US and European clothing brands are increasingly turning to Egypt for their sourcing needs; a country offering shorter lead times as supply chain upheaval globally leaves brands in limbo.
While sluggish consumer demand in the US and Europe has seen sourcing orders slow in the third quarter of 2022 – after a spike post-Covid – many clothing suppliers are still betting on Egypt for the future.
Garment exports increased 35% in the first seven months of 2021 year-on-year, to US$1.44bn, according to Ready-made Garments Export Council of Egypt (RMGEC) figures, led by sales to the US and Europe. The council is forecasting US$2.1bn in exports for 2022.
Egypt has been able to take advantage of brands and retailers wanting to diversify sourcing in the wake of Covid-19, as well as due to capacity shortages in Asia during the pandemic. “When there were capacity issues in India, this helped Egypt, but as capacity has returned there, that has stopped,” said Omar Abdel-Zaher, sales manager at Giza Spinning and Weaving, based in Sadat City, northwest of Cairo.
This year, the Ukraine–Russia conflict and weak consumer demand have slowed exports to Europe. “We have shifted sales to the US to compensate until the European markets recover,” said Abdel-Zahar. Developing new sales is especially important for Giza, which now has 120,000 spindles, having recently invested in 35 spinning machines to bring capacity to 15 tonnes per day.
“We’re seeing orders drying up a bit. All will depend on the situation in Europe and energy prices there. Unless manufacturers are flexible and able to do small orders, they will struggle,” said Jonathan Innes, European executive, global retail solutions, at Germany-based textile and yarn manufacturer Gütermann.
While investment has slowed in general, larger Egyptian companies are still expanding production in anticipation of an uptick in demand due to the trend for nearshoring, said Samer Riad, general manager of the Riad Group, an integrated garment manufacturer in Cairo.
JADE Textile, a Turkish-owned clothing manufacturing company operating three factories in Egypt since 2008, manufacturing for NIKE , Under Armour , Tommy Hilfiger and Lacoste , has had a rise in demand after a drop in orders in 2020 and 2021. Today producing 3m pieces per month, it is operating at full capacity, and is investing in a new factory to bolster production to 3.5m pieces per month from next year (2023).
“We have plans for other factories if the situation gets better. We expect export growth of 1.7 times by 2025,” said Mohamed Hameed, senior merchandiser and business developer at Jade, in Ismailia, northeast Egypt.
Sri Lanka’s Hela Apparel Holdings, which produces 10m units worldwide at facilities in Sri Lanka, Kenya and Ethiopia, is the largest recent investor in Egypt, opening a 275,000 square foot factory in the Alexandria governorate last October (2021).
“We see huge potential in Egypt for the industry due to the competitive advantage of lead times to Europe and the USA. Near-shore to the main markets was a major factor to set up here,” said Nadun de Alavis, merchandising manager at Hela in Egypt. The Hela factory is part of the Qualifying Industrial Zones (QIZ) programme, which gives special tax assistance to companies located in special free trade zones. One benefit is that they allow for Egyptian garments to have tax free access to the United States if at least 10.5% of a product’s content is sourced from Israel.
The tax-free access enabled by QIZ has been a driver for manufacturers, particularly Turkish, to set up production in Egypt. The country also has duty-free access to the European Union (EU) under the EU-Egypt Association Agreement.
Chinese firms had also been showing heightened interest in Egypt to take advantage of duty-free access and near-sourcing, but such moves have been put on hold due to the Covid pandemic. “In 2018 and 2019 there was a lot of interest from China, but not this year,” said Mohamed Kassem, commissioner of Destination Africa.
And while Egypt has potential for growth as a garment manufacturing hub, said Riad, its supply chain needs to be better developed, particularly in the spinning and weaving of textiles.
“With its huge population, infrastructure and available raw materials, we could see a US$10–15bn business in Egypt, if you consider the size of Sri Lankan exports [from a much smaller country], which were US$7bn in 2021,” said de Alavis.
The government of Egypt is trying to make this happen, launching the Egyptian Cotton Hub (ECH) in 2019. It is investing EUR600m in sourcing European textile processing machines as part of efforts to renovate and reinvest in 20 publicly owned textile mills. The aim, said Amre Soliman, ECH commercial director, is to reduce fabric, spinning and yarn imports while bolstering production and use of Egyptian-grown cotton by manufacturers. Locally grown cotton, which has a global reputation, currently only accounts for an estimated 3% of the country’s cotton garment exports.
In fabric dying, capacity is
currently more than the export industry’s needs. This has led to companies
catering to manufacturers for the domestic market, said Riad.
With the export market highly competitive, some manufacturers have tried to sell more to the local market to diversify sales. There was an expectation earlier this year that import and foreign exchange restrictions imposed by the government would drive up sales of locally made garments as imports became more expensive – especially as the Egyptian pound has fallen by 34% to the US dollar since the beginning of 2022.
The government’s moves have had mixed success. Some brands at Destination Africa said they have seen an uptick in sales as import costs have risen, while others said there has been negligible impact due to lower purchasing power among Egyptians. Inflation has surged from 5% at the beginning of the year.
For Cairo-based Scarabaeus Sacer, which produces its own collection of garments made from Egyptian organic cotton, sold at four locations in Cairo, as well as in Dubai and New York, “the import restrictions helped a lot in local sales, to Egyptians but especially foreigners,” said Ali El Nawawi, its co-founder and CEO.
While manufacturers are hoping
for orders to rebound in 2023, in the longer term, Egypt is expected to seek
supply chain improvements as Europe looks for cheaper options: “Cheap energy is
a big incentive. While Turkey has cheap energy, Egypt has cheaper energy and
labour,” said Innes.
By Just Style