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Viewing cable 05DARESSALAAM982, Tanzania: AGOA Textile Update

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Reference ID Created Released Classification Origin
05DARESSALAAM982 2005-05-19 03:50 2011-08-25 00:00 UNCLASSIFIED Embassy Dar Es Salaam
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 DAR ES SALAAM 000982 
 
SIPDIS 
 
STATE FOR AF/E AND AF/EPS 
PLEASE PASS TO USTR BILL JACKSON 
COMMERCE FOR RASHIDA PETERSON 
 
E.O. 12958:N/A 
TAGS: ETRD PGOV EINV EAGR TZ
SUBJECT: Tanzania: AGOA Textile Update 
 
REF: A) 03 DAR ES SALAAM 2943, B) 04 DAR ES SALAAM 0407, C) 
04 DAR ES SALAAM 1468 
 
1. Summary: Tanzania's small textile industry remains 
underdeveloped and faces new challenges since Multi-Fibre 
Agreement (MFA) quotas ended in December 2004.  Only two 
textile companies in Tanzania (Star Apparel and Sunflag) 
export garments to the U.S. under AGOA, and they demonstrate 
two very different models for taking advantage of the AGOA 
opportunity.  Star Apparel is a new investment struggling to 
survive, while Sunflag has operated for over forty years, is 
completely vertically integrated, and has a diversified 
market.  Both companies illustrate that the best opportunity 
under AGOA to develop Tanzania's textile industry may have 
already passed. 
 
----------------- 
Textile Overview 
----------------- 
 
2. Tanzania's textile industry remains underdeveloped, 
despite the trade opportunities under AGOA and an abundant 
supply of quality cotton.  Eighty percent or more of 
Tanzania's cotton is exported unprocessed.  Tanzania has 
about a dozen significant textile and apparel producers, 
employing about 6,000 workers.  The garment producers cannot 
begin to fill the local demand, and Tanzanians are dependent 
on used clothing imports.  Only two garment factories (Star 
Apparel and Sunflag) have exported to the US under AGOA.  In 
addition, one textile factory has exported unprocessed 
"grey" fabric material (canvas) to the US.  Total textile 
(apparel and fabrics) exports under AGOA equaled USD 3.3 
million in 2004, up from USD 1.9 million in 2003.  Apparel 
exports equaled USD 2.5 million in 2004, up from USD 0.9 
million in 2003. 
 
-------------- 
Star Apparel 
-------------- 
 
4. The Star Apparels Tanzania factory is owned and operated 
by the Sri Lankan company that also owns Tri-Star Uganda. 
Tanzanian President Mkapa had invited the company to invest 
in Tanzania after his visit to a Tri-Star factory in Uganda 
in 2002.  The factory opened in August 2003 in the GOT's new 
Export Processing Zone (EPZ).  In 2003 Star Apparels 
invested over USD 2 million in the Dar es Salaam factory, 
and hired and trained over 600 employees.  Under the EPZ 
agreement, the factory is exempt from paying VAT and will 
enjoy ten-years free of income tax.  The factory's first 
order, from American retailer Walmart, was worth over USD 
300,000.  The general manager had estimated that, with the 
factory's current capacity, Star Apparel would be able to 
export nearly USD 4 million per year. (See reftels.) 
 
4. By late 2004, however, Star Apparels was unable to make 
payments on its USD 4 million loan from CRDB Bank.  Although 
the factory had secured orders from the US, it faced a 
number of setbacks.  The privately-owned EPZ business park 
charged high rents, and the government failed to keep its 
promise to acquire the property and reduce the rents.  Water 
and electricity supplies were (and are) unreliable and 
expensive.  Workers went on strike for nearly three months 
and the top management of the factory was replaced.  Orders 
went unfilled. 
 
5. In March 2005, CRDB recalled the loan and the factory 
went into receivership.  CRDB appointed a receiver manager 
to assess what went wrong and to identify the way forward. 
In a conversation with econoff, the receiver manager was 
sympathetic toward the Star Apparel management and blamed 
the Tanzanian government for the factory's failure.  Citing 
the high costs of doing business in Tanzania (high rent, 
poor infrastructure, and stifling bureaucracy), he lamented 
that the EPZ has still not created an attractive climate for 
manufacturing.  His final report (due out this month) will 
make recommendations for the way forward.  He told econoff 
he would recommend that the factory reopen, either with the 
original or new management, if the government agrees to 
further incentives, including rent and power subsidies. 
 
6. Comment: In the post-MFA environment, it will be more 
difficult to obtain orders from the US, especially since 
Star Apparels has so far been an unreliable source.  To 
succeed, the factory will have to lean heavily on marketing 
support from its sister company in Uganda.  So far, there is 
no indication that changing management would change the 
underlying conditions that make Tanzania a difficult 
environment for manufacturing.  End comment. 
-------- 
Sunflag 
-------- 
 
7. Sunflag's textile factory in Arusha is a part of the 
Sunflag group of companies with manufacturing facilities in 
Kenya, Nigeria, Tanzania, Cameroon, Great Britain, United 
States, Canada, India, and Thailand.  Sunflag Tanzania has 
been in business for over forty years and manufactures 
natural and synthetic fibres, cotton and polyester yarn, 
woven and knitted fabric and garments.  Completely 
vertically integrated, Sunflag purchases Tanzanian cotton, 
spins it into yarn, weaves and knits fabrics, and sews 
garments for the export market.  Sunflag exports products 
all along the production chain.  It claims to be the only 
totally vertically integrated textile factory in sub-Saharan 
Africa outside of South Africa. 
 
8. Sunflag was the first Tanzanian company to export apparel 
under AGOA and continues to be the largest AGOA exporter. 
In 2004, Sunflag exported goods to the US worth just under 
two million dollars.  Sunflag also exports to the UK, 
Europe, and within Africa.  Exports to the US account for 
about one-fifth of its total sales. 
 
9. Sunflag executives told econoff that the end of MFA 
quotas has threatened their access to the U.S. market.  Some 
buyers have already switched to Indian suppliers, and new 
orders are more difficult to find.  The Managing Director 
explained that Tanzanian companies cannot compete with India 
and China because of unfair practices (citing subsidies in 
general and China's currency exchange controls in 
particular). 
 
10. Sunflag's management also expressed dismay that the 
provision allowing third country sourcing of yarn and fabric 
was extended, noting that they had already begun to sell 
Tanzanian yarn and fabric to other AGOA countries, including 
Mauritius.   Because of its vertical integration, Sunflag 
would benefit from the expiration of the provision on two 
sides: markets for its yarn and fabric would open up, and 
its own apparel production would be more competitive. 
 
11. The Sunflag management noted that the end of MFA quotas 
will not kill the business, though it has impacted its sales 
to the US.  Because of its diversified markets and full 
range of products, it is not overly dependent on the US 
market.  However, planned expansion of the factory will 
likely slow in the near future.  The managing director told 
econoff that while an established factory like Sunflag can 
continue to be profitable, he does not believe that new 
investment in the textile industry is viable, citing the 
high costs of initial capital investment and the costs of 
doing business in the Tanzanian environment. 
 
12. Comment: Sunflag is a model of what AGOA hoped to 
accomplish in Sub-Saharan Africa.  Its success predates 
AGOA, and will likely continue with or without AGOA. 
Nevertheless, Sunflag has been able to demonstrate how 
Tanzania should have used AGOA to establish a strong, 
vertically integrated and diversified industry. 
Unfortunately, the government has failed to create a truly 
attractive investment climate, and the best opportunity for 
textiles may have already passed.  AGOA remains an advantage 
and an opportunity for the existing textile factories, but 
significant new investment still seems unlikely. 
 
OWEN