|Exporting Africa: Technology, Trade and Industrialization in Sub-Saharan Africa (UNU, 1995, 434 pages)|
|Part I. Exporting Africa: an analysis|
|5. Main findings of the study: a synthesis|
The case studies have yielded some insights into the conditions under which firms which were once exporters to regional and international markets have lost or are losing ground in these markets.
Failure to cope with changing technology
Failure to keep pace with changes in production process technology was often reflected in uncompetitive costs of production and/or deficiencies in product quality. Some firms had made initial investments in labour-based production processes to take advantage of relatively low labour costs. However, the state of technology changed and such methods could not provide the quality and precision now required in finished products. Investment in more automated production methods became necessary. Those firms that failed to make these investments lost their markets because they could not meet the product quality demands of export markets.
There are several factors which inhibited investments in improved technologies. Some firms did not have search mechanisms for information on changing technological and market conditions and did not keep abreast of the technological trends in their industries. The gap had not been filled by any institutional arrangements initiated by governments or industry associations. Some firms had not made any investments in improved technology for lack of foreign exchange or of accumulated profits which could be ploughed back into the enterprises. Such firms had either accumulated losses or had failed to generate profits for a long time. Some firms had suffered from the effects of rigid price controls but others had been operating at low capacity utilization rates for a long time for various reasons. Firms which had been in financial problems for a long time had eroded their capacity to make any significant investments in capital equipment, training and innovations. Investment in general had been low or stagnant.
For instance, it was found that Tanganyika Textiles used to export vikoy, mainly to the Muslim community in Kenya, but it has been pushed out of that export market mainly because it could not modernize its 1959 labour-intensive textile technology. Capacity utilization rates have been falling during the last decade, from about 41 per cent in 1980 to around 20 per cent in 1993, leaving the firm too under-capitalized to modernize its technology in any substantial way. Competitors' finished products were perceived as being of higher quality and the export price could not cover the firm's costs of production. Although the collapse of its export market (in Kenya) was triggered by the collapse of the East African Community in 1977, this may have been only the last straw. In fact the firm has not recovered since then and in the meantime Kenya has developed its own textile base. Even in the domestic market this firm is losing its market share to imports from Southeast Asia.
After 1985, one manufacturer of kangas in Kenya (Rivatex) started to lose its markets in the Middle East and to some extent in Tanzania to the Far East, where prices were more competitive. While Rivatex was selling kangas at US$3.20 per pair, similar products from the Far East were selling at US$1.70 per pair. This loss of competitiveness is partly due to lack of technological improvements or innovations over time. The firm's ability to make investments in technology had been eroded by the rising costs of debt servicing on loans denominated in foreign exchange (between 1976 and 1992 the Kenya Shilling depreciated substantially against the Deutschmark). The firm has failed to inject new capital, to modernize its machinery, or to finance training programmes for its staff.
In the import liberalization phase, some firms which had operated profitably in protected domestic markets found it difficult to compete with imports. In response, instead of making efforts to improve their competitiveness, some firms resorted to export markets with the help of channels which were not strictly commercial, e.g. religious groups or charity organizations. This strategy seemed to work for a while but it could not be sustained. This indicates that losers in the domestic markets are not likely to succeed by seeking refuge in export markets, even if it may seem possible at first.
Some firms were found to be putting considerable effort into improving their competitiveness but the results in terms of export performance did not seem to be commensurate to their efforts. Two categories of reasons were identified in the case studies. First, it was found that the efforts these firms were making were blunted by the inadequacy of infrastructural and institutional support, which ordinarily originates from outside the firms. Second, the basic limitations in the technologies the firms were using were not being tackled. Instead, futile efforts were made in more peripheral aspects of technology. This situation was particularly present in areas in which technology had changed to the extent that high product quality was no longer being attained by highly skilled labour working' with labour-intensive technologies but rather by the use of microelectronic controls. In such cases, further investment in training labour and perfecting skills in the labour-intensive methods could not yield much fruit. These firms succeeded in reducing costs and improving product quality but these achievements did not meet the requirements of international markets. This points to the limitations of small-scale, labour-intensive operations, in specific industry contexts, in producing high-quality products for the international market. Investments in more radical changes in technology were needed. This underscores the importance of understanding the pace and trends of technology development elsewhere, as a guide to the kinds of investment that must be made to create and develop new technological capabilities.
The case studies have also shown that technological changes in the materials used in production have undermined the competitiveness of firms which had based their competitive strength on cheap local resources. For instance, Orbit-sports of Kenya had gained a competitive advantage in exporting balls under licence from Adidas. This advantage was based on the domestic availability of cheap, high-quality leather. As a consequence of technological developments in materials, Adidas recommended a shift from leather to synthetic, non-woven fabrics. The problem has been aggravated by high import duties on imported synthetic materials. The firm has been losing some export orders to competitors from Asia and Europe.
Import substitution in importing countries
The countries which had made an earlier start on industrialization in Africa found their export markets in the neighbouring countries, whose level of industrial development was lower. Some of these regional markets have been lost as neighbouring countries decided to establish and protect their own industries. While this may be a necessary step towards industrialization, it poses the question of whether industrialization might not be better pursued within regional cooperation arrangements which could reduce duplication of productive capacities within the cooperating regions.
Problems of reliability of supply and quality of local inputs
Substitution of local inputs for imported inputs has been one innovative step taken to cut down costs or as a survival strategy in the face of import controls. For example, the shift in textiles in Tanzania, from using imported rayon to local cotton, and from imported starch to local cassava starch, was stimulated by cost-cutting considerations and responses to import controls. These modifications have resulted in a considerable reduction in production costs, as import content was lowered. But these are one-off cost cutting innovations and do not necessarily represent continuous efforts. In the past some of these innovations were made in response to foreign exchange constraints. As competitive pressures build up, with import liberalization and competition from export markets, product quality considerations are gaining in importance. Where such import substituting innovations had compromised product quality, these innovations are being reversed.
The case studies have shown that some exporting firms failed to meet product quality requirements or delivery times because of the low quality of local inputs and unreliability of supply. Firms which could not obtain good-quality inputs found it difficult to maintain their position in export markets. This has some similarities to findings on the Colombian clothing industry by Morawetz (1981).2 He made a comparison of Colombian and East Asian clothing exporters and found that, in early 1977, Colombian exporters were offering prices for jeans and shirts which were 44 per cent higher than prices from Korea, 25 per cent higher than Hong Kong and 11 per cent higher than Taiwan. One explanation of the lack of competitiveness of Colombian firms was the price and quality of their inputs. While East Asian firms obtained good-quality fabrics at world prices, the Colombian firms bought from domestic producers at prices 50-108 per cent higher than the world prices. These producers were protected and were too small to take advantage of economies of scale. Locally made zippers and threads in Colombia were two to three times the world price. The case studies suggest that the African situation is quite close to the Colombian one.
The industries which are supplying inputs to the exporting firms have more often developed monopolistic and protectionist structures than competitive ones. In Zimbabwe, for instance, there are about 250 garment manufacturing firms which get their fabrics from only five textile firms. There is little competition between these firms, since two of them account for 60 per cent of the total output of the sector. The local grey cloth which the textile mills manufacture is not competitive in the world market and it is difficult for those using this grey cloth as an input to face competition in export markets successfully.
This implies that local availability of inputs and linkages in the domestic economy are not always a blessing. If the firms using, local inputs have to be competitive, the efficiency of the supplying firms and supporting institutions also needs to be ensured.
The lack of specialization
The case studies have indicated that the degree of specialization in many firms was limited by two considerations: the size and stability of the markets which the firms had decided to target and the supply conditions in the supportive industries, especially those producing inputs.
Target market conditions were crucial determinants of specialization for firms which were primarily targeting domestic markets and became exporters at a later date. While supplying the domestic markets, these firms adopted the diversification strategy as a growth path where domestic markets for particular products were very small (e.g. NEM and Themi in Tanzania and the fertilizer and paints manufacturers in Mauritius). While these firms extended from domestic markets to exports they retained the wide variety of products they were manufacturing. Firms which targeted the export market from the outset tended to be more specialized than those which were primarily catering for the domestic market.
Product diversification has presented further challenges: shorter production runs, the associated loss of economies of scale and having to cope with requirements of marketing. The case studies have identified the lack of specialization as one factor which inhibited attainment of international competitiveness. The textile firms (e.g. those owned by the government in Kenya) had a low average size, of about eight thousand spindles per mill, compared to the minimum economic size of a spinning plant of 25-30 thousand spindles. These findings are corroborated by a previous study of the textile industry in Kenya (Pack, 1987).3 That study employed engineering and economic data to analyse the deviation of textile plants (in Kenya and Philippines) from international best practice. The lack of specialization was identified as the main source of such deviation. Excessive diversification of products (partly reflecting tariff protection) and the consequent short production runs accounted for considerable inefficiency.
Facing the absence of reliable networks for input supplies, some firms have taken steps in-house to tackle the problem. Diversification in the form of vertical integration has been adopted as one way of ensuring reliability in the supply of inputs. For instance, some clothing firms (e.g. Fashion Enterprises of Zimbabwe) have solved the problem of unreliable supply of fabrics by establishing their own fabrics-manufacturing units to guarantee quality and reliability of supply. While this kind of diversification increases reliability of input supplies, it has often led to higher costs. Where the domestic market has been protected, such costs could be passed on to consumers. In the export business, however, this may not be possible. Some firms have tried to check costs by creating autonomous production units under one group of companies. While this option has been feasible for large corporations operating a group of companies, it is more difficult for smaller firms.
Failure to cope with changing market conditions
Employment of high technology may be a necessary condition but it is by no means sufficient. Faulty marketing strategy and failure to develop the necessary marketing capabilities have led to disaster in spite of having invested in modern and advanced technology. For instance, the manufacture of cloth for shirts and trousers started in Mauritius in 1990 as a significant move towards high fashion and high-technology production in clothing manufacture and exports. The firm was equipped with the latest textile machinery available on the European market. However, due to a defective marketing strategy and a narrow and excessively concentrated customer base, sales collapsed and the firm was placed in receivership barely two years after its creation.