Jumping out of  Agoa frying pan

Jumping out of Agoa frying pan

MASERU – EARLY 2012 was a testing period for Madhav Dalvi. The future of CGM Group, a textile company he leads, looked bleak.
Orders were drying up and margins had become so thin that the company could barely service its loans.
The Africa Growth and Opportunity Act (Agoa), the mainstay of the company’s survival, was yet to be renewed for clothing factories using third country fabric. There was pandemonium across the whole textile industry.

The Agoa itself was valid until September 2015 but for CGM who uses third country fabric the deal would expire by September 2012.
The end of Agoa would be the end of Lesotho’s textile industry. The Lesotho government too was on tenterhooks for it knew that the end of Agoa spelt doom for the whole textile industry. Nearly 40 000 people would lose their jobs.

Dalvi watched as United States buyers slowly moved orders to other companies in Asia because they did not know what the US Congress would decide. Established in 1987, CGM had always relied on the export market for business. That reliance deepened in 2000 when America gave Agoa to poor African countries.

Allowing the countries to sell their garments to the US market duty and quota free, Agoa was seen as a major boon for the poor countries.
But it had an expiry date which most African countries seemed to have ignored as they reaped the results of that preferential treatment. For companies the margins on sales under Agoa were meagre but at least the business was guaranteed.
CGM had joined the bandwagon and signed deals with major American companies.

Its customers included Levis Straus, KMART, PEPE Jeans, Gloria Vanderbilt and few other importers who would then sell to American retailers.
As he pondered the next move with his management Dalvi realised that it was a mistake for the company to throw all its lot with the American market if the CGM Group wanted to have a long term future.

Every month that went without Agoa being renewed was another blow on the nail of the company’s coffin.
“Those times were tough,” Dalvi recalls. Dalvi had been in this situation many times before. Every three years he and his team would hold their collective breath as they waited for African countries to plead the case for Agoa’s renewal in the US Congress.

While the politicians crossed the Atlantic Ocean, begging bowl in hand, Dalvi and his team braced for bad news. They knew that if the US lawmakers said ‘No’, then the company would go under. Presitex Enterprises, a division of the CGM group, would not get more orders from Levi Straus, its main customer.

CGM Industrial, another division which makes garments for US importers, would have to shut its doors. All in all 4 000 workers would be out of jobs.
The Agoa facility for countries using third country fabric was eventually extended in September 2012 but the wait was more than Dalvi and his team could bear. During the wait Dalvi and the management had gone through what he calls “a period of deep introspection”.
“We knew we could not have the same sword hanging over our heads every three years when Agoa had to be renewed,” Dalvi says.

A veteran in textiles, Dalvi had always known that the future of Lesotho’s garment manufacturing industry lay somewhere far from the US. He was cocksure that at some point the factories in Lesotho and other African countries would have to stand on their own without Agoa.
What came out of the research to find the most viable market for his garments pleasantly surprised him. It turned out that the answer was right next door: South Africa.

The numbers painted a picture of staggering potential.
As he perused the numbers Dalvi discovered that the South African market is worth nearly 700 million garments every year.
Add the other regional countries that rely on South Africa for clothing merchandise and the number gets to just over a billion.
The combined production capacity of Presitex and CGM was about 6 million garments. He estimates that the total production of Lesotho’s textile factories is 70 million garments per year.

Those numbers emboldened Dalvi to bin Agoa and concentrate on the regional markets such as South Africa, Zimbabwe, Botswana, Zambia and so on. The result of that change in strategy is astounding, he says. After years of losses the company is beginning to turn decent profits. The CGM Group now makes 300 products annually compared to about 10 products it used to produce under Agoa.

Beyond that, Dalvi and his team do not have to fret over the renewal of Agoa. Freed of the uncertainties associated with Agoa, Dalvi’s team is focusing on new ways to grow the business. The company already has long term contracts with the Edcon Group, the owners of Edgars, Edgars Active and Jet.
Dalvi’s eyes glow as he explains an important curvet in the contract with Edcon.

“CGM is the preferred supplier and that means it’s a strategic partner,” he says. Retailers like FIX, EXACT, Dona Claire, Milady’s, The Hub have also come on board. Soon Guess and Spree will have their products made at the CGM factory. Talks with Pick n Pay Clothing are promising, Dalvi says.

Retailers in other regional countries are signing deals with the company. CGM has thus diversified both its products and market. In that way the company has provided Lesotho a window into what the future without Agoa looks like. And with Agoa set to expire for good in 2025, that future is not so distant.

Sadly, not all companies in Lesotho seem to be prepared for that future. Dalvi predicts a catastrophe if Agoa comes to an end and the companies have not found new markets. “By the time they look for other markets it might be too late.”
Meanwhile, CGM is plodding ahead into a future without Agoa.

“In 2012 everything we made was for Agoa. Today we don’t make even a single pair of jeans for Agoa. We are completely off Agoa.”
Dalvi says it has taken “guts” to walk away from the Agoa market and every year there is evidence that it was the right decision for CGM.
It doesn’t need much head-cracking and number-crunching to see why it makes business sense for local textile companies like CGM to focus on the regional market, especially the Southern African Customs Union (SACU) area.

Lesotho companies don’t pay duty when they export garments to SACU countries. There is a 45 percent duty on the imports of woven bottoms (CGM’s specialty) produced from outside SACU.
It takes CGM 24 hours to deliver products to warehouses in South Africa. That’s a huge cut on the time it would take if the South African companies were buying from say, China, Bangladesh or Madagascar.
Proximity has also significantly reduced their inventory-carrying costs. Dalvi explains: “If these companies were buying from China and suddenly realise that a certain product they have made is not selling very well they will be stuck with the stock. They will still have to receive another consignment of the same product that is still at sea.”

“But with us they simply tell us to stop the line and their person flies into Lesotho to make the necessary changes. That way they are not stuck with merchandise that is not selling.” But Dalvi says for this to happen a company has to have the systems and structures in place to deliver on time, change products fast and expeditiously respond to customers. He says that CGM Group is known as “A Quick Response Vendor” for all the South African retailers it deals with.

This, he says, is what CGM has managed to get right. It is one of the few companies with head offices in Lesotho. That means unlike companies that are controlled from Taiwan, CGM is able to make instant decisions.

“If the client wants to change the style of the garment we don’t have to wait for approval from somewhere else. We make the decision right here and now,” Dalvi says. “South African companies want to work with companies that are controlled at the point of manufacturing. That means the supplier must be controlled at the factory. Everything from banking to sourcing of raw materials, production and merchandising of garments should be at the point of manufacturing.”

Dalvi says what has made CGM’s partnership with South African companies work is that it is fair. That is in stark contrast to the relationship with American companies he says had a take it or leave it with African companies”. “With US retailers you either bend to their demands and prices or you would lose the order. There is very little room for negotiation.” “But when I pick the phone to talk to a retailer in South Africa we are usually talking the same language. It’s the same currency, inflation and cost. If fuel goes up in South Africa the same is likely to happen in Lesotho.”

Dalvi had the first meeting with Edcon officials in 2012, at a time when CGM was looking for a way out of the US market. That meeting with the Edcon’s sourcing team has led to deals with other retail companies. The secret, Dalvi says, lies in doing good work because it will always get rewards in time.

CGM has gone beyond just being a supplier to the retailers. Because of his knowledge in fabrics Dalvi has also trained buying and sourcing personnel from the retailer shops.
“That way they understand what we are offering them. The relationship is way beyond that of a buyer and a supplier.”
Having diversified the market, CGM is now looking for ways to create new revenue streams. It has since made inroads into the work wear market with its Nut and Bolt brand.

“We are looking at protective clothing for industry and uniforms for nurses, companies and government departments.”
In addition the company has factory shops selling its own denim brands. So far there is one at the CGM factory premises and another at Thetsane which is owned by locals.

Dalvi says soon they will open one in the Station Area and another in Maputsoe.
“The idea is that our people must be able to afford the clothes made in our factories. The plan is to have at least ten shops but we are moving cautiously because we also have to remember that such shops should be a way of empowering local entrepreneurs by way of franchises.”
An increase in the sales in the factory shops will allow the factory to hire more hands.

Because of its regional market CGM has also begun to invest heavily in new machinery. For instance, it recently acquired three laser machines from Spain that reproduce designs faster.

Those machines will help CGM in its new venture: the fashion market.
“We will make denim for the high-end market. The European boutique market is the destination for those products. We are not looking at the US at all.

Dalvi says a major handicap of the local textile industry is that factories don’t have support services around them. He means there are no manufacturers of zippers, threads and labels around the factories in Lesotho.
“So you are forever incurring costs to import those.”

Dalvi has made it his mission to bring those support services to Lesotho. CGM is about to sign a joint venture deal that will bring a label maker to Lesotho. Not only would CGM benefit but all the clothing manufacturers would also benefit from having a label manufacturer next door.
Yet CGM’s forays into the regional market have had its challenges. The biggest is the cost of capital in Lesotho.
“We are competing with companies that are borrowing at interest rates which are based on libor which is as low as one percent while here we are dealing with rates of PLR (Prime Lending Rate) of 10 to 11 percent.”

He says South Africa had tried to revive its textile industry with a production incentive scheme which offers subsidies on capital and interest.
CGM Group also has its state of the art water treatment plant where water out of jeans washing is treated and reused in the washing plant.
FIX, one of its customers, had since started using that recycling process in its marketing. It crows that its jeggings are made by CGM Industrial using recycled water.

Shakeman Mugari

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