Executive Briefings

Offering Much, Africa Looks to Compete With China for Manufacturing

Remember when retailers were local? People bought their clothes from the local tailor, their meat from the local butcher and their bread from the local baker. In those days retailers didn't travel very far for their suppliers and most of the accounting work was done by hand, maybe using an adding machine.

But as technology changed so did retailing. Advances in transportation and communications then made it possible for both retailers and manufacturers to expand beyond their local villages. The building of roads and railroads, coupled with powerful engines to drive trains and trucks enabled goods to be easily transported over long distances in less time. Telegraphs and telephones enabled retailers to easily contact manufacturers many miles away to place orders. This is when regional department stores and food markets started taking hold.

Manufacturers lowered costs by centralizing production. Cities like Lowell and New Bedford in Massachusetts thrived as the mills supplied clothing manufacturers around the country with textiles. Detroit grew as companies like Ford and GM centralized auto design and production. The lowered production costs enabled consumers to access goods they had never been able to afford before.

The economies of scale continued to grow, with national brands replacing regional brands until today where global brands such as Wal-Mart have taken hold. These brands require global suppliers. The mills in Lowell have long since been turned into condos and artists' lofts as manufacturing shifted to cheaper and more efficient places like Mexico and China that are better able to feed the global economy.

The available capacity and lower prices available in China and India have long attracted American-based manufacturers. China's lure of materials and labor for pennies on the dollar is very attractive to global executives looking to lower their cost of goods sold (COGS) and increase product margins. More recently, India's university-educated, English-speaking engineers have been spotlighted for their ability to turn out more complicated, engineered-to-order components and assemblies.

As China continues to emerge on the world stage at the heart of manufacturing, many are wondering how far it can go. American politicians from both sides of the political aisle think that slowing China's economic growth will protect American interests. President George W. Bush has noted that the trade imbalance with the Asian giant is becoming worrisome while Sen. Chuck Schumer (D-NY) has gone so far as to suggest a 27.5 percent tariff on imports unless Beijing adjusts its currency by that much.

The goal of this huffing and puffing is to help American manufacturers, but retailers have already made the commitment to global sourcing and are not going to shift back to a model dominated by domestic manufacturing anytime soon. They will continue to do business with China simply because the Chinese manufacturers supply quality products on time and on budget. It's pure economics.

In retail, labor and access to raw materials make a valuable link in the supply chain, meaning that China and India are only two players in a growing field of possible suppliers. Just open your closet and start reading the labels on your garments. There are thriving production facilities in Guatemala, Honduras, Puerto Rico, The Philippines, Jordan, Pakistan, and yes, even Africa.

Africa is a vast continent with resources more boundless than any other on the planet. Oil in the Sudan and Gabon, diamonds in South Africa, copper from Zambia, rare gemstones like tanzanite and opals, exotic hardwoods from Sierra Leone, Uganda and Zaire, and shea nuts-one of the hottest new ingredients in anti-aging skin care lines-from Ghana. Manufacturing has taken hold in Egypt and South Africa as well. Even Kenya, known the world over for its wildlife preserves, has recently enjoyed manufacturing success alongside the textile factories of Lesotho and Tunisia.

There are some interesting economic models at play when considering whether to source textiles from Africa or China. The most complex of these examines the unique monetary policies of China and the U.S. With China's yuan tied to the U.S. dollar, an artificially weak yuan makes products at the Springfield Wal-Mart much less expensive for American consumers. But if the U.S. decides to play hardball with China and start forcing a change in valuation or even slapping high tariffs on Chinese produced goods, retailers won't necessarily turn to domestic manufacturing plants. They are more likely to look for other global partners. This is why African nations are already pulling from China's playbook when it comes to growing their own economies.

To work better with China, many major American and European retailers spent the past few years implementing sophisticated global sourcing systems. These systems unify the buying process so a buyer sitting in an office in New York can easily keep track of the myriad details of a product she designed, all the way down to where the manufacturer bought the fabric, buttons and zippers. Then she can be updated as the goods move through the supply chain right through to delivery. Since much of this information is captured automatically as a part of the process itself, human error is avoided resulting in clearer, more accurate information. It also gives CFOs and CEOs a clear view right through to the very ends of the process, ultimately enabling them to make better business decisions.

Coupling the global reach of the internet with these new Web-based sourcing solutions, retail buyers can now reach well beyond China and into countries that had previously been difficult to work with, or were even unavailable to them. Kenya and South Africa, with their available shipping lines and human capital, are solid incubators for such activity. Also, Jordan and The Philippines are starting to show that they too can cater to the needs of American and European retailers. Using technology, retailers can now access the wealth of resources in these developing nations.

What's more, companies can bullet-proof their supply chain against external factors such as political and economic instability or natural disasters by diversifying around the globe. Assuming a change in the U.S. business relationship with China, companies that are already working in Africa will have a more cost-effective supply chain, producing the margins that Wall Street likes to see, as well as establishing trusted trading partners on the continent.

Africa's advantage becomes clearer by simply examining supply chain length and costing the inventory safety stock necessary to cover the days of exposure due to transportation. With the average proverbial "slow boat from China" taking three and a half weeks from port to port, Egypt, Tunisia, Kenya, Lesotho and South Africa have strategic access to waterways leading to the European Union and the United States.

African nations are already hard at work building the infrastructure to handle this new global market, from roads to move goods overland, to major ports that can handle massive shipping containers, to the communications infrastructure to act as a backbone in the new economy. Money is being invested that will benefit American retailers and manufacturers.

Of course, it's not all a rosy picture. Many African nations remain politically unstable, and it's up to the companies themselves to keep a close eye on the progress being made, but in the long run those who come to the game early will win. But even here there is hope. If the people of one nation remain poor as they watch their neighbors leading better, more educated lives thanks to both political stability and the resulting increased trade, they are more likely to do what it takes to achieve that life themselves.

Currently, the textile trade makes up approximately 7 percent of the global merchandise trade, representing over $350bn, employing 40 million people around the world. The International Monetary Fund predicts a market expansion of 5.8 percent for Africa in 2006.

We're seeing the emerging of another major player into the global marketplace. This is the latest on the road to a true global marketplace in which products that are manufactured anywhere in the world can be sold anywhere else through retail outlets easily and quickly. 2006 is the year to make this happen and it will be up to chief procurement officers and CIOs to ensure that the technology systems are in place to make sure that companies reach this goal.


Sue Welch is founder and CEO of TradeStone Software (www.tradestonesoftware.com), a provider of collaborative e-sourcing solutions for Global 2000 companies and their suppliers.

Remember when retailers were local? People bought their clothes from the local tailor, their meat from the local butcher and their bread from the local baker. In those days retailers didn't travel very far for their suppliers and most of the accounting work was done by hand, maybe using an adding machine.

But as technology changed so did retailing. Advances in transportation and communications then made it possible for both retailers and manufacturers to expand beyond their local villages. The building of roads and railroads, coupled with powerful engines to drive trains and trucks enabled goods to be easily transported over long distances in less time. Telegraphs and telephones enabled retailers to easily contact manufacturers many miles away to place orders. This is when regional department stores and food markets started taking hold.

Manufacturers lowered costs by centralizing production. Cities like Lowell and New Bedford in Massachusetts thrived as the mills supplied clothing manufacturers around the country with textiles. Detroit grew as companies like Ford and GM centralized auto design and production. The lowered production costs enabled consumers to access goods they had never been able to afford before.

The economies of scale continued to grow, with national brands replacing regional brands until today where global brands such as Wal-Mart have taken hold. These brands require global suppliers. The mills in Lowell have long since been turned into condos and artists' lofts as manufacturing shifted to cheaper and more efficient places like Mexico and China that are better able to feed the global economy.

The available capacity and lower prices available in China and India have long attracted American-based manufacturers. China's lure of materials and labor for pennies on the dollar is very attractive to global executives looking to lower their cost of goods sold (COGS) and increase product margins. More recently, India's university-educated, English-speaking engineers have been spotlighted for their ability to turn out more complicated, engineered-to-order components and assemblies.

As China continues to emerge on the world stage at the heart of manufacturing, many are wondering how far it can go. American politicians from both sides of the political aisle think that slowing China's economic growth will protect American interests. President George W. Bush has noted that the trade imbalance with the Asian giant is becoming worrisome while Sen. Chuck Schumer (D-NY) has gone so far as to suggest a 27.5 percent tariff on imports unless Beijing adjusts its currency by that much.

The goal of this huffing and puffing is to help American manufacturers, but retailers have already made the commitment to global sourcing and are not going to shift back to a model dominated by domestic manufacturing anytime soon. They will continue to do business with China simply because the Chinese manufacturers supply quality products on time and on budget. It's pure economics.

In retail, labor and access to raw materials make a valuable link in the supply chain, meaning that China and India are only two players in a growing field of possible suppliers. Just open your closet and start reading the labels on your garments. There are thriving production facilities in Guatemala, Honduras, Puerto Rico, The Philippines, Jordan, Pakistan, and yes, even Africa.

Africa is a vast continent with resources more boundless than any other on the planet. Oil in the Sudan and Gabon, diamonds in South Africa, copper from Zambia, rare gemstones like tanzanite and opals, exotic hardwoods from Sierra Leone, Uganda and Zaire, and shea nuts-one of the hottest new ingredients in anti-aging skin care lines-from Ghana. Manufacturing has taken hold in Egypt and South Africa as well. Even Kenya, known the world over for its wildlife preserves, has recently enjoyed manufacturing success alongside the textile factories of Lesotho and Tunisia.

There are some interesting economic models at play when considering whether to source textiles from Africa or China. The most complex of these examines the unique monetary policies of China and the U.S. With China's yuan tied to the U.S. dollar, an artificially weak yuan makes products at the Springfield Wal-Mart much less expensive for American consumers. But if the U.S. decides to play hardball with China and start forcing a change in valuation or even slapping high tariffs on Chinese produced goods, retailers won't necessarily turn to domestic manufacturing plants. They are more likely to look for other global partners. This is why African nations are already pulling from China's playbook when it comes to growing their own economies.

To work better with China, many major American and European retailers spent the past few years implementing sophisticated global sourcing systems. These systems unify the buying process so a buyer sitting in an office in New York can easily keep track of the myriad details of a product she designed, all the way down to where the manufacturer bought the fabric, buttons and zippers. Then she can be updated as the goods move through the supply chain right through to delivery. Since much of this information is captured automatically as a part of the process itself, human error is avoided resulting in clearer, more accurate information. It also gives CFOs and CEOs a clear view right through to the very ends of the process, ultimately enabling them to make better business decisions.

Coupling the global reach of the internet with these new Web-based sourcing solutions, retail buyers can now reach well beyond China and into countries that had previously been difficult to work with, or were even unavailable to them. Kenya and South Africa, with their available shipping lines and human capital, are solid incubators for such activity. Also, Jordan and The Philippines are starting to show that they too can cater to the needs of American and European retailers. Using technology, retailers can now access the wealth of resources in these developing nations.

What's more, companies can bullet-proof their supply chain against external factors such as political and economic instability or natural disasters by diversifying around the globe. Assuming a change in the U.S. business relationship with China, companies that are already working in Africa will have a more cost-effective supply chain, producing the margins that Wall Street likes to see, as well as establishing trusted trading partners on the continent.

Africa's advantage becomes clearer by simply examining supply chain length and costing the inventory safety stock necessary to cover the days of exposure due to transportation. With the average proverbial "slow boat from China" taking three and a half weeks from port to port, Egypt, Tunisia, Kenya, Lesotho and South Africa have strategic access to waterways leading to the European Union and the United States.

African nations are already hard at work building the infrastructure to handle this new global market, from roads to move goods overland, to major ports that can handle massive shipping containers, to the communications infrastructure to act as a backbone in the new economy. Money is being invested that will benefit American retailers and manufacturers.

Of course, it's not all a rosy picture. Many African nations remain politically unstable, and it's up to the companies themselves to keep a close eye on the progress being made, but in the long run those who come to the game early will win. But even here there is hope. If the people of one nation remain poor as they watch their neighbors leading better, more educated lives thanks to both political stability and the resulting increased trade, they are more likely to do what it takes to achieve that life themselves.

Currently, the textile trade makes up approximately 7 percent of the global merchandise trade, representing over $350bn, employing 40 million people around the world. The International Monetary Fund predicts a market expansion of 5.8 percent for Africa in 2006.

We're seeing the emerging of another major player into the global marketplace. This is the latest on the road to a true global marketplace in which products that are manufactured anywhere in the world can be sold anywhere else through retail outlets easily and quickly. 2006 is the year to make this happen and it will be up to chief procurement officers and CIOs to ensure that the technology systems are in place to make sure that companies reach this goal.


Sue Welch is founder and CEO of TradeStone Software (www.tradestonesoftware.com), a provider of collaborative e-sourcing solutions for Global 2000 companies and their suppliers.