by Tara Donaldson
(Journalist for “The Sourcing Journal”)
Source: The Sourcing Journal
Ever since the African Growth and Opportunity Act secured duty-free benefits for goods made in Madagascar, the African island nation has been working to restore its position as an apparel manufacturer.
Before a coup in the country led the U.S. to pull its duty-free benefits, Madagascar was exporting $300 million worth of textiles and apparel to the U.S. Though that number is a much lower $44.2 million in the first half of this year, according to the Office of Textiles and Apparel (OTEXA), growth over last year is 131 percent.
“The government is trying to push the sector to be one of the prioritized sectors in Madagascar because of the jobs it can create,” Johary Rajosefa, director of investor services for the Economic Development Board of Madagascar, told Sourcing Journal at Sourcing at Magic earlier this month.
In the years before the coup, Madagascar was the second largest textile manufacturer in Sub-Saharan Africa, and the country is looking to regain that title, or at least make its way toward it.
So far, countries and companies are reiterating their interest in sourcing there.
“The moment AGOA was reinstated, all the companies that left in 2009, they wanted to come back,” Mirana Rasamimanana, director of research for the American Chamber of Commerce in Madagascar, said. “People are reassured that things are picking up.”
Madagascar looks to create special economic zones
The government wants the textile sector to generate 200,000 new jobs for the country in the next three to four years and is working on setting up special economic zones where foreign manufacturers would benefit from tax exemptions, save on customs duties and get aid with company creation, permits, infrastructure and energy and water facilities.
Companies that import anything into Madagascar face a 20 percent value-added tax (VAT), which they would save on in the zone. And in a market where cutting costs is the driving factor behind many sourcing strategies, savings the economic zone could provide could lure the necessary investors.
The goal for the economic zone is to create a vertically integrated textile city, where yarn producers, fabric makers, dye houses and garment manufacturers would all be present, helping companies save on the costs of moving raw materials around, too.
The first economic zone could be established early next year, and according to Rasamimanana, big companies from the U.S., China, Korea and neighboring Mauritius have already expressed interest in setting up shop in the zone.
What is Madagascar making?
Workers’ skills in Madagascar are such that the country does well in couture products, things with hand embroidery and knitting.
Companies like Flexknit are crafting high-end sweaters in the country for brands at competitive costs.
Flexknit is the largest full fashion knitting sweater manufacturer in Sub-Saharan Africa, and the hand-linked, high-quality knits on offer have made their way into stores like Inditex-owned Massimo Dutti, which does all of its cashmere with Flexknit.
The company also does business with brand like Talbots, Marks and Spencer and Dillard’s.
One thing Madagascar didn’t lose with its previously revoked AGOA was its skill in textile manufacturing.
“As the business ebbed and flowed with America over the years, they [Madagascar] have continuously developed business with better European countries,” Bill Hulburt, director of USA sales for Flexknit, said. “They have serviced the European market for a long time. They are well established, so what you have here is a very attractive labor price, but you have them supporting customers in Europe that demand a very high quality.”
The quality of the product in Madagascar, according to Hulburt, is unmatched in many of the other producing nations.
Eugene Havemann, CEO of Madagascar Garments, which specializes in golf apparel, seconded the notion.
“Madagascar is like this rough-cut diamond and with a little bit of investment and education, the industry could be world class,” he said.
Beyond golf apparel, Madagascar Garments is manufacturing joggers, sweatshirts, T-shirts, knitwear and leggings, as well as performance apparel. And though the factory started up in March, Havemann said he expects to do $12 million in business next year, and likely double that by 2018.
“If we’ve got a decent production run, we’re running our productivity at 82 percent,” Havemann said. “It just gives you an indication of the caliber of worker in Madagascar. They’ve got the ability to operate at that level.”
What about labor and compliance?
The average wage for an entry-level worker is $60 a month, and though logistics costs run higher than other, closer countries, the low labor cost for the quality obtained offsets FOBs enough for the nation to be highly competitive.
Unions negotiate the wage rates, which get vetted and approved and that’s what factories have to pay their workers.
And because wage rates are negotiated on a macro scale, strikes haven’t been much of a problem in Madagascar.
“We don’t have problems with strikes, we don’t have Chinese New Year, we literally shut down for a few days over Christmas and otherwise you’ve got supply 12 months of the year,” Havemann said.
Because formal employment is a challenge in Madagascar and people remain out of work, there’s a labor force there that’s “yearning” for work, according to Havemann.
Price may be the one thing that gives some low-cost seekers pause.
“If you’re really interested in price, Madagascar may not be your place,” Hulbert said. “But the only place I cannot compete with on price is Bangladesh.”
When it comes to compliance, Rasamimanana said Madagascar is looking to rebuild a sound, safe sector.
“In Madagascar, companies are very much aware of the social norms of production and they are getting into the certification right now with the support of the East Africa Trade and Investment Hub,” Rasamimanana said, adding that training programs for companies to get various certifications are also in place. “We want to do business the right way.”
What about logistics?
For now, the shortest lead time from Madagascar to New York is 27 days and shipping costs can run as much as $5,000 for a 40-foot container, which is roughly the same as in Ethiopia and lower on average than Tanzania and Kenya, according to Rajosefa.
Before the coup, lead times in Madagascar were a much higher 50 to 60 days to the U.S. and many brands couldn’t afford that amount of time. But now, with added ports and sailings, the country has gotten lead times down to what Hulburt calls a “very reliable” 27 days.
The country has continued to invest in improving its logistics, upgrading its port with state-of-the-art software that has been part of what makes the lead times so reliable.
But the country could still stand to benefit from a further lead time reduction to compete in today’s quick turn market.
“The single most critical thing for Madagascar is cutting the lead times,” Hulburt said.
What’s next for Madagascar?
Since AGOA was renewed, container traffic from Madagascar has increased more than 200 percent and growth is only expected to increase.
The country just went through a smooth national election and has been able to demonstrate that there’s stability there and that it’s in the midst of rebuilding.
“What would be nice for Madagascar, what would be nice for East Africa, would be to continually improve the production process by becoming more vertical. By bringing more companies in with trims and accessory items needed to produce fashion products, label suppliers that make their labels there, zipper people, printing, spinning mills, weaving mills, all the back structure that you have in other countries.” Hulburt said. “That’s a long process, but that’s what’ll improve lead times and efficiencies.”
And as far as what Madagascar needs, which is jobs, Havemann said, “The clothing industry could create a million jobs if the country as a whole embraces the opportunity to manufacture for America.”
Madagascar May Be More Than a Few Steps Ahead of Ethiopia for Sourcing
Madagascar may not be getting the same publicity as Ethiopia when it comes to the topic of sourcing in Africa, but the island nation off the southeast coast of the continent has a lot to offer that few are talking about.
One thing that sets the nation apart for sourcing, is its history in textile manufacturing. Madagascar had already been a go-to source for making apparel in Africa before a coup in 2009 saw the country lose its trade benefits under the African Growth and Opportunity Act (AGOA). But its trade privileges under the preference program were reinstated in 2014 and since then, Madagascar has been on a mission to secure its appeal as a viable sourcing
Today, the country is engaged in strong woven cotton production, it has become a one-stop shop for wovens, and many manufacturers there employ state of the art looms, bringing differentiation to the fabric on offer.
Socota is one such manufacturer. The vertically integrated design, fabric and garment group has been in business since 1957, and today counts Zara among its clients—which undoubtedly means it’s no stranger to speed and efficiency.
With monthly wages that can be as low as $50, Madagascar can be counted on for cost savings, but, as one consultant notes, without the sacrifice of quality and ethics. And apart from shipping duty free to the U.S. under AGOA, goods from Madagascar can make their way to the E.U. without facing duties, too.
In Madagascar, as J.C. Mazingue, proprietor of Mauritius-based sourcing services firm Bilcotex, put it, “You get the creativity, the maturity of a first world company in a lesser developed economy…So you get the best of two worlds: you get the labor cost benefit and you get the maturity.”
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What remains counter to the country’s clear benefits, however, is a Western sentiment that at times considers Africa as too complicated a place to source from, with challenges and difficulties they’d rather not navigate. But Socota textile and clothing division CEO Véronique Auger doesn’t see things that way at all.
“Africa is the new frontier,” she said. “It’s about fashion and it’s about a solution. It’s not about problems.”
At Socota, goods go from order to ex-factory in 45 days, and the company can do smaller units and shorter deliveries—something more companies are keen on as they seek to deliver more accurate product to a more demanding consumer. Socota counts cotton flannel, stretch sateen and textured chambray among its fabric offerings, and it makes its woven tops and bottoms in a 1-million-square-foot facility. The company sources the bulk of its trims locally, which itself serves to save time in the supply chain, and much of its cotton comes from closely neighboring island Mauritius. The average FOB cost for what Socota produces is $7.50.
“The only thing we don’t produce in Madagascar is zips,” Auger said.
And it’s that level of verticality that has Madagascar steps ahead of Ethiopia with regard to sourcing.
“No matter how much Ethiopia is progressing—and it probably will be a future giant on the sourcing map of fashion—the supply chain isn’t there…at the end of the day, Madagascar is there and the supply chain is ready,” Auger said.
Ethiopia, though advancing at a rapid clip and luring large companies like PVH and H&M, the supply chain there is a nascent one, and without certain links in the chain, the country’s manufacturing ecosystem is still in the works.
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“That is why doing speed to market in Ethiopia will be a challenge for the next three to five years. Even if they are moving fast,” Auger said. “The export business in Madagascar is 20 years old now. We’ve got sewing thread suppliers, we’ve got packing trim suppliers, and when you are going to do fast and speed to market, you have to source locally.”
The country’s history in manufacturing is something Eugene Havemann, chief executive officer of Madagascar Garments, believes is a key competitive advantage for Madagascar as companies consider sourcing in Africa.
“Some of the other African countries that people have chosen to go and invest in, they don’t have that history of clothing manufacturing,” Havemann said.
Madagascar is known for quality, which comes thanks in large part to the skill level of its workers. And more than that, those workers are present and already trained.
“Certainly Madagascar has a huge number of people waiting to get jobs and get back into manufacturing clothing,” Havemann said.
The country also benefits from having single transformation rules in place under AGOA, which means it can utilize third-party fabrics and by converting them to garments, still be eligible for its duty free benefits.
“We can get the best fabrics from anywhere in the world in unlimited amounts and we can do single transformation with a high-quality labor force and land it duty free in the U.S.,” Havemann said. “And this allows us to grow a lot quicker than if we were a vertical operation because we have a lot more options for fabrics.”
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Madagascar Garments specializes in knitwear with a capacity of 600,000 garments per month. And despite its lack of proximity to the U.S., the country can still be highly viable for the right programs.
“As a factory, we’re not a high fashion, quick-response kind of business,” Havemann said. “Our competitive advantage in the market is synthetics, where there’s a 32 percent duty rate.”
For Madagascar, the goal has been to reassert itself as a valuable player in the apparel and textiles market and shake the stigma often attached to sourcing in Africa—that it’s solely rife with challenges. And more than that, it’s about addressing the misconception that sourcing out of Africa means working with only two or three key countries.
“Africa is no mono sourcing out of Ethiopia,” Auger said. “We are here as well.”