover in styles and fashion trends haveemerged, necessitating ever shorter product life- spans. This puts considerabledemands on the apparel manufacturers to respond to a series of small, irregular 28. Development of the Cluster In the early 1920s, the South African clothingsector was almost nonexistent. Clothing waseither imported or tailored The industry began with the manufacturing ofblankets by limited number of small companies inJohannesburg and Cape Town in 1920s and 1930s During World War II, the industries providedblankets, rugs and sheeting; employed 3,500workers; and supplied 90 percent of domesticneed 29. Development of the Cluster After World War II, the cluster expanded intofurnishings, industrial textiles and clothing. In the 1960s, the cluster further expanded intosynthetic fibers and the sector almost doubled insize Because apartheid limited the use of Africanlabor in urban areas, the clothing industry movedto areas with concentrations of Indian andColored labor: Durban, Cape Town, and areasbordering Bantustans. 30. Development of the Cluster Cape Town soon became the center of theSouth African clothing industry, partly drivenby the large retail chains based there. In theWestern Cape, from 1935 to 1980 the numberof firms increased from 30 to 332, and thenumber of employees increased from 3,500 to53,421 31. Development of the Cluster Liberalization and the restructuring of theindustry resulted in large decreases inemployment, while productivity has increasedthrough cost-minimization and downsizingrather than production growth. A total of 30,000 clothing and textile jobswere lost between 1996 and 1999, as thefirms competed on cost-minimization anddownsizing 32. Current Cluster Condition In the past decade, domestic demand for clothingand textile has been constantly increasing, butthe domestic industry has not captured thegrowing demand Imports of textiles have grown rapidly to an all-time high, while exports have stagnated Countries with cheaper labor force, includingChina, have captured large share of sales volumein the global market, which has pushed down theinternational prices 33. Current Cluster Condition the labor cost in South Africa is much higher thancompetitors, South African textile cluster is losingin the price competition to cheaper exporters. The employment in clothing industry was121,108 in 1990, but it decreased to 59,580 in2001 Employment in the textile industry has alsodeclined in recent years, decreasing from 70,500in 2003 to approximately 50,500 in 2006 (TextileFederation of South Africa, 2009). 34. Firm Strategies in the ClusterCompanies in the cluster have survived the tough competition in the domestic market, becauseof the following strategies.Price competition: These low-end firms compete mainly in cost-minimization. They importcheap products in the domestic market by vertically integrating with modern container berthand mobilizing modern equipment. E.g. SBH Cotton.Exporting high-end product: These firms sell high-end products to retail outlets in internationalmarkets in Europe. E.g. Monatic, which has been successful in selling a large volume offashionable mens suits, but the proximity from the large international market limits their abilityto keep up with up-to-date fashions.Diversify to value-added products: These companies diversified their products and dominateniche segments of the market. They consolidate with related industries, including chemical andmedical industries. E.g. Gelvenor Textiles, which specializes in technical textiles and has 50percent global market share in parachute fabrics. 35. Map of South African Textiles andApparel ClusterOI un tp pu ut tI In nd du us st tr ri ie es s 36. Cluster CompetitivenessSouth Africas textile and clothing industry is concentrated in three provinces: WesternCape, Kwazulu-natal and Gauteng.Clothing Firms350327300 239250219200150100 500Western CapeNorthern areas KwaZulu-Natal 37. South Africa Textiles andApparel Development Development of textile manufacturingCluster expandscluster in into IndustrialCape Town and Johannesburg textiles and apparel 1920s 1945 38. Textile and Clothing Industries Textile and clothing industries are interdependent, as the fabric is the single mostsignificant input into the clothing sector ( half of the cost to produce a garment). Without an efficient and supportive textiles industry, clothing industry expansion isconstrained. On the other hand, clothing industrys growth in export would have apositive impact on the textile industry by creating higher demand. The clothing industry requires a significant amount of low-skilled labor; as much as 83percent of employees in the Western Cape clothing industry was semi- and unskilled in2004. Firms in the textile and clothing cluster vary from well-established large firms to small &medium enterprises and home industries.Number of Firms by RevenuesUnanswered 5514511-25 Million Rand 8274Number of Firms Less than 5 Million Rand 4290 50100 150 200 250 300 350 400 450 39. Institutions for Collaboration The cluster has many potential Institutions for Collaboration (IFC), includingassociations of employers, labor unions, and government initiatives. The problemis their fragmentation and lack of coordination. Labor unions in South Africa played important role in fighting against apartheidand have maintained strong political power. Cooperation between labor and employer is very low in South Africa in general(GCI - ranked 65th ). Organizations that can play an important role: Clothing Manufacturers Association CMT Employers association Bargaining Council for the Clothing Industry Clothing Trade Council of South Africa Industrial Development Corporation Garment Manufacturers Association Clothing Industry Export Council South Africa Clothing and Textiles Workers Union (SACTWU) Some of these groups have undertaken activities to mobilize stakeholders in thecluster. E.g. SACTWU has organized the Cape Town Fashion Festival with the themeWear South African since 2003. 40. Cluster Competitiveness Diamond Analysis The South African textile and apparel cluster shares some of the key challenges and advantages identified in the country competitiveness analysis. Efficient financial market is helpful in nurturing new enterprises in thecluster. A growing black African middle-class is a driving force for the cluster toshift to the high-end sophisticated market. High-income inequality limits the size of an emerging sophisticatedmarket. The high cost of labor, influenced by strong labor unions, rigidity ofemployment and the restriction by the Black Economic Empowermentpolicy, is a significant obstacle for the cluster development. Lack of high-skilled labor. 41. Factor ConditionsHigh factor costs (especially labor cost) constraint the ability of the cluster to compete with foreign companies in on price.CountrySouth Africa China Sri-IndiaLankaUSD per hour 1.36 0.68-0.88 0.480.38The labor cost disadvantage is crucial, because the cluster is labor- intensive.The high labor cost is due in part to the rigidity of employment. Strong labor unions and BEE limit the option of companies in hiring and firing.Regulations regarding overtime and shift pay, sick leave and pension contributions pose an additional burden for firms 42. Factor ConditionsRaw Materials Limited access to raw materials is another important challenge to accessing thehigh-end market. Domestically produced fabrics are limited in terms of their volume and variety.Cotton produced in South Africa is relatively low, and the cluster cannot rely ondomestic cotton for high-quality products Other weaknesses in the cluster: long lead times, poor delivery reliability anddeteriorating quality performanceDistance from International Markets The long distance from EU and US limits the ability of South African firms inupdating the design in high-end fashion market As firms compete in lead time in the high-end fashion market, the distance fromthese markets and the transportation time required by it will be a hugedisadvantage for South African companies Low quality of infrastructure in domestic logistics is an additional challenge. Thisproblem is more severe for the companies outside the Western Cape 43. Context for Firm Strategy andRivalry While the competition among domestic companies is competitive and wellregulated, South Africa has a problem in dealing with imported products. Customs control can be very ineffective, many Chinese products are imported without any duties or customs. Illegal dumping of foreign products is also a threat to local producers. With the aim of reducing the impact of Chinese imported products, thegovernment introduced the China Restraint Arrangement in 2007. This schemeintroduced a quota for Chinese export to South Africa, but the effect wasquestionable because of the loose customs control. Since that arrangement expired at the end of 2008, the government consideredthe implementation of a Rescue Plan to provide subsidies to local textile andclothing industries and help them compete in the domestic and internationalmarkets. 44. Relating and SupportingIndustries The lack of trust and cooperation between clothing producers and textileproducers obstructs the ability of firms to compete effectively. Different segments in the cluster are fighting against each other to protect theirown profits rather than collaborating with each other to promote thecompetitiveness of the cluster.Opportunities Potential collaboration with growing design-related industries. Benefit from the growing fashion, arts and film industries, if they can cooperate with each other to create high end products and promote South African products in domestic and international markets. Design and fashion industry is growing but still weak, and it needs improvement in the technical schools in design and fashion. Cape Town Fashion Week is a good trial to market the design industry and clothing industry of South Africa to the international market. Collaboration between retailers and manufacturers.. 45. Demand Conditions The South African domestic market has a growing middle-class black populationthat is increasingly sophisticated in its consumption decisions. This is a segment in the domestic market that the textile cluster can competein quality and uniqueness of the products. The income disparity in the country limits the size of the sophisticated market. The country needs to address the problem of inequality to create a significantand sustainably large segment of the market that will support higher- endproducts. International markets in the US and the European Union are another opportunityfor the cluster. AGOA and the FTA with the EU provide the companies withvaluable access to these markets. If companies in the cluster increasingly develop unique products, they can improve their ability to penetrate these markets. 46. South Africa - Textile and ApparelCluster Diamond 47. Cluster - Challenges1. Imports impact: Imports of Chinese clothing products increased by 335% from 2002 to 2004. China is the most important source of South Africas clothing imports(74.3%), followed by India (5.4%). South Africas tariff on clothing products is 45%, the highest level allowed by WTO. The imported productions have dominated the local textile and clothing marketand thus seriously threaten the survive of the local manufactures. It is estimated that the volume of illegal imports is almost the same as that of legalimports and therefore presents a significant challenge.2. Exports decline: Textile exports kept increasing from 1995 to 2002, but begun declining since 2003. South Africa Textile Exports (2001- 2006)64 4.5 Exports 3.4 3.83.23.23.1202001 2002 2003 2004 2005 2006 48. South Africa TextileCluster Challenges3. Employment crisis: The employment of textile and clothing sector declined remarkably from about190,000 (2000) to about 130,000 (2006). 55,000 textile workers struck for two weeks in September, 2009, requesting forhigher pay.4. Economic crisis GDP declined in 2009 QuarterQ1 2009 Q2 2009 GDP rate -6.4% -3.0% Unemployment rate is now close to 30%5. Workplace productivity: Low levels of productivity and management Lack of innovation and technology enhancement Lack of skilled workers and technicians 48 49. South Africa TextileCluster Challenges6. Poor Infrastructure Value chains need to be strengthened (lack of raw material suppliers) Electric Supply quality deterioration; power outages (lack of sufficientinvestment)7. Health and welfare of the population: HIV/AIDS & Tuberculosis pandemic affecting workers abilities Excessive and widespread crime (ranked last among 74 countries) Equality through creation of opportunities for disadvantaged black population 50. Q &A 50