Cablegate: Textile and Apparel Production and Employment In

DE RUEHSB #0911/01 2781225
P 051225Z OCT 07





E.O. 12958: N/A



1. (U) The competitiveness of Zimbabwe's textile and apparel
sector has been highly compromised by an unstable
macroeconomic environment characterized by persistent foreign
currency shortages, obsolete equipment, power outages, fuel
shortages and hyperinflation. While production and employment
are in decline across the sector, there are several extremely
well-managed major manufacturers, especially in the apparel
sub-sector, that are making major inroads into the South
African market, in particular. The sector has not
eperienced capital flight and the leading companies ppear
ready to plow investment into their operatons when the
economy stabilizes. End Summary.
A Dearthof Official Quantitative Data

2. (SBU) Despite repeated inquiries, post was unable to
obtain any data on textile and apparel production or trade
from the relevant office of the Ministry of Industry and
International Trade. Consequently, the information we
gathered in response to reftel is based solely on interviews
with the two trade associations that represent the industry
) the Zimbabwe Textile Manufacturers Association (ZITMA),
and the Clothing Manufacturers Association (CMA) - and with
leading companies in each sub-sector.

Overall Declining Production

3. (U) Zimbabwe's prolonged economic contraction has taken
its toll on the textiles and apparel sector. The textile
sub-sector, in particular, has scaled down operations in the
past years, while apparel appears to be internationally, or
at least regionally, competitive. Indications are that most
apparel firms are operating well below capacity but above the
manufacturing sector average of 33.8 percent capacity. One
major manufacturer told us his plant was working at 40
percent capacity. Low capacity utilization is a consequence
of worsening foreign currency shortages, inadequate raw
material supply, pervasive power outages, and fuel shortages
in Zimbabwe. Interlocutors agreed that the number of players
in the two sub-sectors has declined since the 1990s, although
they could not provide quantitative data.

--------------------------------------------- ------
Textile Sub-Sector Subsidizes Exports To Earn Forex
--------------------------------------------- ------

4. (U) The textile sub-sector appears to sell the bulk of its
output on the domestic market, as exports are, by and large,
not especially competitive. Export prices are lower than
domestic prices and domestic sales heavily subsidize exports
to South Africa. Despite low prices, Zimbabwean textile
manufacturers continue to export as a means of earning
foreign exchange, at any cost, to import the spare parts and
chemicals that are unavailable locally. (Note: Regulations
require exporters to relinquish 35 percent of their foreign
exchange earnings to the Reserve Bank of Zimbabwe at the
official exchange rate ) an effective steep export tax.
Prior to the Monetary Policy Statement of October 1, 2007,
they had to give up 40 percent of their foreign currency

--------------------------------------------- ----------
Apparel - Export Driven, But Up Against Commercial Risk
--------------------------------------------- ----------

5. (SBU) The Clothing Manufacturers Association (CMA), on the
other hand, explained that Zimbabwean manufacturers largely
depend on the export market to make money even though they
receive lower prices than their competitors. Foreign buyers,
unsure whether Zimbabwean manufacturers will deliver the
goods, impose a heavy discount to compensate for the
perceived commercial risk. As a result, orders have been
declining on a year-on-year basis at the aggregate level. At
the individual level, however, two major firms that we
interviewed, and that have a strong record of exporting to

HARARE 00000911 002 OF 003

the U.S., told us that their export orders to South Africa
have increased in the past year. The two firms ) one in
Bulawayo and one in Harare ) are known to be exceptionally
well managed, with strong capital bases, particularly good
labor relations, and a strong social commitment

U.S. Restrictions Benefit Zimbabwe Indirectly

6. (SBU) Were Zimbabwe eligible for the trade benefits of
AGOA, it undoubtedly would have the capacity and expertise to
increase its apparel exports to the U.S. Interestingly,
Zimbabwe has benefited indirectly from the introduction of
restrictions by the U.S. and EU on the importation of
textiles and apparel from China. As South Africa, under AGOA,
supplants China and exports an increasingly large proportion
of its textiles and clothing output to the U.S., Zimbabwean
manufacturers have filled the gap in the South African
domestic market, albeit against stiff competition from
Chinese suppliers. According to ZITMA and CMA, Zimbabwe's
close proximity to South Africa balances out to some extent
the sub-economic (i.e. subsidized) pricing of Chinese
products on the South African market. One of the most
competitive apparel manufacturers interviewed told us that
export quotas on Chinese products in the Southern African
Customs Union (SACU) in general, and South Africa in
particular, had helped the firm achieve an export-to-output
ratio of 95 percent. In fact, the company expected to double
its exports to South Africa in 2008. On the other hand, the
company managing director told us that his firm had lost a
major contract with a leading U.S. apparel chain when the
buyer decided to disassociate itself from Zimbabwe for
political reasons.

The Struggle to Maintain Competitiveness...

7. (SBU) Both associations maintained that, aside from the
recent introduction of duty payable in foreign exchange, the
GOZ had done nothing to improve the competitiveness of the
sector. In fact, CMA said that the government continued to
issue export licenses to lint producers instead of promoting
the processing of lint into higher-value products by local
textile manufacturers. Both associations and all companies
visited called for more protection of domestic manufacturers
against cheap imports. Moreover, both associations
underlined the negative effect of the country's deteriorating
electric-power and water infrastructure on their members'
international competitiveness.

8. (SBU) In the meantime, CMA explained that, to cope, its
manufacturers tapped into the foreign exchange black market
to import essential inputs. In addition, about half of
ZITMA's members had reorganized production to reduce waste,
and re-capitalized to improve product quality.

... And the Battle to Retain Labor

9. (U) Most firms interviewed had laid off workers but
maintained capacity to be able to re-hire quickly in a
recovery. According to CMA, employment in the clothing sector
had fallen from 24,000 in 2000 to 14,000 in 2007, against a
capacity to employ 35,000 workers. ZITMA was unable to
provide comparable data for the textile sector.

10. (U) There are no programs in place to deal with
dislocated workers aside from the standard retrenchment
package. However, the most successful firms in the apparel
sub-sector have introduced training programs to address the
problem of skill loss as skilled labor was leaving the
country en masse. Executives told us they could train a
worker to a high level of competency in three weeks.

11. (SBU) Addressing the effect of globalization on labor
market flexibility, textile industry executives pointed out
that the labor market was already very flexible, particularly
in terms of the black market exchange rate; real wages have
fallen substantially. To stem the tide of emigration, CMA has
taken the proactive stance of paying wages that are well
above the agreed minimum for the sector (though still far
below the Poverty Datum Line). Wages are also generally

HARARE 00000911 003 OF 003

supplemented by the provision of staple food, water (in
drought-stricken Bulawayo), and transportation and housing
allowances. The Association maintained that the industry was
always the first to settle in collective bargaining
agreements. In fact, it proposed linking wage increases to
changes in the consumer price index (CPI) as early as
February 2007. Most CMA members also pay bonuses for higher
productivity, which has improved output.

Yet No Signs of Capital Flight

12. (SBU) Notwithstanding all the challenges, capital,
including that of Asian and Jewish investors (most of whom
are Zimbabwean citizens) does not appear to be fleeing the
sector. While the managing director of one of the major
apparel firms visited told us he was emigrating to the U.S.
at the end of 2007, he was not contemplating divestment. On
the contrary, he will act as marketing director for the
company in the U.S. and expects exports to the U.S. to rise
from the current 40 percent to 70 percent within a year. In
the meantime, he has put in place a management structure in
Zimbabwe that will maintain local operations going forward.

13. (SBU) Overall, the apparel manufacturers believe that the
local textiles sub-sector should improve its product range in
order to cut down on imports of "technical" fabrics,
especially those that are water- and blood-proof and used for
safari clothing. One of the textile manufacturers called his
own industry "a joke" because of its dependence on obsolete
equipment and its narrow expertise in manufacturing heavy
cotton fabrics for the production of worker clothing. The
sub-sector needs to re-equip to improve its competitiveness.
Statistics show that in 2006, Africa's share of new knitting
machinery purchases was just over 1 percent, with Asia
accounting for over 88 percent. Of the 1 percent attributable
to Africa, Egypt and South Africa accounted for more than 75
percent, implying that Zimbabwe has a long way to go before
achieving the quality of fabrics demanded by the clothing
manufacturers. Both associations see a need to liaise more
closely going forward given the strategic nature of the
textile and apparel industry in Zimbabwe as the
second-largest contributor to the manufacturing sector.


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