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Rag dolls.

(written in 2002 in the context of the failure of local businesses to manage the inroads made by cheaper Asian Imports, and a failing currency)

The interesting thing about this piece is that most of the predictions in terms of the South African economy and the cascade effect on the local manufacture were right on the mark.

It is a well known fact that the rag trade was the first casualty in the  bid to open our borders to the international trade.   This labour intensive sector has found itself under fire from the increasing cost of skilled and semi-skilled labour, cheap imports and their dependence on textiles and trimming from abroad that landed at high costs due to the decimated Rand.

Most manufacturers went to the wall,  and with dwindling profits  chose  one or other of the following alternatives to stay in the game.  Some of the larger players chose a combination of choices.

Diversify.

Having access to past profits the industry at large looked to low maintenance investments that could supplement their income and create the safety nets they needed.  Real Estate looked like the best possible source of stability. Those that had international money bought property and low maintenance businesses. (Typically low yield) Low interest rates in overseas banks  forced them to utilize the funds in low risk ventures that performed at rates that stayed just a little above the bank  rates.  In many cases the money  that  was sent abroad was borrowed at the very high SA interest rates, but  the downward  spiral of the Rand meant that all losses to the banks were gained in the exchange rates.

Refine Profits.

Increased efficiency was the keyword. Many manufacturers introduced computerized systems that reduced the human factor and decreased the wastage in the processes.  Software and systems that could offer this boomed. The first IT vacume was exposed in that  few systems exist in the world that can successfully integrate all the operations that the industry required, least of all in SA. The IT industry was missing key personal who had conveniently left for greener pastures abroad and the Rag trade,  together with the rest of the South African industry was forced to make do with systems that  were painfully outdated and fraught with problems. IT companies offering even partial solutions  boomed as never before.

Go Direct.

Many manufacturers chose to do the unthinkable. They removed the middleman  that separated them from the higher paying consumer.  This temporarily boosted profits and sustained the factories for a while. In the long term this led to a large scale failure within the retail industry as all the independents began to fall by the wayside.  There was little or no room  for the traditional small clothing store as the manufacturers needed chains to service their factory floors. They were able to sell cheaper to more people than ever before.  The only really successful retailers were  the national chains. Some as pure retailers and some as manufacturers who had evolved  to meet the consumer.  The only flaw with the seemingly perfect relationship between factories and factory shops was that the shops either received goods at cost in which case the factory ran at a loss or it bought at  a markup in which case it had trouble competing with other chains, and in doing so was forced into the red.   

The task of running a retail operation in a grand enough scale to be of any consequence required a change in the family oriented manner in which the industry traditionally worked. Managers who were hired to run the multitude of stores were total strangers who  were monitored through systems of checks and balances.  POS software was the second area where the industry  came up against the limitation of the IT industry in South Africa.  Most current systems in the country were designed for small stores and not for the “chains” and when modified to run chain stores came up constantly against the limitations of having too much modification from the design  objective.  This led to a large scale rethink on the viability of the national chain.  Traditional chains that had evolved long before the current crisis had developed a host of software solutions and closely guarded these solutions as their edge in the market.  Privately they  predicted the failure of the upstarts who had come to threaten their domain.  Some did indeed fail and a large majority found  ways of using sound business sense to keep abreast of the fast moving retail world.

A plan that started off as the grand scale effort to induce a industrial sector to grow and export  turned against itself and self  destructed.  The low Rand led to some exports yet the  increasing cost of labour as well as the fall of the Far Eastern currencies led to the local product costing higher than a similar one from the east.  The dependence on imported fabrics and trimms as local mills again could not compete with those from abroad, even with the weak local currency, led to a higher cost and a product that would not sell, not even abroad.

Importers:

Importers prospered and saturated the local market with cheap imports.  This was done at the expense of the local manufacturer.   Manufacturers have in the past used designer labels to sell at a higher price and thus salvage their trade.  The importers however were  not intimidated by South Africa’s weak legal system and flooded the market with counterfeit brand name goods. This in turn closed what could have been a life raft to the industry.

 The road ahead:.

There are only two types of Manufacturer “The  quick and the dead”.

There seem to be two possible alternatives. The move out and the drive forward.

The Way out :

Stock Exchange listing.

Those that can measure up to the requirements to list on the JSE have found an attractive way of  taking on capital, and with each  new blow to the industry have watched their shares plummet.   Buying back their devalued stock from disillusioned stock holders represents a brilliant way of selling your company, and buying it back at a fraction of it’s worth.  Those who have opted for this route have found that it is a double edged sword in that investors will ultimately nominate the management structures and this is invariable done on merit.

What they did not anticipate  was  the appearance of the American style corporate raiders who buy companies with suppressed shares for it’s asset value and strip off assets as they represented a higher price than the sum of the shares.

Liquidate.

The high rate of liquidations in the industry bears testament to the failure of an entire generation to measure up to the challenges of a changing society and economic climate in South Africa.   Many of the liquidations seem to represent  an easy way of selling your company to your creditors and in one fell sweep walking away with your private wealth and the dignity  that the limited liability that the South African PTY LTD offers.

 The Way Forward:.

 What lies ahead for the industry is a series of possibilities and probabilities.

Mergers:.

The merger of companies into giants will in the short term  attract large venture capital to apply the latest in technology  to mechanize the costly labour intensive parts of the process and thereby reduce costs.   This will happen successfully only when the family based ethos of the industry is replaced by an aggressive corporate based system that allows everyone the opportunity to climb up the corporate ladder , promoted purely on merit. Affirmative action in this workplace will  attract black empowerment funds and address some of the inequalities of the industry.  Mergers will also make the approach to the JSE feasible for companies that would not have made it on their own.

Super chains.

Already the formation of large super chains seem to be the trend and the fitter of these will survive and prosper. Their buying muscle will break the hold that the old chains had on the market and inroads into the larger Africa will be the success story of the next decade.

Evolution.

Old money will find new ground to take root in.  Traditional clothing money is being ploughed into chemical manufacture,  software development, technology and a host of emerging highly specialized  areas. The strong manufacturing experience and a dedication to efficient use of capital will lead to a  string of successes for visionaries.  

Political solutions.

With incentives offered in the past to Industrialists in Kwa Zulu Natal the industry went to bed with the IFP and in doing so find themselves in a precarious position. The ANC remembers those who helped and those who didn’t.  The other parties seem to have shorter memories and the industry has found that  the political partners of old have outgrown them and those in National government have no favours due.  While some companies have made inroads into supplying the national armed forces this is isolated and done through the tender structures.  Until the Clothing industry has a voice in parliament the laws passed to help industry will largely pass this industry by and there will be no comfort from  the  State or the Unions.

While there have been informal associations of manufacturers there have been no formal forums for them and until such unions exist between the competing factions, the  united trade unions will overpower the fragmented industry in most negotiations.

This is evidently a very exciting time for the “Rag trade” and those who have seen the great opportunity in the current turmoil.  The saying “Adapt or die” was never as true as it is for this sector of the economy.   Any volatile time , good or bad, offers opportunity to those with vision.  All it takes is vision.

CAD has made the Rag Trade it’s target market and has had it’s fate determined by the forces that effected the Clothing industry. Any slump  has worked in converse in that CAD has been called on to help improve profits and productivity in the bad times and as such has thrived on the challenges of the industry.   Having learnt from the industry we are in a very good position to advise on the possible way forward.  Many  corporates have used our connection to the IT to produce feasibility studies on investment potential  future ventures.  In the past five years we have met the challenge to evolve from a pure IT company to a consulting house that has tested theories and ideas with   an unbeatable tract record.   We wish to formally offer this skill to our trusted client  base   who will find in us the ability to quickly grasp a new industry and advise on it’s dangers.

Where the past investments depended largely on “gut instinct” the new world we find ourselves in is fraught with danger and we at CAD can help you through uncharted terrain at fees that you can afford.  Call us if you need more information on specifically what we can do for you on your next venture.  Remember your skills in business are global and can be channeled into a wide variety of opportunities out there, all you need is  a lean and fast advisor run the numbers and  provide you with all the FACTS.

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Last modified: 01/19/08