OPEN ECONOMY: Textiles and the tale of Cottco

09 Nov, 2014 - 06:11 0 Views
OPEN ECONOMY: Textiles and the tale of Cottco cotton plant

The Sunday Mail

I am yet to see a Zimbabwean walking around in the nude. Across cities nationwide, it seems as though every third retail store is a clothing or textiles shop.

I trust that even you, my dear reader, unless in the extreme confines and privacy of your own home, are reading this while dressed as well.

So, on the surface it seems that all should be well with our textiles and clothing industries in Zimbabwe. Yet, that is far from reality.

Apparently, our textiles industry is producing at about 10 percent capacity. Job losses in the industry shot up to 65 percent from 2009 to 2012, and more recently companies such as Cottco are applying for judicial management.

The inconsistency from what is superficially seen and the reality of our dire industry is explained by competitiveness.

It seems that we are losing business to somebody else?

With that in mind, perhaps there are three quick considerations to ponder with regards to our clothing and textiles industry in terms of their competitive positioning, both on the local and global market.

First, less debt more equity!

Industrial players like Cottco must reduce their dependence on debt and instead look to equity for capital injection. Cottco had a reported debt obligation of over US$56 million and interest on that debt of over US$17 million; that is interest on debt of over 30 percent.

Likewise, Cottco had a debt to equity ratio of over 100 percent. Such a cost of capital is unsustainable and uncompetitive for two reasons.

Debt affects the whole production chain of textiles in the country. Cottco’s debt obligations became a transmitted pressure for the rest of the production chain, especially as Cottco has a monopsony of the cotton buying market.

The company was then forced to demand lower buying prices to producers for their output, squeezing margins for the entire production chain. This infuenced side-marketing which then caused a high level of defaults by producers.

Likewise, the cost of debt is a comparative disadvantage.

As Cottco exports 80 percent of its lint to markets in South Africa, Europe and the Far East, this exorbitant debt cannot rival producers fighting for those same foreign markets. The US, for example, was operating under zero interest rate policies, where central banks offer zero percent nominal interest rates to commercial banks that lend to agricultural sectors.

That means our competition for global markets had very little interest on debt to worry about compared to us.

How do we get around the burden of debt?

The issue goes back to indigenisation laws. Many companies today are being forced to look at debt as the only means of short-term recapitalisation because of a lack of investors in equity.

China Africa Development Bank seemed to be interested in acquiring a stake in Cottco, but more investors should be lured into the industry.

Without equity as a reliable means of capitalisation, many of our industries just like textiles and clothing, will prove to be uncompetitive on the global market because our monetary policy does not allow us to compete in terms of debt financing.

Second, we need supportive tax policy.

Global competitors from India and Pakistan offer their textiles industry a tax subsidy on interest expense to their local companies to retool and invest in equipment. The more they borrow to invest in their industry, the more tax exemption they get. Hence, interest costs are not passed down the production chain as is the case in Zimbabwe. So, if we are going to carry on relying on debt, perhaps we must respond with similar favourable tax conditions.

In the same vein, fiscal policy can be a source of finance if we strengthen our revenue collection from duty charged on imported clothing. This is a source of subsidy financing. Duties collected on clothing imports can be used as subsidies for producers, which lowers their production costs and gives them greater margins on their output for the year.

In that way, producers of cotton do not have to be as dependent on a single entity like Cottco to provide them agronomic, extension services and inputs.

Likewise, tax policy can be used as the traditional means of protectionism. If we are at 10 percent capacity utilisation, it is safe to assume that an overwhelming majority of clothes in this country are entering our borders from outside. This is the rare case where I support tax hikes.

Third, we should compete across the entire production chain of clothing and textiles and pursue value-addition.

Textiles has one of the longest production chains in all of industry, with the potential of value-addition at each stage of processing from farming, cotton ginning and spinning to fabric-making, dyeing, finishing and production of garments and other products.

Positive for us, these are all activities we can do locally in Zimbabwe. Pakistan is the fourth largest producer of cotton globally. Just last week, their Ministry of Textile Industry presented a five-year textiles policy.

It identifies its comparative advantages as legislation, tax policy, tariff structure, labour laws, access to quality inputs and timely allocation of resources.

We can compete with all these.

It seems an industry where competitive edge lies in policy-making, and not in any resource that Zimbabwe does not have.

A bonus point to consider, we should start off with looking at our local market to kickstart the textile and clothing industry again. Just last week, I attended the Zimbabwe Fashion Week.

I personally believe that if we can give our designers a chance and offer them space in our boutiques and stores, eventually we will have products that competes in terms of quality. However, that will take a conscious effort from both the private sector and Government in marketing our own brands and giving a platform to local producers.

All this would be with the hopes to grow domestic demand from the consumer.

In trying to sustain domestic demand, there will be incentives to invest in value-addition locally, because value-addition comes from proximity to the final consumer.

There are lessons to be learnt with the fall of Cottco and our textiles industry as a whole. I am positive the industry can still be revived.

It is one worth the effort.

We can compete both locally and globally when it comes to clothing and textiles. It is just time that we understand where we are losing out from a competitive standpoint.


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