the material issues facing the south african textile and...
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SASTAC Material Issues Report_26November2014
The Material Issues Facing the South African Textile and Apparel Industry
Executive Summary
South Africa faces a complex array of issues that are of major significance to how
businesses operate and people live. Companies as well as their investors need to be
cognisant of the risks associated with these issues and take proactive steps to mitigate
negative impacts and adapt their operations to those changes that are inevitable. This
applies to all players within the textile and apparel value chain. Identification of those issues
that are most material to the industry was thus crucial in terms of the broader objective to re-
establish the local industry to be competitive and sustainable.
The material issues facing the textile and apparel industry were identified through desktop
research and interviews with players across all sectors of the value chain. These interviews
provided important insights into the companies’ operations and existing sustainability-related
initiatives. Issues were also identified through enquiring about the greatest challenges for
the respective company, their sector and the overall industry. It also allowed for issues that
emerged through desktop research to be verified for applicability at a local level.
The industry raised numerous issues as material to their company, sector and / or the
industry as a whole. These issues could be categorised into over-arching challenges – the
so-called “Big Five” Challenges. These are:
Economics – “Money, money, money”
People – “Shaky human capital”
Legislation and policing – “The Wild West”
Power, fraud and corruption – “Dodgy Ethics”
Environmental – “The Poor Cousin”
The areas of concern are in most cases complex and interconnected, with far-reaching
consequences and impacts. There are however demonstrations of best practice within the
industry from which others can learn.
Apart from the material issues identified, it became clear through the research that there is
currently no comprehensive industry strategy which all stakeholders buy into and drive. As a
result, attempts to turn the industry around have failed and it is unlikely that without such a
strategy, any further attempts will succeed.
It is essential the findings from this research inform the industry strategy so that it addresses
all five material issues areas. It should also be used to guide the Sustainability Standards
developed for the industry. Finally, it should be used to provide investors and other
interested stakeholders insights into the industry and inform their future engagements with
players in the industry.
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Research objectives and outcomes
The objective of this research was to identify the key material issues affecting the
sustainability of the textile and apparel value chain in South Africa and assess their likely
impacts on the long-term success of value chain players. In addition, examples of best
practices and industry-specific solutions implemented by key players in this sector were
identified.
This report is intended to serve as a valuable resource for industry players across the value
chain, investors and other stakeholders.
Approach
The Material Issues facing the industry were identified using a two-pronged approach.
Desktop research included an analysis of local and international textile and apparel market
trends and a review of relevant government and industry initiatives. This research identified
a broad range of sustainability issues facing the South African textile and apparel industry.
In addition to this, comprehensive interviews with companies across the value chain were
conducted to collect primary data. Interviews focused on unpacking challenges and
opportunities at company, sector and entire industry level, exploring existing sustainability-
related initiatives within the companies to identify best practices and key lessons and
determining which aspects of the industry interviewees felt need to be changed. The
interviews also enabled the research team to verify and expand on the issues that emerged
through desktop research.
The report is structured according to the “Big Five Challenges” identified through the
research, with each section covering:
The South African context
Details around each material issue
The outcome of each material issue
The changes that are needed
The overall consequence of the “Big Challenge”
The report concludes with a summary of key insights. An appendix of case studies of
organisations and initiatives that have successfully addressed the “Big Challenges” is
included
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The “Big Five” Challenges
1. Economics – “Money, Money, Money”
The South African context:
South Africa is ranked as an upper middle income country and is looking to continue its
transformation into an upper income country. Obstacles to achieving this include a
commodity-based export profile, limited competitiveness, challenging exchange rates
and sluggish growth within sectors of the domestic industry. Coupled with this is the
significant competitive pressure from Indian and Chinese imports into the domestic
market.
Sustained economic growth will only be possible if the country’s unemployment crisis is
addressed. Labour market inflexibility and legislative complexity are key constraints to
growth and job creation. Significant energy cost increases place further strain on industrial
sector growth.
South Africa is the only country that mandates all listed companies to prepare forward-
looking integrated reports and is one of only two countries to formally encourage
institutional investors to integrate sustainability issues into their investment decisions.
Despite this, the main focus of the business and investor community remains on short-term
profits.
The retailers’ drive for profits at all costs
There was consensus among the industry players consulted that it is highly unlikely that
South African retailers would consistently utilise local production capacity to the extent that
would enable the revival of the industry. This stems from the perceived lack of support and
sustained commitment shown to local suppliers in the past. The industry feels that retailers
are solely profit driven and drive down prices in order to increase their margins. Three key
issues were identified as stumbling blocks to the effective partnerships between the supply
and demand sides of the value chain. These are discussed below.
Ownership structures – The misalignment between retailers and the enterprises making up
their supply chains is influenced by contrasting ownership structures. The suppliers are
typically owner-managed or family-run operations, while the majority of South African retail
companies are publicly-owned and therefore required to answer to shareholders and
investors. While this is, in itself, not an issue, the prevailing attitude among shareholders
and the investor community appears to be the pursuit of short term returns, rather than long-
term sustainable growth. This pressure trickles down through the retail structures and
manifests itself in the way employee performance is measured (i.e. key performance
indicators). The undue emphasis placed on price and profit means that sustainable
principles and practices tend to be neglected. There are however, some exceptions within
the investment community, such as the PIC, Element Investment Managers and Arisaig
Partners.
What is needed? A shift in mindset of and engagement approach by the investment
community with regard to the retail sector, with the focus shifting to long-term,
sustainable growth and increased understanding of supply chains.
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Detachment from supply chains – The textile and apparel industry value chain is currently
buyer-driven, which is ironic considering that retailers do not consider themselves part of the
industry. As a consequence the balance of power is skewed towards retailers, who are able
to exert significant control despite being largely disengaged from their suppliers. The
retailers are often oblivious to the far-reaching impacts their behaviour has throughout the
entire supply chain. The shift by retailers to quick response models that imply a significant
increase in near-sourcing will require retailers to build partnerships with local suppliers and
to gain a much deeper understanding of their impact on the full supply chain of retail. This
process is likely to be challenging given the current lack of trust by local suppliers of retail
and the prevailing ‘victim’ mindset of the industry.
What is needed? Retailers should aim to rebuild the trust of the industry and look to form
long-term partnerships with suppliers.
The profile of retail buyers – The age, lack of experience and maturity level of the retail
buyers was consistently raised as an issue. Many buyers are perceived to lack critical
knowledge relating to fabrication types and qualities, the complex processes involved in
garment manufacturing and the impact of changed or cancelled orders on suppliers. Buyers’
key performance indicators (KPIs) typically drive a focus on sourcing products at the lowest
possible price.
On the flip side, it was noted that local manufacturers tend not to be proactive in their
engagements with retailers. This seems to be driven by two key issues. Firstly, it appears
as if they are too afraid to raise concerns and challenges with retailers, for fear of having
existing orders cancelled. Secondly, they are often lack the capability to immediately
provide retailers with alternatives to proposed order changes that can meet the retailers’
needs while not having an impact on price or delivery times. This stems from a lack of
understanding of their own costings, detachment from their own supply chain partners and a
lack of internal capability to quickly conceptualise alternatives.
What is needed? Retail buyers need to have a deep understanding of the full supply
chain. Local suppliers need to become more proactive and grow their capability in
providing alternatives to retail.
Impacts of current challenges: The focus on low prices, a lack of commitment to the local
market and the subsequent lack of supply chain understanding by retail buyers makes it
challenging for suppliers and retailers to form long-term, strategic partnerships.
Local manufacturers are struggling to stay afloat
Operating on the supply side of the textile and apparel industry in South Africa has become
increasingly challenging. There are three major contributors to the decreased ability to
remain competitive, namely insufficient scale, increased operating costs and inconsistency in
payment terms across the value chain.
Insufficient local support / demand - During the apartheid era, the imposition of
economic sanctions on South Africa meant that the local industry was largely
protected through not having to operate in a globally competitive environment. This
extreme protection enabled the industry to be profitable during these times. This
situation changed dramatically when South Africa began trading on the open market.
Local manufacturers were no longer protected and were not able to compete with
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the low prices and extensive product range offered by international competitors. This
situation motivated local retailers to source and increase the proportion of their stock
from international producers. The reduction in volume and frequency of orders to local
manufacturers resulted in decreased efficiencies, further reducing their competitiveness
and discouraging further investment in the sector.
It should be noted however that other factors apart from economies of scale reduce South
Africa’s competiveness. Two such factors are the limited availability of accessories and
intermediate products, as well as significant levels of both direct and indirect subsidisation
in competitor countries.
What is needed? Increased production scale to improve efficiencies and drive
investment in technology, capability development and innovation.
Increasing operating costs – Both fixed and variable overheads are becoming more of an
issue for firms operating in South Africa. Almost all value chain players consulted identified
the high cost of electricity (and to a lesser extent water) as one of their biggest concerns.
The cost of electricity has increased dramatically over the past few years. The spinning and
textile manufacturing sectors, in particular, have been hard hit due to the energy intensive
nature of their operations.
In addition to utility costs, the increase in municipal rates was another concern noted by
industry players across the value chain. The impact of the Carbon Tax (implementation
delayed to 2016) and the implications of the Waste Amendment Act of 2014 for the industry
have not yet been quantified but are a concern for the industry.
Interestingly, while high shipping costs were raised as a concern for the industry, fuel and
transport costs were not. However, it became clear from the research that the decentralised
nature of the industry results in substantial logistical inefficiencies, which in turn add
additional cost.
Finally, the increasing cost of labour was raised as a concern. This was identified as one of
key reasons behind South Africa’s inability to compete with other, lower-wage-paying
nations. There is vigorous debate around the socio-economic impacts of following a low-
wage growth path, with SACTWU (South African Clothing and Textile Workers Union)
leading the fight against it. Many of those consulted found the biggest constraint to be the
fact that the current wage structure is inflexible, with limited scope for productivity-based
incentives. This is felt most acutely by those businesses operating in a low-margin
environment, supplying the value retail segment.
Labour rates are set by the two Bargaining Councils – the National Textile Bargaining
Council and the National Bargaining Council for the Clothing Manufacturing Industry (see
below for details on Bargaining Councils in South Africa). However it is possible that even in
the absence of bargaining council wage structures, South African labour costs may need to
be higher than many other competing nations due to the high cost of transport and food.
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Overview of South African Bargaining Councils
The Labour Relations Act (LRA) makes provision for the establishment of bargaining
councils for each of the major sectors in South Africa. The bargaining councils consist of
representatives from the major unions and employer groups within each of the sectors.
Their main purpose is to reach consensus on the employment terms and conditions for their
specific industries. The terms and conditions agreed by the councils are contained in a
collective or main agreement. Once a collective agreement has been finalised, it is gazetted
by the Minister of Labour. Its terms then extend to all of the workers and employers in the
sector, including those who are not members of the union/s or employer group/s represented
on the bargaining council.
What is needed? Ongoing cost reduction and business reengineering to ensure that
operating costs are minimised and efficiencies are optimised. Engagement with the
Bargaining Councils to explore mutually accpetable alternatives to the current wage
structures.
Payment terms across the value chain – There appears to be a mismatch of payment
terms across the value chain which places working capital pressure on certain sectors. The
prevailing silo mentality within the industry, from fibre producers through to retail, results in a
lack of transparency of payment terms and working capital constraints.
Traditional banking institutions seem reluctant to provide development finance to players in
the industry and as a result, companies seek alternatives, such as debt factoring, to help
relieve these pressures. These alternatives are often costly and therefore compound cost
management challenges. Furthermore, restricted working capital hampers investment and
growth.
Poor financial management and the failure to adopt world class manufacturing principles
further compound the issue.
What is needed? Creative solutions to address working capital constraints across the value
chain, including aligning payment terms and creating innovative, cost-effective financing
solutions.
Impacts of current challenges: Large numbers of industry players have been forced to
either down-size or close down operations due to financial pressures, resulting in over
100 000 jobs lost between 1996 and 2013. The pressures on remaining players
continue to mount.
The overall outcome: Money, Money, Money:
Industry players have become inwardly-focused and place attention on managing
short-term financial pressures. Partnerships, innovation and strategic thinking
are in short-supply and as a result, the industry’s competitiveness continues to
decline.
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2. People – “Shaky Human Capital”
The South African context:
South Africa is plagued by extreme poverty and inequality, indicated by one of the highest
(worst) GINI coefficients in the world (65). Some structural transformation has occurred as
witnessed by rapid urbanisation, the development of an industrial and service economy,
and declining birth and death rates. However, the current social context remains largely
reflective of the political reality during apartheid.
The apartheid era saw economic and trade sanctions imposed on South Africa, which
forced the nation to look internally for all its sourcing needs. Local industries were largely
protected through the elimination of external competition. This culture of complacency
persists amongst many industry leaders today, despite the operating landscape having
changed dramatically since the democratic transition and South Africa joining the open
market.
A cornerstone of apartheid was racial segregation. People of colour were disadvantaged
by legislation and policies, resulting in a large supply of cheap and deliberately unskilled
labour. There were also limited opportunities for children from disadvantaged groups to get
a quality education and become highly skilled, which prevented them from entering the job
market. Despite 20 years of democracy the quality of education available to the majority of
South Africans remains among the worst in the world. This has contributed to the 25%
unemployment rate and distorted skills base, representing an ongoing failure to transform
the economic landscape. Previously disadvantaged communities are today still associated
with high crime rates and poor health.
True leadership is hard to come by
Strong leadership skills are increasingly recognised as a crucial ingredient for successful
businesses. A lack of forward thinking leadership was highlighted as one of the material
issues facing the South African textile and apparel industry.
Absence of strategic thinking – Many stakeholders consulted during the research were
critical of leadership within the industry. Some examples of the way leaders were described
are presented below: “There is a lack of innovation and forward-thinking”, “Managers need
to wake up and stop being complacent”, “An ‘old mill mentality’ resides – where those in
management positions are living in the past – where not very much had to be done to make
large sums of money”, and “Our leaders are evolutionary, rather than revolutionary”.
Two other issues emerged during the engagement sessions with the companies and
industry associations. The first was the near absence of collaboration between leaders in
the industry. Challenges are perceived to be unique to individual companies and sharing
information or working collectively is considered to undermine individual competitive
advantage. This has resulted in a silo mentality within the industry, ineffectual impact and
increased costs from not sharing resources. Secondly, many leaders believe that they run a
‘world-class’ operation, although it is unclear whether they have benchmarked themselves
against firms in other manufacturing nations. This indicates a lack of critical reflection
among many industry leaders and stifles progress and improvement.
What is needed? Forward-thinking leaders with a passion to make a sustainable and
positive difference to the broader industry context.
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Limited demonstration of sound financial management – The lack of access to capital
and prospects for future growth were identified as challenges by many of those consulted.
This is evident from the large number of companies that have been forced to close or have
been ‘rescued’ by the IDC (Industrial Development Corporation).
The challenges in financial management relate primarily to areas such as financial planning,
activity-based costing, technology investment strategy development and people investment
strategies. The lack of financial skills and experience is particularly prevalent in smaller
CMT operations, where owners and managers often lack formal business training.
What is needed? Focus on developing the financial skills, both at an operational and
strategic level..
Insufficient efforts to create shared social value - Effective management and leadership,
within South Africa’s socio-political environment, requires consistent engagement with
multiple stakeholders, particularly supply chain partners and labour. There is often a direct
correlation between ineffectual management and labour-related problems. The
organisations where labour-related issues were not raised as a critical challenge all had
progressive leadership that were acutely aware of the social and economic reality of their
workforce.
Employees, particularly at the factory floor level, are a critical component of an efficient
operation. Labour issues often arise when managers ‘sweat their human assets’, rather than
engage with them as people.
Contracting of workers is common within the industry, particularly in the agricultural and
CMT sectors. These workers lack the security that is associated with permanent
employment, which can negatively affect performance and productivity. However, it was
noted that some workers were content with informal (cash-based) employment as this
enabled them to continue accessing social grants1.
Health and safety enforcement is another area that could be improved by most managers.
Common occupational health and safety issues include exposure to potentially harmful
chemicals, particularly in the dyeing and finishing space, inhalation of small particulates in
knitting, weaving and CMTs, and ambient temperature and pest control, particularly in the
CMT environment.
Skills development, by contrast, is one of the few areas that appears to have received
signficant attention from factory management. This has been driven by the shortage of skills
in the current workforce and the perception that interventions by government and related
organisations in the skills development arena have been inadequate. There are numerous
examples of highly effective in-house training schools, especially at a CMT level. However,
the focus of the skills development programmes has been on technical skills rather than soft
skills, such as communication and life orientation.
What is needed? Improved focus on proactive employee engagement within the factory
environment.
1 This practice was not observed in any of the factories visited during this research. However, it was noted by
some of those interviewed as an issue, particularly with non-Bargaining Council Compliant factories.
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Environmental management driven solely out of compliance and cost-saving – Very
few of the value chain players interviewed raised environmental management as an issue or
challenge currently facing the industry. More concerning was the fact that it was not
considered among the risks that the industry believe they will encounter in the medium term
(5 to 10 years). There seems to be a lack of awareness and understanding of environmental
sustainability among the decision-makers in the industry, which is concerning. If the
prevailing attitude persists, the industry is unlikely to benefit fully from potential efficiencies
related to inputs (e.g. doing more with less - electricity, fuel, water), selection of raw
materials with the smallest environmental impact (e.g. fibres, chemicals, dyes), the
installation of environmentally-friendly technology and infrastructure, the effective
management of waste (solid and effluent) and by-product opportunities (e.g. seed oil and
material off-cuts).
What is needed? Increased awareness of the medium- to long-term environmental risks
facing the sector, coupled with a more proactive approach to managing environmental
issues.
Impacts of current challenges: Lack of leadership, strategic thinking and business
management skills within the industry have contributed to the general low level of
competitiveness.
Labour force
Previously disadvantaged communities are affected in three main areas that impact the
industry, namely living conditions, health and skills levels. The communities in which the
majority of the labour force resides are ‘unsafe’ in terms of gangs and violence. There are
also high incidences of domestic violence, drug and substance-abuse within the
communities. While this may not always directly affect those employed by the industry,
concerns over the safety of children and family members does impact absenteeism and
productivity.
The high population density within low-income communities and informal settlements and
limited access to adequate health care mean that workers are more vulnerable to disease
and health issues. The prevalence of HIV/Aids and TB amongst staff and their families is
believed to be high and impacts business through time off work for clinic and hospital visits.
Overall, the lower ‘quality of life’ often translates into lower productivity in the work place.
There is a general perception of a low level of ambition amongst staff, based on an apparent
unwillingness to extend beyond the absolute minimum required by the job and the necessity
of a high level of supervision to maintain productivity. The situation is more complex and is
influenced by historical labour practices within the industry and a lack of progressive
leadership in some cases, making employment unattractive.
Thirdly, low levels of education, with many workers being functionally illiterate, is a major
challenge for the industry. Furthermore, the shortage of certain critical skills was raised by
almost all those interviewed. Critical skills gaps largely relate to management and
leadership-related issues as well as poor numeracy and literacy, while the industry’s scarce
technical skills were highlighted as pattern making, production operators (machinists) and
materials technologists.
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The merger of the technicons with universities, to create universities of technology and the
resulting shift from practical to more academic skills, along with the significant reduction in
formal apprenticeship programmes was cited as a reason for the shortage of practical skills.
The low number of young people entering the industry was identified as a serious challenge
for the industry. As a result, the shrinking skills pool is not being replenished. The industry
has suggested some reasons behind this phenomenon. Primarily, the textile and apparel
sector is seen as a ‘sunset industry’ with limited future prospects. The youth of today aspire
to more than what their parents had. They desire more glamorous, white-collar jobs, so
factory work is not seen as a legitimate career path. Coupled to this is a perceived sense of
entitlement and impatience amongst South African youth.
What is needed? Attempt to rectify previous disadvantages, understand the challenges
faced as well as encourage and attract the youth to the industry
Impacts of the current challenges: The socio-economic challenges facing the South
African textile and apparel sector’s labour force contribute significantly to high
absenteeism, poor productivity and a limited skills base.
The overall outcome: Shaky Human Capital:
Outdated management approaches, coupled with poor leadership and strategic
skills have hampered the industry’s ability to compete in a free trade environment.
Systemic social challenges place additional pressure on an already stressed
labour-intensive environment.
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3. Legislation and policing – “The Wild West”
The South African context:
The Constitution of the Republic of South Africa (Act 108 of 1996) is the supreme law
and makes provision for how the three branches of Government should operate. One
such branch is the Legislature Authority which includes Parliament, provincial
legislatures and municipal councils. Parliament has legislative authority (i.e. the
power to make laws) in the national sphere of government. The provincial legislatures
and municipal councils are able to introduce legislation at a provincial and local government
level, provided they are consistent with the provisions of the Constitution.
Although the principles behind much of South Africa’s legislation are good, the outcomes are
often misaligned with the objectives. Another deficiency is the lack of follow through in
implementation, as well as the insufficient policing.
Incoherent and misaligned policy frameworks and legislation
The two major issues emerged from the consultations with respect to the legislative
environment. Firstly, there appears to be a lack of coherence with regard to government
policy and legislation, which has undermined the industry’s ability to make strategic
decisions, particularly with respect to investment. While most of the principles upon which
individual policies and frameworks are based are sound, their impacts are often at odds with
one another. Secondly, there has been a lack of consideration of the often far-reaching
consequences, intended and unintended, of policy and changes in legislation. This restricts
effective decision making within the industry further.
The legislation that is especially pertinent to the industry is in the areas of trade, tax and
labour.
Trade – Since the transition to democracy, South Africa has adopted an open, non-
protectionist approach to trade policy, often at the expense of the local industry. This is most
obvious in the duties on imported goods. Due to this approach, there are now essential
materials that now cannot be produced locally. Import duties remain on some of these
materials, negatively impacting price competitiveness. There has not been a coherent lobby
by the industry to challenge the status quo, with the intent to enable an industry-wide
strategy. Where exemptions have been obtained, such as for wide-width fabrics, this has
been driven by select individuals within specific sectors.
The mechanism currently used to calculate the value of imported products, for the purpose
of determining duties, has been raised a concern by the local industry. Reference prices of
finished goods are currently based on the value of the raw materials used to produce the
product, rather than the total value-add. This results in often significant undervaluing of
imported goods, to the detriment of local producers.
Furthermore, certain large-scale textile producing nations (India and China) provide their
manufacturers with export incentives, effectively enabling them to sell their products to
foreign buyers at a significant discount without impacting on their profitability. It has been
noted that even accounting for shipping costs and import duties many of these products
remain cheaper than they can be produced locally.
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South Africa is party to the SADC free trade agreement, so finished items, manufactured in a
SADC country, may be imported into South Africa duty free. Individual SADC countries are
free to negotiate trade agreements with countries outside the SADC region and many of
these allow the import of fabric and raw materials with little or no duty. The net result is that
even with comparable production costs, the unit price of the finished product manufactured
in the SADC country is significantly lower than the local equivalent. As their products may
be imported duty free they represent more attractive options for South African buyers.
What is needed? Trade policy and trade agreements need to be reviewed and modified
to ensure that South African manufacturers are able to operate on a level playing field
with international players, particularly those in the SADC region.
Tax – The South African tax environment is stringently regulated and policed by the South
African Revenue Service (SARS), one of the most efficient arms of government. While the
corporate tax structure was not raised as a concern by those interviewed, many within the
industry suggested that revenue from customs and import duties could be ring-fenced and
used to fund initiatives that benefitted the industry, particularly in the area of skills
development.
In addition to existing taxes, two new taxes, the Carbon Tax and “Waste Tax” are in the
pipeline. While the magnitude of the impact of these taxes and the mechanisms of their
implementation are unclear, they will have a further negative impact on the competitiveness
of the local industry.
What is needed? A more consultative approach needs to be employed by government
when establishing new taxes. Industry players also need to be more proactive in
engaging with and lobbying government.
Labour – South African labour laws and regulations are ranked as the 7th most restrictive
out of 139 countries which has a direct impact on the country’s labour market
competitiveness. The World Economic Forum’s Labour Market Competitiveness ranking
placed South Africa at 133rd in the world in 2011. Firing practices, labour unrest and wage
inflexibility are highlighted as the three most critical challenges facing the country. The
power of the unions and central bargaining councils has a significant role to play in labour
unrest and wage inflexibility. These issues impact directly on the local industry and were
highlighted as one of the most fundamental challenges facing the industry.
Not only do the laws and regulations make it challenging to effectively operate a labour
intensive business in South Africa but they also hamper local suppliers’ competitiveness
relative to global producers. Traditional textile and apparel producing countries such as
China, India and Mauritius all score much higher in terms of labour market flexibility than
South Africa, particularly in the areas of co-operation in labour-employer relations, wage
flexibility, hiring and firing practices and pay and productivity. This has a direct impact on
their cost and efficiency of production and positions them well above South Africa in terms of
competitiveness.
What is needed? Strategic collaboration between the industry, the unions and
government to develop a labour framework for the industry that enables improved
competitiveness.
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Broad Based Black Economic Empowerment (B-BBEE) – While only one player
interviewed for this study noted B-BBEE as an issue for their business, the new B-BBEE
legislation, which comes into effect in early 2015, is likely to have an impact on the industry.
The emphasis of the new legislation will require more active focus on driving black
ownership, skills development and preferential procurement.
Under the new B-BBEE codes, the turnover threshold for exempt micro enterprises (EMEs)
has increased to R10 million from R5 million. Companies with a turnover below R10 million
will be exempt and will receive an automatic level 4 B-BBEE status. Companies with a
turnover of between R10 million and R50 million qualify as Qualifying Small Entities (QSEs).
However, QSEs will now be required to comply with all the elements of the B-BBEE
Scorecard. This will have a significant impact on QSEs, as they previously could choose
four of the seven elements with which to comply.
The new codes will likely result in a number of companies that previously achieved an
acceptable level of B-BBEE accreditation (Level 4 or 5) either falling to Level 8 contributors
or becoming non-compliant. This will have a signficant impact on all industry players as
customers in all sectors (retail, industrial/commercial and government) increase their
demands on suppliers to meet minimum B-BBEE requirements.
What is needed? Increased awareness and understanding of the implications of the new
legislation on the industry.
Impacts of the current challenges: The incoherence, inflexibility and complexity of
legislation and policies hampers the industry’s ability to operate and plan effectively.
Limited enforcement
Government Procurement - The Preferential Procurement Policy Framework Act (PPPFA)
was legislated in 2011 as a means of addressing the high level of unemployment in South
Africa by stimulating local manufacturing. The vast majority of industry players consulted
held the view that the Act is not properly understood by government procurement officers
and is not being effectively enforced. More importantly, industry representatives believed
that with effective implementation, preferential procurement would transform the local
industry, as it would provide the necessary scale and consistency to enable the rebuilding of
the industry.
What is needed? A working model for government procurement that would enable all
government departments to meet the PPPFA requirements needs to be developed.
Lack of policing – Several players indicated that limited resources are dedicated to policing
the implementation of legislation and regulation. One area of particular concern is the
limited policing at customs borders, where containers are meant to be checked on arrival.
Industry players quoted statistics (not confirmed) of approximately only one in ten containers
being checked. Ineffective policing is well-known throughout the industry and is thus
exploited by those illegally importing products into South Africa.
Imports are considered ‘illegal’ when profits are made as a result of under-invoicing. Agents
and importers under-invoice to avoid or minimise duties on finished products (22% on
fabrics, 30% on home textiles and 45% on clothing). South African customs is bound by
World Trade Organisation (WTO) rulings, which state that customs control officers are
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obliged to accept products at the invoice price unless they have sufficient evidence to
believe that is under-valued.
What is needed? Increased resources dedicated to effective enforcement of legislation
and regulation.
Impacts of current challenges: An environment that enables fraud and corruption.
The overall outcome: “The Wild West”
Incoherent legislation, coupled with ineffective policing provides a breeding
ground for fraudulent activity due to both complexity and the low risk attached to
getting caught. Industry players’ ability to plan and invest is undermined by
constant changes to legislation
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4. Power, fraud and corruption – “Dodgy Ethics”
The South African context:
Crime, corruption and fraud are significant challenges facing South Africa as a whole. The
country was ranked 69th out of 176 countries in Transparency International's Corruption
Perceptions Index 2012.
Unethical behaviour appears relatively prevalent within the local textiles and apparel
industry. The lack of ethics and integrity is not confined to one particular stakeholder group,
but is evident across multiple areas, including government procurement, retailers, off-shore
manufacturers and local supply chain players.
Government – Government procurement practices and the way tenders are issued and
managed were highlighted as a concern. There are a limited number of government
departments that procure centrally and where this is not the case, effective tracking of the
tenders is difficult. A consequence of decentralised procurement is the large number of
procurement officers employed by national, provincial and municipal government. Assigning
accountability and providing transparency is therefore extremely challenging. This is
exacerbated by issues such as the bribing of customs officers.
The roles of Treasury, the Department of Trade and Industry and the South African Bureau
of Standards (SABS) are unclear with regard to monitoring of delivery against tenders
awarded. As a result, there appears to be little, if any, policing of suppliers delivering within
the required specifications of awarded tenders. The practical outcomes of this lack of
policing are that sub-standard products are being delivered, portions of tenders are procured
locally with the balance being imported despite the full tender being awarded to local
suppliers and finished products are ‘disappearing’ once procured.
It should be noted that, while there are significant challenges within government and its
agencies that enable fraud, corruption can only take place when both parties to a transaction
are operating illegally. Stamping out corruption is therefore dependent on addressing illegal
activity both within government and within those companies that are awarded government
tenders.
What is needed? Increased co-ordination and accountability around government
procurement and severe consequences meted out for illegal behaviour.
Retailers – Several organisations on the supply-side of the value chain were concerned by
the business practices employed by many local retailers, which they felt were prejudicial and
at times unethical. They also noted that retailers are often oblivious to the consequences of
their actions. Examples cited included the retailers’ perceived contribution to illegal imports,
the cancellation of orders at the last minute without effective consultation with suppliers and
the termination of partnerships after extensive product development had been completed.
The suppliers expressed resentment at the way retail buyers aggressively squeeze the
supply chain on price, particularly given the substantial mark-ups (up to several 100%) the
retailers impose on their products.
What is needed? An increase in retailer transparency and accountability.
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Off-shore manufacturers – Local manufacturers indicated that they were not adequately
protected again unethical behaviour and business practices perceived to be common among
off-shore manufacturers. Issues raised included the under-valuing of products exported to
South Africa, export incentives, price manipulation (e.g. cotton stock), dumping of products
and the use of false marketing claims (e.g. treated cotton marketed as ‘flame-retardant’
fabric). In addition, the disparity between wages paid by local and off-shore manufacturers
was raised, with many off-shore producers paying below what is classified as a ‘living wage’.
What is needed? Less tolerance by retailers of unethical behaviour within non-South
African suppliers, coupled with increased loyalty to local manufacturers.
Local supply chain players – Examples of unethical behaviour on the part of local
suppliers emerged in three main areas, namely import practices, government tenders and
labour relations. Under-invoicing, the practice of declaring the value of imported goods at
significantly below their actual value to avoid high duties, emerged as the biggest issue with
respect to imports. Customs police are not in a position to dispute the value on the invoice,
so the practice is difficult to combat. The use of ‘B-BBEE fronting companies’, to circumvent
preferential procurement and the misuse of SABS certificates to win government tenders
was raised as a critical issue by several of the stakeholders interviewed. A number of
factories are not bargaining council compliant and concerns have been raised regarding the
treatment of workers in those operations. Non-compliance appears to be more prevalent
among foreign-owned businesses. Areas of concern centred on wages, working hours and
adherence to health and safety standards.
Business owners cited theft by employees as the unethical behaviour having the most
significant impact on their operations. This was particularly prevalent within the CMT sector.
What is needed? Industry players should realise the significance and damage caused by
unethical behaviour.
The overall outcome: Dodgy Ethics:
Unethical behaviour and an absence of integrity undermine the ability of the local
industry to compete freely and grow.
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5. The Environment – The “Poor Cousin”
The South African context:
Natural resources, such as water, coal, oil, land and air are used as raw material inputs
into many South African industries and are relied upon by all individuals for day to day
living. The necessity for sustainable management of natural resources and systems is
reflected in South Africa’s environmental legislative frameworks which are of an
international standard. However, accountability has not been embraced by most
stakeholder groups, with relatively few examples of environmental stewardship available.
In South Africa, the current level of consumption creates a significant amount of pollution
and is not sustainable, as the majority of energy (electricity and liquid fuel) is generated
from ‘fossil fuels’ in the form of coal and oil. The sustainable management of freshwater
resources is critical for economic development. South Africa is a naturally dry and water-
stressed country (98% of supply is utilised) with below-average annual rainfall
(< 464 mm). Based on current water usage, population growth, and climate change
predictions, a 1.7% water shortage is predicted by 2025 (Department of Water Affairs).
Pressure on these natural systems is increasing as a result of over-exploitation,
unsustainable practices, pollution and climate change.
The issues
Environmental issues did not feature among the primary concerns of those interviewed.
Only two of the industry players, across the value chain, identified current and future
environmental issues as a material issue facing the industry. Similarly, the opportunities
associated with integrating sustainability thinking into their strategies were not recognised.
When pressed to consider risks and opportunities associated with the environment,
compliance with legislated standards was raised as the greatest risk, specifically the
treatment of liquid effluent to meet municipal discharge specifications. There was limited
understanding or appreciation of the broader impacts of environmental neglect.
The most important current material issues to emerge from the desktop research and factory
visits related to energy, water, chemicals and waste (solid and effluent).
Energy - The textile and apparel industry is energy intensive across most of the value
chain. While most of those interviewed raised concerns related to the increasing cost of
electricity, the environmental impact of energy generation was not considered. The benefits
of greater energy efficiency were only considered from an economic perspective.
Many players noted that the Production Incentive was invaluable in providing the funds to
enable them to replace outdated manufacturing equipment with modern, energy-efficient
technologies. Some players indicated that they have installed solar panels at their facilities.
Companies are currently tackling energy efficiency and mix on an individual basis, with many
making use of the National Cleaner Production Centre’s energy offering. However, there is
an opportunity to upscale these efforts.
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What is needed? Sector-wide solutions to assist companies in both reducing their energy
consumption and incorporating renewable energy sources into their mix. Such solutions
will need to incorporate innovative funding mechanisms so as to make them
economically attractive to the industry
Water – The industry is a heavy user of water, particularly on irrigated commercial farms and
during dyeing and finishing. The laundering of products is also water-intensive. A number of
respondents cited increasing water costs as a concern but as with energy, the environmental
impacts of water use were not flagged as a concern.
Water needs to become a far greater concern for the industry going forward, particularly
given the fact that South Africa is water-scarce.
What is needed? Future industry development strategies will need to consider water
scarcity and water-related impacts of production, particularly in the agricultural and
dyeing and finishing parts of the value chain.
Chemicals – Chemicals are used extensively throughout the value chain, from fertiliser,
pesticides and herbicides at the farm-level to industrial chemicals at all stages of production.
Many of the chemicals, such as acids, alkalis and oxidising agents are very reactive, while
others, such as azo-dyes have limited biodegradability. The chemicals represent a
significant risk, both to human health and receiving ecosystems, but the potential impacts of
these risks were not recognised by any of those interviewed.
Globally, chemical use and management has been noted as one of the critical hotspots in
the textile and apparel industry. In 2011, a number of international apparel and footwear
brands established “ZDHC” and set a target of Zero Discharge of Hazardous Chemicals by
2020. They developed a joint roadmap that sets out specific commitments and timelines to
achieve the ZDHC target. A number of the signatories already have a presence in South
Africa, with others are planning their entrance to the market in the near future. The ZDHC
commitments will have a direct impact on local companies looking to supply these brands
going forward and may also have an indirect impact as those brands start to raise
awareness for the chemical issues amongst South African consumers.
What is needed? Increased focus on effective chemical management throughout the
value chain, including at retail level where supplier codes of conduct are developed and
managed.
Waste - The industry is synonymous with waste generation. Liquid effluent is the primary
concern through much of the value chain, from farming, through textiles manufacturing,
dyeing and finishing. At the CMT stage, the quantity of material offcuts going to landfill is
substantial. While opportunities to recover value from the waste do exist there is little
implementation at this stage. Recycling does not appear to be a common practice across
the industry, even for products such as cones which are simple to recycle. There appears to
be a complacency within the industry to deal with waste-related issues that do not have
either a direct cost or compliance implication.
What is needed? Increased awareness of the cost of waste, both in terms of input costs
and removal costs, coupled with increased focus on finding opportunities to recover
value from waste.
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Impacts of the current challenges: Increasing costs and risks as a result of not
effectively managing environmental issues.
What about climate change?
The issue of climate change was raised by only two individuals interviewed, with only one
citing the potential impact it may have on the industry. It was noted that the effects of
climate change are already being experienced in the retail space through product ranging by
season. The winter season is becoming shorter and traditional summer-only garments such
as shorts are becoming standard stock items throughout the year, while other items such as
heavy-weight jerseys are required for a much shorter period. Retailers and design centres
need to be aware of and plan effectively for such shifts, as they have a significant impact on
range and product design, stock turn and mark-downs.
Climate change is also going to affect agricultural patterns for natural products such as
cotton, flax and even wool and mohair. Extreme weather events such as droughts, floods
and frosts can have a catastrophic impact on crops. Furthermore, climate change is already
putting pressure on food security in South Africa, which will impact textile-related agriculture
as land use becomes more of an issue.
What is needed? Industry-wide and sector-specific strategies need to consider the
impacts of climate change and factor in how the industry will contribute to mitigating
climate change.
The question of responsibility
The wide-spread avoidance of taking responsibility when it comes to matters of the
environment begs the question – whose problem is it anyway? Although some examples
exist, not enough is currently in place to entice or incentivise environmentally-sound
principles and practices. This includes the switch to green technology and alternate energy,
the developing of green skills and efforts to improve efficiency. Punitive measures as a
consequence of neglect or harmful impact on the environment and the ecosystem services it
provides are also perceived to be largely non-existent.
What is needed? A more effective ‘carrot and /or stick’ situation to ensure all
stakeholders take an appropriate degree of responsibility for their behaviour.
The overall outcome: ‘The Poor Cousin”:
Environmental risks and challenges are starting to impact the industry although
many players are unaware of this. It is therefore likely that, unless the industry
seeks external guidance, such issues will not be considered in the development of
future strategies. As a result, the sustainability of such strategies may be
questionable.
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Key insights
Economic sustainability emerged one of the greatest challenges facing the local industry
and as such, is the focus of most industry players. A silo mentality has developed within the
industry, with each player focusing on protecting their own business and not collaborating on
addressing systemic issues that affect everyone. An “us and them” situation exists within
and between supply chain players and buyers (retail, industrial and government). As a result,
there is a general lack of innovation, collaboration and efficiency across the industry. The
re-establishment of long-term, strategic partnerships between buyers and suppliers will be
crucial to changing this paradigm. It will take time and commitment from both sides to do
this.
People issues heavily impact South Africa’s global competitiveness. An inflexible labour
market, a general lack of leadership within the industry, challenging socio-economic issues
and skills shortages all play a role in reducing the country’s ability to compete with off-shore
suppliers. Collaboration between industry, the unions and government will be crucial in
developing strategies to combat these challenges.
There is a dire need for the legislative and policy frameworks across government
departments to be aligned in such a way that they create an enabling environment for the
industry to prosper. The consequences, both intended and unintended, of proposed
legislation needs to be thoroughly understood prior to implementation. Furthermore, the
legislative and policy environment needs to remain stable for a reasonable period of time in
order to allow for companies to plan and invest. Once legislation is put in place, it needs to
be effectively policed. This requires that sufficient resources, with the appropriate mandate
and authority, be put in place in crucial areas.
Unethical behaviour is prevalent across all sectors of the industry, although the most
obvious areas relate to corruption within customs and the government tender process.
Resolving some of the key government tender fraud and illegal imports issues would likely
play a key role in enabling the revival of the local industry.
Environmental issues, while critical to the long-term sustainability of the industry, do not
appear to be of concern to industry players. This further highlights that the industry is in
“survival” mode, generally operating with short-term time horizons. Going forward, it will be
essential that industry players have a greater degree of awareness and understanding of the
key environmental challenges and impacts on their businesses and the broader industry.
The research has indicated that, while a number of material issues impact the local industry,
one of the greatest challenges facing the industry is the lack of a comprehensive and holistic
long-term strategy which all stakeholders buy into. A significant amount of work has been
done to date to try to turn the industry around. However, much of this work has been
focused on the supply-side of the industry, with little attention having been given to the
demand-side. It also appears that work has been conducted in silos, without broad
consultation of affected stakeholders. Recommendations arising from the various analyses
are often conflicting and little implementation of recommendations has taken place. As a
result, industry players are pulling in different directions rather than working towards a
common goal, following a common strategy.
The turnaround of the local industry will be dependent on the development of a robust
strategy, supported by all stakeholders, including government and the union. It is also
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crucial that such a strategy be developed in such a way that it addresses all the material
issues and considers all aspects of sustainability (economic, social and environment).
Strategic options need to be informed and assessed based on customer demand
requirements, industry capability levels and sustainability impacts.