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IDEALLY SUITED
BY AMENA BAKR
Turkish parliamentarians may be taking their time
ratifying the Egypt-Turkey free trade agreement, but the country’s
textile and garment companies are already anticipating the benefits
of the deal and rushing to set up shops and factories in Egypt.
Unprecedented capital is flowing in, yet Turkish investors say it
could be even better.
Even before the ink had dried on the Egypt-Turkey
free trade agreement (FTA), businessmen in both countries were hatching
plans to take advantage of the open markets it promised. Within
days of the December 2005 signing, representatives of Turkish companies
were booking tickets to Cairo to scout out business opportunities,
particularly in the textiles and garments sector.
Eight years in the making, the FTA establishes a 12-year transitional
period for Egypt and Turkey to phase out customs duties and other
barriers to trade. While Egyptian officials insist the agreement
will more or less provide “equal” benefits to both sides,
Turkish officials think Egypt is the clear winner, at least in the
short run. The historic accord requires Turkey to swiftly abolish
customs duties on many key commodities, while allowing Egypt to
phase out its higher tariff rates more gradually. In textiles, for
instance, Turkey will immediately drop its 4-percent tariff to zero,
while Egypt has 12 years to gradually reduce its 20-percent tariff.
Yet Turkish officials, recognizing the imbalances in the economies
of the two countries, are remarkably cool about the apparent imbalance
of the deal. “Turkey is more developed than Egypt, as Egypt’s
GDP is only one-fifth of Turkey’s, so I think it is fair to
give Egypt this deal,” says Emre Orhan Oztelli, commercial
counselor at the Turkish embassy in Cairo.
Trade between the two nations amounted to $950 million in 2005,
but Oztelli expects the FTA to give commercial exchange a sizeable
boost, particularly in the trade of apparel and agricultural products.
“We aim to reach a trade volume of $1.5 billion in 2007, but
this year won’t see a significant increase as the FTA has
not yet passed through [Turkish] parliament,” he says.
Yet Turkish apparel companies are not waiting. Some of the biggest
names, including Orka Group, Beymen and Sarar, have already entered
the Egyptian market in the belief that the FTA, when implemented,
will help their business flourish in the long run.
Turkish fashion house Orka Group, which opened its first branch
in Alexandria’s San Stefano Mall last June, expects the tariff
reductions outlined in the FTA will make its business increasingly
competitive in the coming years. “We believe the FTA will
help reduce customs in the long run so that we’ll be able
to offer customers here high-quality products at reasonable prices,”
says Suleyman Orakcioglu, Orka Group’s owner and CEO.
Orka Group manufactures and markets three high-end brands of menswear:
damat, Tween and ADV. Orakcioglu believes these brands, which he
describes as “international brands” rather than Turkish,
will help fill an obvious gap in the market. “We started with
menswear because there aren’t many shops in Egypt that sell
it as the focus here is mainly on women’s clothes,”
he explains.
The group plans to open a second branch in Cairo’s Citystars
mall next summer, allowing enough time to test the market before
committing to its plan for 16 additional stores in major cities
by 2011. Uptil now, the company has invested LE 3 million in its
Alexandria store. It further expects to invest another LE 5 million
in its Citystars branch.
Retail rush
Orka’s arrival was preceded by another big name in Turkish
apparel, Beymen. The Turkish luxury retailer, part of the Boyner
Group, sells its own high-end clothing line as well as top international
brand names. Its 6,000-square-meter department store in the Four
Seasons at Nile Plaza hotel complex, which opened last November,
has already made an indelible impact on the high-end fashion market.
Beymen’s country manager, Tamer Yilmaz, says the decision
to enter the Egyptian market was taken because of the opportunities
resulting from the FTA, and because at the time of the agreement
no viable competitors had entered the market. “We came to
Egypt because we wanted to be the first high-class retail store
in the market,” he told Business Monthly. “We would
never prefer to be [second or third] to arrive... we aim to always
be first.”
Yet 10 months into operation and with $8.5 million invested in its
Cairo retail outlet, Beymen is facing challenges. Tariffs on imported
ready-made garments stand at around 40 percent, which puts much
of the store’s merchandise far beyond the reach of most Egyptians.
“I believe that custom charges on garments were [previously]
more than 100 percent, but we need them to be lower still so we
can decrease our prices and increase our sales volume,” Yilmaz
says. The retailer is also challenged by Egypt’s undeveloped
banking sector. Few Egyptians own credit cards, and those who do
often have low credit limits. “Beymen is not a store you go
into and pay for several items in cash. You need to have credit
cards with a high enough limit, and this is still a problem here.”
So far, Beymen is focusing on developing its retail investments,
with plans afoot to expand to Alexandria, Sharm Al Sheikh and Hurghada.
But Yilmaz says the retailer could eventually shift some of its
manufacturing capacity to Egypt, which would help to lower its bottom
line. “Nothing has yet been planned, but the potential is
certainly there,” he says.
Turkish menswear brand Sarar, however, which opened its first retail
store in Egypt in the Citystars mall last December, has shelved
plans to open factories here. At least for now. “The reason
we decided to open in Egypt is because we knew that there was a
shortage in the market in terms of high-quality menswear,”
says Hamza Malek, Sarar’s marketing manager. “[Yet]
at this point, it is very difficult for us to manufacture here since
there is a certain level of quality that we have to offer and quality
control here is not so easy to take charge of.”
More discouraging, he admits, are reports by other Turkish firms
of excessive bureaucracy and tortuous licensing procedures encountered
while setting up factories in Egypt. “Manufacturing in Egypt
at this point is a big challenge that we are not yet ready to face,
but maybe in the future we will,” he says. For the time being,
at least, Sarar will focus entirely on its retail operations, with
a second outlet expected to open this month in Mohandiseen.
Turkish firms move in
But other Turkish firms have taken the initiative to set up production
facilities, capitalizing not only on the Egyptian-Turkish FTA, but
also on the growing number of preferential trade agreements that
Egypt has concluded with Turkey’s trading partners. Though
their content requirements and rules-of-origin vary, the qualifying
industrial zones (QIZ), Greater Arab Free Trade Agreement (GAFTA)
and Common Market for Eastern and Southern Africa (COMESA) and Egypt-EU
Association Agreement present opportunities for Turkish factories
in Egypt to export to a large number of countries with no custom
charges.
“To be frank, the reason why we’re here is not because
of the FTA,” admits Ahmet Abalioglu, vice president of Abalioglu
Textile Group, a Turkish spinning and weaving company preparing
to open a factory in Egypt by the end of the year. The new production
facility will manufacture textiles for domestic sale and export,
taking advantage of the Egypt-EU Association Agreement’s “accumulation
of origin” rule, which allows factories in Egypt to incorporate
Turkish inputs in their products then export them to Europe duty-free.
Abalioglu explains that Turkey’s textile and garment industry
has become saturated and the costs associated with running a plant
there continue to climb. While many Turkish firms have set up offshore
operations in the Far East, where the cost of labor is significantly
lower, investors have slowly been coming around to Egypt’s
potential. “[Egypt] has a lot to offer us in terms of its
geographic location and low cost of energy and labor,” he
says.
For starters, Egypt’s labor and energy costs are significantly
lower than Turkey’s. According to Amr Assal, chairman of the
Industrial Development Authority (IDA), the average Egyptian textile
factory worker earns $100 per month, while in Turkey the wage is
about $800. And while Turkish companies pay 0.9 cents per kilowatt
of electricity, Egyptian factories are charged just 0.3 cents. “The
price of energy in Turkey is three times as much as it is in Egypt,
so that’s a huge saving for [Turkish investors],” he
notes.
In addition, opening a factory in Egypt lets Turkish apparel firms
keep their operations close to home. “It only takes me an
hour and a half to get to Cairo from Istanbul, which saves me a
lot of money and time in comparison to the Far East,” says
Abalioglu. He points out that Egypt also straddles the trade routes
between Europe and Africa, two of Turkey’s top export markets.
And unlike the Far East, where business practices are as exotic
as the culture, Egypt and Turkey share certain cultural affinities
that allow businesses to adapt more easily to each others’
markets and consumer behavior patterns.
The IDA has sweetened the deal by allocating 2 million square meters
for Turkish factories near Borg Al Arab. Assal expects the designated
industrial area to attract up to 300 small and medium-sized manufacturers.
“This is a very good step,” says Abalioglu, “but
in order to encourage more companies to come from Turkey to fill
up that area the government needs to reduce [duties] on raw materials,
which are currently about 20 percent.” Yet it’s not
all that bad at customs, he admits. Machinery for textiles and garment
factories is exempt from all duties, which helps lower startup costs.
“With a bit more support from the government in giving incentives
to Turkish companies, Egypt will very soon become a leader in the
textile sector,” he predicts.
Abalioglu’s Egyptian subsidiary, CSA Textiles Egypt, has already
purchased 173,800 square meters in the IDA’s industrial area
near Borg Al Arab. “We’re investing about LE 72 million
in the first phase of the project, and by the end of six years we
expect our investment to reach LE 250 million,” he says. The
project’s first phase, expected to begin operation by the
end of the year, will employ 200 local workers. The number is expected
to climb to 2,300 by the end of six years.
To date, over 35 Turkish textile and garment companies have registered
in Egypt, 16 having entered the market in the last three months
alone. According to Oztelli, another 87 textile and garment companies,
as well as nine retail brands, are considering entering the market
with investments that could top $1.2 billion.
Investor obstacles
The Ministry of Trade & Industry is working on several tracks
to overcome investment obstacles. Its key initiative has been the
creation of the General Authority for Investment & Free Zones
(GAFI) one-stop shops – which bring representatives of all
government authorities under one roof. Currently, these exist in
Cairo and Alexandria, though the IDA intends to have one in every
governorate within two years.
The one-stop shops have helped reduce the time it takes to register
companies and land. “It takes about three days to register
a company and about three to four weeks complete the paperwork for
the land,” says Assal. Previously, he notes, it took four
to five months to register a company and another three to four months
for the land.
In theory, one-stop shops let investors complete their paperwork
in one trip. But wouldn’t it better if they didn’t have
to visit at all? Assal thinks so. “About two months ago, we
started up a new system on the IDA website so that international
investors can apply for a business online by filling in applications,”
he says. The process still takes three days, but allows businessmen
to complete the paperwork from the comfort of their offices in Istanbul.
Abalioglu’s experience, however, suggests there are still
a few kinks to work out. He claims it took about two weeks to establish
his company and another two months to process the paperwork for
the project’s land. Not that he’s complaining. “To
tell you the truth, I don’t see a big difference between getting
a company set up in three days or two weeks, but getting the paperwork
[for the land] done was a bit complicated due to bureaucratic issues,”
he explains.
Some of these bureaucratic issues were addressed in a recent report
published by the Turkish embassy in Cairo. Following interviews
with nine Turkish companies that sought to open factories since
the opening of GAFI’s one-stop shops, the report concluded:
“It does not take less than three months [to establish a company]
mainly due to the permission required to be taken by the ministry
of interior.”
Other problems noted in the report included corruption, bribery
and the inaccuracy of information provided by various authorities,
as well as the government’s tendency to suddenly change rules
and procedures. “The problem is that when owners of companies
share their bad experiences, they discourage other Turkish investors
who were eager to come here,” says Oztelli.
Assal, however, insists he has not heard any complaints about these
problems from Turkish investors. He says issues such as corruption
and bureaucracy are “generic” problems that will be
solved over time, adding that the government is keen to investigate
any complaints and find solutions. “I think the best way to
deal with these problems is for these companies to send us their
complaints so they can be addressed by the appropriate agency,”
he says.
Last month, the IDA organized a workshop where 15 international
investors were invited to share their experiences and any problems
they faced when opening a business in Egypt. “For the first
time, we are giving people a chance to give us feedback and I think
there will be more workshops like this in the future since they
benefit both sides,” Assal says.
And cooperation is the key to a mutually beneficial relationship.
“We have the know-how and [Egypt] has the resources, so with
this combination Egypt can become a leading textile manufacturer,”
says Abalioglu.
ADDING VALUE
Turkish haute couture has won acclaim in the fashion-savvy
capitals of Europe, but until recently was virtually unknown
in Egypt. As Turkish brands enter the market, one of their
biggest challenges has been to change the public’s perception.
“People here in Egypt still have the perception that
Turkish clothes are of lower quality to Italian or British
clothes, but this is not true,” says Mostafa Makhlouf,
general manager of Cougar Group, which owns the franchise
for damat, Tween and ADV in Egypt.
He says this erroneous impression resulted from the limited
experience Egyptians had with Turkish apparel. “People
only related Turkish clothes to what individual importers
would bring back in their bags from Turkey, which were mainly
cheap, low-quality tank tops for girls,” he explains.
Part of the challenge was convincing shoppers to enter the
store, try out the clothing and decide for themselves. “There
are so many brands in the world that are of excellent quality
yet we know nothing of here in Egypt,” says Mahklouf.
“People have to more adventurous and try out new brands.”
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