In textile industry, a hidden goldmine

NIGERIA, Africa’s largest economy, once had a booming textile industry. In the golden era of this industry between 1985 and 1991, the sector had an annual growth rate of 67 per cent and as at 1991, employed over 350,000 people who made up 25 per cent of workers in manufacturing. Then the textile mills in operation were about 180.

But today the story is different as all but 25 of the textile mills have shut down with most of the mills running at less than 40 per cent of installed capacity and employing 25,000 people. Most industry participants blamed the change in fortunes of the textile industry on the influx of cheaper fabrics from China and India, hard for local mills to compete with.

The government in 2010 responded by placing a ban on importation of textile fabric which, like most restrictive trade policies, failed to bring about the relief that was intended but did boost the smuggling industry which made it possible for continued influx of textile fabrics. The smuggled imported textiles account for over 85 per cent of fabrics sold locally but they brought no revenue to government.

High cost of financing has largely contributed to the death of the industry as interest rates on loans from local banks are close to 30 per cent while similar loans in China could be obtained at less than 6 per cent rates making it far easier for Chinese firms to acquire new equipment. The cost of capital, both in depreciation and interest make up about 20 per cent of total production cost.

Several factors are believed to be responsible for Nigeria’s high production cost. Often cited is the unreliable electricity supply, pushing manufacturers to opt for costly independent power supply sources. Power account for about 15 per cent of production cost according to data from the International Textile Manufacturers Federation (ITMF).

Another major contribution is the use of obsolete technology by most local textile firms. Textile manufacturing today is now a highly automated process that reduces labour cost for textile firms and eliminate the advantage Nigeria firms should have enjoyed. To put this in perspective, a modern day high-tech yarn spinning mill with a production capacity of 1,000 tons per week would need only 140 persons to operate today as against over 2,000 persons for a mill with similar capacity in the eighties.

High cost of financing has largely contributed to the death of the industry as interest rates on loans from local banks are close to 30 per cent while similar loans in China could be obtained at less than 6 per cent rates making it far easier for Chinese firms to acquire new equipment. The cost of capital, both in depreciation and interest make up about 20 per cent of total production cost.

Market for African print fabrics
The annual global output of textile firms is estimated at over $400 billion, half of which comes from China. A variety of fabrics are used by different regions and cultures. The most popular fabric type among sub-Saharan Africans is the African print fabric. This fabric is an integral part of African culture with annual sales volume of 2.1 billion yards at average production cost of $2.6 billion and retail value of $4 billion.

China and India account for 60 per cent and 21 per cent respectively of African print fabric production. On the consumption side, West Africa accounts for 65 per cent of the market with Nigeria accounting for 38 per cent of total demand for African print fabric.

Relative advantages in textile manufacturing
Does Nigeria have a good comparative advantage in textile manufacturing? This seems unlikely given that local textile firms have failed to thrive in the midst of the influx of foreign textile. But a close look at the cost determinants shows that Nigeria does have a competitive edge in textile manufacturing over the largest textile producers in the world.

The failure of the Nigerian textile industry to compete with exports is largely due to its inability to make use of the country’s unique advantages in lowering its production cost.

Nigeria is a highly populated low income country with available and cheap labour but today textile manufacturing requires far less unskilled labour due to increased automation. Highly skilled labour, able to co-ordinate automated processes in manufacturing, is increasingly on demand. High cost of power in Nigeria is a major reason for the poor competitiveness of the industrial sector.

Cotton is the raw textile used in manufacturing Africa print fabric and it is the largest contributor to production cost making up about 40 per cent of total cost of production. Interestingly, it turns out that a textile mill in West Africa has a huge advantage in terms of the availability and price of cotton. West Africa is the fifth largest producer of cotton globally with several of its members having an economy dependent on cotton production.

Also significant is that average cotton prices in west Africa is less than half the price of cotton in the U.S, China and India – the three biggest producers of cotton. This is largely because cotton production in Africa is by small scale farmers who sell their cotton to just one or two large trading firms, a situation that gives the firms a leeway in setting prices for cotton.

In Burkina-Faso, the region’s largest producer, over 80 per cent of the population are cotton farmers who sell their produce to a monopoly trading firm for exports. Textile firms operating in West Africa have benefited from this situation by obtaining cotton at very low prices.

From the assessment of Nigeria’s relative position in labour, power and raw materials as cost factors in textile manufacturing, one can conclude that Nigeria has a good competitive edge. The problem is with the industry’s inability to utilize this advantage. This may not be unrelated to the difficulty and high cost of financing in Nigeria. The second biggest contributor to cost in textile manufacturing is capital cost accounting for as much as 25 per cent of total cost in some major producing countries. In terms of the ease and cost of loans to industry, Nigeria lags behind competing countries. This has discouraged capital investment by textile firms in who are missing out on the latest advances in manufacturing technology used by their competitors to lower cost and improve quality.

Nigeria is a highly populated low income country with available and cheap labour but today textile manufacturing requires far less unskilled labour due to increased automation. Highly skilled labour, able to co-ordinate automated processes in manufacturing, is increasingly on demand.

In 2009 the government set up a 100 billion naira textile and garment intervention fund, disbursed at 6 per cent interest rate to textile firms in Nigeria. Six years later and with disbursement of over 60 per cent of the funds, its achievements are at best modest. The beneficiaries spent little on capital investments like replacing old machinery and switching from diesel to gas plants. They simply refinanced their outstanding loans, which helped cut their interest rate cost. While this has helped keep some of these firms afloat, potentials in textile manufacturing remain very much unrealised.

One important way integrated textile firms can reduce cost is by improving efficiency, which can be done by looking for ways to turn waste from one production process into useful input at another production level. One such way textile firms can enhance production efficiency is by making use of natural gas plant with co-generation technology, ideal for manufacturing processes that require both electrical and thermal energy.

Conventional gas plants are about 40 per cent efficient generating heat as the by-product of gas combustion. This waste heat can be re-used in a production process requiring heat which in textile manufacturing is the dyeing and finishing level of production.

Co-generation in integrated textile production can yield energy efficiency rates of up to 90 per cent making it possible to carry out thermal energy intensive processes with no additional power cost which would reduce power cost by up to 50 per cent.

The African print market is favourably structured for a textile firm seeking to improve its margins by getting involved in the distribution and selling of its product.
Aibueku is a student at the University of Benin (yiabzone@yahoo.com).