Diversification and new markets needed to counter the effect of the Asian currency crisis
By AMANULLAH BASHAR
Feb 10 - 16, 1998
The textile industry, for the first time, has committed to enforce self accountability process in the export sector. The accountability process will be based on three principles i.e. export price check, commitment to bring back the entire export sale proceeds to the country and improvement in the delivery efficiency.
The decision to this effect was taken unanimously at a meeting with a spirit to achieve the export targets set by the government to bail out the country from economic crisis. The meeting was held in Lahore on Friday which was presided over by Jehangir Illahi, the chairman, APTMA.
The objective of the export price check, is to ensure that the textile industry gets optimum price of the products produced in the country and to avoid unfair competition and under-hand price cut trend prevailing among the exporters.
Khalid Amin, the chief executive of the apex textile body, when asked to comment how these export price check measures will be implemented in letter and spirit, said that APTMA has developed an effective mechanism to check underhand cutting in prices by some of the exporters to get into the deal by all means. The other decision is to ensure that entire export sale proceed has been brought back into the country and improvement in delivery efficiency in the face of highly active competitors in the export market is believed to add at least 15 per cent increase in our exports which at present stand at $5.5 billion, almost static for the last three or four years.
The textile industry, which is endowed with a strong base of raw cotton, had started its journey from almost non-existence in 1947 with a meager size of 78,000 spindles and merely 3000 looms that is too in the unorganised sector, with only one textile unit. The industry has gone through a longway and now possess 440 units, 8.4 million spindles and 143 rotors. The textile industry not only is catering to the entire local requirement but sharing over 65 per cent of the total foreign exchange earnings. This sounds a triumph like situation at a glance. There is however much more than it meets the eyes when you go into details which carry some failures also to weep on.
Pakistan, being the fourth largest cotton producing country, provides a strong base for development sustenance of the textile industry. Inspite of tremendous growth in all the peripheral areas of the textile industry including Cotton, Ginning, Spinning, Processing and made-up sectors this industry which is the main pillar of the economy, has not attained its optimum potentials so far.
The traditional edge of availability of raw cotton within the country, has not been fully exploited by our economic managers. It will be interesting to note that the export value of our raw cotton which was $1.03 per KG some 45 years ago in 1951-52 while is still roving around $1.47 per KG. The value of Egyptian cotton is more than double of Pakistan cotton in the international market simply because they have been able to develop good quality staple as against the poor quality cotton produced in the country, despite the lavish spendings on R&D which runs into billions of rupees every year. The major chunk of the funds allocated for research and development go into salary bills of the white elephants hired by different governments on political considerations in the past. We failed in developing even a single variety of long staple cotton which is the major handicap of the textile industry in producing yarn of fine quality.
The textile industry at present is passing through a transition phase. It is sailing smoothly under the protected cover of the quota system, however it has to face the rough waters of the open sea when globalisation of trade is implemented under WTO agreement in 2004. Three years have already gone unnoticed. The fast approaching deadline sounding a note of warning for re-structuring of all the segments of the cotton and textile industries on war footings to enable it to face the future challenges of fierce competition amongst the low cost Asian manufactuers to capture share of their higher cost European counterparts when the gates of the global economies are open.
Inspite of enormous, distinct advantages and incentives the textile industry enjoys, the aspect of achieving competitiveness in terms of quality, quantity, value addition, price optimisation, and BMR is conspicuosly missing from our industry as well as the textile products, mainly because of half-hearted attention paid by the industry in general.
It is unfortunate that the aspect of attaining competitiveness in all aspects of the performance which is crucially significant to survive in the face of future challenges was neglected and the industry opted for easy money and handsome profits from the elementary trade of raw cotton and semi-value added cotton yarn. To tell the truth the textile industry in general avoided to indulge with comparatively painstaking business of weaving process. The handsome profits earned by the textile industry through rudimentary level of production consequently created a crop of lethargic people in the industry.
The textile industry generally speaks against the free export of raw cotton with the tall claims that the raw cotton is required by the local industry for value addition, but it will be interesting to note that the major export business of the raw cotton is carried out by the textile mills themselves.
However, with the internationalisation of the trade and diversification in a large variety of textile products, the period of easy going is now going to be over, especially with the phasing out of the quota system. The industry is now confronted with more demanding and choosy buyers, competition and deregulated global market. The situation demands for recovery of the lost time and make all out efforts for attaining and maintaining competitiveness in all segments of the industry in view of the already improved competitiveness in the developed world with the use of high-tech and state of the art technology.
The WTO agreement, legally binds all countries of the South into a global system of product standardization specified by institutions in the North. The developed nations have far superior and advanced technologies and far greater and diversified production. Under a meticulously contrived scheme, tariff barriers are to be replaced by non-tariff ones in the shape of free trade. The newly framed technological standards will have to be required by the exports of all the developing countries to meet these standards.
There are apprehensions that the textile industry in Pakistan, with all resource constraints, and outmoded technology, may got itself into trouble if the restructuring process of the industry was not undertaken without any loss of time, as the industry has already lost three precious years while the time left is running fast. It has to achieve competitiveness in terms of price, quality and delivery situation well before the deadline is over to insure its existence locally as well as globally. Serious attention is also needed to be paid on Balancing, Modernisation and Replacement of the projects.
It is however unfortunate that in many cases, instead of utilising the funds on BMR, the companies were allegedly involved in lending the available funds to the associate companies. This practice not only forced them to neglect the aspect of improvement through the process of BMR but also entrapped with cash flow problems. In most of such cases they were sitting on the borrowing limits, their projects landed into serious financial problems and ultimately fell into the ranks of sick industries. The existing industry will have to opt for BMR in the interest of its own life but to foster a sense of innovation. The demand of the textile sector for duty free import of machinery for BMR is however stands valid especially to get it equipped with enough force and technology to meet with the challenges it has to face in the years to come.
GROWTH OF TEXTILE INDUSTRY
With the exception of a period from 1958-59 to 19974-75, the textile industry could not maintained a sustainable growth and registered its growth rate at the snail's pace in the country. In the organised sector there are 232 listed textile companies of which 153 are spinning units, 28 weaving and 51 composite units. While the total number of textile units both listed and unlisted is however around 440.
The weaving capacity of the textile industry in our country is static at 10,000 shuttleless looms for past many years. The capacity of conventional looms is also around 15,000 which have no match with the quantum jump the industry has taken in the spinning sector. Instead of going for value added products, the frenzy for setting up spinning projects dictated the minds of the industry over the years which took the 4.1 million spindles in 1981 to a massive number of 8.5 million spindles in 1996-97, while the rotor capacity also jumped from 21 million to 133 million.
IMPORT OF TEXTILE MACHINERY
The industry imported textile machinery worth $789.2 million in 1992-93 which gradually declined to $352.7 million in 1993-94, $294.9 million in 1994-95, $187 million in 1995-96 and $129 million in 1996-97 showing a decline of 84 per cent over the years. Like automobile sector joint ventures in collaboration with world's leading textile machinery producers is the need of the hour to provide an impetus to the stagnant growth in the the textile sector. Since the textile machines of hi-tech are much expensive and beyond the reach of smaller and medium size units, they generally depend on buying used machines. The locally produced shuttleless looms and other textile machines and accessories in collaboration with the internationally recognised manufacturers is the answer to the stagnant growth of the weaving sector and to enhance competitiveness of the textile industry in terms of quality, quantity and cost optimisation too.
The textile exports projections in the trade policy 1997-98 worth $ 5.5 billion of the major textile products include cotton yarn with a target of $1590 million, Cotton cloth $1485 million, Readymade Garments $750 million, Tent & Canvas $35million, Knitwears $750 million and Made-ups $940 million.
The industry has to achieve these targets in the face of difficult trading conditions especially the disturbed economies of the Asian countries, threat of imposition of anti-dumping duties on our grey cloth by EU countries, cotton yarn of 20/s in Japan and constant decrease in imports from South Korea, altogether posing an uphill task of achieving the export targets for the textile industry during the next financial year.
According to an assessment made by APTMA, although the policy for 1997-98 attempts to address the country's worsening trade deficit, emphases upon the need for diversification in exportable products, the traditional items like raw cotton, yarn and textile will contribute $815 million to a targeted increase in export earnings of $1.3 billion.
Like other industrial sectors, the textile industry is also confronted with the problems of electricity like frequent shutdowns and load-sheddings which is affecting the productivity of the units. In view of the chronic nature of the problem, most of the textile units are installing their own power plants. Since huge amount of funds are being shifted for acquiring self reliance in power production, the cash flow situation has been affected, however this would increase the assets of these projects.
The competent managers in the industry have, however, adopted a cost-effective approach and have produced handsome results. These units have already stressed upon diversification in quality products to remain fit to survive in the world market and to get better returns. However, the overall industry in general showing in their balance sheets that they are incurring huge losses over the past few years. The insiders, however, suspect the genuineness of these losses as they feel them as engineered ones.
The market operators are attributing the loss making trend in the textile industry to the factors including high and unpredictable inflation, higher interest rates, inconsistent fiscal policies and a unmanageable balance of payments. The cumulative effect of this situation, the active industry operators said, emerged in the form of credit problems and liquidity crunch restraining the industry from bringing new units and revival of the sick industries.
Performance Results of some of the active textile units.
Sindh Fine Textile Mills Ltd:
The unit earned handsome profits to the tune of Rs30.8 million (pre-tax) during the year 1996 as compared to Rs7.8 million earned previous year. The outstanding results were achieved by adopting cautious approach with strict monitoring of its quality, procurement of cotton, great care in utilisation of finances and strictly controlled and variable expenses. The performance is commendable especially in view of constant problems faced by the economy such as large fiscal deficit, excessive government borrowing, high interest rate, pressure on exchange rate and balance of payments and abnormal increase in the prices of utilities and rupee devaluation by 17 percent against the dollar resulting in pushing up the inflation during the said period. The unit has entered into a Power Purchase agreement with Sindh Energy Ltd (SEL). The entire energy requirement will be met by SEL. The unit feel relaxed and hopes that they will get regular, uninterrupted power supply at competitive rates, as compared to the rates charged by WAPDA.
Sapphire Fibers Ltd
The unit earned a profit worth Rs132.4 million (pre-tax) during the said year as against Rs61.7 million during last year. The exports were increased by 13 per cent over last year and sales also increased about 13 per cent resulting an increase in Gross Profit of about 4.5 per cent. The export sales includes knitted fabrics of about Rs.210 million.
The company has imported modern Dyeing and Finishing unit for knitted fabrics through a long term loan of about $2.65 million from PICIC. This is a step forward for increasing value addition capacity of the unit.
Sapphire Textile Mills Ltd
This unit also succeeded in enhancing the profits. The pre-tax profits of the company amounted for Rs133.5 million during the year as compared to Rs19.5 million profit earned last year. The company carried out major replacement of machinery at its old plant at Kotri.
The company has acquired 100 per cent share of its subsidiary Sapphire Energy Ltd during the year and has set up generating sets to ensure uninterrupted power supply to its units.
Kohinoor Weaving Mills Ltd
The pre-tax profit during the year were estimated at Rs31 million as compared to the profit of Rs109 million it had earned last year.
This unit has embarked upon a re-engineering programme in the areas of financial management, human resource development and organisation restructuring, technical improvements and quality assurance through adoption of ISO-9001 Quality Standards and ISO-14000 Environmental Standards. This programme is expected to be implemented by the year 1999 reassuring the company to move in to next century with confidence.
Saif Textile Mills Ltd
The pre-tax profit earned during the year amounted to Rs101.9 million as compared to Rs84.7 million of the previous year.
The company spent Rs 51,327 million on its expansion project.
The management had a programme to install captive power plant to provide uninterrupted and cheaper power supply to the mills.
(Colony) Sarhad Textile Mills Ltd
The company's pre-tax profit during the year amounted at Rs9.2 million showing a decline over the last year's profits which stood at Rs22.9 million. The management is however confident that once a proper treatment of the assets/debts situation is in place as per the policy of the government, the company will be in a position to re-establish the production.
Mahmood Textile Mills Ltd
This unit again produced encouraging results and earned Rs2661.8 million as operating profit as compared to Rs79.1 million in the previous year. The company could achieve these significant results, in the face of severe inflation, due to better management control and its efforts to acquire raw materials well in time at very competitive prices.
This company has also invested 100 per cent sponsors stake amounting Rs66.806 million in Mahmood Power Generation Ltd, from self generated funds. This company is setting up 9.2 MW captive energy project to ensure uninterrupted electricity to all units of Mahmood Textile Mills Ltd.