With increasing globalization there will be increased pressure on our manufacturers and exporters to produce quality products


May 10 - 16, 2004





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.

Labor 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 benefit.

Cost 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.



Productivity 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 manufacturer.

Long 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 partners.

Branding: 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.