East Africa: The next hub for apparel sourcing?

This article was compiled by Achim Berg, Saskia Hedrich and Bill Russo for Mckinsey and Company.

In the past two years East African countries—in particular, Ethiopia and Kenya—have the potential to become bigger players in garment manufacturing. But the road ahead won’t be easy.

In the past two years, a number of European companies—among them, H&M, Primark, and Tesco—began sourcing some of their garments from Ethiopia. The rest of the apparel industry took notice: since 2013, there has been rising interest in not just Ethiopia but also other East African countries as potential sourcing destinations for apparel. Also contributing to the buzz is the renewal of the African Growth and Opportunity Act (AGOA), which gives certain countries in sub-Saharan Africa duty-free access to the US market.

What is the true potential of East Africa to grow into a major garment-sourcing hub? To find out, we visited factories in the region; interviewed stakeholders, including manufacturers and buyers; and analyzed market data. In addition, we conducted our third survey of chief purchasing officers (CPOs), this time with a series of questions focused on East Africa. This year, 40 apparel CPOs, representing a combined $70 billion in 2014 purchasing volume, responded to our survey. We found that East Africa could indeed become a more important center for apparel sourcing, but only if stakeholders—buyers, governments, and manufacturers—work together to improve business conditions in the region.

Up-and-coming sourcing countries

Nearly three-quarters of survey respondents said, as they did in 2011 and 2013, that over the next five years they expect to reduce their purchases from Chinese firms. Chinese apparel production has indeed fallen since 2010—but China remains the undisputed giant of garment manufacturing, with approximately $177 billion in apparel exports in 2013.

Among CPOs surveyed, Bangladesh remains at the top of the list of future sourcing destinations, with 48 percent of respondents including the country in their top three (Exhibit 1). And 62 percent said they intend to increase their sourcing value from Bangladesh over the next five years. The next two up-and-coming countries are Vietnam and India, where, respectively, 59 percent and 54 percent of surveyed CPOs plan to increase their sourcing value in the next five years. Yet the combined apparel exports of Bangladesh ($24 billion), Vietnam ($17 billion), and India ($17 billion) still amount to less than one-third of China’s.

For the first time in our survey, African nations appear on the list of countries expected to play more important roles in apparel manufacturing. Ethiopia, notably, is seventh on the list.