Shining its way through
There is much that needs to be done for the Egyptian ceramic tile industry to compete in world markets, writes Khaled Rashed*
In the Egyptian ceramic tiles industry, the figures say it all. Twelve players make up the industry, utilising only 74 per cent of their maximum attainable capacity to produce around 62 million square metres of ceramic. Local producers' actual sales are estimated at 55 million square metres valued at LE969 million, generating bottom-line profitability of nearly LE116 million.
The local market consumes LE832 million worth of ceramic tiles annually, of which 96 per cent is locally manufactured. The remaining sales are exports, which are valued at LE173 million.
Local demand is driven by the real estate market, 55 per cent of which is accounted for by new homes and 45 per cent by refurbishing existing ones, known as the replacement market. Real estate demand is highly cyclical -- any downturn in the construction cycle hits the tiles business six months later. Demand stimulated by replacement orders is seasonal, since it is revived in the summer when schools are off and Egyptians working abroad are back for vacations.
Over the past five years, there has been a noticeable demand shift to high-quality tiles triggered by rising renovation orders. The four high-grade ceramics manufacturers -- Cleopatra, Gemma, Al-Amir and Pharaoes -- capture almost 55 per cent of the volume and 72 per cent of the value of local market sales. These four players also receive 75 per cent of the industry's profitability. High- quality tiles include porcelain, which account for seven per cent of total market volume and 17 per cent of value. Only high quality tiles are qualified for export.
Local manufacturers have turned to the export market due to over-capacity. Exports not only offer a chance to off load excess ceramics, but also allow some savings from the drawback system. The system allows manufacturers who import raw materials to use in producing goods for export to retrieve customs duties paid on these materials after proving that the finished goods have been exported.
Exports of Egyptian tiles, which go mainly to the Gulf region, are growing at very minimal rates, handicapped by unjustified prices caused by an inflated cost structure. Unutilised capacity of almost 26 per cent in a capital intensive manufacturing process raises the average fixed cost per square metre produced. The industry is also still in the assembly phase, as manufacturers import all raw materials and put them together in Egypt. This means the industry imports over 90 per cent of its raw material and almost all its machinery.
Raw materials make up an average 71 per cent of local manufacturers' total cost of production, the rest go to energy and labour. Glaze, used to give tiles their shine, is one of the most expensive ingredients imported and is a critical input in the manufacturing process.
Most tile manufacturers import raw materials from Italy and Spain. But, Egyptian tiles exports are 20 per cent more expensive than Italian, Spanish and Turkish ones. As a result, global strategic positioning of the Egyptian ceramic tile industry is a challenging task. This positioning involves benchmarking against successful international players, among whom Italy occupies the top position.
Over the past six years, Italian tiles have captured a considerable share of world production. Italian manufacturers supply almost 13 per cent of the world's ceramic tiles, with sales of 623 million square metres valued at 5.2 billion euros. Italian ceramic sales recorded a volume increase of almost five per cent and a leap value growth of almost 7.5 per cent in 2000 compared to the previous year. Exports grew by 4.7 per cent and 8.8 per cent in terms of volume and value respectively. In the year 2000, Italian tile manufacturers sold 257 million square metres of porcelain, of which almost 66 per cent was exported.
The success of the Italian tile industry is owed to a number of factors, not least of which is sophisticated and demanding local buyers, who have forced Italian manufacturers to innovate and upgrade continuously to keep their edge. Italian companies possess a clear picture of emerging buyer needs that has enabled them to penetrate advanced segments of the market.
In Italy, news of product and process innovations spreads rapidly and companies seeking technological superiority have to improve constantly.
Also, Italian tile manufacturers have succeeded in making the most of their most disadvantageous factor of production -- labour. Through the rapid single fire process, in which the hardening process, material transformations and glaze fixing all occur in one pass through the kiln, 60 per cent of the labour used in production was cut down.
Finally, the presence of related and supporting feeder industries has been a key factor for success. The strong domestic equipment industry, along with raw material feeders supported by specialised technicians have resulted in an efficient industrial system.
Egyptian manufacturers are currently abreast of the latest production techniques involved in manufacturing tiles. Constraints lie in their being almost fully dependent on foreign feeder industries and in their failure to cooperate and unite into a cluster. Excessive capacities, built during the past 10 years, have squeezed the industry's profitability.
If the industry is to be saved, a number of corrective structural measures need to be implemented. The following recommendations are not an exhaustive list, but a proposed effective action plan.
Consolidation is the only means to rectify inefficiencies caused by overcapacity. Strategic alliances, mergers and acquisitions are a must. This will strengthen the manufacturers' bargaining positions. Also, by uniting forces and sharing the high marketing expenses associated with competing in the export market, the price of Egyptian tile exports will become more competitive.
As market research gains increased importance in the setting of expansion strategies, a ceramic market research centre should be founded. The 12 tile manufacturers should fund a specialised centre to conduct continuous research of the local and international tile markets. Local manufacturers must also share their information with the centre. When compiled, filtered, analysed and organised, this information could be the base for setting up a clearer strategy for the coming years.
The recommended action plan is almost useless without establishing a local raw material feeder industry. There is only one glaze manufacturer in Egypt whose factory is small and whose production quality is not up to standard. A lack of manufacturer support and a low budget for research and development have hindered the factory's growth.
Since glaze accounts for over two-thirds of the value of imported raw materials, establishing a glaze factory is mandatory. The current 12 local manufacturers should establish a shareholding company to build, operate and manage a glaze factory in Egypt. Glaze manufacturing is a capital-intensive business -- to operate profitably, mass production is a must. Local demand can consume the required production scale of a medium-sized glaze factory.
A glaze factory will reduce, if not eliminate, the industry's raw material availability and foreign exchange exposure risk. Producing local glaze efficiently will result in cheaper raw materials, which will bring costs and prices down. This will not only give Egyptian exports an edge internationally, but will also defend Egyptian tiles from a cheap flood of imports resulting from the removal of trade barriers in 2005.
On the national level, local sourcing of raw materials will reduce imports, which will have a positive effect on Egypt's trade account. Meanwhile, increased exports of ceramics, due to more internationally competitive pricing, will increase the country's foreign currency proceeds. Also, establishing a tile feeder industry will offer new job opportunities.
The Egyptian government could support the industry by helping in establishing the glaze plant, which would shift the industry's competitiveness and thus should be considered a national project.
The government could facilitate establishment procedures, eliminate tariffs on imported machinery, provide funds in the form of equity or subsidised loans and waive taxes, registration fees or any other related expenses.
The Egyptian government's role in supporting the manufacturers' ceramic research centre is also vital. Updated, accurate data on the ceramic tile market, provided by the government's research units on a timely basis, is key to the centre's success.
By implementing an effective action plan, the Egyptian ceramics industry can gradually tile its way up to the international market floor.
* The writer is senior credit analyst at the Corporate Banking Group of the Commercial International Bank, Egypt.
