When global free trade arrived on New Year's Day 2002, it felt like a badly tailored suit to Egyptian businesses already suffering through a recession. Domestic garment makers faced the prospect of having their prices undercut in a sudden rush because of a World Trade Organization deadline requiring Egypt to lift its long-standing percentage-of-value tariffs on the import of foreign ready-made garments.

To the businesses' relief, the Egyptian government gave them a new shield--massive per-item tariffs on imported clothes. Foreign clothes sellers in the Port Said free zone protested, and some analysts said the tariffs were a crutch that would keep the Egyptian textile industry complacent.

But amid the uproar over how the domestic garment industry would continue to sell clothes inside Egypt, key leaders of the textiles sector were in Germany. Representatives of 17 public and private Egyptian companies were attending a trade fair in Frankfurt where they could prospect for new customers -- and not for garments, but "home textiles" such as towels, bed sheets, table cloths and curtains. "The future is being able to compete is home textiles," says May Khairy of the German-Arab Chamber of Industry and Commerce, the two-way trade promotion organization that sponsored the Frankfurt trip.

During the same stretch of days in January, a delegation from Egypt's fresh produce industry was also in Germany -- at a fruit trade fair in Berlin. The group was trying to spread the word that Egypt has improved the quality and efficiency of its produce operations. "It requires changing the image of the country," says Yousri Tinawy of the Egyptian Exporters Association, also known as ExpoLink.

The timing was coincidence, but the simultaneous trade trips had a common theme -- showing international buyers how Egypt's traditional resource-based industries have matured. In the effort to show that Egypt is ready for the world, Germany is both a target market and a partner. But even as Germany remains one of Egypt's best customers, its officials are warning the Ebeid government to accelerate its market reforms lest it find itself a loser in the free-trade free-for-all.

A two-way street

Just as Germany made itself a grand marshal in Europe's procession toward economic unification, Berlin has also prodded Egypt into the international marketplace. German Chancellor Gerhard Schroeder has urged Egypt to remove trade barriers and embrace global competition. Last month, when the Egyptian government imposed new tariffs on clothes and a range of imported industrial components to stem the drain of hard currency out of the country, Germany's ambassador to Egypt expressed concern.

"The steps the Egyptian government is taking at the moment to redress its currency situation are not very promising," Ambassador Baron Paul von Maltzahn told Business Today Egypt. "Egypt's future is in improving the quality of its exports, and it can only be improved if there is strong pressure from the outside and not what is sometimes the tendency here, setting up protective walls for local production."

Egyptian officials know they have to improve their balance of trade to stabilize the economy. In that climate, it's a hard sell to tell them they ought to remove barriers that keep out foreign imports. Yet Germany is taking that role. Ambassador von Maltzahn told bt that he hopes the People's Assembly will speed the process of ratifying the EU-Egypt Association Agreement, which calls for progressively removing trade barriers to create a free-trade zone with European countries over 15 years. "We hope very much that the Egyptian government is getting on with this on their side. This would be not only to the immediate benefit of Egypt, it would also be a very important signal for potential investors from EU countries," von Maltzahn says.

German officials say they're not giving empty advice; they're giving concrete help. Germany is one of Egypt's longest-running benefactors, dating back to major infrastructure assistance in the 1950s that built power plants, dams and railways. Today, Germany sends more economic aid to Egypt in proportion to its population than to any other country and more aid in total than to any country except China.

The level could dip as Germany's federal budget absorbs cuts, but von Maltzahn says no major decrease is expected. Germany also provides 30% of the the European Union's budget, whose Industrial Modernization Program took over on 1 January from its popular Private Sector Development Program. And the German government's partnership with the Egyptian Ministry of Education, the Mubarak-Kohl Initiative, has provided German-style apprenticeship training to 8,400 Egyptians since 1995.

Germany has an unusually tight bond with Egypt in export development. While it's commonplace for a country to maintain a trade office in a client nation to increase one-way trade, in Egypt the German-Arab Chamber of Industry and Commerce has the distinctive mission of promoting trade in both directions. The group, which marked its fiftieth anniversary last year, hosts business delegations from each country on trade visits to the other and also provides technical and legal assistance.

And German citizens are the number one visitors to Egypt. Lovers of Red Sea diving and swimming, 786,000 Germans visited Egypt in 2000, surpassing Italians. German tourism was headed toward 1 million for 2001, but was quashed by the global anxiety that followed the 11 September terrorist attacks on the US. But Germans have apparently gotten over their hesitation faster than other nationalities: Total visitation for 2001 should ring in at 800,000 or more, according to the German embassy. The German economy has been less affected by the global recession than have other European countries, and travel companies are offering irresistible deals. German visitation is sure to remain solid, considering how heavily German businesses have invested in resorts in Hurghada and elsewhere on the Red Sea. Including the largely German-owned inn and cruise company Travco of Cairo, Germans own 7,000 hotel rooms in Egypt, the largest foreign holding. "They have a vested interest in promoting Egypt," explains Elhamy El-Zayat, chairman of the Egyptian Travel Agents Association.

No small potatoes

Germany is one of the world's largest importers of Egyptian goods, the fifth largest in 2000, behind the US, Italy, the UK and France. But the balance of trade is lopsided in Germany's favor. In the first half of 2001, Egypt imported $626 million (LE284 million) in goods from Germany. Germany took in $144.6 million (LE656 million) of Egypt's exports in those six months. For all of 2000, Egypt imported $1.48 billion (LE 6.8 billion) in goods from Germany and exported $266 million (LE 1.2 billion) worth to Germany.

The imbalance between what Egypt takes from Germany and what it sends has narrowed since 1999 from a ratio of about 8 to 1 in 1999 to about 4 to 1 in the first half of 2001. Egypt's economy and currency have weakened, and businesses can't afford as many of Germany's specialized industrial machines, electrical and technical products. Egyptian purchases of German cars also dropped. On its side, Germany is holding steady in its imports of Egyptian cotton products including clothes, yarn and fabric -- $62.5 million worth in 2000, perhaps slightly less in 2001. German intake of Egyptian fuel and metal has fluctuated.

Surprisingly, Egypt's sudden success story in sales to Germany is the humble potato. Egypt's exports of potatoes to Germany totalled $6.6 million (LE 30.2 million) worth in the first half of 2000 and nearly doubled to $11 million (LE 49 million) in the first half of 2001. Trade officials give credit to a concerted effort by the Egyptian agricultural industry to show German buyers the quality of farm operations recently developed on the Cairo-Alexandria road and elsewhere. ExpoLink, which provides promotional help to exporters, hosted representatives of a handful of German companies on such a visit in early 2001.

"They were very interested in the amount of effort that the Egyptians have made to transform the land to green areas," says Tinawy of ExpoLink. "They know we have all the good elements for good agriculture. We're showing them that we have the model techniques of agriculture and new infrastructure." One of the visiting companies, Kölla, followed up with a contract to import Egyptian potatoes and green beans, Tinawy explains. While ExpoLink's first round of funding from the US Agency for International Development expired at the end of December, the export association is scheduled to re-launch in April with an added emphasis on helping exporters with marketing. Promotion of fresh produce to Germany is also receiving major attention from the Egyptian government and the German-Arab chamber (GACIC).

Textile troubles

But Egypt's textile industry has further to go before it can succeed internationally. German officials roundly agree that Egyptian textile makers will remain at a steep disadvantage against cheaper East Asian producers unless they can improve the quality and diversity of Egyptian products while lowering prices. With the perception that the government-owned portion of the cotton industry is inefficient, Germans are subtly encouraging quicker privatization.

"Germans are happy to buy Egyptian products, and I can tell you this is due to the success of Egyptian private industry in the textile sector," says Wolfgang Bindseil, commercial attaché in the German embassy in Cairo. "The private textile producers have been very successful in adapting to foreign markets. The problem, I think, in the textile sector is mainly state enterprises that are not able to produce competitively. If they were forced to overhaul their production, you can see the potential."

Ambassador von Maltzahn believes the recent increases in tariffs only add to the perception that trade with Egypt is crippled by its bureaucracy. An apparent unintended consequence of the new garment tariffs was reported to the GACIC: A German company operating in one of Egypt's duty-free zones saw its insurance premium skyrocket because it was linked to tariff levels -- even though the products assembled at the company are exported and never officially enter the Egyptian market.

Removing such bureaucratic impediments could encourage German investment in the textile sector, von Maltzahn says. "Take the case of Morocco and Tunisia. They have a great number of German firms making clothes in those countries. It has to do with the business atmosphere in those countries, which is more open for these sort of joint ventures," he notes.

"Here, what German industries fear very much is red tape. These fears have not been allayed. There has been some progress, but there are still many problems with customs which frighten investors."

Roland Sabais, managing director of DaimlerChrysler Egypt, says speeding paperwork in the import-export process is vital if Egypt is to attract new investment.

"It's not a matter of whether I have to pay 50% customs or 20% customs; it's that I can bring my goods to a harbor, present my invoice, pay the customs and go on. This is impossible in this country because of the bureaucracy," Sabais asserts. "I think this is more the problem that a country like Egypt needs to look at: How can they have clear regulations?"

Automotive dreams

German business interests are already heavily invested in numerous production industries in Egypt, including steel, oil and industrial gases. The German mark on Egyptian automotive market is unmistakable. Apart from dominating in luxury cars and other categories, German automakers also manufacture domestically. BMWs and Mercedes both roll off assembly lines in the Sixth of October industrial zone.

The local operations were born of a government mandate: Cars that are assembled domestically with at least 45% local content avoid taxes and tariffs that can add up to 200% of the price of imported cars. That spawned a small Egyptian automotive component industry. Some in the field hope this sub-sector can develop into a vigorous auto-part industry with export capability. But DaimlerChrysler Egypt officials don't think that's realistic -- even though they've recently begun making auto parts for export at their Mercedes plant in Sixth of October. Daimler Egypt started making brake disks in the car plant to help satisfy the domestic content requirement, then made extra parts to justify the cost of the manufacturing equipment, selling them back to their parent corporation in Germany.

"In the international market, you have to meet the prices, and up 'till now it has been very, very difficult for Egyptian companies to reach that point in prices and in quality. There are always individual [Egyptian] companies that are able to meet the standards. But I still don't see the framework for Egypt as a production country to serve the world," says DaimlerChrysler Egypt's Sabais.

"Egypt has a lot of competitors who started this process much earlier, like Turkey and other countries around the Mediterranean. It's not so easy to become part of the international supply chains. The chain is usually filled, and there's hardly a chance for a newcomer to come in. Even if you are a little bit cheaper, they don't just throw away all their old relations."

The local content requirement would ultimately be phased out under the EU-Egypt Association Agreement, albeit on a delayed schedule. Sabais won't predict whether DaimlerChrysler would cease using local components when that day comes. "For us, we always do what is feasible under a certain market condition, so whenever local production is feasible, we'll do it," Sabais says. "I don't think that in the near future we'll have to worry about this. We are preparing for tomorrow, when we want to market our products. We work under the framework that Egypt is giving us."

Learning the German way

Germany's unique export to Egypt is teaching. That history stretches back 100 years to the founding of Christian missionary schools in Cairo and reaches to the future, with classes scheduled to begin this fall at the proposed German University in Cairo south of the airport in New Cairo. Today, the most direct input into the Egyptian economy comes through the apprenticeship programs under the Mubarak-Kohl Initiative, in which high school-age Egyptians learn vocational skills by splitting their time between classrooms and workplaces. Established by President Hosni Mubarak and then-German Chancellor Helmut Kohl, the program started in 1995 in the Tenth of Ramadan, Sixth of October and Sadat City industrial zones. It spread to Alexandria and other cities around Egypt and started in Cairo public schools last year.

Run jointly by the Egyptian Ministry of Education and Germany's Society for Technical Cooperation (GTZ), the project essentially takes over one of Egypt's technical secondary schools -- public schools for students headed for vocational training instead of university -- and transforms it into a three-year, German-style apprenticeship experience. The "dual training" system has students age 15 and up learning in two settings: two days a week in class for practical education, four days a week on site at a business recruited by Mubarak-Kohl organizers.

Organizers say the cooperation with the private sector is a model for integrating educational institutions into the larger community. But finding willing firms isn't always easy: The employer is asked to cover the cost of training, pay the student a basic stipend (rising from LE 60 a month in the first year to LE 100 the third year) and remit an LE 35 monthly administrative fee to the program. Employers also help devise and grade final exams. Mubarak-Kohl organizers make their case with figures from past employers which estimate a firm's net cost over three years is only LE 275 after accounting for the value of the trainee's labor.

"Sometimes the problem is the companies' understanding of the system. They try to get quick benefits," says Osni Georgious, director of Mubarak-Kohl's regional unit for Cairo.

Organizers choose which skills to teach after surveying the current needs of local businesses. A school selected for the initiative gets bumped up on the Ministry of Education's long list of needed repairs. When organizers chose the Nile Commercial Secondary School in Malek el Saleh as the site for an office-administration training program in February 2001, the ministry replaced broken windows and doors and set up a computer lab with 15 PCs. With 15 more computers donated by German tech firm Siemens, organizers set up a "practice office environment" with professional furniture and color-coded workstations simulating the different departments of a corporation.

Ali Ahmed Sayed, co-director of the national program, said the union of school and workplace suits Egypt's urgent need to give students applicable skills that will immediately help the workforce.

"Egyptians admire the German system very much. We believe that the backbone of the development of Germany after the Second World War was through the dual system. Why not have the experience of the German people here?" Sayed asks. "The emblem 'Made in Germany' sounds very good to us." -bt

The Majors

Leading German businesses in Egypt:

German Oil and Gas Egypt: Majority-owned since 1998 by RWE, Germany's second-largest utility. GEOGE has spent $2.5 billion (LE 11.4 billion) over 25 years in Egypt in oil production and plans to spend $1 billion (LE4.5 billion) prospecting in the next five years. A minority partner in BP Amoco's natural gas drilling off Egypt's Mediterranean coast.

Messer: Germany's Messer Griesheim has an estimated $40 million (LE180 million) share in two Alexandria industrial gas producers, Messer Egypt and Messer Gases Dikheila, with the latter part-owned by SMS Schloemann Siemag.

Siemens: Worldwide juggernaut in electrical and electronics technology has 850 employees in Egypt with annual turnover of more than $400 million (LE1.8 billion). Also operates EGEMAC (transformers), Egytech (a communications cable firm), and Egyptian Telecommunications Services, which produces digital telephone exchange systems.

DaimlerChrysler: Three affiliated automotive plants. AAV near Heliopolis, a joint venture with the Egyptian government since 1979, makes Jeep Cherokees and other cars. EGA in 6th of October City is majority Egyptian-owned and makes Mercedes cars and brake discs. Egyptian-owned MCV in Obour makes commercial trucks and buses, many exported to African and Arab countries.

BMW: Egyptian-owned Al Fotouh for Vehicle Assembly manufactures passenger cars in 6th of October City.

Inco-Steel: Udo Scherf of Germany reports an investment worth $100 million (LE450 million) in this producer of gas and water pipes in the Abu Rawash Industrial Area. Affiliate Inco-Sand supplies foundries; Infit, minority-owned by Woeste GmbH & Co., makes iron fittings.

Ferrometalco: DSD Deutschland owns this structural steel maker, a newer subsidiary (DSD Egypt) and (with Siemens) the Egyptian Turbine Company. Combined annual combined turnover: $53 million (LE240 million).

Duravit: Plumbing product maker in 10th of Ramadan City since 1999. Estimated annual turnover of $10 million (LE49 million).

Aventis Pharma: Pharmaceuticals giant formerly known as Hoechst-Marion-Roussel. Some exports to Arab countries. Turnover in 1997 was $38 million (LE170 million).

Bayer, Merck, Schering, BASF: No significant local production, but these pharmaceutical and chemical firms have offices in Cairo to support domestic distribution.

Sectors to Watch

For Egypt and Germany, the near future of trade and economic cooperation should see changes in these industries:

Textiles: A good news/bad news sector. On one hand, Egyptian businesses are optimistic about selling more towels, sheets and other home textiles to Germany. But their share of cotton garments such as shirts could slip to more inexpensive Asian products.

Fruits and vegetables: The Egyptian potato is conquering Germany. Now export marketers are confident they can also increase German consumption of Egyptian green beans, citrus fruits, grapes and other fresh produce, not to mention herbs and spices.

Tourism: German visitation to Egypt recovered after 11 September far more quickly than from other nations, and they're here to stay. Reason: German businesses invested heavily in developing Hurghada and own more inn space in Egypt than any other foreign country.

IT: As Egypt strives to develop its information technology industry, it could build on the already strong presence here of German firms such as technology conglomerate Siemens.

Petrochemicals: As Egypt finds huge reserves of natural gas, a significant allied industry could emerge from the byproducts, including artificial fibers. German involvement would be likely, as German firms are invested in natural gas exploration here and are a leading exporter of the necessary industrial machinery and chemical products.

DaimlerChrysler Egypt recently began exporting brake disks made at its factory in Sixth of October City, but company officials doubt Egypt can break into the international auto parts market. 44 bt February 2002

Resources

For more information on German-Egyptian economic cooperation:

German-Arab Chamber of Industry and
Commerce (DAIHK)

3, Abu El-Feda St. , Zamalek, Cairo

Tel: 736-3662, 736-3664

Fax: 736-3663

http://www.ahkmena.com

German Embassy in Egypt

3 Hassan Sabri St., Zamalek, Cairo

Tel: 739-9600

Fax: 736-0530

http://www.german-embassy.org.eg/ de/home/Nachrichten.html

Federal Agency for Foreign Trade
Information (BFAI)

43, Degla St., Mohandisseen, Cairo

Tel: 336-1620

Fax: 338-4738

http://www.bfai.com/main05.htm

Mubarak-Kohl Initiative (MKI)

National Technical & Vocational
Education and Training Program

4D, Gezira St., Zamalek, Cairo

Tel: 592-9037

Fax: 589-5564

German Academic Exchange
Service (DAAD)

11, Saleh Ayoub St., Zamalek, Cairo

Tel: 735-2726

Fax: 738-4136

http://cairo.daad.de

Q&A with Ambassador Paul von Maltzahn

As Germany nudges Egypt toward free trade, much of the encouragement comes from Baron Paul von Maltzahn, Germany's ambassador to Egypt since September 2000. In an interview with bt's Dan Bernard, von Maltzahn said Germany will not cede to the European Union the mission of helping Egypt develop its economy, and he chided government officials for recent import protectionism. Excerpts:

Q: Germany has had a close relationship with Egypt for decades. Will some economic-development programs start to be shifted to the EU?

A: I don't think so. Egypt continues to be the largest recipient of German aid per capita ... You can consider the permanent and steady degree of very strong economic cooperation as a token of our recognizing Egypt's vital role in this region. ... The EU instruments are still very much under development, whereas Germany in this field has a very long-standing practice and very well-oiled, well-greased tools.

Q: How can Egypt's government increase exports to Germany?

A: Restore confidence in its handling of economic affairs. The measures taken in November in curtailing access to foreign currency were not very confidence-inspiring. The steps the Egyptian government is taking at the moment to redress its currency situation are not very promising, either -- more decrees on restricting imports.

The best advice we could give to Egypt is to think in the medium and long term, not in the short term. Go for more liberalization, not import restrictions. Open your markets to competition. Egypt's future is in improving the quality of its exports, and it can only be improved if there is strong pressure from the outside.

Q: How can you persuade an Egyptian businessman that it's to his benefit to lift import barriers and possibly see his business go elsewhere?

A: The advice would be that they should change the direction of their efforts: Not go setting up protective walls and continue producing the same bad stuff, but really change gear, take courage and go for higher-quality production, then face the competition. I wouldn't mind if these were temporary measures, but the danger is always that the temporary measures are seen as a cozy corner in which you can continue your production in the good old ways instead of using this time for radically changing the outlook. Spend and improve. Otherwise you will never make it, because in two years the situation will be different again.

by Dan Bernard

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