SLUGGISH EXPORTS & RISING INPUT COSTS

A comparative study of the competing countries

AMANULLAH BASHAR
June 18 - 24, 2007

High costs of input forcing the export oriented industries to dispatch semi-finished products instead of exporting value added products to avoid high cost of production in Pakistan.

The fact that increase in export of yarn by 145 percent from Pakistan in the current financial year substantially justifies this conclusion.

The government on its constantly taking steps to facilitate the industry in general especially the export oriented ones. Since currency appreciation also affects exports, the government declared that it has no plan to devalue Pakistani currency and is finalizing a 'new strategy' to enhance exports.

In order to facilitate exports, the government has decided a zero-tariff slab just to reduce cost of raw material thus minimizing cost of doing business and to accelerate industrial developed as a result about 400 items would fall under zero rating scheme.

To support exporters and ensure availability of raw material for export industry, it has also been decided to withdraw of customs duty on machinery used in horticulture, furniture marble and granite, surgical and medical instruments business.

The customs duty on raw material used in electrical, capital goods, paper and paper board, chemicals, plastic and rubber industries is proposed to be reduced by 5 percent

Since cost of power is another major contributor towards cost of production, it has also been decided to withdraw customs duty on components used in alternative energy sources. Reduction in customs has also been proposed on generators for industrial consumption.

Textile exporters are actually the main players in the economy so the existing Withholding Tax (WHT) rate of 0.75 percent to 1 percent is also being rationalized.

REGIONAL STUDY COST OF PRODUCTION

The government in order to have a factual position of the textile industry in the regional countries has also hired an international agency to have an objective report on the textile industries in the competing countries.

In response to a request made by the Ministry of Textile, Government of Pakistan, Gherzi conducted a benchmarking study, benchmarking the production cost in Pakistan vis-a-vis India, China, Indonesia, Bangladesh, Egypt and Vietnam

The study was made in conjunction with another recent survey made by Gherzi for the Ministry of Textile termed ì A comparative Study of Incentives for the Promotion of Textile Industry in Pakistan, India, China, Bangladesh and Sri Lanka".

SUMMARY OF THE FINDINGS OF THE REPORT

HIGHLIGHTS: PAKISTAN VS COMPETITION

1. IMPORTANCE OF TEXTILE INDUSTRY

The following figures highlight the relative importance of the textile industry to the target countries.

A) SHARE OF TEXTILES IN GDP

Pakistan 9 per cent
India 4 percent
Bangladesh 6 percent

SHARE OF TEXTILE EXPORTS IN TOTAL MERCHANDISE EXPORTS

Pakistan 63 percent
India 17 percent
Bangladesh 75 percent
China 15 percent

Pakistan's main competitors India and China have a highly diversified economic base.

d) In the long run, wages in India and China are likely to rise faster due to inter-sector competition between textile and non-textile sectors. There would be high demand for skilled workers from non-textile sectors. This trend would be to Pakistan's advantage.

2. EXPORT GROWTH

Textile exports in the three competing countries are projected to grow as follows

The present study compares the situation of the Pakistani textile industry with the reference countries in terms of raw material, manufacturing costs, state of technology and quantifies the impact of various incentives on the total cost.

PAKISTAN

•RAW MATERIAL

The Study reveals that Pakistani textile industry suffers from an inherent disadvantage resulting from lower yield from its chief raw material, i.e., Cotton coupled with its present high price.

•INCENTIVES

In Pakistan, the export oriented textile mills engaged in manufacture of finished articles get a significantly lower interest rate for new investment in plant & machinery. However, for new investments in spinning, weaving and processing mills have a significant disadvantage on account of the interest rate in relation to other countries, particularly India, which supports both, companies who serve the local market or the export market. This has to following consequence for Pakistan: The raw material cost, yarn and fabric from non subsidized mills for the down stream manufacturers such as home textiles; is higher.

The exporters of finished products enjoy also a direct incentive in the form of R& D Support to modernize their equipment and improve quality. The exporters get also concessional working capital credits.

WAGES

Pakistan enjoys lower wage costs compared to its main competitors India and China. However this advantage cannot be leveraged due to the low labour productivity in many mills and the recent wage increase.

•POWER

The cost of electricity is lower in Pakistan than in India and China, however, this advantage is endangered by the recent increase in the cost of gas.

•TECHNOLOGY

The study compared the state of textile manufacturing technology which is determined by key parameters such as percentage of spinning equipment less than 10 years old and share of shuttle-less looms in total weaving capacity.

The Study reveals that Pakistan has a modern spinning technology with 44% of ring-frames being 10 and less than 10 years old. The percentage of open-end spinning rotors with only 4% indicates technological obsolescence. Likewise Pakistan's shuttle-less loom base with only 32% of its installed looms being 10 years and less than 10 years old shows the lowest percentage compared with the reference countries. Like in India the share of shuttle-less looms in the total loom population stands at 11% which is the lowest compared with the reference countries.

•RECENT INVESTMENTS (2005)

In ring spinning Pakistan added about 1.03 mn ring spindles compared with

-India 1.42 mn
-China 7.18 mn
-Bangladesh 0.540 mn

In rotor spinning Pakistan's investment was only 1406 rotors compared with

-India 20'000 rotors
-Bangladesh 6'080 rotors
-China 246'000 rotors

In shuttle-less weaving Pakistan's investment was 1925 looms compared with

-India 4871 shuttle-less looms
-Bangladesh 3934 shuttle-less looms
-China 2'630 shuttle-less looms

INCENTIVES

This Study has established that incentives play a key role in the development of the textile industry in South East Asia. The governments have clearly realised the need for encouraging massive investments in the industry after the world trade in textiles was liberalized in 2005.

Significant measures have been taken to achieve the modernisation and the expansion targets by improving infrastructure and giving attractive fiscal incentives

India recognized the need for generating an investment of Rs 140,000 crores to achieve its ambition of USD 50 billion in textile exports by 2010.The Textile Up-gradation Fund (TUFS) was set up to provide a 5% interest re-imbursement to the new investment in textiles. In the last budget (2007) India announced that the scheme will be continued during the XIth five year plan till 2012.

The individual state governments also provide attractive incentives through subsidized power and tax holidays. Apart from this, the Indian exporters enjoy concessional working capital interest and duty drawback. The government has also embarked on establishment of dedicated textile parks with self-sufficient infrastructure.

The Chinese strategy has been more holistic to create macro economic factors such as an under-valued exchange rate which is favorable to exports, low interest rates to provide cheap capital and super-efficient infrastructure to boost competitiveness. Freight cost from China to Europe and USA is 50% cheaper than from Pakistan/India. Added to this is the high productivity of the Chinese worker. The exporters benefit from fiscal incentives such as tax rebates and tax holidays.

Bangladesh enjoys highly competitive wages which favour mass scale garment production. However, the government gives direct incentives to encourage backward integration in textiles.

SRI LANKA

There is a special drive by the Government to attract investments through tax holidays in the primary textile industry to enhance the value addition and to minimise lead times and two dedicated textile manufacturing zones are being set-up.

A dedicated port complying with USA Container Security Initiative (CSI) is being set up to address US Security concerns as 1/3rd of garment exports are destined to USA.

Tax holidays are given also to the garment industry which leverages the highly trainable workforce.

CONCLUSIONS

Following four tables have summarized the results of the benchmarking study of the production costs and the impact of incentives in the four reference countries.

The general picture that emerged was that even though Pakistan had lower conversion cost, the total cost of articles, after taking the incentives into account, was higher than that of the reference countries, especially India.

MANUFACTURING COST OF PROCESSED FABRIC

SHEETING-REACTIVE DYED, MEDIUM SHADE 30/1 K X 30/1 K 78 X 78,60" FIN.WIDTH (US$ CENTS/ LINEAR METER)

 

PAKISTAN

INDIA

CHINA

BANGLADESH

Grey Fabric Cost

76.60

76.56

82.43

76.68

Conversion Cost

27.40

30.30

27.80

25.10

Cost of:rabiric

104.00

106.86

110.23

101.78

Cost of Fabric After Interest

133.60

129.93

126.78

129.11

Total Cost after Incentives

117.64

114.71

112.01

127.18

Impact of Incentives as a Percentage of Total Cost

11.94

11.72

11.65

1.50

MANUFACTURING COST OF YARN

COTTON YARN-30/1 COMBED RING YARN ON CONES FOR KNITTING (USS CENTS PER KG.)

 

PAKISTAN

INDIA

CHINA

BANGLADESH

Clean Cotton Cost

173.7

161.0

203.5

186.3

Conversion Cost

49.5

61.0

57.5

37.0

Costof Yam

223.2

222.0

261.0

22.3.3

Cost of Yam After Interest

257.52

249.22

282.59

255.30

Total CostAfter Incentives

25T.52

228.70

249.70

251.50

Impact of Incentives as a Percentage of Total Cost

0.0

8.15

11.65

1.50

MANUFACTURING COST OF GREY FABRIC

GREY COTTON SHEETING FABRIC,20/1 K X 20/1 K / 60X60, 63" GREY WIDTH (US$ CENTS/ LINEAR METER)

 

PAKISTAN

INDIA

CHINA

BANGLADESH

Cost of Yam

48.74

45.76

59.69

49.53

Conversion Cost

13.34

17.20

14.40 

11.30

Cost of Fabric

62.08

62.96

74.109

60.83

Cost of Fabric After Inte rest

71.67

70.64

80.17

69.73

Total Cost after In centives

68,54

64.42

70.83

68.69

Impact of Incentives as a Percentage of Total Cost

4.36

8.80

11.65

1.50

MANUFCTURING COST OF MADE-UP-TERRY-FABRIC

TOWEL-JACQUARD YARN DYED GR.-20/2 K PILE-24/2 K X WF. 12/1 OE, 60X44, 400GSM, 100CM X 180CM (US$ CENTS/KG.)

 

PAKISTAN

INDIA

CHINA

BANGLADESH

Cost of Yam

326.78

312.46

332.61

332.29

Conversion Cost

1,78.80

199.00

182.70

161.00

Cost of Fabric

506

511

515

493

Cost of Fabric After Interest

589.8

578.6

565.3

571.4

Total Cost after Incentives

527

524

499

537

Impact of Incentives as a Percentage of Total Cost

10.67

9.40

11.65

5.96