Levi is now manufacturing in South Africa, but what of currency decline and material production problems?

The South African operations of US family-owned apparel manufacturer Levi Strauss underline some of the difficulties that need to be overcome in investing in greenfield operations in new countries.

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As local managing director Alan Head puts it: “We are manufacturing denim pants for the domestic market. Our raw materials are practically all imported, as adequate quality cannot be sourced locally.”

In common with many foreign companies concerned about sanctions, Levi Strauss was understandably reluctant to enter South Africa until apartheid was crushed and it was clear the country’s post-apartheid economy was on a sound footing. In 1996, two years after the country’s first majority government had been inaugurated, Levi Strauss set up its Cape Town factory.

Location & investment

Cape Town has long been a centre of South Africa’s garment manufacturing industry, particularly for fashion goods. But that does not appear to have been a compelling factor in Levi Strauss’s investment and location decisions.

The company employs approximately 275 people in Cape Town. But, as Mr Head puts it: “We tend not to hire people with clothing manufacturing skills. We prefer to recruit people who may not have previous skills but who do have the appropriate mindset for the job.”

“We do an vast amount of training. It is easier to train an operative from scratch than to retrain people whose working methods may not be ours.”

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As many other companies that have established themselves in the Western Cape have found, the region’s workforce is the best educated in South Africa. There is a history of better labour stability, of less militancy than is found in other industrial centres.

South Africa’s textile manufacturers seem unable to produce material for the fashion clothing industries in sufficient quantities, quality and varieties. Nor do they seem capable of making timely changes to supply. This complaint is not something that affects Levi Strauss alone; it is regularly heard from fashion clothing makers throughout the country.

Local textile manufacturers are tied to old equipment, so they are largely incapable of quick turn-around times as differing cloths are demanded.

The need to modernise

Levi Strauss has tried to alter the supply situation, but its prospective domestic suppliers of fabric were either unable or unwilling to invest in the necessary capital equipment needed for a modern plant. In contrast, Levi Strauss itself imported most of its own cutting, sewing and trimming equipment. It needed to do so to ensure that its quality matched that from its plants elsewhere in the world.

Modern equipment was also needed to provide the manufacturing flexibility for the range, finishes and fabrics derived from the basic Levi jeans.

For the present, manufacturing is entirely for South Africa’s domestic market. And though Mr Head does not say so, there seems little likelihood of exports to the US in the immediate future. Gaining favoured access to the US apparel market is governed by the Africa Growth and Opportunities Act (Agoa), which permits low-tariff imports of African-made garments into the US provided the cloth used is American or African.

At present, Levi Strauss sources its cloth for its South African factory from qualified mills in countries such as Turkey or Italy, with only some coming from the US, so opportunities for benefiting in terms of Agoa are limited. The material used has to be from mills whose quality is approved by Levi Strauss. And manufacturing quality approval applies equally to the products made in Cape Town.

The rand in decline

The rand has fallen from about R6 to $1 early in 1999 to R9.4 to $1 at present. Is this decline against major currencies an advantage?

“Not necessarily,” says Mr Head. “Imports of cloth are paid in hard currencies.” And Levi Strauss is not yet exporting to benefit from comparatively low labour costs. But the rand’s weakness may be a factor when the parent company decides from which of its non-US plants it will source its garments. The lower the cost, the better.

Mr Head is reluctant to disclose how much Levi has invested in South Africa. However, its factory is large enough to accommodate production increases for export. This may also depend on the availability of benefits under South Africa’s duty credit certificate programme, which offers duty rebates to exporters.

In a country with unemployment running between 30% and 50%, depending on how it is calculated, job creation is a priority. That, Mr Head believes, will depend on incentives.

Whether South Africa will ever be a major garment exporter is debatable. The country’s garment industry has been heavily unionised for decades. But, with a comparatively non-militant employee pool in the Western Cape, export prospects for branded goods manufacturers seem better than for the garment industry as a whole.

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