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The textiles industry
General characteristics of the industry
The industry has four large companies: ERG, Utexi, Cotivo and Uniwax. They concentrate on spinning and weaving (ERG, Utexi and Cotivo) and cloth printing (ERG, Utexi and Uniwax). The textiles industry is one of the oldest industrial activities in the country: ERG was founded in 1962 and Uniwax in 1965. It aims at the local processing of the 280 000 tons of raw cotton produced yearly in the Ivory Coast. From this it produces 120 000 tons of fibre per year and 130 000 tons of cotton seed. But only 20 per cent of the cotton fibre receives further processing. This can be explained by the absence of an appropriate development policy for the sector as a whole, the CIDT preferring the export of non-processed cotton fibres.
The industry includes both companies with significant state shareholdings (ERG and Utexi) and private companies which are subsidiaries of multinational groups (Uniwax, a subsidiary of the Anglo-Dutch group Unilever, Cotivo, a subsidiary of the French group Schaeffer and ERG, controlled by the French group DMC). The main final product of the industry is finished cloth. Uniwax specializes in wax prints for the local market, ERG and Utexi meet the local demand for fancy prints. The domestic cloth market has undergone a considerable contraction over the last 10 years: the total consumption of cloth went down from 46 to 30 million metres.5
History of the firms in the sample
Created in 1967, Uniwax was at first controlled by Blohorn, which owned 80 per cent of the capital, the other 20 per cent being held by the German group Vlisco. In taking control of Blohorn in 1980, Unilever became a majority shareholder in Uniwax (with 68 per cent of the capital), Vlisco's part diminished slightly (17 per cent) and private Ivorian shareholders entered with just 15 per cent. The installed production capacity was 25 million yards per year but actual production peaked at the beginning of the 1980s at only 15 million yards per year. The company produces only 7.5 million yards today, a production level just above its break-even point, estimated at 7 million yards.
Uniwax has experienced two types of major difficulties. At the end of the 1960s, when the firm was launched, concerns about cost reduction led the management to abandon the last of the three washings which the printed material normally went through as part of the process. The idea was based on the fact that the colours used fade after six manual washings. One fewer wash would reduce total costs while extending the life of the product. This idea proved disastrous because consumers concluded on the contrary that the colours could not resist washing. In spite of the quick correction of the mistake, the negative image of Ivorian wax prints has been a long-term handicap for Uniwax's products in competing with imported wax prints, coming mainly from Holland. This has obliged the company to undertake long and costly advertising campaigns.
Uniwax's other major difficulties relate to the fall in domestic demand, due to the general crisis of the Ivorian economy. This has been exacerbated by a shift in consumer preferences. Some of Uniwax's traditional customers now opt for the top-class 'fancy' prints, of lower quality than wax prints but reasonably good substitutes for Uniwax's products. This situation was further worsened by the unprecedented development of smuggling of imported wax prints via Togo or Gambia and from Nigeria. All these factors have naturally led to enormous losses. Cumulative losses at the end of 1988 were some 2.5 billion f.CFA, that is to say 2.5 times the capital. These losses have been totally covered by reserves and cost reduction efforts. Staff levels have been cut by more than half (from 982 in the middle of the 1980s down to 362 today), and executive positions, apart from those in central and technical management, have been terminated. The company has also had to resort several times to temporary production shut downs (most recently, from 15 November 1990 to 15 March 1991).
This vigorous reorganization has been assisted by significant tax relief measures (decreases in tariffs on imported inputs, removal of taxes on private water pumps and wells, a decrease in taxes on fuel) and more vigorous efforts against smuggling (using countermeasures but also with a reduction in tariffs, making smuggling less attractive).
Cotivo was created in 1974 but started its activities in January 1976. The capital of the company was 3.6 billion f.CFA, shared by the French group Schaeffer (32.5 per cent), the Ivorian government and a state-owned bank, BIDI (27 per cent), other public shareholders (DEG of Germany and the Swiss Sifida) and some other private operators (CFAO, CNF). The management of Cotivo was at the outset put in the hands of Schaeffer. The installed treatment capacity, of 8 500 tons per year of cotton fibre, allows the company to produce 500 tons of raw yarn per year and more than 20 million metres of fabric.
Cotivo was founded by Icodi (Ivoirienne Cotonnière d'lmpression), a subsidiary of Schaeffer, to supply it with basic fabric for its 'fancy' printing operations. The firm also supplied other fabric printers in the Ivory Coast (Uniwax and ERG) and in Niger (Sonitextil). At that time, Cotivo's activities were oriented mainly towards the domestic market.
In the early 1980s, there was a shift in the firm's orientation as Icodi stopped its activities and the American group Blue Bell started to produce jeans locally. Blue Bell used Cotivo's fabric, most notably in manufacturing the famous Wrangler Jeans. From that time, the supply of heavy-dyed stretch fabric (denim) to Blue Bell became Cotivo's most important activity after the delivery of unbleached cloth to independent fabric printers. The importance of denim was increased by the establishment of the Challenger company, in the industrial area of Yopougon, to make ready-made denim items. Cotivo thus ceased to have any real contact with the downstream processing of its cloth, while its weaving capacity increased to 27 million metres (21 million metres of unbleached cloth and 6 million metres of dyed cloth and denim). This capacity has since remained unchanged.
The production of denim for Blue Bell and Challenger forced Cotivo to meet international quality standards and to master denim production technologies. A yarn-dyeing unit and an appropriate weaving system for heavy fabrics were set up, involving significant investments. Some machinery was bought second-hand from Europe and some was new.
The adjustment of the firm to the standards of its new market (jeans) facilitated a shift towards export markets later, when Blue Bell closed down its Ivorian subsidiary in 1985 and when the government introduced an export subsidy scheme in 1986. Cotivo was able to transform itself into an export firm. To tackle the export markets, Cotivo created a European branch in Belgium in charge of exploring and developing the jeans markets in Europe and the US.
Cotivo also bought shares in Utexi in 1987 (8 per cent of the capital) so as to get involved in cloth printing activities and strengthen its position on the domestic market.
We also notice that the shift in the firm's orientation towards exports has resulted in financial costs and some staff adjustment. The firm increased its assets from 1985 to 1990, while regularly reducing its staff except for the managerial staff, whose number increased. These trends are due to the need to adapt to export market conditions, which require additional investments and skilled labour.
Performance of the firms
Uniwax manufactures only one product, wax prints. Its production (Table 11.26) grew regularly until 1985 and then started to fall. Sales, which were 3.5 billion f.CFA in 1975, grew to more than 8.7 billion in 1980 and then to 12.8 billion in 1985. They dropped to 7.5 billion in 1990, a 40 per cent fall. This is another indicator of the difficulties which Uniwax had to face from the middle of the 1980s.
Uniwax's domestic market share (Table 11.27) increased until 1985 but fell sharply between then and 1990 although the firm retained its dominant position. The portion of output going to the export market, which was relatively low until 1985, increased dramatically from 3 per cent to almost 10 per cent over the same period. Facing difficulties on the domestic market (a fall in demand, increased smuggling and shifts in consumer preferences), Uniwax had to turn towards export markets, mainly in the local region.
Table 11.26 Sales and products for Uniwax (million f.CFA)
|Wax prints||3 576.9||8 777.4||12 878.5||7 486.0|
|Total||3 576.9||8 777.4||12 878.5||7 486.0|
Table 11.27 Market shares for Uniwax (%)
|Total sales exported||5.68||6.12||3.20||9.90|
|Share of domestic market||67.80||66.70||74.50||50.30|
|Share of export market||17.90||13.40||13.20||-|
Table 11.28 Performance of the factors of production for Uniwax
|Productivity of physical assets||2.05||1.74||1.32||0.60|
|Average staff unit cost (f.CFA x 1 000)||-||0.64||0.91||1.13|
Note: See Table 11.4 for definitions of these ratios.
Table 11.29 Protection, comparative advantage and financial performance indicators for Uniwax (%)
|Comparative advantage: DRC||-||0.91||1.29||1.65|
|Financial profitability: Net result/owners' equity||24.34||55.40||113.90||64.00|
|Activity profitability: Net result/total sales||5.10||6.30||8.80||-8.60|
Note: See Table 11.5 for definitions.
Table 11.28 shows that Uniwax enjoys fairly high productivity levels. Its productivity per employee (3.6 on average), is constantly higher than the average staff unit cost (0.9 on average) and well above the industry average (3.04 in 1990). The stability of this indicator is largely due to the simple technology used, the relative age of the plant and the limited possibilities of productivity increases given Uniwax's technical setting. The productivity of physical assets is also relatively high.
Uniwax is an over-protected firm (Table 11.29). Despite the slight negative protection of the export market, the over-protection of the domestic market on which the firm realizes most of its sales confers a very high level of protection. Uniwax, which was very efficient in 1980 (with a DRC of 0.9), became less efficient from 1985 (its DRC rising to 1.65 in 1990). This is in line with traditional views on protection and firm performance. We also note that the good financial performances of the 1980s definitely deteriorated in 1990, with the firm experiencing considerable financial losses.
From the beginning of the 1980s, Cotivo has produced two main products, unbleached cloth and denim. Unbleached cloth is the more important of the two. This product, destined mainly for the domestic market, represented more than 56 per cent of the total sales of the firm until 1987 (see Table 11.30). In 1990, it accounted for only 44 per cent. The fall in sales of unbleached fabric at the end of the 1980s was due to the drop in domestic demand for printed cloth, which is the major use of these fabrics.6 Total domestic sales of unbleached cloth fell from 11.3 billion f.CFA in 1987 to only 5.7 billion in 1990.
The fall in unbleached cloth sales is also due to international competition, mainly from Asia (China and Pakistan). The fabrics can be imported from Asia via Benin and sell in Abidjan at prices about 25-33 per cent lower than those charged by Cotivo and Utexi. The cloth printers, who face enormous financial difficulties, naturally turn towards those imported fabrics.
Denim, the second product of Cotivo, was originally delivered to Blue Bell and Challenger. Since 1986 it has mainly been exported, especially as administrative difficulties prevent Challenger from getting the fabrics tax-free direct from Cotivo, forcing it to reduce its local purchases of denim. Cotivo therefore exports a large part of its denim production (more than 80 per cent since 198(1). But faced with tough international competition on the blue jeans market, again from Asian competitors, Cotivo has had to concentrate on white denim, in which its expertise is greater. This now represents 70 per cent of Cotivo's denim production but unfortunately produces poor profit margins as compared to blue denim and unbleached fabrics.
Cotivo also sells cotton yarn to ERG and bed linen for export, mainly to Italy. The worsening of its position on the domestic market partly explains the firm's engagement in more risky and less profitable activities on export markets.
Cotivo has a dominant position on the domestic market (more than 50 per cent until 1987 and 45 per cent in 1990). It was the only local supplier of denim to Blue Bell (until 1985) and Challenger. Cotivo is also the supplier of Uniwax (the Ivorian wax prints manufacturer) and of other cotton print manufacturers (Utexi and ERG).
Table 11.31 shows the changes in the firm's export performances. Its export rate, for instance, which was only 11 per cent in 1980, was around 50 per cent from 1987. This development is the firm's response to increasing difficulties on the domestic market. The firm has created a market niche in the manufacture of white denim. Cotivo's success with white denim has been eased by the fact that this type of material (heavy-dyed cloth) is no longer produced in Europe, and by the relative disinterest of Asian firms, given the extremely weak profit margins it offers. The success of Cotivo with this product is such that it now represents 70 per cent of its denim production and the firm has a very long waiting list for orders.
Cotivo's productivity per employee (Table 11.32), which is stable between 2.5 and 3, seems rather low but is close to the average for the industry. It is clearly above the average staff unit cost, which unfortunately is increasing every year, moving from 0.57 in 1980 to more than 1 in 1987 and 1990. The productivity of physical assets is also definitely weak. These indicators show that Cotivo is reasonably efficient in the use of the factors of production.
Despite the rise in the protection of the domestic market, Cotivo's total activity has progressively moved from some protection to increasingly marked negative protection. ERP was 38 per cent in 1980 and fell to -4 per cent in 1990 (see Table 11.33). This is due to the increasing exposure of the firm on foreign markets, where it has no protection. In fact, as shown above, Cotivo's exports increased from 11 per cent of total sales in 1980 to an average of 50 per cent in 1987 and 1990.
Table 11. 30 Sales and products for Cotivo (million f.CFA)
|Unbleached fabric||4 304.4||5 933.9||3 949.2|
|(20 297)||(21 026)||(13 267)|
|Denim||1 938.4||2 974.7||3 948.3|
|(2 638)||(2 857.7)||(4 200)|
|Others||1 082.2||1 230.4||1 128.5|
|Total||7 325.0||10 139.0||9 026.0|
Note: Figures in parentheses show thousands of metres.
Table 11.31 Market shares for Cotivo
|Total sales exported||11.0||51.0||49.3|
|Share of domestic market||55.0||52.4||45.6|
|Share of export market||13.4||13.2||(not known)|
Table 11.32 Performance of the factors of production for Cotivo
|Productivity of physical assets||0.87||1.01||1.15|
|Average staff unit cost||0.57||1.09||1.07|
Note: See Table 11.4 above for definitions of these ratios.
Table 11.33 Protection, comparative advantage and financial performance indicators for Cotivo (%)
|Total activity||38.00||16.00||- 4.00|
|Comparative advantage: DRC||0.84||0.77||1.31|
|Financial profitability: Net result/owners' equity||9.40||10.20||- 16.00|
|Activity profitability: Net result/total sales||4.30||3.60||- 6.40|
Note: See Table 11.5 for definitions.
This new orientation has obvious consequences for the firm's return on equity ratio, which became negative in 1990 (-16 per cent). In fact, the development of exports as a solution to the difficulties met on the domestic market entailed not only moving out from the umbrella of protection but also emphasizing products with very poor profit margins. The effects are visible in the disproportionate rise in sales volume in relation to sales value between 1987 and 1990. At the same time Cotivo, which had a net comparative advantage until 1987, seems to have lost this advantage between 1987 and 1990. Its DRC moved from 0.7 to 1.31. So the opening to world markets did not mean higher productivity and better financial performances. We noticed management's lack of enthusiasm and perplexity as to the lessons to be drawn from the consequences of their reorientation to export markets.
Strategies and capabilities of the firms
Uniwax undertook major investments in the 1980s (see Table 11.34), despite its having excess capacity. The firm was using only one third of its installed capacity but the needs of the export markets justified new investments, which were self-financed. But apart from 1980, new investments were centred not mainly on physical assets but rather on marketing and trading activities.
Uniwax's cloth printing uses a simple wax-resist technology, with a discontinuous production line including several manual segments. Its inventive possibilities are therefore limited to the design and colours and the choice of the quality of the basic fabrics. The technology is from Vlisco, one of the European partners' which has selected all the machines presently used by the firm. Vlisco also provides Uniwax with the necessary designs and drawings. The firm therefore undertakes very little technical innovation. It does possess a technical workshop which remakes cylinders and the processing and preparation of designs received from Vlisco. Uniwax's lack of technological autonomy explains the high royalties and technical assistance fees paid by the firm, whereas training costs are low (Table 11.35). Training is mainly limited to maintaining the technical competence of the staff, rather than the acquisition of new technologies. In a sector in which manufacturing processes have undergone rapid progress, Uniwax has to face the realities of international competition with the help of Vlisco, which has permitted it to take over and adapt its technologies and shares especially its designs.
The firm generally produces to meet orders from wholesalers, the chief of which is the trading firm CFCI, a subsidiary of Unilever. The wholesalers trade on their own account, so the distribution of its products does not entail additional charges for Uniwax. Besides, under its contract with Vlisco, Uniwax has to confine itself mainly to the domestic market, where it also faces competition from Vlisco's own products and those of other manufacturers and from 'Fancy' cloth. This limits Uniwax's export possibilities while compelling it to undertake frequent and sustained advertising to hold its place on the domestic market. The six-fold increase in advertising expenses between 1985 and 1990 is linked to the firm's export efforts.
Table 11.36 shows an extraordinary expansion in Cotivo's investments in 1987. Almost 95 per cent of this increase was for the acquisition of physical capital. This corresponds to the reorientation of the firm's activities to export markets, both to counterbalance the difficulties on the domestic market and to take advantage of an export subsidy scheme which the government had just launched.
These investments were for new equipment for spinning, the largest items being the acquisition of open-ended turbines and second-hand looms, including projectile looms. Investments were also made for the preparation of heavy-dyed cloth, mainly for precutting and trimming technologies, as well as in the organization of the activities of the European subsidiary. These investments were mainly self-financed.
But the actual profits accruing from these heavy investments remain doubtful, given the low profit margins of Cotivo's export markets. To these problems, one has to add the non-payment of export subsidies by the government since 1988, as a result of its own financial difficulties. On 31 December 1989, the arrears were some 2.18 billion f.CFA.
Cotivo does not produce under licence, so it does not pay royalties in the normal sense of the term (see Table 11.37). But under an agreement with the German firm Sanfor, its main supplier of the machinery and equipment it required to start operations, Cotivo had to pay from 5 to 8 f.CFA per metre of cloth sold for a period of 10 years, in exchange for an annual inspection of its plant. This agreement expired in 1984. Moreover, a technical assistance agreement links Cotivo to Schaeffer for the refurbishment of its machines and the management of the spares inventory, which is done internationally through the group's purchasing system. The technical assistance also covers help to apply the norms of modern process management and in financial and administrative management. This agreement costs 3 per cent of Cotivo's turnover and accounts for most of the technical assistance fees which appear in Table 11.37.
Table 11.34 Investment strategy indicators for Uniwax (million f.CFA)
|Investment in physical assets||27.6||370.2||184.1||355.9|
Table 11.35 Indicators of the management of technology and human resources for Uniwax (million f.CFA)
|Royalties on licences and patents||-||426.0||609.2||278.4|
|Technical assistance fees||-||275.4||403.3||168.7|
Table 11.36 Investment strategy indicators for Cotivo (million f.CFA)
|Investment in physical assets||47.0||1 238.2||27.3|
|Total investment||82.0||1 308.0||33.0|
Table 11.37 Indicators of the management of technology and human resources for Cotivo (million f.CFA)
|Royalties on licences and patents||1.6||-||-|
|Technical assistance fees||215.8||290.8||267.7|
In the day-to-day organization of its operations, the local executive is definitely autonomous. Production plans and the definition of work assignments, and minor technical adjustments, are carried out by Cotivo's specialist departments.
Cotivo's marketing strategy has traversed the same route as its other activities. Before the advent of Blue Bell, the firm, profiting from guaranteed markets (mainly Icodi and Uniwax), did not invest much in promotion and market search. Later its relations with Blue Bell opened the doors of the American market. Famous brand names in jeans, such as Lee and Wrangler, began to use Cotivo's dyed cloth. The firm felt obliged to respond to those new markets, at first through Blue Bell (until 1986) and through its European subsidiary since 1987.
In fact, from 1987, when Cotivo turned towards export markets, the resources devoted to sales and promotion have grown quite dramatically. Commissions and brokerage on sales, for instance, moved from 1.2 million f.CFA in 1980 to 123 million in 1990. while advertising expenses, which were negligible in 1980, grew to 11 million f.CFA.
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