A few weeks ago, Vander attended the sourcing event Destination Africa held in Cairo, Egypt. Exhibitors included manufacturers from 13 African countries, where duty rates for exporting to the US and EU are either minimal or nonexistent. In an increasingly competitive global market, Vander believes these low-cost countries (LCC’s) tariff advantages and their low labor costs give them the potential to be ideal export locations for light manufacturing within the next ten years, particularly for textiles.

The US gives many African nations special trade preferences under The African Growth and Opportunity Act (AGOA), which was recently renewed, and the European Union offered similar benefits under the Everything but Arms Agreement, which currently applies to 33 of Africa’s 54 nations. Both of these pieces of legislation allow countries and products that meet certain eligibility requirements to waive duties for entrance to US and EU markets. As wages in and labor associated costs in China continue to rise, we see this as a key advantage that will enable African manufactures to pick up the Asian market share being lost as companies look for more cost effective locations. With average U.S. tariffs on textiles accounting for an average of 17 percent of the landed cost, we believe that the elimination of this cost will be enough incentive for companies to find ways to overcome some of the logistic, quality, and productivity concerns that have traditionally been associated with manufacturing in Africa.

A good historical example of this effect is Egypt. While Egypt does not qualify for EBA or AGOA, it receives trade benefits for particular Qualified Industrial Zones (QIZ). Products manufactured in these areas and meeting specific value added requirements have duty-free access to US markets, as well as several other large markets. Over 700 companies in these areas qualify for easy access to these markets with tariff exemptions and no quota limits. After these zones were developed, Egyptian exports, particularly in the textile industry increased dramatically from 500 million USD in 2004 when the zones were implemented to a peak of nearly three billion USD annually just four years later in 2008. Since then, Egypt’s exports have retreated in the face of a global recession, a textile worker strike, and domestic unrest, but we see its surge in growth as an indicator of the power of duty free trade agreements to stimulate growth. With the 2015 renewal of AGOA and the weakening of China’s grip as THE low cost manufacturing destination, some experts are predicting that sub-saharan exports of textiles will quadruple to around 4 billion dollars annually within the next 10 years. Looking at these countries’ unique advantages and noting the rapidly increasing costs in Asia, we tend to agree.

Duties and quotas aside, another unexploited advantage for African manufacturing is sea freight times from ports in Africa to the US and Europe. Particularly for Eastern US and European destinations, the average ship time from China is 30–40 days, depending on the ports of origin and landing. Ship times from African ports often cut that time in half, creating a huge improvement in supply chain efficiency and responsiveness. These benefits are mostly going unrealized at the moment due to poor African infrastructure, outdated ports, and inefficient logistical approaches, but we believe that the tremendous potential advantage offered by Africa’s location will lead to the resolution of some of these issues. Investments have been made in modernizing specific African ports and improving efficiency, and we believe these investments will continue as African nations attempt to follow the successful model set by China decades ago. Once the correct infrastructure is in place, Africa’s advantage in location will make it extremely difficult for Asian exporters to compete with its speed and reactivity to Europe and Eastern North American markets.

Africa’s final untapped advantage is its low labor cost. With African skilled and unskilled labor costs ranging between 25 and 50% of competing Asian countries, there is great potential for cost cutting by shifting labor intensive tasks to Africa. Unfortunately, lack of modernized manufacturing facilities and effectively implemented operations has resulted in very poor reported productivity. Historically, research shows that this poor productivity has more than negated the massive hourly labor savings, but we believe that a closer look at the data shows a more complex picture. Laborer productivity at well managed larger firms matches or almost matches the highly efficient labor in manufacturing leaders like China or Vietnam, and much of the poor productivity is coming from smaller, informal operations lacking the resources and direction to maximize worker output. Again, we believe that the massive labor savings available in Africa will incentivize companies to invest the capital needed to boost productivity, and, once this occurs, Africa’s lower labor and labor associated costs will allow it to become the new low cost labor destination.

In conclusion, although only 2% of US imports currently come from Africa, we believe that percentage will increase dramatically over the next ten years. The 17% savings on import tariffs, combined with Africa’s favorable location and rock bottom labor costs will incentivize companies to infuse capital to solve some of the issues that have previously repelled factory relocations. Once that occurs, we believe there is the potential for explosive growth in African manufacturing. Because of this, Vander is actively seeking strategic partnerships with manufacturers in AGOA countries, and we believe that our clients will benefit from these relationships sooner rather than later.

Destination Africa: The New LCC Manufacturing Frontier was originally published in Vander Group on Medium, where people are continuing the conversation by highlighting and responding to this story.