Value chain analysis for Apparel from Egypt 2020

Structural transformation and export diversification into higher value-added products, away from primary commodities remain major development objectives for low and middle-income countries (LMICs). The textile and apparel (T&A) sector has traditionally been a gateway to export diversification for LMICs, so entry into these industries is generally regarded as a first step for developing countries embarking on an export-oriented industrialisation process. Given the rather low entry barriers (low fixed costs and relatively simple technology) and labour-intensive nature, this sector can absorb large numbers of unskilled workers and provide upgrading opportunities into higher value-added activities within and across sectors. However, the defining characteristics of the T&A sector also mean that it is a very competitive sector, leaving many suppliers with limited leverage and facing challenges in ensuring social and environmental sustainability, as well as longer-term development benefits.

In Egypt, the objective to develop the T&A sector is an important pillar of the country’s Vision 2035 strategy, which is why the sector is promoted by a comprehensive set of policies and institutions. The overall goal is to improve the vertical integration of the sector, modernise the industry, increase exports, and create employment.

The T&A global value chain (GVC) represents a classic example of a buyer-driven value chain that is characterised by decentralised, globally dispersed production networks, coordinated by leading businesses that control the activities that add value to products, such as design and branding, but often outsource all or most of the manufacturing process to a global network of suppliers. The shifting T&A GVC dynamics — including China’s decreasing global supply of apparel products and the growing trend towards nearshoring — open a window of opportunity for low-cost countries like Egypt to increase exports. Exporting to the large markets of the EU or the US is highly demanding and — depending on the specific value chain — margins are often very low. Integration with the EU and US value chains can nonetheless provide important learning opportunities and support manufacturers in exporting to markets with higher margins. Egypt has, in addition, not only market opportunities in these key consumption markets, but also in regional markets with high growth potential and in the relatively large local market.

This report highlights that the Egyptian T&A sector has many strengths and the potential to increase exports as a regional and global supplier of apparel products. The major competitive advantages of the Egyptian T&A sector include:

1. the local availability of high-quality extra-long staple (ELS) cotton as an input for high-value apparel products;
2. an almost vertically integrated value chain with a large textile and apparel sector;
3. well-developed transport and logistical infrastructure;
4. flexible production lines accommodating large as well as small orders;
5. duty-free and quota-free market access to key consumption markets (US and EU);
6. an institutional environment that is committed to support the sector and improve its performance through a variety of policies.

In order to improve the sectoral export performance and take advantage of opportunities, key bottlenecks in the T&A sector need to be mitigated. Some constraints are structural in nature and will take time to solve on a large scale, but reducing these obstacles step by step will nonetheless suffice to gradually increase exports. The key obstacles and challenges include:

1. limited vertical integration of the T&A sector, in particular bottlenecks in the textile segment;
2. lack of modernisation and limited workers’ capabilities;
3. limited access to finance, in particular for small to medium-sized enterprises (SMEs);
4. limited capacities and capabilities of many SMEs to meet global buyer requirements;
5. the partially negative reputation of Egypt as a supplier country;
6. difficulty in harnessing Egypt’s unique selling point (USP), Egyptian cotton;
7. environmental and social sustainability challenges in the cotton, textile and apparel sub-sectors.

In particular, the lack of capacities and capabilities of locally owned SMEs to link to GVCs and meet buyers’ requirements highlights the importance and potential of supporting measures such as the ones CBI offers.

The industrial policy focus and strategic orientation of the Egyptian government could leverage CBI’s mandate to work on sustainable economic development with a focus on improving sector competitiveness through the promotion of BSOs as well as locally owned SMEs in their ‘last step’ towards exporting to the EU market, to create an integrated approach that could play an important complementary role in facilitating private sector development in general, and export growth to the EU in particular.

Taking into account the CBI’s focus on supporting SMEs, EU market and trend developments, and Egypt’s apparel sector structure, we have identified the following product-market combinations (PMCs) as mid- to high-potential targets for a CBI programme:

• Egyptian cotton womenswear niche market
• Mid to high end Egyptian cotton menswear, particularly woven shirts
• Egyptian cotton underwear
• Islamic wear
• Men’s, women’s and children’s low to mid-end casual wear (incl. denim products)
• Men’s and women’s low to mid-end suits

The first three product groups, which are based on Egyptian cotton, are particularly aligned with the Egyptian government’s sector strategy to promote the textile sector’s vertical integration aiming at leveraging Egypt’s competitive advantages. The latter three product groups on their turn can also adopt high levels of vertical integration, while using other types of raw materials. If CBI implements a project in support of locally owned apparel SMEs in Egypt, it will be also important to ensure its sustainability and maximise its impact. Linking up with key government institutions and, depending on the project, key relevant donors will be crucial to avoid redundancies, identify complementarities and maximise the impact of CBI’s programme.

Achieving the SDGs is a pressing global concern, so it is crucial for a CBI project to incorporate improved production sustainability. Across the identified PMCs, this can happen, for instance, by stimulating the adoption of production processes that reduce environmental impact and support the creation of decent work opportunities. Key opportunities include supporting the use of environmentally friendly raw materials, such as organic cotton, BCI cotton and recycled fibres. SMEs directly involved in CBI programmes can receive training on ways to setting up their facilities (such as planning processes, payment structures, and management styles) to help ensure the creation of good jobs. A successful expansion of Egypt’s textile industry would also create new job opportunities in the future.