Pakistan is as an agrarian society because of its
dependence on crops like cotton, wheat and rice for export earnings.
Over 65% of Pakistan's export earnings are from cotton textile and
cotton garments. Pakistan is the third largest producer of cotton with
around 11% of share in world production. For the last 3 or 4 years, the
cotton yields have been in access of 10 million bales. Pakistan's needs
over 7.85 million bales to satisfy its domestic demand, the excess
cotton has resulted in higher export earnings for the country. This
heavy dependence on cotton creates a substantial economic risk for the
country. A bad cotton crop results in a recession. In the last decade
government has tried to diversify into other industries to create a
hedge against that dependence. But the success has been patchy and most
of the times minuscule as compared to other countries in the region.
There are many reasons for this dismal performance. But some of the more
critical factors are discussed.
as a competitive advantage: Pakistan policy makers as
well as entrepreneurs consider an abundance of manpower as a competitive
advantage. The advantage disappears when you look closely at the
composition of this labor force. A large majority, of this labor force,
is unskilled and illiterate which makes them unsuitable for
manufacturing and assembling jobs, which requires certain level of
technical know how. The other factor is low productivity of this labor.
If a labor in India is producing 3000 units a month against a salary of
USD 120 the per unit labor cost comes out to USD 0.04 cents/unit.
Whereas the same labor in China is producing 10000 units per month
against a salary of 300, which comes to USD 0.03 cents/unit. The same
labor in Pakistan is producing 1500 units a month earning a salary of
USD 90 this converts to USD 0.06 cents/unit. This situation can be
improved by instituting a training regime for the labor force as well as
process redesign. The training budgets in Pakistan have been the lowest
in the region. Another factor is quality of production. If here is high
number of production errors, especially labor related, that result in
rejection of production and can add to the wastage costs. The other
factor is relationship between the management and labor. Managers should
keep their labor happy by providing certain benefits like medical,
accidental insurance and child education bonus. The labor should also
understand that making the corporation successful is in their own
of Input: Labor is 1/3rd of total cost of production
for labor intensive industries like garment manufacturing. The other 2/3
constitutes other inputs like cost of capital, energy, rental,
communications etc. All these other costs are higher in Pakistan than
other countries. A gallon of fuel cost USD 2.15 in Pakistan whereas it
cost USD 1.65 in USA. Office rents are USD 0.45/sqft in USA whereas the
same quality building cost USD 0.75sqft in Pakistan. It cost on average
USD 0.15/minute to call Pakistan from USA while it cost USD 0.30/minute
to call from Pakistan to USA. A broadband Internet connection cost USD
39.99 per month whereas a similar connectivity cost USD 115/month in
Pakistan. This is just a small sample of cost comparison. The point is
unless and until we are able to bring down the cost of inputs it will be
difficult for us to compete on labor advantage in the world markets.
gain: Productivity gains are achieved through process
redesign as well as periodic trainings of labor which is commonly known
as BMR. If Chinese manufacturers are achieving a productivity gain of
say 8% they can sell their products, costing USD 100 dollars in the
previous year, for USD 91 keeping the other factors constant. This gain
gives them a greater negotiating power without affecting their profits.
The productivity gain can also be achieved by building bigger and better
factories thereby achieving economies of scale which result in
distribution of fixed overhead cost over a larger volume of production.
This reduced fixed overhead per unit result in higher marginal profit.
This higher profit also provides a higher level of negotiations to the
Term relationships are the road to success: It takes
time for a vendor to understand the quality requirements, logistics and
modus operandi of a buyer. Once this relationship takes root it is very
difficult for a buyer to place orders with a new vendor just because
they are 5% cheaper. There is cost associated with switching a vendor.
On the other hand a buyer expects a vendor to be sensitive to his need
of timely delivery and consistent product quality as per specs. A vendor
can also contribute to the decision making process of the buyer by
sharing new developments in the industry. One reason Chinese vendors are
successful is their willingness to take the burden of "just in time
delivery" to reduce warehousing and logistics costs of their
Rice is a commodity, which means it has same characteristic regardless
in what part of the world it is produced. But when you call it Basmati
then it becomes a brand because it carries certain characteristics that
are unique to it. Pakistan is still at the commodity stage of its
textile and other products. If we continue operating at the commodity
level it will always create a pricing pressure because the customer is
not getting the value of a brand. China and India are gradually
migrating from commodity to brand level manufacturing and export.
Chinese Konka and Coby brands have gradually become a major contender
for Home appliance market in USA. Similarly, Chinese local sports shoes
are competing well with Nike and Adidas. Despite a long history of
textile exports, we have yet to produce a quality textile brand in last
50 years. Most of our textile brands are domestic successes like Gul
Ahmed and Lawrencepur. We can not achieve migration to a brand until we
establish product design institutes and international marketing
education centers in the private sector.
CHANGING DIRECTION: In
last decade, Pakistan has tried to enter many new industries like
software export, ceramics, stuffed toys etc. This changing direction has
resulted in chaos at best. When the technology hype was at its peak,
Pakistan tried to create a foot hold in software export. Tens of dozen
of software houses were created without clear insight and direction
about the industry. All these attempts lacked one fundamental
requirement to be successful in international markets, which is the
absence of domestic market. A new manufacturer or service provider has
to master its expertise by working with local customers first before
they could even think of export markets. In case of software export
there is no local market for the applications developed by these houses.
This has resulted in lack of depth in expertise to executive projects on
time with quality. Pakistan's total earnings from software export during
2002 were USD 32 million as compared to USD 5 billion by India.
These are some of the more critical factors that we
need to address in a short term. In the long term we have to diversify
our markets to reduce our dependence on US and EU. Attract foreign
investment by improving law & order situation so that corporate
decision makers find it convenient to travel to Pakistan to experience
the potential of the market at first hand. With increasing globalization
there will be increased pressure on our manufacturers and exporters to
produce quality products at a competitive price. Unless we start taking
actions now we will be left out and become insignificant.