Johannesburg - The uncertainty over restrictions on an export-incentive scheme for clothing and textile manufacturers in the Southern African Customs Union (Sacu) is forcing exporters to focus increasingly on the South African market.
This will intensify the pressure on struggling South African manufacturers, reckon industry players.
Last week at a Sacu board meeting officials were still unable to make a final decision on drastic cuts to the number of products qualifying for the incentive scheme.
South Africa wants to reduce the 102 products that currently qualify to nine, and scrap the scheme in its entirety by the end of March 2010, with potentially catastrophic consequences for manufacturers, especially those in Lesotho.
In terms of the incentive scheme textile manufacturers have earned tariff credits based on their exports of certain textile and clothing products. These credits can then be used for discount on imports of certain textile and clothing products.
They could initially be freely sold to other manufacturers or retailers, offering manufacturers significant cash flow benefits.
The scheme has always been very instrumental in helping local companies become globally competitive, says Alan Jarvis, head of Formosa Holdings.
"Everyone in the world that makes clothes has incentives. This type of scheme is necessary to enable competition, and the credits have to be fully tradable."
Respected Swiss consultancy group Gherzi, which conducted research for Sacu, recommended that the current format of the scheme be retained because it would have the best outcome for the region. But the South African government says the scheme leads to increased importation to the disadvantage of local manufacturers.
Thanks to the scheme and favourable access to the US market, in the early 200s Formosa's subsidiary Tern Sports-wear was able to increase the number of its employees from 300 to 5 000, and about 90% of its output was exported.
Up to 1.5m items of clothing were exported to the US every month, Jarvis explains.
Domestic focus
But because of uncertainty over the continued existence of the scheme and the restrictions on the system, production has been scaled down and since last year has focused almost exclusively on the domestic market. Only 10% of its production is exported.
The company now has about 2 000 workers, a large number of whom are in rural KwaZulu-Natal.
"Believe me, we are hungry and nimble and other local companies find it very difficult to compete with our prices. Some of them have already closed their doors. That's the problem - if exporters take their eyes off the export market, it's the local suppliers (and not the importers) that suffer the most," Jarvis continues.
"It's only a question of time before Lesotho does the same (focus on the South African market)," he reckons. Lesotho's economy is heavily dependent on its clothing and textile industry. With almost 40 000 workers it is Lesotho's biggest employer, and the incentive scheme is of vital importance, both to it and to Swaziland.
The incentive-scheme debacle emphasises how difficult it will be within Sacu to develop a uniform trade and industry policy, like that decided upon at last week's board meeting.
- Sake24.com
For more business news in Afrikaans, go to Sake24.com.