# <u>Figure 13: Apparel Value Chain Comparison between Kenya and Honduras</u>

<!-- Start of picture text --> T-Shirt Value Chain: Kenya and Honduras Compared<br>SOURCE MAKE<br>FOB Cost Per FOB Cost Per FOB Cost Per Import Raw Material Labor Cost Utilities Overheads<br>T-ShirtT-ShirtT-Shirt Dependence Costs /T-Shirt<br>Kenya $3.60 ~ 65% $2.30 $0.40 $0.05 $0.57<br>Honduras $1.30 ~ 80% $0.80 $0.25 $0.03 $0.16<br>High Tariffs:<br>Honduras = 9.5% Lower Wages Offset by Speed to Market<br>Kenya = 17.5% Lower Labor Productivity Honduras <15 days<br>Kenya > 30 days<br>Impact of Rules of Origin Honduras: $12/ labor day<br>Exacerbated by location and Kenya: $9.40/ labor day High cost of Export Logistics:<br>therefore transportation costs Honduras = $500/TEU<br>Honduras: 45-50 shirts/day Kenya = $1980/TEU<br>High Cost of Import Logistics Kenya: 20-25 shirts/day<br>Honduras = $ 670 / TEU High Incidence of Rejects:<br>Kenya = $2325 /TEU Electricity Charges: Honduras: <1%<br>Honduras: 3.5 cents/ kwh Kenya: >3%<br>Total Import Logistics Time: Kenya: 6 cents/ kwh<br>Honduras = 39 days<br>Kenya = 45 days<br><!-- End of picture text --> <!-- Start of picture text --> T-Shirt Value Chain: Kenya and Honduras Compared<br>SOURCE MAKE DELIVER<br>FOB Cost Per FOB Cost Per FOB Cost Per Import Raw Material Labor Cost Utilities Overheads Outbound<br>T-ShirtT-ShirtT-Shirt Dependence Costs /T-Shirt Logistics<br>Kenya $3.60 ~ 65% $2.30 $0.40 $0.05 $0.57 $0.28<br>Honduras $1.30 ~ 80% $0.80 $0.25 $0.03 $0.16 $0.06<br>High Tariffs:<br>Honduras = 9.5% Lower Wages Offset by Speed to Market<br>Kenya = 17.5% Lower Labor Productivity Honduras <15 days<br>Kenya > 30 days<br>Impact of Rules of Origin Honduras: $12/ labor day<br>Exacerbated by location and Kenya: $9.40/ labor day High cost of Export Logistics:<br>therefore transportation costs Honduras = $500/TEU<br>Honduras: 45-50 shirts/day Kenya = $1980/TEU<br>High Cost of Import Logistics Kenya: 20-25 shirts/day<br>Honduras = $ 670 / TEU High Incidence of Rejects:<br>Kenya = $2325 /TEU Electricity Charges: Honduras: <1%<br>Honduras: 3.5 cents/ kwh Kenya: >3%<br>Total Import Logistics Time: Kenya: 6 cents/ kwh<br>Honduras = 39 days<br>Kenya = 45 days<br><!-- End of picture text --> <u>Source: Uma Subramanian, “Being Competitive: Value Chain Analysis and Solution Design,” IFC</u> – World Bank Group, April 2006 At US $3.60, the FOB price of a plain cotton t-shirt from Kenya is over 2.5 times the FOB price of a similar t-shirt from Honduras. What explains the difference in FOB price offered by firms in the two countries? As highlighted in Figure 13, let us examine three elements that are much higher in Kenya than in Honduras. Raw material costs, mostly imported fabric, for Kenya are almost 3 times that in Honduras. Both Kenya and Honduras are subject to trade agreements with the US – AGOA and CAFTA respectively. Apart from Kenya’s location that increases ocean freight costs, there are two other underlying issues that are not insignificant in explaining the difference: (i) trade logistics costs for imports at $2325/TEU in Kenya is 3.5 times that of Honduras;<sup>30</sup> (ii) tariff in Kenya on imported fabric at 17.5% compared to 9.5% in Honduras. For a labor intensive sector such as apparel, would Kenya not have some comparative advantage given that Kenyan wages (at $9.40/labor day) on average are much lower than in Honduras ($12/labor day)? However, in monetary terms the labor cost for a t-shirt in Kenya is still higher than Honduras. This is really driven by lower labor productivity. On an average, Honduran firms produce twice as many shirts as Kenyan firms holding all other factors constant. Finally, outbound logistics costs (excluding ocean transportation costs) in Kenya are almost 4 times that in Honduras. The

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