Africa may well be the next hot sourcing locale, but beyond the buzz, many brands don’t know much about doing business there.
At an opening day panel at Sourcing at MAGIC Sunday, industry experts discussed the challenges and benefits of sourcing in Africa in a talk titled, “Looking Forward: From the Western Hemisphere to Africa—Pros and Cons.”
As brands continuously look to diversify their supply chains and chase the best product at the lowest cost, the question often comes down to where to go next and how to work there successfully. According to Bill McRaith, chief supply chain officer at PVH, it’s all about creating a balanced supply chain. “Right now we’re in a period of fairly dramatic changes in the supply chain,” he said.
McRaith noted that as brands talk about shifting sourcing away from Asia in favor of new locations, he’s often asked which country will be the next China.
“The next China is not a where, it’s a how you do business,” he said. “But Africa seems to be the emergence of the next China.”
Africa today is much like China was in the late 80s and early 90s, McRaith explained. There’s little there, but the continent is developing.
The first thing to consider, however, McRaith said, is that the sizable continent cannot be discussed as one region and understood as such. Africa is big enough to fit all of the world’s major players within it: the United States, China, India, Eastern Europe, Japan, the U.K., Spain, France, Germany and Italy, among others. “Africa is of a scale we’ve never dealt with,” he said.
PVH has been manufacturing in Africa for some time, but the retail giant is now moving into the continent vertically, and overseeing all aspects of production from growing the cotton all the way through to the finished product.
According to McRaith, what makes Africa advantageous is that the cost of producing there is lower than many other regions brands source from due to: lower cost, plentiful and high work ethic labor; green energy at the lowest global rate (hydro electric and geothermal power); land available at subsidized rates to develop large-scale industrial parks and for growing cotton; duty free exports to the U.S. and Europe, and China free trade between East African countries; plus tax holidays.
Despite these advantages, Tom Travis, managing partner at Sandler, Travis and Rosenberg said people hadn’t been using Africa well in the past because there were so many other low cost options. A chart of U.S. apparel imports from January to June 2014, shows sub-Saharan Africa ranks at the bottom of the list with $479.8 million worth, just 0.01% of the world’s apparel imports. China, by comparison, exported $12.4 billion worth of apparel to the U.S., 33 percent of the world’s total.
But free trade agreements always create opportunities for profit, Travis said. And under a U.S. preference program like the African Growth and Opportunity Act (AGOA), eligible countries in Africa could present that opportunity.
AGOA allows sub-Saharan African countries duty-free access to the U.S. market, provided they abide by the law, support human rights, promote poverty reduction and do not engage in corrupt activities. Of the 49 nations that qualify for AGOA, 25 have the effective visa system in place to ensure country of origin and guard against trans-shipment, and of those, only nine countries are taking advantage of the preference program, including Benin, Lesotho, Liberia, Tanzania, Ethiopia and Madagascar, which just regained its AGOA eligibility in June.
In 2013, U.S. imports from sub-Saharan African countries under AGOA and the related GSP program totaled $26.8 billion, more than three times the amount in 2001, the first full-year of AGOA trade, according to the Office of the United States Trade Representative (USTR).
The AGOA trade preference is set to expire Sept. 30, 2015 and trade organizations are lobbying for the program’s extension. In a statement last week, the United States Fashion Association (USFIA) joined six U.S. and African fashion and retail trade organizations in a call for its immediate renewal. USFIA called for at least a 15-year renewal of AGOA and its accompanying third-country fabric provision, which allows duty-free access to the U.S. market for apparel made from fabric originating anywhere in the world.
AGOA’s impending expiration date is already putting the region’s opportunities at risk as brands that plan their sourcing strategies six to 12 months in advance are already considering leaving Africa because sourcing from the region would be cost-prohibitive without the duty free treatment.
“We hope that the discussions at the U.S.-Africa Leaders Summit last week, as well as the recent Congressional hearings, will lead to quick, long-term renewal of this important trade preference program so fashion brands and retailers can continue placing orders and expand their business in the AGOA region,” USFIA president Julia K. Hughes said last week.
While many believe the preference program will be renewed, there’s no certainty about what term it will be extended for. “People are going to have to work very hard and unify to get AGOA renewed,” McRaith said. “I don’t think it’s going to be a cake walk.”
Trepidation over AGOA’s extension aside, JC Mazingue, apparel trade advisor for USAID East Africa Trade Hub said brands are slowly beginning to realize the advantages the continent has to offer. Energy in the region is cheap, Mazingue said, also admitting honestly that the region’s logistics still need some help.
But the fact that PVH opened a regional office in Nairobi, Mazingue said, and H&M opened an office in Ethiopia, and Tesco intends to expand in the region, are indications that big brands are paying attention to Africa’s promise.
“The East Africa Trade Hub has been getting more inquiries in the last 18 months than it has in the last five years,” Mazingue said, noting that Ethiopia and Madagascar are the fastest expanding markets on the continent.
“The opportunity for Africa seems to be coming around the bend finally,” Travis said.
The media is dining out on the fallout from Uber's founder ouster and wondering why restaurants leaving patrons cold.Read more
Don't let phantom inventory haunt your business, get the right tech tools and insights to manage your stock.Read more
E-commerce may be stealing the spotlight from brick-and-mortar, but many consumers still prefer the sights, sounds and feel of physical stores.Read more
Vietnam is improving its garment sector with more sustainable foundations.Read more
One day after touting the expansion of its appliance store concept, Sears Holdings has announced it will close 20 more locations.Read more
Burberry rolled out more executive changes this week, Amazon Go's director of technology exits and Stitch Fix named Paul Yee as its new CFO.Read more
Two lenders have filed a lawsuit against J.Crew in an attempt to block a term loan amendment designed to help the retailer stave off bankruptcy.Read more