Cost of doing business a real issue

Aug 27 - Sep 02, 200

High cost of doing business is the biggest problem faced by all the manufacturing industries in Pakistan. Textile is at the top that is always complaining about this dilemma. However, poor policies of past have greatly contributed to the present state of the industry.

The textile industry worldwide has witnessed a drastic change after the removal of quotas. When global textile trade was under quota system, there were many myths about the future of textile exports of developing and developed countries that industry could witness after the removal of trade barriers. In those times, IMF and World Bank reports suggested that as much as $137bn were cut from the world income due to quota system. USA, the world's biggest textile buyer was buying goods from 50 destinations at that time which was expected to be reduced to five or six, due to free will of buyer.

Economists had mixed views about the impact of removal of quotas on the developing countries. These views differed from country to country, depending on the easy and preferential market access. Pakistan, where textile sector has always dominated the share in total exports, was expected to benefit from the removal of quota system. This was due to the abundant cotton production. Pakistan is the fourth largest cotton producing country. Industry was gearing up itself to boost the exports once trade barriers will be removed. It was evident from the huge investments of $6bn done by the local industry. Machinery was imported for up gradation of existing units and also for installation of new plants.

Before further discussing the potential benefits of liberalization on the world trade, let us first evaluate the entire textile chain in detail and the benefits of value addition at different stages. Conversion of raw cotton into yarn is a value addition of 110% i.e. if exports of cotton earn $100 foreign exchange then the same cotton if converted to yarn can earn $210. It seems that a country will be making mistake if it exports raw cotton isn't it. However, if one goes up the ladder of value addition, this mistake becomes even more prominent. Conversion of cotton to towels is a value addition of 400%, for finished fabric 500%, knit wear is 1200% and woven garments with a value addition of 1300% is the most profitable category. If one simply puts a glance on the above numbers then the next immediate thought for a cotton abundant country would be to develop expertise in garments.

The contribution of garment increased from 12% in 1982-83 to 30% in 2001-02 in the total textile exports. It clearly indicates that garments were making room in the total textile exports. Market conditions in 2002-03 and the removal of textile quotas were obvious sign of dominance of garments in the world textile exports in the years to come.

It required that investments should mainly be done in the value added category. Indian and Chinese textile industry was also in the expansion phase at that time. Both these countries were wise enough to design policy frame work for the expansion. Industry in India had designated cities for spinning, weaving and garments. Pakistani Government also made textile vision 2005, which targeted aggressive exports and also investment in the textile industry. The concept of making textile cities was also introduced. It seemed as textile industry will change the status of Pakistan as a developing country and will bring it among the developed ones. The industry responded to the government expectations and heavily invested in the sector. Cheap borrowing from banks due to lower interest rates supported the enthusiastic investments.

One thing that Government forgot to advise industry and perhaps industry itself did not feel like doing was a feasibility study. In depth analysis were required that could incorporate both local and international scenario and could evaluate future state of affairs with respect to both, the buyers and the sellers of textile products.

Industry did not invest the way it should have invested. Despite growing trends in the demand of garments in the past, major investments were not done in the garments. Spinning which is the lowest category of value addition from raw cotton attracted 47% of total investment, weaving the next category attracted 26.3% and garments surprisingly was able to capture just 5% of this pie. Government was supposed to guide the industry to invest in the garments that was being considered the future of cotton producing countries. This investment of $6bn was done in a span of 5 years and Government kept on praising the textile sector and giving hopes to the public for bright future that will be brought in by the textile industry.

Not only could the past trends guide local industry to invest in the value added category but Bangladesh where cotton is imported and still its textile exports were increasing in the said period was a lesson for the local industry that they should focus on the value added category. Another lesson could be relocation of Japanese spinning industry in china. Pakistan tried hard to relocate Japanese spinning industry in Pakistan but these efforts could not materialize. The local industry could realize at that time that Pakistan is not an ideal destination for spinning industry.

Bangladeshi textile industry signed joined ventures with Korean and other firms where their entrance and presence was otherwise difficult. All the regional countries made their industries innovative and dynamic to ensure buyers loyalty. However, the garments industry in Pakistan lagged behind in this area. Tax payer's money that was given to the industry was not utilized for research and development and hence industry stands at a position where it finds very difficult to meet the changing fashions in the west.

Skilled human resource is very important for garments segment. Practically, no measures were taken to develop a quality human resource that could improve workers productivity. Pakistan ranks the lowest in the region in productivity and this is mainly due to lack of technical skills.

Buyers have become very shrewd now. Big international chains like wall mart and jessy penny do not have inventory management systems anymore and they have transferred this cost to the sellers. Now orders, not only have become bigger in size but also delivery system has become very fast. Pakistani garment industry is not efficient enough to cope with this competitive environment. Problems at the port also further complicate the situation by increasing problems of the industry.

Branding and marketing is a concept that has remained absent in Pakistan's garment industry. Under invoicing and over invoicing also surrounded the industry that is one of the reasons why "made in Pakistan" tag could not earmark its presence in the international markets.

Only measures that government could announce are Aggressive marketing strategy. Branding and co branding benefited Bangladeshi industry but Pakistan has lately considered it as an option to boost exports. Pakistan has missed many boats; we hope there are still some boats left that can bring a turn around in the exports of textile industry.