Business Forward’s “Sector Spotlight” series is a collaboration with the Egyptian Center for Economic Studies (ECES), presenting sector-specific insights based on ECES’s series “Views On The Crisis”: a sectoral analysis of how the outbreak is affecting different parts of the Egyptian economy.
Debuting this series are the country’s garments and home textiles industries. Inextricably linked to the global economy, these two industries have faced major challenges in the form of disruptions to their supply chains which span the world, as well as shocks to local and international demand brought about by the COVID-19 pandemic.
Some key facts
According to the 11th edition of ECES’s Views on Crisis series focusing on garments and home textiles -arguably two of the country’s most important industries- these sectors are jointly the second largest employer in Egypt’s manufacturing sector, employing around 15 percent of the sector’s workers.
In 2019, the combined value of these two sector’s exports was $3.3 billion, amounting to 13 percent of all of Egypt’s exports from the manufacturing sector.
The ECES report says: “Although the value chain of the textile and garment industries in general is present in Egypt from the cultivation of cotton through to the final product, many production requirements are imported from abroad, namely, fabrics, dyes, and thick yarns, hence, the impact on the industry by external developments, especially during the crisis.”
China, the birthplace of the COVID-19 outbreak, is Egypt’s biggest import-partner of yarn and fabrics. The United States, at the time of writing the world’s worst affected country, is Egypt’s garments and home textile industries’ biggest export market. Europe is the second biggest export market while also being the second worst affected region, according to the World Health Organization (WHO).
By mid-May, 50 percent of the industries’ factories ceased production while the rest operated at much lower levels of productivity. 800,000 workers stopped working, amounting to 67 percent of the total workforce of 1.2 million. Formal workers employed by these factories are likely to earn no more than 65 percent of their wages. The remaining 35 percent is attributed to income earned through work on the production lines and regular attendance.
Supply affected by import partners
The supply side began to feel the bite as Chinese production came to a halt earlier this year. This was compounded by the fact that other yarn and fabric exporting countries did not have the capacity to supply Egypt’s production requirements, and they cannot replace China as the country’s main import partner any time soon.
Mohamed Sabah, a member of a family-owned business that has been in the textiles industry since 1965, and AUC Alumni ’07, said their factory imports yarn, cotton, and blended cotton such as cotton-polyester from India and Pakistan. “What we import from China is the 100 percent polyester and microfiber yarns,” he added.
Sabah’s manufacturing business, called Fashion Knit, produces two kinds of products: fabrics supplying local manufacturers, most of whom produce for export markets, and garments for several local brands.
Sabah has seen their Chinese supplies affected by the COVID-19 pandemic, while their imports from India did not stop but were significantly reduced due to production slowing down and the reduced local demand. “Our factories stopped for a while. Their factories stopped for a while. We had our times when we didn’t want to input anything because there’s no one to buy our products.”
The disruption to the international supply of production materials is a significant hit as they cannot be locally sourced, according to Mohamed Kassem, a board member of the Federation of Egyptian Industries (FEI) and the Egyptian Chamber of Apparel and Home Textiles Industries (ECAHT), who helped to contribute to the ECES’s report’s findings.
Kassem told Business Forward that the textile industries are split into two areas: the upstream and the downstream. “The upstream is spinning, weaving, binding and finishing, and the downstream are the garments and home textiles.”
What we have a lot of in Egypt is the downstream. The upstream is in very bad shape with very few exceptions. I think that rebuilding the upstream and the task of providing the needs of their factories will take a long time and require huge investments.”
Reduced demand for new season’s collections
On the demand side, the knock-on effects of COVID-19 hit in February, when 15 percent of export contracts underway at the time were cancelled, leading to a loss of at least $77 million in the first quarter of 2020. 80 to 85 percent of future export contracts were also cancelled, in addition to 15 percent of production contracts. Compared to the last season, demand for summer clothes fell by 70 percent.
$809 million in export earnings is estimated to have been lost during the second quarter of 2020 as a result of the export contract cancellations, with $782 million alone between the months of March and May.
According to the ECES, for every $10 million of revenue lost in exports, workers in the industry lose $1.3 million. Exports will only recover when demand in US and European markets return.
“Our business has gone down 50 or 40 percent at least,” Kassem said, who also owns an export company that represents several significant buyers of Egyptian products in the US such as Ralph Lauren and Jordash.
“Some of our biggest buyers are in deep trouble. JC Penney went bankrupt. Macy’s is in deep trouble,” adding that J. Crew, a specialty retailer founded in 1947, filed for bankruptcy protection.
Sabah’s factory used to export garments but as of last year, have remained exclusively in the local market. This did not protect them from the effects of export markets collapsing, however.
“My customers who I supply with fabric, were [exporting],” he said. “Garment factories don’t always have fabric machines. They only have the garments section,” which is sewing. “When they need the fabric, they come to my factory. I produce the fabric for them.”
“When exporters cancelled their orders, we also had to cancel our orders of yarn and our supplies. We had to shut down our factories.”
Inventory build-up and diminished liquidity
Thanks to global demand shocks and the cancellation of export contracts, from the middle of March factories began to build up inventory of finished products which in turn was impacting their liquidity. Due to this reduced liquidity, factories were unable to purchase necessary supplies from China when production there started again. This was further compounded by increasing difficulties of importing these supplies thanks to a slowing down of international trade, shipping and transportation.
According to the ECES report, an estimated $900 million is needed to buy the supplies to produce products for the next fall and winter seasons.
Sabah confirmed the report’s findings on overcrowded inventories, which his own businesses has suffered from.
“Inventory build-up happened because of several things. One, the retail stores only work till 5 pm. This is the main problem in the local market. People work till 4 pm and are afraid to buy anything,” adding that the nationwide-imposed curfew has also reduced foot traffic.
Government efforts and proposed solutions
In an interview with Business Forward, Abla Abdel Latif, executive director and director of research at the ECES, said “the ready-made garments industry is one of those that are in between flourishing and slowing down. People need to remain clothed. However, there is going to be a complete change in everything that is offered, and this is an international trend. Working from home is going to be part of the new normal, so those businesses that are producing suits and dressy clothes are actually going to slow down. The basics are going to be the ones expanding.”
As COVID-19 was starting to take hold in Egypt, the government announced a EGP 100 billion emergency response package to mitigate the virus’s economic impact.
As far as the garments and home textiles industries are concerned, Kassem said the package “did not trickle down to the floors of these factories.”
In March, the Central Bank of Egypt (CBE) launched an initiative to postpone loan repayments for a period of six months without any penalties, potentially assisting over five million beneficiaries. Additionally, the CBE injected EGP 20 billion into the stock market.
Khaled El-Mikati, the chairman of the Egyptian Exporters Association, criticized this move, however, stating that when money is pumped into a stock market, “it’s going to vanish in a week because the [listed] companies are still facing the [same] financial problems.”
He instead proposed that the central bank should have pumped this money directly into the capital of these companies. “When you pump the capital of a company that is facing a challenge in liquidity, that means this company which is already registered in the stock market is going to rise anyway.”
The ECES also claims it is possible for these factories to shift their operations to manufacturing medical supplies such as masks and clothes for hospital staff and patients. The center cited a study which estimates that the investment required for this shift in production would be around EGP 30 million, and added such an initiative should involve the Ministry of Health and Population to ensure products meet the proper standards.
Kassem said that some factories have already switched to produce masks and medical gowns but conceded that there is still the capacity to produce far more than the current output.
El-Mikati also agreed that the prospect of shifting to medical supplies presents a golden opportunity. “Masks will become a necessity from now on. Even the [medical] suits are a necessity. It’s going to be a way of life.”
He further revealed that there are already companies producing uniforms for export to Europe and Africa.
On shifting manufacturing to medical supplies, Sabah said the license to produce these products was one of the first demands that were made in April to the government through the Egyptian Junior Business Association (EJB), of which he is a member. However, the lengthy process to get licensed still constitutes an obstacle for factories to make the shift.
El-Mekati further proposed that the government could play a role in enhancing the supply chain by solving some of the logistical issues local industries have, citing that medical supplies have to be delivered by air freight “to reach destinations such as West Africa and South America” through a direct route, as opposed to sea freight.
The ECES proposed a number of measures the government could implement to protect the garments and home textiles industries. One is the Ministry of Manpower’s emergency fund which all factories contribute 1 percent to monthly. The purpose of the fund is to cover workers’ salaries during emergency situations. This fund is yet to be released and would provide the factories with much needed liquidity.
Another of the proposals entailed the refunding of the value-added tax levied on exported goods and giving the factories the option of paying customs duties on imported production materials in instalments.
Sabah said this has been one of the most talked-about issues in meetings he has had with the government through the EJB and the Egyptian Businessmen’s Association (EBA) since COVID-19 took hold in Egypt, and echoes the call for these exceptional measures to support local businesses.