With one textiles-industry success story in Oriental Weavers, a handful of privatized garment makers and cotton ginners are looking to break into the big leagues. Here's how.
Few sectors of the economy have as rich a history as the cotton and textile industries, where Egyptian firms were once among the best in the world. Today, there are a mere handful of standouts looking to make their mark in a segment dominated by China. Dozens more state-owned and newly privatized alike are struggling with baggage left by decades of nationalization and neglect, and painfully few of them are making the difficult decisions they need to make to become competitive, whether it's trimming and upgrading labor forces, updating equipment or exploring what the global market is really eager to buy.
A group of the largest cotton and textile companies were privatized 10 years ago and began trading on the Cairo and Alexandria Stock Exchange, but the majority have failed to update anything, from their factories to their designs, to say nothing of their marketing campaigns, proving that private ownership is not necessarily synonymous with increased efficiency and the retention of existing markets let alone the penetration of new ones.
But a tiny group is finally looking to become globally competitive, and their model isn't an exotic Chinese company, but a home-grown titan: Oriental Weavers Carpet Company.
Oriental Weavers never had to go through the long process of privatization, and it is by far the most successful textile company in Egypt. It ranked number 16 on the Fifth Annual bt100, fully 42 spots ahead of the next company in the industry. The group that started as a relatively small private company in 1980 is now one of the top carpet producers in the world.
At home and broad, Oriental is the standard by which other textile firms are judged. Besides dominating the domestic market with its large chain of stores and supplying just about every prominent Egyptian store its wares are also found on the shelves of major global big-box retailers including Ikea, Carrefour, Target, Sears, Home Depot, Wal-Mart, JCPenney and Marks & Spencer.
"Oriental started with eight rooms. Today, we have 300," says Mohamed Shaban, the company's vice president, noting that Oriental now has manufacturing operations in Egypt, China and the United States. The recent factory opening in China was not motivated by China's cheap labor, the main reason most manufacturers go there, but to actually compete in the Chinese market of more than 1 billion people. It's also dipping its toes into the raw-materials end of the business, having opened a petrochemicals subsidiary that allows Oriental to count itself as a fully vertically integrated firm.
In 2005, Oriental Weavers' factories produced a total of 42.2 million square meters of rugs and carpets, an increase of more than 39% from 30.3 million square meters the year before. Shaban says the company is adding at least two looms per month. The yarn machinery increases its output by two tons per day and is now producing at least 300 tons every 24 hours.
That's about 105 square meters a minute. At that rate, the company could produce more than 55 million square meters this year alone.
Oriental threaded a deal with Italy's Miro Radici, one of Europe's leading energy and textile companies, and opened a plant in Tenth of Ramadan under the Nazif government's 1,000 Factories Plan, where 700 employees now manufacture high-quality bath towels and bed sheets.
The factory reveals a number of reasons Oriental Weavers has excelled and others have not. The facilities are clean, efficient and up to date. Some of the other companies that weren't ashamed to show us their factories but probably should have been had facilities that were dusty, rusty and old. In an industry where a single contaminated thread could stop a big export order, cleanliness is a must.
Furthermore, Oriental's employees are motivated with incentives for production, efficiency and quality. While many of the staff come from industrial schools that prepared them for work in the field, Oriental runs a training center to constantly improve their skills. Shaban says the industry's technology changes significantly every two years, and with Oriental's aggressive research and development, it is important for workers to be able to adapt.
Shaban, an engineer, spent several years in the company's US plant in Dalton, Georgia. There, he learned the value of constantly modernizing processes. Every morning, he received briefs on technical developments through a partnership with Dalton University. He also saw the advantage of working with a government that responds to the needs of companies that support the local economy. In one instance, he went to a local politician with a feasibility study and a request to obtain an additional eight megawatts of power for the factory. In three days with no graft he received a signed approval.
"There is no bureaucracy. Oriental Weavers is like this: Snap! That's why it's [been] booming from 1980 to 2006. We are growing, growing, growing," says Shaban.
Shaban prides himself on efficiency: "If we make just one mistake, we will go straight home," he says. He asserts that machines depreciate in value over a 10-year life cycle, but he can extend the life through light daily maintenance and regular servicing a concept alien to most local producers. He also insists that when production stops at the end of the day, they have to stop the machines.
"When the work is finished they must shut down," he says. "There is no excuse. No maalesh."
Ten years gone
El-Nasr Clothes and Textiles (bt100 num-ber 84), better known as Kabo, has not had the 25 years of success that Oriental Weavers has enjoyed. It was privatized 10 years ago, but according to company officials, it's only starting to look like a private firm today.
In December 2005, it restructured its board and put Mahmoud Kamal at the head of the company to "defend its interests," as one company official puts it.
With a booming, resonant voice, Kamal's orders carry across his long office as if he speaks through a bullhorn. Thick suspenders stretch across his broad shoulders and his presence dominates the room.
He speaks about his company with a mixture of disgust at its past and a determination that he will change its future. His business mantra is the bottom line: "Profit. Nothing else matters, sir," he says.
Kabo produces underwear and outerwear under brand names including Jil International, Kabo and Super Kabo that ship to Europe, North America and the Middle East. It distributes domestically to its own Jil stores and other retail clothing distributors using its own shipping fleet.
Kabo produces some of the finest men's underwear in the world, using 100% long-staple Egyptian cotton. He says 65% of sales are in the four basic items of men's undergarments: slip, short, sport (sleeveless) and half-sleeve, using four different yarns.
The long-staple 30 by 1 count cotton is the only yarn that faces any substantial competition, chiefly from India. As the underwear moves into 36 by 1, and then 60 by 2, there are even fewer competitors.
"And 80-by-2, we call that 'crystal' in the market: You're sleeping like a king. It will tickle your insides. It's something seriously different," Kamal says.
The primary problem in the past, says Kamal, was not the quality of the finished product, but inefficiency in marketing and production. The company's factory churns out at only 29% of its capacity, yet Kabo's warehouses were until recently loaded with years' worth of unsold back stock.
"Egypt is famous for its stock of ready-made garments, and it always puzzled me the stock was always up and up, up and up. When I came here in January, I immediately tackled this problem," Kamal says, explaining that Kabo's products were overpriced. He met with people in every department and told them he was re-pricing everything to move. When one of his managers asked to rent more storage space, Kamal acted on the spot to clear his warehouses instead of paying more rent. He estimates that from January through June, he sold about three or four million pieces half of what Kabo's stock had been when he took over.
"We took an [on-the-books] loss of LE 18.6 million on the thirty-first of December because I priced it correctly," Kamal says.
Kamal discovered the high-end items were not selling in some stores, such as the one in Agamy, where an LE 11 garment flies off the shelf and a LE 24 pound one sits. He recently launched an outlet line called Nile Stock which shifts leftovers, second-tier products and clothes spun with extra yarn. This will help take care of the extra stock, fill empty store shelves and expand the company's market base to customers who still want the premium label, but at a discounted price.
"If you keep a t-shirt in hiding for four or five years, what are you doing? You are rotting it, you're causing it to rust, causing it to be eaten by different types of insects, seeing it get stolen, getting it dirty and it's a lot of money. It's unhealthy. That much unsold stock is like a cancer on any company."
Pervading problems
Kamal compares the discovery of the overstock problem to seeing one insect crawling on the floor: You know there have to be hundreds, maybe even thousands, more hiding in the walls.
"We have a tremendous [local distribution] network 30 owned shops. They're ugly. Ridiculous. It's disgusting.
I visited a shop in Alex: They don't have a Visa machine, don't have a window dressing, they have ugly uniforms." As for improving the quality of the company's retail outlets, Kamal says simply, "We'll do it."
Kabo's chain of Jil stores can be found throughout the country, but Kamal says the prime ones number no more than 10 two in Cairo and eight in Alexandria. "It's biased towards Alexandria because the factory is in Alexandria. It's a bad strategy and we're trying to cure it, but it's no easy task," he says.
Kamal has several deals in the works to expand Kabo's clothing lines. In the past few months, management has negotiated with several ladies' clothing manufacturers, two foreign and one local, although Kamal would not disclose the names of the companies until the deals are completed. He also has met with two children's manufacturers one local and one foreign which could end up as a joint venture or a complete buyout of an Egyptian company.
Kamal hired Madkour Bakr, an engineering consultant, and several professors from Alexandria University's Faculty of Engineering to improve the production infrastructure and maintenance techniques. Bakr says Kabo's equipment was not kept in good condition, which hindered production and was also very dangerous.
He fixed the factory's electrical switches and transformers and corrected the steam and air systems. A thorough inspection of the equipment showed him that he not only had to improve the mix of old and new machines, but that many of the devices needed emergency repairs before he could move forward. Kabo's large fleet of 100 vehicles now has a department overseeing its operation and maintenance because it had high costs and frequent stoppages.
"Now we are changing the culture of the maintenance from emergency to planned, preventive [measures]," says Bakr.
The corporate structure also proved to be an impediment for Kamal. Kabo may have been privatized 10 years ago, but it has had a hard time shaking the mindset of a big, bureaucratic institution. Before, if an employee sought a reimbursement of as little as LE 30, Kamal says eight signatures were needed on the form. All this time wasted on bureaucracy wore Kamal's patience thin.
The improvements began with management and are trickling down the line. Kabo is training its staff to acquire new skills and prepare to move into new roles. It is also stitching together a system of rewards to motivate its staff, and officials are working on restructuring employee benefits and compensation.
"How are you going to get rid of the public-sector tradition?" Kamal says. "The public sector has very long experience, but they are lacking the modern management system. This is what the new top management is doing changing methodology of management and using techniques of technology and motivation."
Getting export-ready
Currently Kabo has a limited consumer base. Kamal says he is only getting men 40 years and up with buttoned-down tastes, consumers representing a small portion of Egypt's huge population. He has deals in the works with companies from other countries, including Turkey and Israel, to produce women's underwear, a much more complex affair than men's undergarments.
A bra, for example, can be made of 35 individual pieces sewn together; a t-shirt has just five.
With burgeoning interest from abroad, Kamal has plenty of arguments to lure manufacturing operations here, but he needs foreign expertise and licenses to achieve this.
"Turkey at the present time cannot survive in our industry. My labor cost is one fifth of theirs, water is one eighth, electricity is one third, gas is one tenth and petrol is one sixth," he says. "It is scandalous the Turks were exporting $13 billion and Egypt was exporting less than $1 billion. Now, planeloads of Turks are coming who are interested."
There are members of Kabo's management who are pushing to export more as soon as possible, but Kamal worries about accidents or mistakes along the way that could ruin the company's reputation. Although Kabo has moved quickly in the last six months to do what should have been done in the last 10 years, Kamal wants to build up appropriate attitudes in departments such as merchandising and customer relations to export correctly.
"We are producing a lot of products for export. That's only the production part of it, not the merchandizing part, not the export part. We're just producing for export now, with varying degrees of success, and one or two problems, to tell you honestly and transparently. We should be ready to export on our own by July," he says. "Export people think it is difficult to get customers. No it isn't. Get the quality, get the pricing, get the deliveries on time, get the transparency, get the customer's confidence and approval. Exporting is an attitude."
A recent corporate restructuring might help push Kabo along the export road. At the end of 2005, Modern Nile Cotton Company and Arabia Cotton Ginning Company (bt100 number 75) combined to hold a 52% stake in Kabo. Modern Nile flipped from owning 10% in Arabia, to Arabia acquiring 60% of Modern Nile. At the beginning of May, Arabia announced it had partnered with the Gulf investment firm Amwal Al-Khaleej Commercial Investment Company to form the new holding company, Amwal Al-Arabia.
Amwal Al-Arabia will serve as the holding company for Kabo, Arabia Cotton Ginning and Alexandria Spinning and Weaving, better known as Spinalex (bt100 number 64). Kabo has a 54% stake in Spinalex.
Amwal Al-Arabia's first act was to raise its stake in Modern Nile, by far the largest Egyptian cotton exporter, to 100%. The next decision was to acquire 50% of the Egyptian Textiles Company and raise its capital to LE 160 million.
"Give [Kabo] time. They will be just as good as Arabia," says Hani Olama, the chairman and CEO of Arabia, who also sits on the board of Kabo with four other Arabia board members.
The long cotton road
Olama, also the new president of Amwal Al-Arabia, has 10 years of experience turning public-sector companies into private enterprises, having run Arabia Cotton Ginning since 1996. If anything was in worse shape than Kabo was six months ago, it was Arabia when Olama took over. Shortly after doing so, he hired an American consultant to assess the company.
The consultant asked him, "Why did you buy a heart attack?"
Today, the company has the best reputation in the country for cotton ginning, the process of removing the seeds from raw cotton.
Olama, who originally trained as a refrigeration engineer, joined colleagues from universities where he taught engineering to start Modern Nile in the early 1990s. They bought a 90% stake in Arabia in November 1996, reserving the remaining shares for the employees. Before they bought it, Olama says the government had run the company and cotton in general into the ground.
When Arabia was nationalized in 1962, the government consolidated 13 companies into five: Arabia, Delta Cotton Ginning Company, El-Wady Cotton Ginning Company, Misr Cotton Ginning Company and Nile Cotton Ginning Company. In those 34 years, Olama says the government only replaced two cotton gins, the machines that pull the seeds out of the cotton, at each of the five companies, even though each company had 13 factories.
"We had to replace everything because all of these machines were produced in England in 1894. One eight nine four. Not last century, but the century before. And they were still running," Olama says. "The government did not bother to modernize, make new factories or replace these factories. So the situation was kept as [it was] until it was privatized, [which] left this problem of modernizing to the people who buy the company.
"We were appalled with the state of the factory and the state of the machines and the state of the process. We were taking this Egyptian cotton, which is the best in the world, and mistreating it from the first moment we picked it," he laments.
Olama is proud of the fact that Arabia has built at least one factory every year since the company changed hands. When he government started upgrading in 1980, finishing in 1987, each of the government's new factories had cost LE 100 million. Arabia paid LE 30 million to LE 40 million for each new factory 20 years later. Olama did not want to point to any of the other ginning companies specifically, but he could safely say that none of them have bought new gins, and only one bought a bail press, a machine that compresses bails of cotton to ease shipping, but it is not yet operational.
Arabia's old factories were located on the Nile to facilitate shipping, but the cotton is no longer moved on the river. With the swelling population around the factories suffering from pollution, Arabia sold the valuable riverside land and moved out to the cotton fields. The new factories, 12 of them newly built and two that the government had fixed, were equipped with high-density bail presses, the only presses of their kind in Egypt. One 25-ton container holds 88 bails of pressed cotton. The same container cannot accommodate even one bail of uncompressed cotton.
But the reforms and investment did not come seamlessly. Around 200 workers organized against the privatization and demanded the company be renationalized. They were accustomed to the old way and feared that their guaranteed salaries would no longer be there for them. Their pay was now linked to the success of the company and with the poor state Arabia was in at the time, who could blame them for being nervous?
"[The workers] were worried. They were not cooperating and were not motivated. The board did not take a bonus and gave it to workers in the first year. We explained to them, 'We will make improvements; your salary will be better.' Not all of them believed us," Olama says.
When the company was privatized, the government stipulated that 10% of the stock would be reserved for the workers. But in the fine print was a clause that the workers would have to pay for the stock, and if they could not, the price would rise by 8% each year. So the board took the dividend that would have been paid to the owners of the 10% portion and used it to pay off the debt owed to the government. In six years, 6,000 shares were in the hands of the workers' association.
When the stock split, the company gave the employee stock owner's association a grant to buy the stock at the lower price.
"For the first time, they feel this company belongs to them. This total change of attitude came gradually, and they believed when they received their money. They believe in the new system and they are, in my opinion, 10 times more efficient than they were before," Olama says.
Cotton conundrum
Since Mohamed Ali first introduced cottonseeds to Egypt, the nation's crop has had the best reputation in the world, with American pima and supima strains as the only competitors. But while Egypt's natural environment engenders the finest quality cotton, the business environment has not been as congenial.
"Egyptian cotton is one of the best, if not the best in the world. It's not that we are very clever; in my opinion it's God-sent. With this sort of temperature, with this sort of soil, with this sort of water, with this sort of humidity, you can get this fantastic quality cotton. It has nothing to do with us," Olama says.
Since the government created an official cotton logo with the Alexandria Cotton Exporters' Association (Alcotexa) to market the valuable finished product, it has had difficulty ensuring that all manufacturers are actually using 100% Egyptian cotton. Rumors have circulated about other countries blending the cotton with cheaper fibers, yet still using the logo. Currently about 40 companies 26 local and 14 foreign pay for the logo. The license costs LE 2,000 per year for Egyptian firms, $2,000 per year for foreign companies.
"If it is the end product, it is very hard to be sure that it is 100% Egyptian cotton or if it is a mix because of the dyeing process and all the steps in finishing," says Mohamed Montasser, president of Alcotexa.
Montasser says Alcotexa recently had a meeting to discuss the issue and decided the only way to determine if companies are being honest is to check their output and make sure it matches their purchases of raw material. Starting legal action against violators could be difficult, but Alcotexa plans to devise strict inspection criteria to prevent misrepresentation from happening in the future.
The other issue Montasser worries about is waning interest from farmers in producing cotton, whose profit margin has declined in relation to that of other crops. According to the Ministry of Agriculture and Land Reclamation, the yield of cotton in 2005 was higher than the previous two years, but the estimate for 2006 is lower than it has been for 15 years.
The industry does have a unique opportunity in the Qualified Industrial Zone (QIZ) agreement, which will allow products to enter the US completely duty-free provided they include 11.7% Israeli content. More than 400 companies have signed on to the plan since its announcement, and about two thirds of them are in the textile industry.
Ron Khordi, a QIZ consultant for Coleman Becker Consulting, has several complaints about working with manufacturers here. His biggest frustration is what he calls an inability to "understand the American business environment." Khordi says he cannot sell a product without the buyer actually seeing and touching the product.
"It's classic bait and switch. I bring [potential buyers] to the store to buy one thing, and end up selling something else. If I can catch their eye, I will sell. But I need [the product] in my hand," he says.
Several local companies he declined to disclose their names refuse to send samples. "They're not straight with me. I wait a month and then they say, 'I have a policy that I don't send samples.' Well, why didn't you tell me a month ago? Is that how you do business? You go to Cairo and stick them in suitcases?" he says.
Of the 40 companies with which Khordi has established a relationship, only five sent samples. He also complains that they do not have websites, a basic prerequisite for doing business in the US. Khordi, however, has met with staff at the Egyptian Consulate's New York Economic and Commercial Office, and they have agreed to help in any way they can to work with him and Egyptian businesses. He also recently took a trip to Cairo to meet with textile leaders in the hopes of expanding the industry.
"My dream is to have a showroom with the entire QIZ product line in one room, then they will succeed," says Khordi. "You have to start big."
Kabo, at long last, seems ready to try.
By Andrew Bossone
© Business Today Egypt 2006
