H&M Looks to Source Clothing From Ethiopia

Retailer Hopes African Country Will Help Keep Shelves Stocked

H&M Hennes & Mauritz AB HM-B.SK -0.37% is looking to Ethiopia as a new low-cost country in which it will produce clothing, as the apparel retailer races to keep shelves stocked at a growing number of stores world-wide.

The Swedish company relies heavily on Bangladesh for clothes production, and a move to Africa would expand its sourcing footprint but not replace its commitment to production in Asia. One supplier says H&M is looking to source one million garments a month from Ethiopia.

A spokeswoman said the fashion company has placed test orders with Ethiopian suppliers and that large-scale production could begin as early as this fall. H&M is adding stores in a number of markets, a move needed to help offset stagnant same-store sales in some regions.

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Bloomberg News

An H&M store in Boredeaux, France. The Swedish retailer might source as many as one million garments a month from Ethiopia.

"As a growing global company we have to look at how we guarantee that we have the capacity to deliver products to all our stores where we have a rapid pace of expansion," H&M spokeswoman Camilla Emilsson-Falk said. "We are doing that by increasing production in our existing production areas and also by looking at new ones."

H&M joins a host of rivals looking for alternatives to areas such as southern China, where costs are rising. The Sanford C. Bernstein investment-research firm estimates costs per unit manufactured in Ethiopia were more than half the cost in China as of 2011, which is the latest data available.

But rising costs in Ethiopia could be a problem in the future. Bernstein analyst Anthony Sleeman said costs rose 18% in Ethiopia in 2011 versus 2010, compared with a 7.7% spike in China. At that rate, Mr. Sleeman expects Ethiopia's costs per unit to exceed China's by 2019.

Still, retailers see advantages in getting a more diverse footprint, and are looking to source closer to the markets they sell in because of a need for reduced shipping costs and lead times. Depending on how H&M's retail network expands, the proximity of production could help offset production cost disparities.

"We know that [Spain's] Inditex sources from Morocco and Tunisia," Société Générale analyst Anne Critchlow said. "If [H&M] can play a part in supporting the development of this industry in Ethiopia while benefiting from lower delivery costs and perhaps shorter lead times to Europe than from China, then I think, 'Why not Ethiopia?' "

Ms. Emilsson-Falk, the H&M spokeswoman, said the retailer's test orders in Ethiopia aren't related to media reports earlier this year that the company was looking for store space in South Africa, and there are no concrete plans for a store in South Africa.

The spokeswoman reiterated the company's long-term commitment to Bangladesh and said the retailer is growing and increasing sourcing in all the markets where it is active.

H&M says low production costs aren't the only thing it looks at as it makes deals with new suppliers. The company says it strives to work with suppliers over the long term that can offer the capacity and quality that H&M needs and that can meet its conduct rules.

Ethiopia isn't a newcomer to the textile and garment industry, and it has aggressive plans for growth in coming years. The first garment factories in the country were built in 1939 during the fascist Italian occupation.

The Ethiopian government has said it wants to revitalize its textile and garment industry, and has set a target of $1 billion in textile exports by 2016. In order to reach that target, it is bringing in foreign investors to modernize machines and factories.

The country's ability to successfully expand its garment industry could help it achieve its goal of moving from primarily an agricultural economy to an industrial one. The nation has been supporting this push for more than a half decade.

"Ethiopia not only gives infrastructure support but financial support," said Rajeev Arora, executive director of the African Cotton and Textiles Industries Federation. He cited competitive interest rates, cheap land and labor, and tax breaks from the government as key incentives leading to extraordinary rates of foreign investment over the past five years.

The nation's textile and apparel exports totaled about $99 million for the 12 months ended in June, up 17% from the prior year, according to Fassil Tadesse, president of the Ethiopian Textile and Garment Manufacturers Association. Ethiopia hopes to reach $500 million in these types of exports next year.

Mr. Tadesse added that it will be difficult for Ethiopia to reach its goal of $1 billion in such exports by 2016, but not impossible. "There's a lot in the pipeline," he said. "Turkish companies, Indian companies and Chinese companies are coming now."

The government has eased the process for companies wanting to establish textile manufacturing in Ethiopia by eliminating trips to multiple offices and setting aside industrial parks for the building of factories, he said.

H&M established its office in Ethiopia's capital of Addis Ababa about a year ago, and has been buying clothing from a number of manufacturers including Mr. Tadesse's Kebire manufacturing company. He said he alone sells H&M about 150,000 "test" garments a month. He didn't provide a dollar figure for the sales, saying that the prices varied depending on the garments.

"They are trying to form a cluster of companies because their need is one million pieces per month," Mr. Tadesse said.