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Sunday, 5 June 2022

POLL- What do manufacturers need for a successful shift to local manufacturing?

POLL- What do manufacturers think will help grow local industry? The government has been stepping up its efforts to help grow local manufacturing and limit Egypt’s imports as of late. Last month, we reported on the Trade and Industry Ministry’s list of priority sectors in which to increase domestic manufacturing to address local consumption needs. Today, we look at the measures local manufacturers think are critical to expanding local industry.

REFRESHER- Why is the gov’t prioritizing local manufacturing now? Reducing imports is a cornerstone of narrowing the current account deficit, which stood at USD 3.8 bn in 2Q 2021-2022, narrowing from USD 4.8 bn during the same period the prior year on the back of rising tourism revenues and Suez Canal receipts. On the export side of the equation, Egypt is aiming to increase to USD 60 bn a year by 2025 as part of the government’s new structural reform program, Trade Minister Nevine Gamea had previously said. This also comes as supply chain issues continue to batter global trade amid pandemic-fueled shutdowns in China and the Russia-Ukraine war.

What will help us reach these targets, according to manufacturers?

#1- More industrial land provision: The government announced last month that local manufacturers will be getting usufruct land rights, and will be allowed to pay fees in installments, as part of a package of measures it plans to take to help expand local manufacturing. This will help manufacturers direct investments towards production lines, machinery and equipment, instead of draining their capital in paying land fees, several industry experts we spoke with said.

#2- Supportive banking policies and incentives from banks: More “supportive” banking policies — particularly for medium industries — from banks is the fastest solution for growing the local industry, Hani Kassis, chairman and managing director of Mintra, told Enterprise. Banks need to offer manufacturers the capital that would help them cover their operating costs, allowing them to increase their production capacity and subsequently, their exports, Kassis said. Interest rates for manufacturing loans must also be “reasonable,” in order for manufacturers to be able to get financing to expand and increase production, Sherif El Gibaly, chairman of the board of the Egyptian Chamber of Chemical Industries, told Enterprise.

That includes being open to providing capital to different sectors: Banks tend to consider some textile industries high-risk and, consequently, refuse to provide them with the necessary funding to upgrade their production lines, said Magdy Tolba, chairman of Cairo Cotton Center and former head of the Export Council of Spinning and Textiles.

#3- Continued public sector contribution is still important: The public sector will need to contribute to the development of local manufacturing, especially when it comes to newer industries that require large investments from the private sector, El Gibaly told us. The government has already said it is prepared to contribute to new sectors by purchasing non-majority stakes in manufacturing companies, El Gibaly added.

How will this work in light of the government’s new “hands-off” strategy? This comes as the government announced plans to exit as many as 79 industries over the next three years as part of plans to restructure the economy in favor of the private sector. But some industries — like food and beverages — will see the government only handing over management to the private sector, while retaining ownership of the assets, while others — including high-tech industries — will see public-private partnerships (PPPs).

The caveat: We still don’t know how much the government is planning to invest in developing these sectors, nor do we know the time frame for these targets.

#4- Upgrading production lines is essential for industry to stay competitive: Improving quality while keeping prices competitive is essential, but this can’t happen as long as production lines are outdated, Tolba explained, adding that this is the case for a large portion of Egyptian manufacturers. Upgrading production lines to enhance their efficiency will keep production costs low, which can help attract more investments, and boost exports, Tolba added.

Check out our Inside Industry automation series (Part I, II, and III) for more on where Egyptian manufacturers stand when it comes to production line efficiency and industrial automation.

#5- Some industries require a push from the state…: Industries like pharma and pharma component sectors need to be tied to preferential agreements for unified procurement contracts in order to grow, Ashraf El Kholy, CEO of HoldiPharma, told Enterprise, adding that several Gulf countries do the same to develop their own local industries.

#6- …while others require more attention: Some Egyptian products, like long-staple cotton, are very competitive, Tolba said, adding that this kind of cotton is produced by only seven countries in the world. We need to add value to the product by expanding the spinning cycle to include manufacturing fabrics and finished products, instead of exporting it as raw cotton, he added.

#7- On the export side, it’s important to open up new markets while simultaneously ramping up exports to existing ones, Gamal El Leithy, head of the Federation of Egyptian Industries’ pharma division, told us. It is important to review our trade agreements and begin to reconsider other markets in light of the recent changes to the global trade landscape, House Industry Committee deputy head Mohamed Mostafa El Sallab told Al Mal earlier this month.

The shift in the global order means new attractive export markets for us: Egypt has trade agreements with many foreign markets and it is necessary to review them to comply with the broader interest of the national economy in light of shifting global dynamics, El Sallab said, adding that the various crises affecting global trade present a window for us to increase exports to foreign markets. It’s also essential for Egypt’s industry to become self-sufficient, especially in light of the recent rise in freight costs and in the prices of basic materials and oil, Kassis said.

#8- Finally, manufacturers need skilled labor: Some industries, like textile, are struggling to find the skilled labor needed to operate high-tech equipment, Tolba said, adding that manufacturers are competing over a limited amount of talent in the market. Egypt was among six countries identified by McKinsey in a 2018 report (pdf) where more than half of the workforce holds a high school diploma or lower. It is important for both the public and private sectors to help upskill workers.

Your top industrial development stories for the week:

  • A unified legislation on industry could be in the works: The Industrial Development Agency (IDA) is working with the EU and the OECD to assess the possibility of merging existing laws and regulations governing the industrial sector into a single piece of legislation. The study will be finalized within two months.
  • Al Futtaim Group is looking to invest between USD 700 mn and USD 1 bn in Egypt over the next three years, including partnering with international firms in our industrial sector, CEO Omar Abdullah Al Futtaim said.
  • A step closer to our first waste-to-hydrogen plant: The Suez Canal Economic Zone (SCZone) has signed an MoU with H2 Industries to establish Egypt’s first waste-to-hydrogen plant in East Port Said at a cost of USD 4 bn.
  • Eastern will acquire a quarter of Egypt’s second tobacco manufacturer after the company’s general assembly approved the EGP 100 mn purchase of a 24% stake in Philip Morris’ United Tobacco.

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