VZCZCXYZ0000
RR RUEHWEB

DE RUEHAN #0512/01 1901235
ZNR UUUUU ZZH
R 091235Z JUL 09
FM AMEMBASSY ANTANANARIVO
TO RUEHC/SECSTATE WASHDC 2643
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS ANTANANARIVO 000512 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/EPS AND AF/E - MBEYZEROV 
DOC FOR BECKY ERKUL - DESK OFFICER 
STATE PLEASE PASS TO AUSTR FLORIE LISER AND BILL JACKSON 
TREASURY FOR FRANCOIS BOYE 
 
E.O. 12958: N/A 
TAGS: ETRD AGOA EINV ECON MA
SUBJECT: MADAGASCAR:  GARMENT MAKERS SHOUT FOR AGOA ASSURANCES AS 
ORDERS DECLINE 
 
REF: A) ANTANANARIVO 451 B) ANTANANARIVO 494 
 
¶1. (SBU) Summary: Madagascar's garment industry is suffering the 
effects of the political crisis that began in January and is already 
showing signs of further collapse due to the uncertainty of AGOA 
renewal at the end of the year.  Commercial chambers and businesses 
have successfully educated members of the transition authority (HAT) 
and other key political actors on the high stakes to be lost - tens 
of thousands of jobs -- if Madagascar fails to show continual 
progress towards establishing the rule of law by year-end.  These 
political leaders have responded with efforts aimed at showing they 
understand the importance of AGOA, but unfortunately, they haven't 
delivered any progress yet on the road to returning to 
constitutional order.  Some local chambers and businesses plan to 
attend the AGOA Forum in Nairobi August 4-6 to raise awareness of 
Madagascar's plight among fellow AGOA nations and the USG.  End 
summary. 
 
Garment Exports Decline 
----------------------- 
¶2. (SBU) Madagascar garment exports to the U.S. under the African 
Growth and Opportunity Act (AGOA) were 26 percent lower in May 2009 
than in May 2008.  Exports from January through May 2009 were 15.6 
percent lower than in the same period of 2008.  Garment 
manufacturers are screaming for assurances that AGOA will be 
extended, as they see their orders steadily decline.  While some are 
actively moving production and equipment offshore, most remain in 
wait-and-see mode, pending a clearer sense later this year of what 
the interagency recommendation to the President will be.  Most have 
orders already through September; the impact of AGOA uncertainty 
will be strong, however, beginning in the last quarter of the year, 
while a loss of AGOA would be devastating in 2010 as most businesses 
would significantly downsize or close their operations.  Following 
is a discussion of business' and the HAT's strategies for saving 
AGOA, along with a synopsis of the status of the companies with U.S. 
investment and the other main suppliers. 
 
AGOA Forum in Nairobi 
--------------------- 
¶3. (SBU) The presidents of AMCHAM and the Export Processing Zone 
(EPZ) Association, along with representatives of affected businesses 
plan to attend the AGOA Forum in Nairobi August 4-6.  The HAT itself 
is not invited.  AMCHAM would like to present a petition to 
Secretary Clinton that already has been signed by thousands of 
Malagasy workers pleading for the maintenance of AGOA benefits. 
[Note: We have encouraged AMCHAM to focus its lobbying efforts 
solely on the Malagasy authorities, but it is becoming increasingly 
desperate and is now seeking to attack the problem from all angles. 
End note.]  The Corporate Council on Africa may host a side session 
on Madagascar during the forum to provide interested businesses an 
opportunity to voice their concerns. 
 
HAT's Response to AGOA Threat and Business Pressures 
---------------------------- 
¶4. (SBU) On June 12, AMCHAM and the EPZ Association met with the 
HAT's economic commission to urge them to seek a political solution 
soon to save AGOA. The EPZ Association has raised the issue with 
many HAT ministers, as well as members of the four movements 
involved in the SADC/AU/UN negotiation process (ref A).  On June 19, 
the seven vice presidents of the HAT signed a letter to President 
Obama announcing the creation of a technical commission composed of 
HAT and business representatives to discuss the importance of AGOA 
and stating that they have the political will to return Madagascar 
to constitutionality and to strengthen the rule of law (ref B).  In 
early July, AMCHAM and the EPZ, in conjunction with the various 
unions, began a campaign to gather workers' names on a petition to 
be presented to each of the four Malagasy political movements 
involved in the negotiation process.  Although these chambers have 
succeeded in raising awareness of AGOA among Malagasy political 
actors, unfortunately these actors have yet to deliver progress 
towards re-establishing constitutional order:  a consensual 
transition government capable of scheduling and organizing 
legitimate legislative and presidential elections is not yet in 
place, nor is there agreement yet on its shape or timetable. 
 
Firms with U.S. Investment 
-------------------------- 
¶5. (SBU) MKLEN (owned by Jordache) (produced 16% of AGOA exports to 
the US from Madagascar in May):  MKLEN has orders up until October 
and may be in the clear until the end of the year.  Its 
Vice-President has personally lobbied the Ambassador and appears 
quite concerned about losing its Malagasy investment worth over USD 
 
30 million.  They are reluctant to take orders for post year-end and 
risk paying the duty.  However, MKLEN is in a more favorable 
position than most of the other factories here because 1) Jordache 
has its own distribution network in the U.S. so they sell directly 
to Jordache, which is less gun-shy than other buyers and 2) the duty 
on their main product -- jeans -- is around 15 percent, whereas the 
duty on synthetics - the focus of many Malagasy factories -- is 
around 30 percent.  According to the manager, their margins are less 
than 15 percent, so if AGOA were cancelled, they would assume a net 
loss.  If there is no indication of AGOA being retained in the next 
two months, they will rethink their 2010 strategy.  They have over 
USD 30 million in assets at risk, as well as 4,000 jobs.  If they 
were to relocate, they wouldn't stay in the AGOA area.  According to 
the manager, Jordache can source from Bangladesh more cheaply even 
with the duty. 
 
¶6. (SBU) Mazava (3.4% of AGOA exports in May): Mazava is partially 
U.S.-owned with investment from the company Winds.  Mazava is 
opening a new factory in Tanzania, rather than Madagascar.  The 
company also has a factory in Mauritius.  If there is no 
announcement concerning AGOA renewal by the end of July, they will 
reduce their Madagascar operations by half to assuage their 
concerned customers.  If AGOA is cancelled, they will move most of 
their Madagascar business to Tanzania or Mauritius. 
 
¶7. (SBU) Cottonline (4% of AGOA exports in May):  Cottonline is an 
American joint-venture with investment from Martin Trust that 
employs 1,850 workers.  It exports 40% to the U.S., with the 
remainder to the EU and SADC countries.  The company estimates an 
almost 30 percent reduction in its production for June - August 
¶2009.  It has not yet received orders for September - November. 
According to factory manager Michael Appadoo, they will downsize, 
and potentially close, if AGOA and the US market are lost. 
 
¶8. (SBU) Nova Knits: Nova Knits is American-owned.  They are 
awaiting the AGOA eligibility decision later this year and will lay 
off workers at that time if the decision is negative. 
 
Other Main Exporters 
-------------------- 
¶9. (SBU) Prime View (15.5% of AGOA exports in May): Prime View 
exports 100 percent of their garments to the U.S. market.  Their 
orders from the U.S. have already begun declining, and if AGOA is 
not extended, they will relocate to another country, according to 
the manager Mr. Li. 
 
¶10. (SBU) Kwok Hing (7.8%) and Kam Hing (2.9% of AGOA exports in 
May):  They have not yet made any decisions on downsizing or 
relocating, but believe most companies will do so if AGOA is 
suspended.  Their buyers are pushing them to guarantee that they 
will pay any duties imposed if AGOA is suspended. 
 
¶11. (SBU) Grove (7.7% of AGOA exports in May): Grove exports 100% to 
the U.S.  They have orders confirmed through the third quarter, but 
not until the end of the year.  They have no plans to close at this 
time, but if Madagascar is suspended from AGOA, the company will 
close and fire all workers. 
 
¶12. (SBU) Ariva (6.7%): Their buyers have lost confidence in 
Madagascar due to repetition of political crises.  Prior to the 
crisis, the company planned to enlarge its operations and aimed to 
work with Mazava, Puma, and Adidas, but their plans were cancelled 
due to the crisis.  They have reduced their number of workers by 
half.  They have also been plagued by corruption at customs since 
the change of government.  If AGOA is suspended they will further 
downsize and likely close. 
 
¶13. (SBU) Glory (6.5%): Between May and December 2008, the company 
laid off 700 workers.  Between January and mid-May 2009, they 
received some orders and recruited 150 new employees, who have 
subsequently been laid off.  They were the subject of an audit at 
the beginning of July by their buyer in New York.  Ongoing 
operations are subject to the outcome of the audit, expected in 
mid-July, but as they have no orders currently they will almost 
certainly close soon. 
 
¶14. (SBU) Griffy (5%): They have orders only through August.  They 
employ 2,600 workers and have no plans to reduce the work force or 
shut down at this time, but they have eliminated overtime work.  As 
their orders are all from the U.S., if AGOA is suspended they will 
be forced to close.  They are also concerned about the possibility 
of a strike or port closure affecting their shipments. 
 
 
Comment 
------- 
¶15. (SBU) Based on our soundings, the loss of AGOA eligibility will 
lead to the closure of many of Madagascar's garment manufacturers, 
and the subsequent unemployment of tens of thousands of Malagasy 
workers in the capital area.  There are no other formal sector jobs 
on hand to absorb this excess labor; reliable government statistics 
are not available, but a reasonable estimate puts urban unemployment 
rates already at over 30 percent.  A large uptick in urban 
unemployment would further destabilize the political situation, 
exacerbate a humanitarian crisis that is already evident, and worsen 
rising crime levels in a country where the average worker's margins 
are already very thin.  The impact on US-Malagasy bilateral 
relations will also be significant, notwithstanding our ongoing 
efforts to put the blame for this crisis where it belongs. 
 
MARQUARDT