Increasing labor costs in the US as in all other developing countries coupled with the increasing market orientation of the Chinese economy have rendered manufacturers in many countries uncompetitive. In the last few years however, concern about human rights and labor standards and the increase in the overall standard of living resulting from countries are prompting manufacturers to look for alternatives. This report explores the possibility of Superior Modern Garments investment in uniform manufacturing with particular emphasis on scrubs in Ghana.
The report looked at the reasons why Ghana provides significant and cost effective alternatives to production in Asia, of which the proximity to the east coast of the United States is preeminent. The report also considered economic and cultural conditions in Ghana and their effect on productivity in apparel manufacturing. Finally, the report weighed Ghana government policy toward apparel manufacturing and the general trade stance to determine the effect they have on exports of manufactured apparel from Ghana.
An analysis of the foregoing issues indicate that SMS will benefit from investing in joint venture with one or several of the companies under the now defunct President’s Special Initiative on Apparel to take advantage of AGO while it lasts and to capitalist n the large pool of experts that are available and willing to work in the country. In addition, because Ghana is a lot closer to the US than Asia, SMS can bring products to market faster in absolute terms all things being equal.
Introduction Superior Modern Garments is a Us-based manufacturer of assorted apparel including uniforms of which the most popular with clients are surgical scrubs. Scrubs are easy to produce because they have very little design element and can be cut by machines out of patterns designed anywhere. SMS has since its inception maintained all its manufacturing and sales operations in the US relying on skilled Barbour and utilities available in country and importing components and other inputs that are produced more efficiently elsewhere.
Over the last few years however, SMS has been facing increasing competition from manufacturers in countries with lower costs of production notable labor costs. Rising wage rates in developed countries has forced manufactures across all productive sectors to see ways of diversifying production. Invariably, this means that Superior Modern Garments, like other manufacturers, has to turn to developing countries where wage rates are still very low even in the formally declared minimum wage rates.
Illiteracy and economic growth rates are still very low while population growth rates are relatively high. The traditional and obvious choice for manufacturers has been to move production to the east particularly China and Bangladesh where low labor costs and efficient production techniques are provide However, there is an increasing drive towards pro-poor especially pro-African production under the Trade for Aid slogan that is sweeping across the developed world.
Legislation like the Africa Growth and Opportunities Act (AGO) which provide for quota-free and tariff-free exports of over 6,000 goods including manufactured apparel from African countries like Ghana provide a real opportunity for manufacturers to make up for the lack of efficient production. Therefore, if Superior Modern Garments is able to bring its experience in efficient production line and raw material sourcing to Ghana, it might make a windfall by taking advantage of AGO while it lasts and still be competitive if the US does not extend the duration of the law after it elapses in 2015.
This report looks at the fiscal and exchange rate regimes in Ghana and the US, the cultural differences and similarities that will facilitate Superior Modern Garments operations in Ghana and specific points of advantage for apparel manufacturing in Ghana visa-Г-visa the main global competition in China and other countries in Asia. Overcoming the Asian Advantage Asian countries have enjoyed a competitive advantage in manufacturing largely due to the low labor costs that they offer compared to producers from developed nations.
Because most governments in Asia are either authoritarian or totalitarian, workers who are mostly poor and illiterate cannot form effective unions to agitate for better wages. This is in sharp contrast to their counterparts in developed nations ho have legal rights of association that are backed by laws with Judicial systems ready to enforce these laws. Figure 1 below illustrates how the low wages, from which Asian countries derive their competitive advantage, have been perpetuated.
The diagram traces the path to show how the low wages that give producers and advantage eventually lead to more low wages by reducing global demand leading to falling prices and profits, which in turn lead to cost cutting that ultimately result in the continued payment of low wages. This phenomenon, which has been the main source of advantage for China and other Asian countries is fast eroding under pressure of importers for more ethical manufacturing. Pick] Business System The US is world renowned for its open market system and indeed prior to the global financial crises of 2007/2008 when the US government stepped in with massive bailout packages for automobile manufacturers and financial institutions, government had pretty much stayed out of business. Government sticks to the task of creating an enabling environment for business although the US does have certain protectionist policies for industries defended and agriculture considered vital to the national interest.
Un)fortunately, these protectionist policies do not extend to Smog’s area of activity-apparel. In fact, the US goes beyond denying protection to local apparel manufacturers to grant trade preferences to exporters of apparel to the US. The following paragraph from the US Trade Compliance Center website sums up Shania’s international business environment: Outside mining, fishing and forestry, Ghana does not screen FDA although the Ghana Investment Promotion Centre monitors it. Only a few activities, including petty trading and taxi services, are reserved for Ghanaian.
Joint ventures are optional. Foreign investors must have minimum capital levels of IIS$II,OHO for Joint ventures and IIS$50,OHO for wholly foreign-owned enterprises, unless engaged solely in exporting Ghanaian goods. Foreign trading companies must have capital of US $300,000, and employ at least ten Ghanaian. No performance requirements per SE exist. (Trade Compliance Centre, 2001) As aptly described above, Shania’s economy is very much market oriented although there is occasion government intervention mostly under the guise of national interest.
In fact, Ghana is arguably the most market-oriented economy in sub- Sahara Africa outside South Africa. Shania’s political environment is often hailed as a beacon of success and an example of democratic governance in Africa. This combination should enable SMS to make a near seamless transition to operating in Ghana. 1 Socio-cultural Analysis Both Ghana and the US inherited their official language from the United Kingdom. Therefore, communication between SMS management at head office and staff on the ground in Ghana should pose no problems at all.
In addition, since the legal systems are similar, SMS does not need to hire new legal representation although the celebrities of the Ghanaian system might require a local attorney in much the same way as a local attorney is required in transacting business across states in the US. Not have a culture of litigation anywhere close to the situation in America where for example doctors order expensive laboratory tests for simple symptoms in a effort to stave off malpractice lawsuits (Hill, 2011) Americans are much more individualistic and short-term goal driven than their Ghanaian counterparts.
For example, in Ghana it is not uncommon for qualified candidates to wait an extra year to enter public universities because of backlogs caused by strikes in previous years. The all to familiar saying in Ghana that literally means “let’s leave it to God” has no equivalent in English or in American culture because it simply does not exist. Thus while Americans will, or at lease attempt to, cease every single opportunity, Ghanaian will say if it is not meant to be, it is not meant to be. Certainly, some Ghanaian have the American cultural inclination through education or the influence of western media but these are only a small minority.
It is not for nothing that the woman who sold roasted plantain from a ablated by the roadside in Sacra to you as a child is still operating at the same scale twenty years later. Ghanaian are much more likely to forgo satisfaction today in hopes of a better tomorrow. This orientation toward the long-term in Ghana provides an opportunity for SMS to boost short-term profits by paying minimum wages and providing incentives like education and profit sharing with employees. Many more Ghanaian go to church on Sunday than Americans do per capita.
Ghanaian are raised to be religious and to revere leaders – religious or any other kind. From compulsory prayers at school gatherings to mandatory bible knowledge or airship sessions on Wednesday mornings, Ghanaian grow up in Ghana learning to obey authority. Therefore, leaders are seldom questioned in Ghana. This is in sharp contrast to the situation in the US where prayers and religious activity are banned in public schools and the only state religious affiliation is the “In God We Trust” inscription on all US dollar bills.
Gender issues have come under the spotlight in recent years. Nowhere is the issue of gender more relevant than in sub-Sahara countries like Ghana. There are still entrenched customs that permit men to inherit their brother’s wives. The women have no say in the matter. Such customs will be very difficult to explain to an American who has no exposure to Africa. In some communities especially where Islam is the dominant religion, women must dress in a prescribed manner that sometimes interferes with daily activities in the work place.
SMS must negotiate these peculiar set of circumstances with community and opinion leaders if it is to have successful operations in Ghana. For example, a consensus-building visit to the local chief of the catchments area of the factory site will go a long way to foster understanding of Smog’s business. This is because information is still spread by word f mouth in many parts of Ghana despite a rapid growth in mobile telephony and a US-Ghana Trade Relations The US and Ghana have had trading relationship for a long time. According to the GUST website, Ghana was the Use’s 96th largest goods trading partner in 2009.
Table 1 shows the pattern of trade between the two countries over the last five years, which underlines the US trade surplus in trade with Ghana. Table 1: US trade with Ghana between 2006 and 2010 I Year 273. 4 2008 1217. 6 I Exports 1709. 3 1608. 4 1 12006 I Imports 1 12009 1222. 2 1289. 5 I Balance 1715. 9 1386. 2 1192. 2 1 12010 1135. 0 1 12007 97. 3 1982. 7 1580. 9 1416. 4 1198. 8 SOURCE: U. S. Census Bureau website 4. 5. 1 Incentives for Apparel Exports from Ghana to the US The main incentive here in Shania’s eligibility for quota-free and tariff-free exports to the US under AGO.
According to AGO. Info, trade between the United States and Africa increased 37 percent from 2003 to 2004, to $44. 4 billion. U. S. AGO imports were $26. 6 billion in 2004, an increase of 88 percent over 2003. Of these, on-oil AGO imports totaled $3. 5 billion, an increase of 22 percent from 2003. Of the 48 sub- Sahara African, 37 nations are eligible for AGO. The AGO law has been hailed as success not only for the amounts of exports it has helped to facilitate out of Africa but also for the awareness that is has drawn to American business people and policy makers of Africans true potential.
Ghana, as well as qualifying for AGO, has also qualified for a textile visa and takes advantage of the Third Country Fabric agreement to make garments out of fabric sources at lower costs from other countries. “Opportunities in this [apparel] sector have been enhanced with Shania’s receipt of website) SMS would benefit from operating in Ghana if for no reason other than to take advantage of the incentives offered under AGO for exports to the US. However, apart from the AGO benefit, SMS has more to gain by investing in Ghana for exports to the US. Investment Incentives in Ghana According to its website, the Ghana Free Zones Board provides fantastic incentives for investors if the resultant Free Zones enterprises export at least 70% of their products. These incentives include, guaranteed protection from nationalization and or expropriation, 100% tax holiday for the first 10 years, 100% repatriation of profits and dividend income, 100% foreign ownership, total exemption from import duties ND tariffs and facilitated customs procedures. These incentives are very attractive on the surface.
However, for the apparel industry where demand changes every so often, SMS could suffer severe penalties if it has to sell products on the local market due to a fall in demand by export clients for whatever reason. With its strong management experience in the management of production lines and the technical capability to produced to exacting customer specifications, SMS has an opportunity to capitalize on the staff human resources that were trained under the SSI that are now largely unemployed.
SMS can also leverage its global contacts with logistics companies to improve shipping time from Sacra to the east coast of the US for timely order delivery. 3 Exchange Rate Regime The US operates a free-floating foreign exchange rate regime under which the rate on exchange is determined purely by the forces of supply and demand. Due to the long-standing use of this policy in the US, it is not likely to change anytime soon. Ideally, SMS should invest in a country with a similar exchange rate regime to eliminate exchange rate risk.
This however, should not be and excluding condition if there, more compelling reasons exist to make up for the divergent exchange rate policy between the two countries. As revealed below, Ghana does not run a strict free-floating exchange rate regime. Intervene directly in exchange rate determination, accumulating and depleting reserves to maintain the rate. This is contrary to the officially espoused policy of a floating rate determined by the market. The manipulation of the exchange rate can cause problems for SMS especially as inflation rates in Ghana are much higher than in the US and can lead to large variations in factor costs.
If the exchange moves in response to market forces, Smog’s budget for labor and other costs in Ghana will vary in tandem with the exchange rates. However, if the Ghanaian government manipulates foreign exchange reserves to keep the local currency artificially strong, SMS will need more and more US dollars to meet an unchanged bill for local inputs. It is particularly worrying for utilities and labor, which only make economic sense when sourced locally. SMS could experience wide fluctuations in profit figures because of the unpredictable exchange rates policy in Ghana.
To counter the results of the government’s exchange rate policy, SMS could agitate as part of its Free Zones status, a rebate of the amount of fluctuation in taxes of various kinds. Investment Strategy The government of Ghana under a previous administration from 2000 to 2008 established the Presidential Special Initiative (AS’) on Garment and Textile in 2001. Under the AS’, government sought to facilitate the establishment of privately owned garment businesses.
At its peak, the SSI on Garments and Textiles created a garments village and assisted more than nine local entrepreneurs to set up modern factories with a minimum of 250 machines and capable of employing 400 persons each. The Initiative also included a modern clothing technology and training centre for the development of the human resource base for the industry, which trained over 8000 people to use industrial sewing machines and associated equipment. Organizations like the SAID West Africa Trade Hub provided technical assistance and market entry support to the companies established under the AS’.
Unfortunately, most of the entrepreneurs that benefited from the SSI were selected based on their affiliation to the ruling party rather than technical or entrepreneurial competence. Therefore, as the infant apparel companies received more and more orders with exacting demands from American buyers, their quality begun to slip. These large orders also revealed the lack of preparation in terms of negotiated financing and logistics to bring finished products to market in an acceptable amount of time.
Additionally, many companies did not have contingency measures for Shania’s unreliable electricity supply and were not adequately prepared for the power rationing that accompanied the local electricity crisis in 2007. Ultimately, many Smog’s easiest way to enter production in Ghana is to take part or full ownership in en or several of the defunct SSI companies in the apparel village located very close to the main shipping port of Team. A Joint venture is advised over 100% ownership to allow SMS to learn local business norms and customs from local entrepreneurs who own the facilities.
This will help SMS to translate its brisk customer focused and process oriented approach from which it derive efficiency into successful relationships with employees, business neighbors and government partners who are not used to doing things the American way. SMS should take advantage of the great incentives offered by the Ghana Frees Zones Board to incorporate the new Joint venture in Ghana as a Free Zones enterprise as Smog’s market is 100% American and there is little risk of selling products on the local market save production rejects.
SMS can explore options for export to other countries for better trading terms to maximize profit as the benefits provided under AGO for exports to the US change over time. 6. 1 Corporate Social Responsibility Corporate Social Responsibility is now a common phrase in popular Ghanaian culture due to the work of multinationals like Coca-Cola, which sponsors the annual Spitball basketball tournament, and Nestle, which sponsors the annual Sacra International Marathon and the Ghana Inter-Schools Competition.
The government of Ghana and civil society organizations like the Corporate Social Responsibility Movement Ghana are very vigilant and keep pressure on large companies on matters of pollution and other environmental impacts of their production as well community development efforts for the locality where production is based. They commend companies that pursue regular CARS activities. SMS should look no further than education for its corporate social responsibility portfolio. Education is appropriate because the majority of the workforce in is low