By Donald MacKay
Georgina Crouth notes in her “Daily Maverick” article “Thami Moatshe, an entrepreneur with exposure to the private and public sectors, says one of the primary obstacles to manufacturing localisation is the high cost of production and the competitive pressure from cheap imports.”
Although Moatshe was talking about the South African clothing industry, variations of this argument are made by every local manufacturer everywhere in the world.
South African clothing manufacturers are protected from global competition by a 45% import duty. This works less well than it should, first because there are some very dodgy importers who circumvent the duties. Second, because innovations in the clothing supply chain allow companies like Shein and Temu to sell at prices our local factories struggle to compete with.
Maybe the imported clothing is of poor quality (I’m sceptical of the claim), but even if it is, it provides poor consumers with cheap options. This is no trivial issue in a poor country.
Allegations have been repeatedly made that China subsidises its clothing production, which could very well be true, but if this is the case, the solution lies in imposing countervailing (anti-subsidy) duties.
Except this important tool was deliberately dismantled for political reasons in around 2010 by Dr Davies when he was the minister of trade and industry.
Nothing subsequently changed and unless this is attended to, South Africa will find itself in choppy waters in this subsidy-rich world.
The local clothing manufacturers could also bring an anti-dumping application against clothing from China.
I don’t know if the clothing is being dumped (sold to South Africa cheaper than it is sold in China), but if it is being subsidised then it probably is.
I don’t know why local producers have never pulled this trigger. Perhaps it is the presence of the local clothing retailers who have signed up to the Retail -- Clothing, Textile, Footwear and Leatherwear (R-CTFL) masterplan, who also import from China?
The R-CTFL masterplan attempts to fix this by creating an incredibly complicated set of localisation commitments between the signatories.
It goes something like this. The clothing manufacturers can get duty relief on textile imports if they make a minimum purchase commitment for textiles from local textiles mills.
If they get this rebate they are not allowed to sell the clothing they make to any retailer who has not signed the masterplan. They also can’t export the clothing (I’m not kidding).
There are seven retailers who have signed, all of them large. But this alone would be too simple.
Anyone else can join the special masterplan club and enjoy the juicy fruits of membership, but they must be bargaining council members and, of course, agree to the same commitments.
For those unfamiliar with bargaining councils, they are the fresh coat of paint on the rusty car of sectoral determinations, an important part of why we have such a high unemployment rate.
They allow the Minister of Labour to make the outcome of wage negotiations within a particular sector applicable to the whole sector, whether or not the companies impacted were involved in the negotiations. Even if their staff are not unionised, they must still pay up.
Bargaining councils allow the big companies in the sector to be part of the process of setting wages for the sector. You can see why the queue of people waiting to sign the masterplan is so short. As far as I can tell no one has joined since the plan was signed in 2019.
But some things have improved in the clothing manufacturing sector, although I’m not sure this is because of the plan. Competition, beloved between suppliers and detested between customers, has created pressure on the industry to make important changes.
Nothing has ever been created to drive improvement quite like competition. It’s the bedrock of capitalism and innovation and it works.
If companies are protected from competition, something you will find every business loves being shielded from, the incentive to innovate is removed.
Clothing manufacturer, Green Thread Manufacturing, employing 350 people, has been losing money for four years and has seen a remarkable turnaround.
They’ve done all sorts of things which sound very impressive, like streamlining processes, eliminating bottlenecks and ensuring a balanced workflow, which helped the company turn its first profit in four years.
Karma Clothing also suckled at the localisation teat and got their shirt together by “optimising the layout of the factory floor, doing visual mapping and giving staff further training.
“Bottlenecks were resolved, capacity unlocked, and Karma was positioned to scale from a medium-sized entity to a large business.” Incredible. Why do this now and not before?
I think a lot of this focus came neatly packaged in boxes labelled Shein and Temu. Nothing, it turns out, focuses the mind quite like an existential threat.
By providing evergreen protection (93% of all products which attract a duty have not had their duty levels reviewed in more than 20 years), we create low innovation, vulnerable industries, poorly equipped to deal with a rapidly evolving world.
Parts of our clothing industry will innovate, adapt and be just fine, but some won’t.
The shock of the new innovative supply chains of Shein, Temu and others to follow will be too much. The stifling structures of the masterplan make it difficult for companies to make the critical trade-offs they need to in a threatening environment.
Need to lower your cost of textile raw materials? If you buy less locally, you lose your rebate of duty on all your textile imports.
Can’t afford the bargaining council wage increases? You need to live with it, or you lose the duty benefits you get as part of the masterplan.
This is not a recipe for strong, resilient companies, a serious risk to the whole of South Africa.
Donald MacKay is founder and chief executive of XA Global Trade Advisors and Anneke Jansen van Vuuren an analyst at XA Global Trade Advisors. MacKay has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of Business Report and Independent Media.
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