The Textile Industry in Ghana and Trade Liberalisation

Introduction

The textile industry in Ghana was once a very booming industry, which once employed about 25000 workers. Most of these companies produced high quality materials, designs and very good textile brands, which sold, so well on the local market as well as other markets in the West African sub- region. Wax prints produced by these companies were in high demand on the Ghanaian market because they are use in making traditional apparels like the Kaba and other exquisite wears. The Industry was not only a source of employment to many Ghanaians but also contributed significantly to the country’s Gross Domestic Product, (GDP).

In recent times the industry has gone through some difficult times resulting in shutting down of production lines of most of the companies in the industry. A lot of workers had been made redundant as a result of these shut downs. Ghana Textile Print, (GTP) which once produced a very good textile brand the GTP brand is reported to have shut down its spinning and weaving departments and laid off many of its workers. This was a company, which was known to have competed with multinational textile companies in the past. The story is not different for Ghana Textile Manufacturing Company limited (GTMC). GMTC shut down its production line way back in December 2005.

Juapong Textile also went into administration and its production lines shut down completely. It opened its production line briefly under the name Volta Star Textiles but could not cope with the competition. Some of the companies which are still operating are believed to be importing gray baft and semi-finished/ bleached cloth for printing in Ghana. One such company is Printex which is believed to be producing below capacity. The only surviving local textile company in the industry is Akosombo Textile Limited, (ATL) but the story doesn’t look good for that either. (The Financial Times Limited 2007)

Bail Out Plans for the Industry

Considering the fact that the textile industries in Ghana once contributed significantly to the Gross Domestic Product, (GDP) and was a source of employment for many Ghanaians, this statistics were quite worrying. There was therefore an appeal from the stake holders in the industry to the government to bail out the companies in order to save the industry from total collapse. The government responded to their distress call and came out with some bail out packages, which could possibly transform the industry to its former glory.

One significant bail out package put in place by the government was to acquire one of the distress company GMTC at a cost of $ 1.5 million. This company which was almost in ruins was to be refurbished and fitted with hi-tech factory, and rented out to ten new indigenous medium garments and textiles companies. It is expected these new producers will produce textiles for both the local industry and for exports to America under AGOA (Ghanaian Chronicle 2006-01-24). Also the government gave its backing to ABC Textiles; a UK based Textile Company in building a 10-million-dollar new production facility at the Akosombo Textile Limited (ATL) factory. This facility will be used to produce wax prints for the local market as well as other markets. ABC Textiles owners of the plant have plans of expanding its market in the West African sub-region. In 2003, the government reduced duties on imported textile inputs from 10 per cent to five per cent with plans to abolish totally in the 2006. (GNA

Protection of the Textile Industry

The government has also put in place plans to curb the influx of textile products from other African countries. In order to achieve this, plans are underway to turn Takoradi Port into a single import corridor for all African Textile Prints (ATP) coming into Ghana. According to government reports when this plan is put in place all commercial imports of African prints through unauthorised routes, particularly the land borders, would be confiscated.

Furthermore CEPS and Ghana Standards Board (GSB) shall subject commercial African prints imported through the Takoradi Port to 100% physical examination. Finally the government has established a New Economic Intelligence Task Force to check and deal with all cases of trade malpractices in Ghana, including but not limited to the textile sector. (The Chronicle (Ghana), 05.19.2005)

Support for the cotton industry

One area of the industry which the government decided to focus its attention on is the cotton industry because this forms the bedrock of the textile industry in Ghana. In fact the cotton farmers feed the textile industry with raw material. For them to remain in business they need a constant supply of raw material and at a competitive price too. The government gave out a bailout package of an amount of GH¢2.6m to the Ghana Cotton Company Limited (GCCL) to purchase cotton from local farmers in the three Northern Regions of Ghana and also to support the farmers for the 2009/2010 crop season. As part of the support twenty (20) brand new tractors were given to the farmers.

The government also promised 20 billion cedis in the form of agro inputs to around 10,000 cotton farmers in the three northern regions. It has also promise to provide funds for procurement of certified cottonseeds and ploughing of lands. A total of 10,000 hectares is likely to be cultivated within the year. An amount of 4.6 billion cedis has already been released to the GCCL for ploughing and procurement of 300 tons of certified cottonseeds, which had been imported from Burkina Faso for distribution to the farmers. A further sum of 16 billion cedis has been earmarked to support farmers in the three cotton companies mentioned above. A process has been scheduled for completion by July 20, 2006 for the inputs to be provided to the farmers through the companies. (allafrica.com)

Causes of the collapse of the Textile Industry

Trade liberalisation

It has been argued by the industry watchers that the near collapse of the textile industry in Ghana could be attributed to the trade liberalisation policy. They are of the view the liberalisation led to the influx of textile products from China and other countries. These textiles are relatively cheaper compare to those produced in Ghana and therefore made it impossible for the local producers to cope with the competition. Besides some of these products are made with Ghanaian motives, which made them, look like they are produced in Ghana. Consumers cannot therefore differentiate between these products and those made in Ghana. To make matters worse local retailers prefer to sell these brands because they are affordable to local consumers and fly off the shelves quicker.

Well, one could argued that it is very good idea to protect the industry from external factors. This is because the industry form part of the production sector of the economy. It’s not good to have the economy dominated by the service sector i.e. (banking, insurance transport etc). However experts like David Ricardo (a classical economist) are of the view that trade protectionism flies against the theory of comparative advantage, which suggests that opening up world markets, and reducing trade barriers (trade liberalisation) would lead to gains from trade for all concerned.

Besides trade liberalisation is not a bad thing at all but it’s the way it is handled. Trade liberalisation simply put means reducing trade limitations such as tariffs, quotas and non-tariff barriers (e.g. regulations, legislation etc) that make it difficult for foreign competitors to sell goods into another country. It has its good sides as well as the bad ones. What needs to be done is to balance the equation between trade liberalisation and trade protectionism because it’s also not good to introduce trade protectionism policies.

Influx of Textile products.

Competition in the textile industry in the distance past was just among the local companies but the equation has now changed. These companies now have to compete with influx of textile products from China and other countries. These products offer value for money and are affordable. To compete with these foreign products will mean the local producer reducing their retail prices. This will mean they will be under pricing their product and this will have adverse effect on their profit margin.

Its been argued that the most of the textile companies use obsolete and out date machines that is why they are finding it very difficult to compete with the foreign textile products. Assuming this is true what it means is their cost of production will increase due to loss of man-hours as result of machine breakdowns and stoppages in production lines. This cost is likely going to be passed onto the consumer. Also the old machines are likely going to be less efficient. This will lead to the companies not meeting their production target for any given period. What this means they will be delays in meeting orders and this could result in customer dissatisfaction.

Imperfect Market

The market in Ghana could be described as an imperfect market during the period under review. This created a very difficult situation for the textile industries to operate. An imperfect market is where information is not quickly disclosed to all participants in it and where the matching of buyers and sellers isn't immediate. Generally speaking, it is any market that does not adhere rigidly to perfect information flow and provide instantly available buyers and sellers. (www.investopedia.com) It could be argued that the trade liberation policy was not communicated properly to the textile companies. Probably they were not given enough time to prepare for it or they were not consulted. The information on the policy needed to be made available to the retailers as well as the consumers. In fact all the stake holders in the industry need to have access to any information on any policy that could affect the industry and this includes the cotton farmers in the three northern regions of the country. The absence of any thing of this sort will make the market imperfect.

Some Suggested Solutions

Costing System In order for these companies to survive in these turbulent times they need to apply very effective costing system to reduce their cost of production. They need to have terms and methods of allocating and apportioning fixed production overheads into various cost centres, using an appropriate method and then reapportioning the fixed overheads from the service centres into the production centres so that the costs can then be absorbed. One Such method they could consider using is the Activity Based Costing Activity Based Costing Activity-Based Costing (ABC) is defined as a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect cost (overhead) into direct cost. Activity base costing methods is the fixing of overheads for various categories of cost centres, for example canteen or maintenance costs; need to be shared out to various cost centres. ABC as costing system recognises that activities consume resources and products consume activities (R S Kaplan and W Bruns, 1987). Application of the Activity Based Costing will mean these company needs to have terms and methods of allocating and apportioning fixed production overheads into various cost centres, using an appropriate method and then reapportioning the fixed overheads from the service centres into the production centres so that the costs can then be absorbed. First and foremost they need to identify their cost centres, profit centres and investment centres. Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. (R S Kaplan and W Bruns, 1987) The costs from the production centres then need to be absorbed into the standard cost per unit using an appropriate method. For this paper this method will usually (but not always) be on a per unit basis, on a machine hour basis or on a labour hour basis but others are possible. The use of ABC will allow the managers of the textile companies to better understand and get the true costs associated with business activities at each of its revenue and cost centres. These companies have profit centres like business and marketing department etc. These centres have both revenue as well as cost centres. They are therefore viable centres, which generate most of the revenues. An effective activity based costing system will help increase the revenue generation of these centres. Activity based costing will also enable the managers to better examine their business activities that are indirectly associated with their service delivery like information systems, customer support, electricity, security, marketing, transport services and maintenance. It will thus make it easier for them to be accurate in assigning costs. They will be in a better position to assign cost for the operations of their cost centres since these centres do not bring any revenue. It will also help the managers to identify inefficient product, department and activity and therefore allocate more resources on profitable product, department and activity. ABC will also help to control the cost at individual level and on departmental level and to find unnecessary costs. The only problem is ABC has been found to be a very high-cost accounting technology. Installing an ABC system is technically complex, requiring talented personnel and a considerable amount of time. Though its been argued that ABC has lost ground to alternative metrics, such as Kaplan's Balanced Scorecard and economic value added its still widely in used.

Finally it will be unwise for these companies to use full costing, because in practice full costing ‘tends to use past cost and to restrict its consideration of future cost to outlay cost. It also provides a long - run relevant cost which gives information that relate only to the narrow circumstance of the moment (Mclaney and Atrill 2005)

Just in Time (JIT)

Another way which these companies can cut down cost is to eliminate waste in their production set up. Waste is defined as any ‘activity performed within a manufacturing which does not add value to the product’ (FTC Foulks Lynch 2005). One way by which the companies could reduce waste is to apply Just in Time (JIT) system of production. JIT is described as a system of production, where actual orders serve as a signal for when a product should be manufactured (Henry Ford 1923). The use of JIT by the companies in the textile industry will help them produce only what is required, in the correct quantity and at the correct time. They will make sure their supplies are delivered right to the production line only when they are needed. For example they make sure they receive exactly the right quantity of cotton (their raw material) for one day’s production. Their suppliers need to deliver the cotton to the correct loading bay on the production line within a specific time slot. This will help to reduce their stock levels of raw materials, components, work in progress and finished goods.

Experts are of the view inventory is an incurring costs, and doesn’t have any value. In fact inventory is regarded as one the seven wastes which are; overproduction, waiting time, transportation, processing, motion and product defect. These companies should make the effort of holding lower stock because this will save them some rent, insurance cost and space. For example Juapong Textile is reported to have `heap of gray baft stacked in its ware house with no hope of buyers’ (The Financial Times Ltd). This will definitely cost the company some rent as well as insurance premium payment. Holding of less stock will free their working capital, as this will not be tied in stocks. Working Capital is the capital available for conducting the day to day operation of an organisation. This usually refers to short-term net assets- stock, debtors and cash less short term creditors (FTC Foulks Lynch 2005). When these companies tied their working capital in stocks what will happen is their cash flow (which is regarded as the life blood of any business) will be affected and this could lead to lost in other investment opportunities.

The use of JIT will prevents the build-up of unsold textile products product that can occur with sudden changes in demand in the Ghanaian market. Production is very reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed. The correct implementation of JIT can lead to dramatic improvements in returns on their investment (www.tutor.net)

Exploring other Markets

One other area that is worth considering by these companies in order to remain in business is to explore the market beyond the boundaries of Ghana. Seeking for new markets is very good business strategy. The aim of every business unit is to make profits and maximise shareholder wealth. In certain circumstances however, opportunities elsewhere would have to be exploited so as to achieve this outcome. In achieving their goals various factors impinge either on the success or failure of most business units. These factors mainly have to do with deliberate government action, which adversely affects the fortunes of these companies. In the case of the textile industry in Ghana it’s the trade liberalisation policy introduced by the government. Most of the companies in the Textile Industry in Ghana have been crippled and others have completely wound up due to the governments liberation policy that had adversely affected these companies. One market that is worth exploring is the market in Singapore.

Domestic market In Singapore

Singapore has a large domestic market of 3.6 million people, which just like Ghanaians will like to wear dress made from local textiles. Apart from that the lifting of quotas by the US and other wealthy countries to limit imports from developing nations under the General Agreement on Tariffs and Trade, (GATT) place Singapore in favourable market in the apparel industry. Atmi, a USA based textile industry group, (now defunct) predicted that the end of the quota could accelerate growth of the textile industry in Asia and the collapse of the industry in the USA. The group predicts that 630,000 jobs in textiles, apparel and related industries could be lost by 2006 in Americans. Atmi reports went on to say the end of the quota could lead to the collapse of the US textile and apparel industry with orders moving to Asia. The Ghanaian textile companies can capitalise on the situation and move now.

The country has a large population and therefore has ample labour to spare. This cheap labour will be a good incentive to the Ghanaian companies. The caution here however is that the labour may be unskilled and this may lead to high operational losses to the companies as a result of the learning curve. The companies can anyway weigh these losses against the benefits it will derive from the cheap labour and the overall effect determined on the activities of the company. (MAS report 2002)

Domestic Interest rate in Singapore

One area that makes Singapore attractive is the domestic interest rates. This has been relatively low and stable since 2000, the domestic three-month inter bank rate currently the Singapore the inter bank SIBOR 2.5%. With such a low interest rate the Ghanaian companies can thus borrow from the Singaporean banks and invest it into the expansion programme. However Singaporean commercial banks have the tendency of giving loans to individuals rather than to the business sector. It is known facts that loans granted to professional and private individuals in Singapore grew to double-digit rates in 2000. Nevertheless the intense competition between banks, which came as a result of the liberalisation of the banking sector in Singapore, lending to the manufacturing sector has gone up in the last few months of 2000. In the first quarter of 2001, loans growth rose to 7.1%, compared with 4.7% in 2000, although this was partly on account of DBS Finance’s integration with DBS Bank. Adjusting for its effect, loans to non-bank customers would have grown by a slower rate of 4.7% in the first quarter of 2001. (MAS report 2002)

Financial risk and Economic risk

Singapore under the Monetary Authority of Singapore Act (MAS) has taken several measures to maintain exchange rate stability. The floating exchange policy was introduced. Currency restrictions were also lifted. The prohibition of advance payment on import contracts and opened an inter bank market for foreign exchange was also lifted. However Enterprises under current Singapore currency regulations are obliged to sell a certain percentage of their hard currency to the government. This measure is aimed at maintaining exchange rate stability. The problem, which arises out these situations, is that foreign companies may find it difficult to raise foreign exchange to import essential parts to keep their business running.

The risk here will lie in the value of the funds, which Ghanaian companies will want to repatriate to Ghana. Assuming the companies are going to price their exports in cedis (Ghanaian currency) then they will not be wholly affected by the foreign exchange regulation as well as fluctuations. However, if they decide to charge the Singapore dollar for exports then fluctuations may have a serious effect their profits.

Conclusion

It is time the textile companies in Ghana start considering expanding to other markets in the West African sub region as well as other markets. For instance they could consider expanding to the market in Singapore in order to take advantage of the predictions by Atmi, (the textile industry group). Atmi predicted a boom of the textile industry in Asia from 2004 onwards as a result of the end of GATT quotas. According to the report the end of the quota will result in the collapse of the US textile and apparel industry in the USA and orders for textiles products will then move to Asia. However the danger is that investing in another country has its intricate complexities based on the fact that international trade does not only have to do with finance and profits but has to do with social and culture issues. The companies must weigh the advantages of going into Singaporean market against the threats they may face before taking a decision.

Francis Kwaku Egu -MBA (Finance) UK, LIFA Level III, ACCA Level II

PhD Finance Student, London- UK Honorary Member- Licensed International Financial Analyst (LIFA) kwakuhull@yahoo.com