1. Investor Description
ABC Clothing is a Mauritian clothing manufacturer. They are primarily in the business of making shirts and pants, although they have made uniforms to order for local businesses. ABC has considered options of exporting to the United States under AGOA, however its production facilities are capable of producing only a tenth of what a typical American buyer would require.
ABC sees an opportunity to supply countries in Southern Africa including Zambia, Zimbabwe, Botswana, Malawi and Namibia with its clothing. There are few local manufacturers with the exception of Zimbabwe, and while the clothing must be made at a low cost to accommodate the income levels of the market, clothing remains a basic necessity item.
ABC understands that competition will come primarily from within the region from South Africa and Zimbabwe. It also knows that foreign goods sourced from Asia are plentiful in the countries. Finally, the company has great concerns of competing with used clothing that is present in some of the target countries.
3. Investment Process
ABC is unfamiliar with the marketplace and the rules of doing business in its targeted countries. Little information is available to them, however some individual buyers have come to Mauritius to buy goods from Zambia and Zimbabwe for resale in their countries.
ABC would likely send management to trade fairs and exhibitions typically during August and September with the intent of making contacts with local distributors to find a partner. ABC would prefer to sell its goods into the market for at least one year before deciding on an investment destination. Because Mauritius’ labor market is almost at capacity, it will be very difficult for ABC to expand its operations to serve these markets. It does have the option of expanding production to Madagascar, which is what many Mauritian firms have done.
4. Decision Process
Cost of Investment: ABC is concerned about the time that management must take away from the factory to establish marketplaces. From speaking to other clothing manufacturers, it is extremely difficult to establish relationships with reputable local distributorships. It is likely that they will have to work on a cash basis until strong relationships are built, and this can stunt the growth of the business.
ABC is unsure about available land and/or existing facilities into which it can expand its operations. There is little information available to them in Mauritius on labor laws, productivity rates, and infrastructure rates (although Mauritian firms are better off than their counterparts in Namibia, Zambia, and Malawi due to the presence of the Mauritian Export Development and Investment Authority). ABC anticipates a lengthy process in investigating these costs.
Revenues: ABC is currently unsure as to the level of competition, although it feels that it can competitively price its goods with Zimbabwe and South Africa, particularly with duty-free access to the marketplace. It understands that many local competitors, particularly in Zambia and Malawi, have gone out of business, and it believes that this is due to foreign competition and the presence of used clothing. It also understands that local wages are low and in some of the envisaged marketplaces stagnant. Nonetheless it feels it can compete, although the products it will manufacture will be of a considerably lower quality that what it delivers to Europe.
Cost of Doing Business: Clothing does not have a high transport component, although the lower quality clothing does, by its nature, have a relatively higher cost component. What concerns ABC in some respects is the access to currency. Several of its target markets have experienced shortages in hard currency, and in some cases significant devaluations have taken place in short periods of time. ABC can initially work around this problem by pricing in dollars and demanding payment in cash, but eventually if it intends to expand, it will be forced to become more immersed in the market’s currencies.
ABC does not anticipate heavy bureaucracy. There are positive stories of firms working in Madagascar, and they believe that the integration of economies that comes from COMESA (more so than SADC) will allow them choose a site and open a facility fairly easily. ABC does not perceive these countries as being very corrupt and feels it can do business without making payments and bribes to officials.
Risk: For the most part, ABC does not fear nationalization of its facilities so it does not feel this form of risk. It feels a greater risk lies in its ability to repatriate profits, make payments for raw materials, and collect from debtors. ABC does not believe that the court systems in these countries will protect their interests, and they worry about changing policies towards profits and overseas remittances.
It has encountered a number of stories of unscrupulous business people and this is of great concern to them. ABC will seek to ameliorate this risk by seeking out business partners with whom other Mauritian firms have dealt.
The scenario of ABC clothing emphasizes the barriers inherent in sales and revenues. Competition has all but eliminated clothing manufacturing in Zambia and Malawi, and it threatens Zimbabwean firms. Some of this competition comes through legal channels, a considerable amount is smuggled in duty free. The question that will face ABC is whether they will be able to sell enough to justify the investment.
In this scenario, it is likely that ABC will move very slowly, learning the ropes via marketing its goods for cash through various contacts. Many other firms from Zimbabwe and Mauritius have gone this route, and have sometimes had the misfortune of selling goods on terms to distributors that are either unscrupulous or unable to pay. Doing business on a cash basis makes it very difficult to expand the operations, so in this case growth comes very slowly.
Some of the firms interviewed have proceeded directly on these lines. Firms mainly from Zimbabwe and Mauritius, and, to a lesser degree Malawi have been encouraged by sales to individual traders that have purchased items with cash. They have traveled to marketplaces, sometimes using the exhibitions, other times trying to make local contacts through telephone books and word of mouth. Both are slow and often unrewarding processes. In most cases, the company owners themselves are traveling. This puts a heavy burden on the management of the facility because the owners often play a major role in the factory’s day-to-day operations. Communications are difficult and very expensive between member states, and travelers feel cut-off from their facilities.
Assuming ABC makes it past the stage of merely trading in the nations and chooses an investment destination, it must turn to some of the government imposed processes. For the most part, clothing manufacturers do not have a heavy bureaucracy burden imposed on them. They are often labor-intensive operations with low environmental impact, and most governments are very welcoming to this type of operation. However, ABC will likely face very difficult problems when it comes to exporting management, particularly in the startup stages.
High unemployment in the target countries make it difficult for immigration departments to understand why operations managers, many of them with fewer academic qualifications than some of the local unemployed, must be imported. It is likely that ABC will fight a pitched battle for every non-senior executive it wishes to import. Even countries that permit a base number of expatriates (such as Zambia’s allowance of 5 expatriates) still create problems if they feel that local talent is available.
It is important to note at this time that this investment can range from anywhere between 40 and 150 percent of the firm’s investment already in Mauritius, making it, for this investment, an extremely high-risk investment. This investor’s inability to import management will scare off many investors completely from investing. Investors in Mauritius suggest that in Madagascar, there has been little or no interference by government in allowing Mauritian firms to import labor to Madagascar.
All these points may be made moot if ABC is unable to sell its goods. No bureaucracy, magnificent relationships with distributors, stable currencies and other factors mean nothing if the typical garment is sold for less than ABC’s cost of manufacture.
The first concern for ABC will be used clothing. Surprisingly, some Malawi manufacturers do not attribute the import of used clothing to the downfall of the Malawian and Zambian clothing manufacturing industries. However, it is clear that goods, some of which are of higher quality than goods sold as new, are available for a fraction of the price and with wide distribution.
National governments are faced with a dilemma: despite claims by the above-mentioned Malawi firms, Zimbabwean and Zambian clothing manufacturers claim that there is little market for new goods. A once thriving Zambian clothing manufacturing industry, albeit well protected by tariffs in the past, has been decimated, putting thousands out of work. Neighboring countries Botswana, Namibia, and Zimbabwe, have either strictly curtailed access or prohibited them altogether.
However, used clothing provides a sometimes high quality basic necessity to low-income and unemployed individuals at affordable prices. Clearly there is a consumer benefit as the marketplace is more open and free.
This issue will magnify and may become a significant source of disagreement when the common external tariff is negotiated. Zimbabwe has a great deal of jobs in the clothing industry, and while it has the capability of exporting, a great deal of the work is dependent on the local marketplace. Should Zimbabwe open its borders to used clothing, it could possibly close a number of small manufacturers. Alternatively, Zambia and Malawi have provided citizens the opportunity to purchase used clothing at a significant discount to new.
ABC, like many manufacturers, is not very familiar with COMESA, the Secretariat, or its policies. It has heard of the free trade area through newspapers and announcements, and feels that it provides it with an advantage, particularly with competitors from South Africa and the Far East. Many firms do not understand the difference between SADC and COMESA, and are skeptical that real changes are taking place. Some have noticed lowered duties, but the duties have lowered very gradually. This left many interviewees indifferent about the announcement of a duty-free area. None of the firms interviewed had not heard of a Common Investment Area.
ABC will soon learn that a large number of goods enter the region completely duty-free through payoffs and bribery. This study was not intended to collect the percentage of goods that enter COMESA through these means or to identify ports of entry. However, several firms interviewed that have exported to neighboring countries have been disappointed that their advantage is not as great as first thought.
A complete analysis of imported goods was not done, but interviewees suggested that the goods that enter local markets are taken from batches of clothing destined for Western countries and are seconds and of lower quality. Their costs are minimal for these goods, as they have nowhere else to send them. When duties are not paid, these goods come into countries at a significant cost advantage.
The bottom line is this: If ABC cannot sell its goods at a price that allows it to be profitable because of competition, it will not expand its operations to other COMESA countries.
6. What COMESA Can Do
There is an ideological battle to be waged in thinking this process through. This report suggests that governments be concerned that manufacturers be able to acquire the price at which they can profitably sell their goods. This is not a new concept as manufacturers have, seemingly since the beginning of time, argued for more protection and more tariffs. On the other hand, the people that elect the government must buy these goods. Giving the population access to affordable basics necessities such as clothing is a must.
On the one front is the issue of used clothing. Its cost is minimal, not much more than the cost of shipping. Its quality is sometimes very good. Its distribution network in countries that allow it is extremely strong. Yet clearly it tremendously narrows the market to producers of new clothing and reduces the opportunity to engage this labor-intensive industry.
The other front involves the avoidance of paying duties by unscrupulous business people and customs officials. Long recognized as a drain on national economies, economic integration means that corruption in one country becomes another’s loss. COMESA has not, to a large degree, addressed corruption as a regional issue. It has primarily left it as national. Indeed, degrees of corruption vary greatly from country to country. However, it is recommended that COMESA raise the issue of corruption as a regional issue.
Some textile firms that operate in markets that have used clothing continue to sell to the local market, indicating that opportunities do exist. However, the lack of information available has plagued firms, which was mentioned during the interviews. The trade fairs and exhibitions have provided firms with good opportunities to make contacts, but the costs are high. This goes beyond the cost of the plane fare and accommodation, but extends to the absences from the office.
By providing firms with more information, COMESA can decrease the cost of investment and ensure that textile and clothing firms can achieve the revenue levels that are required to invest in exporting.
Another point that was addressed in interviews was the American Growth and Opportunity Act (AGOA), which promised duty-free access to a massive marketplace. However, the vast majority of local manufacturers do not have even a small percentage of the required capacities to satisfy American firms. Some of the larger Zimbabwean and Mauritian firms either have the capacity or the resources to sell into the market. Mauritian firms, lacking the available labor pool to expand, have tapped labor resources in Madagascar, through bi-lateral accords.
However, it is difficult to see where COMESA will have an impact on AGOA. While Zambia and Zimbabwe produce cotton, it is sold at world market prices as a commodity. Most countries in the region already either have incentives for raw material import or are duty free. Textiles are often imported from countries with comparative advantages (typically the Far East). AGOA allows certain countries to source raw materials from outside the region, but it is likely that companies based in those countries that are not eligible for this exemption will simply shift production to countries that are eligible (e.g., Mauritian firms in Madagascar).
AGOA has already had an impact on production in some firms. This impact is not the result of COMESA integration, but comes from the need of these firms to tap into other markets to increase their benefits, whether through export or through moving their production. COMESA could possibly have an impact if it can assist small producers in given regions to connect with each other across borders in order to meet the scale for the demands of the U.S. Market. This will only be successful, however, if private sector investors find this profitable by standardizing the quality of the small producers to meet export demand.