TEXTILE INDUSTRY: NEW CHALLENGES
Count the strengths, remove the irritants and build upon the existing infrastructure
By SHABBIR H. KAZMI
Apr 19 - 25, 2004
Textiles and clothing is the largest industry and major foreign exchange earner of Pakistan. Its performance is directly dependent on cotton availability and its prices in the domestic and international markets. At present, the industry faces three major challenges these are high yarn prices, imposition of anti-dumping duty on Pakistan's bed linen to the European Union (EU) and SRO 410. The industry has to also get ready to face the challenges associated with complete textile quota phase out by the end of year 2004. In order to retain its share in the global trade, the industry must explore its strengths and weaknesses and also take the desired measures on war footings. Not only that the Government of Pakistan has to remove the irritants affecting the smooth performance of the industry but the players also have to redefine their strategy to beat the growing competition.
The resilience of textiles industry is evident from its performance during financial year 2002-03 and July-December period of year 2003. Textiles and clothing exports recorded an impressive 25% growth during financial year 2002-03. Total foreign exchange earnings from this sector amounted to US$ 7.3 billion, raising its share in total exports from 63.6% in 2001-02 to 65.1% in 2002-03. Responding to increased market access granted by the EU, USA and others, and exploiting the opportunity provided by the outbreak of SARS virus in China, Hong Kong and other Asian countries, exports of cotton fabrics, hosiery, bed linen and readymade garments were able to achieve the unprecedented growth in country's textile exports. Exports in each of these categories crossed the US$ one billion mark, and together with yarn exports, which showed a slight decline over the last year, constituted 80% of total export earnings from the sector. The share of cotton yarn and cotton fabrics in the textile exports was down to 31% in 2002-03 from 35.5% a year ago.
The year 2003 witnessed a surge in international prices of cotton, owing to lower size of world cotton production. This rising trend in international prices of cotton caused a slight improvement in the unit price of most of Pakistan's textile products. However, except readymade garments and cotton yarn, the bulk of the improvement came from rising export quantum of various categories. Textile exports to Asian market recorded significant increase followed by quota exports to EU and the USA. The rise in quota exports to EU is attributable to a 15% enhancement in quota for all the categories and withdrawal of import duties. Earnings from textile quota exports recorded about 24% growth in 2003, thus reaching an all time high of US$ 2.7 billion.
Cotton yarn exports registered a marginal decline in 2003 as compared to 2002. This can be attributed to higher domestic demand as well as lower export to China and South Korea. Pakistan's export to these countries fell due to the economic slowdown caused by the SARS epidemic. Against this bed linen export recorded an impressive 45% growth and became the second highest earning category in the textile sector. The rise in export earnings was contributed both by rising quantum and improved unit price.
Similarly, during July-December 2003 period textiles and clothing exports recorded about 14.5% growth over the same period of 2002 at the back of rising exports of cotton fabrics, knitwear, bed linen and cotton yarn. Encouragingly, this gain in textile exports was caused by both higher quantum exported as well as rising unit prices for the major categories. Both higher value addition in textiles and the exceptional hike in international prices of cotton caused the rise in unit value. The large-scale textile sector recorded 4.7% growth during this period as compared to the 3.8% growth in corresponding period of 2002.
However, during this period the textile sector faced some problems. The first was enormous hike in the domestic prices of cotton, resulting in higher cost of production. The second and more serious threat was the imposition of anti-dumping duty on Pakistan's bed linen to the EU that dampened its growth prospects. The third but manageable issue was the withdrawal of SRO 410. While this SRO was reinstated almost immediately, the government also indicated that the SRO has to withdrawn eventually.
There are concerns about the future of country's export earnings from this sector, once the currently available fixed market access for textile exports ends. However, the domestic textiles and clothing industry has been preparing to faces the challenge through the on going BMR drive, evident from the rising level of textile machinery import. Moreover, in case of some categories, Pakistan's exporters are unable to meet the demand because of the quota restriction. Export of these categories is expected to increase after the quota phase out.
It is encouraging to note that textile manufacturers are investing heavily for the upgradation of their facilities. Textile machinery has been imported to the tune of US$ 1.6 billion in the last three and half year (up to December 31, 2004). However, it is necessary to reiterate that while a large investment is being made in spinning, weaving and processing, very little is being invested in made-ups manufacturing.
A closer look at the export figures show that the growth of high value-added exports recorded a fall in July-December 2003 period as compared to corresponding period of 2002. It was mainly because of a decline in readymade garments. However, it should be of some interest to compare Pakistan's export of knitwear to the USA with that of China and India. The comparison provides some interesting insights.
According to the data for January-July 2003 China enjoyed the largest share (11.1%) of the US market followed by Pakistan (3.4%) and India (1.6%). However, the unit value achieved per dozen by India was the highest (US 37.9) followed by China (US$ 21.2) and Pakistan (US$ 19.6). Although a large portion of Pakistan's knitwear exports are to the US, its share in small. The unit value earned by Pakistan's exports in lower than both competitors. This scenario may suggest that Pakistan's export to the US, as well as, in overall terms can expand further.
However, some of the sector experts do not consider this strength sufficient enough to compete. They say, "These figures clearly demonstrate that Pakistan is still exporting low value-added product. Exporters are mainly surviving on volume sale. This is a bad strategy. They should strive to produce higher value-added products".
This may be a good suggestion but needs further probing to establish Pakistan's capability to produce higher value added products. According to a leading exporter, "We do not wish but are forced to produce low quality products. We do not have any control on quality of cotton and yarn. We have to use whatever is available in the country. Therefore, unless the quality of locally produced cotton and yarn is improved Pakistan cannot attain the status of producer of premium quality products. Saying this, we hope that with the recent investment in spinning sector quality of locally produced yarn will improve and we will be able to produce superior quality products".
In the post quota scenario made-up manufacturers, particularly knitwear producer, are expected to face the fiercest competition. In the woven garments segment India, Thailand and Bangladesh have already intruded into the markets being catered by Pakistan. In the knitwear segment, China is expected to capture bulk of the global markets. The adverse impact has already started appearing.
Bangladesh has emerged as the twelfth largest manufacturer of garments. The phenomenal growth of its garment industry is attributed to the Multi Fibre Agreement (MFA) and Generalized System of Preference (GSP). Bangladesh exports about 50% of its readymade garments to the EU and 44% to the USA. The country is heavily dependent on imported raw material and biggest threat is after quota phase out many countries may not prefer to export even their low quality raw material or semi-finished products to Bangladesh.
India has set a target to achieve US$ 50 billion from export of textiles and clothing by 2010, out of which half will be from readymade garments. Till seventies bulk of its exports were to former USSR and other East European countries. At present most of the textile products go to EU and the USA. Readymade garments account for approximately 40% of country's total textile exports.
Sri Lanka has a very robust readymade manufacturing industry. The impressive growth during the last two decade is the result of following market oriented policies. Till 1977 there were only 5 garment factories and at present the number exceeds 1000 units. Nearly 65% of total garment exported goes to the USA, followed by 31 to the EU. Since the country is heavily dependent on imported raw material, sailing is not expected to be smooth once quota is phased out.
China is expected to emerge as the largest exporter once textile trade is released from the shekels of quota regime. The prime reasons being that state not only owns manufacturing facilities but also guarantees supply of raw materials at lower than market rates.
According to a spinner, "We faced chicken or egg first" situation. We were reluctant to make investment in facilities for producing fine and super fine counts of yarn. There were two apprehensions, size of the market and government policy. However, over the years the government has been following a realistic Cotton Policy, which has resulted in increasing import of long staple cotton. The market response has also been very encouraging. That is the reason huge investment is being made in spinning. Low quality of indigenous cotton is not an issue as long as the government continues to follow free trade of cotton and abstain from imposing duty on imported cotton".
If the government is serious in improving production and productivity of manufacturing sector in general and textile industry in particular, the first issue to be address is cost of utilities. The industrial consumers have to pay not only high electricity tariff but also have to face interruption in supply and voltage fluctuations. Since textile industry, particularly spinning and weaving units, is deploying latest technology it can neither afford interruptions nor surges in voltage.
Most probably working environment is the worst for textile processing units. Besides electricity they face the problem of water supply and its quality. A large number of processing units have to buy water from tanker suppliers, which is not only expensive but quality is inconsistent. Use of water of inconsistent quality adversely affects the quality of bleaching and dying. On top of this the interruption in electricity supply create havocs.
Medium and small manufacturers of made-ups also suffer very badly due to interruptions in electricity supply. According to an office bearer of a textile association, "Supply and cost of electricity is not the problem of large industrial units. Most of these have either already opted for self-generation or are in the process of installing additional electricity generation capacity to become completely reliant on self-generation, as such most of them have the stand-by generation facility. It is a very serious problem for the made-ups manufacturers. The worst hit are medium and small manufacturers.
Even if they have stand-by generation facility, it is not adequate to run all the sections/machines. Besides, these generators cannot be run for long hours. Smaller manufacturers are at the mercy of utility companies because they do not have generators to keep even 10 industrial stitching machines working".
The government has ultimately realized the problems facing the textiles and clothing sector, though, too late. Now the policy planners are talking about establishment of textile/garment cities. The basic idea behind this is that a specific type of industrial units should be established in an industrial zone. Since their requirements/problems are similar these could be addressed more effectively and efficiently.
The initial response of private sector has been very encouraging. Most of the leaders of the business community are also extending the maximum help to make this dream come true. The comments of head of a trade association should be an eye opener for the policy planners. He said, "Our biggest problem is that the government often comes up with very good policies. However, the policy runs into snags after a while and the whole process of implementation is derailed. We have three large industrial sites in Karachi. The initial plans were marvelous and they also worked efficiently for some time. Today the conditions are pathetic; electricity and water supply systems, roads, solid waste and effluent disposal system are not in order. My suggestion is that instead of creating new cities the efforts should be made to save the existing industrial sites from becoming industry graveyard.
It must also be kept in mind that garment manufacturing is on continuous relocation. Investment goes to those countries where raw material and skilled manpower are available and governments follow market-oriented policies. Most of the developed and developing countries are no longer in the readymade garments manufacturing business. The countries presently considered suitable for made-ups manufacturing are Bangladesh, Sri Lanka, Vietnam, Thailand, and Pakistan. China has already attracted the largest investment.
Pakistan has the prerequisite but comes very low on the priority of investors. The idea of developing Textile Cities and Garment Cities aims at attracting foreign investors. However, the policy planners must lean lesson from the failure of Export Processing Zones. If they still not know the reasons they must go through the long list of complaints from the companies operating in such zones.
Most of the players of textiles and clothing sector should also look at their balance sheet and can find out the reasons why foreign investors are not willing to enter into joint ventures with them, the biggest being meager profitability or persistent loss making. Foreign investors often reach the conclusion that operating textiles and clothing units is not economically viable business proposal. It may be true that the working environment is not up to the desired level of foreign investors but it is not as bad as being presented by the balance sheet and profit and loss statements of companies in the business of textiles and clothing.
There is no doubt that textiles and clothing sector is the largest contributor to the economy of the country and also the largest foreign exchange earner. It also suffers from smaller irritants to key policy issues. It has its own strengths but also suffers from some structural weaknesses. In order to face the emerging challenges it is necessary to count the strengths and remove the weaknesses.
The first step is to remove all the smaller irritants and then come up with policies in consultation with all the stakeholders. A good effort was made in the past by preparing 'Vision 2005'. Is it not ironic that the policy planners did not succeed in translating this Vision into a plan fully supported by the policies?
Some of the countries having far smaller than Pakistan's textile industry have Textile Ministry. The debate for/against setting up this ministry has been going on for decades. The issue has been raised once again and the person not less the Prime Minister has supported the idea. However, it is yet to be seen how the various stakeholders respond. The only fear is that the proposed Textile Ministry may ultimately become the protector of the strongest lobby of spinners.
Last but not the least the survival and growth of Pakistan's textiles and clothing sector is directly dependent on the strength of made-ups manufacturing base. The country already has reasonably strong spinning, weaving and processing facilities. The government policies should be aimed at maxim utilization of locally produced raw material and semi-finished goods.
The SRO 41- provides for duty free imports of fabrics and accessories not manufactured locally but are required for value-addition in garments. The duty that is not paid on the import stage is adjusted subsequently on the export stage. The government after devising the Duty and Tax Remission Rules (DTRE), with the view of introducing a system of no duty no remission wants such imports of raw materials to be carried out under the system. However, exporters find the DTRE rules quite cumbersome to follow.