Back to the Source: Cotton

In December 2015, members of the Impact Angel Network closed an investment in a family-owned textile and apparel manufacturing facility, Desta PLC. Established in 1992, Desta PLC is a multi-faceted company that oversees several production lines, including embroidery, knitting, cut-and-sew, fabric and garment manufacturing. The company’s dedication to quality and timely service has garnered trust and confidence from domestic and international customers.

One could say, though, that this dedication is not only applied to Desta’s customers but its employees as well. At any given time, Desta employs more than 550 individuals, mostly young men and women, and ensure that each day they have access to a healthy subsidized meal, a fair wage, a medical nurse, team trainings and opportunities for advancement. Desta is committed to the fair treatment of its employees and adherence to guiding principles of sustainability, setting it apart from the trajectory this industry has taken in many other low and middle-income countries. Desta is accredited by international standard and compliance organizations. It passed an audit by BSCI (Business Social Compliance Initiative), proof that Desta has created suitable working conditions and takes care of employees. In addition, Desta undergoes a social audit twice a year by SGS, a leading inspection and certification company headquartered in Switzerland. Worldwide Response Accredited Production has also certified the company.

The company’s commitment to sustainability and corporate responsibility is assisting Desta in becoming a market leader in an industry that is just now starting to take hold in Ethiopia and the East Africa region. While the first textile mill in Ethiopia was established nearly 80 years ago, the entire cotton-textile-apparel (CTA) value-chain has been one of the country’s least developed industries, only marginally contributing to the country’s GDP. The reasons for this are many, but two significant causes are lower cotton cultivation rates and a lack of vertical integration across the value chain (1).

If you know anything about Ethiopia and the important role that agriculture plays in its GDP, this may actually come as a surprise. While cotton has long been considered a “cash crop” that is grown by commercial and smallholder farmers alike, cotton cultivation has yet to reach its full potential. Ethiopia currently cultivates only 3% of the total 2.6 million hectares that are suitable for cotton production, and out of 84,000 hectares of land that are under cotton cultivation, only 35,000 hectares are irrigated while the remaining is rain-fed (2). This translates directly into the country’s export figures. In 2012, total CTA exports amounted to roughly $27.2M, of which only $4.7M was directly from cotton production (1) - as a comparison point, coffee exports for the same year amounted to $694.6M (3). In addition to lower cultivation rates, up to 70% of cotton that is grown in Ethiopia and the East Africa region is exported to other countries (1). To date, only a handful of textile and garment manufacturers are vertically integrated from “dirt to shirt,” leaving the remaining facilities to import costly raw materials from other countries and stunting the overall textile industry (1).

Bringing this point closer to home, 60-70% of what Desta produces is made from 100% cotton or a cotton blend. Of these cotton products, only about 20% is actually made from locally grown Ethiopian cotton, while the remaining 80% is made from imported cotton or polyester-cotton blends. However, this reliance on expensive imports may not be for long. Global sourcing for apparel is currently undergoing a significant realignment due to a rise in labor wages in China, the world’s largest textile exporter; buyers are now looking elsewhere to source apparel (1). So, where might these buyers be looking? You guessed it - Ethiopia.

To put this in context, the East Africa region currently produces approximately $1B in cotton products (cotton fiber through apparel) on an annual basis, whereas China exported $159.6B in garments alone in 2012 (1). “If one-half of one percent of China’s current garment exports were to relocate, this would represent a near doubling in the value of all CTA exports from East Africa” (1). And Ethiopia is well positioned to take advantage of this shift. The country is rapidly becoming a top destination for textile manufacturing on account of competitive labor costs, government incentives, and low energy costs. Companies such as H&M, Tesco, Gap, Belk, and Walmart, among others, are now sourcing textile products from the country (4).

In light of these global shifts, the government of Ethiopia has recently taken steps to further ensure the future success of the sector in naming the CTA industry, across the entire value chain, as a priority sector under the Growth and Transformation Plan II (GTP II). According to AllAfrica, the country plans to “increase cotton output from the land productivity level of 15 quintals/ha in 2015 to 28 quintals/ha by 2020. In the long-term, Ethiopia has set out to become self-sufficient in lint cotton supply” by the completion of GTP II. The country is also taking advantage of initiatives such as the Africa Growth and Opportunity Act (AGOA), Common Markets of East Africa (COMESA) and other bilateral trade agreements with Western countries that offer free trade benefits and access to the global and regional markets. And to ensure that facilities are taking full advantage of these agreements, the Ethiopian government has established a National AGOA Center under the Ministry of Trade to help companies better utilize AGOA.

In strengthening the cotton cultivation segment of the CTA value chain, Ethiopia will not only support full integration of the important textile industry (one that is expected to significantly contribute towards Ethiopia’s future GDP), but it will also positively affect food and income security for rural populations. “In addition to production for the value chain, by-products include cotton oil and cotton seedcake for home use and cattle feed. Cotton production for smallholder farmers has a strongly positive impact on food security through raising rural incomes. It is highly suitable to be grown in rotation with other staple crops and provides the cash necessary for the farmer to invest more heavily in food crops” (1)

All in all, the continued development of the CTA value-chain not only positively affects textile manufacturers, like Desta PLC, but it will also economically benefit the country and the lives of the farmers who are involved in cotton cultivation.