READYMADE GARMENT INDUSTRY
A Periphery of Issues and Remedies
AROOJ ASGHAR (firstname.lastname@example.org)
Aug 27 - Sep 02, 2007
The textile and clothing industry is the backbone of Pakistan's economy. It comprises majority of the manufacturing sector's output, provides employment to the bulk of the manufacturing sector labor force and is a major foreign exchange earner for the country. Textile sector growth has been led by the spinning and the manmade fiber industry i.e. commonly referred as readymade garment industry. GOP has recently announced trade policy in which it fixed the export target of US$19.2 billion for textile products out of which garments export share has been set at US$12.3 billion for the financial year 2007-08. Country's textile export increased by 5.3% during the financial year 2006-07 to US$10.75 billion against US$10.21 billion in the previous year, however it fell short of its full-year target of US$11.5 billion. It is important to note that more than 40 million people are gainfully employed with the industry making it the second largest employment providing sector after agriculture.
Textile industry in Pakistan is split into various sub-sections like spinning, weaving, cotton ginners, commercial exporters of towels, bed wears, hosiery, woolen, knitwear and readymade garments, etc.. Each component is a complete industry in its own place and discussing every component might not be possible in limited time, therefore we focus on few of emerging issues of the readymade garment industry and their probable solution.
The garment industry provides highest value addition in the Textile sector. According to the Economic Survey of Pakistan issued by State Bank of Pakistan (SBP), Pakistan's total export of the readymade garments was around US$ 1 billion which is roughly 1% of the global market. This might be an unsubstantial share but certainly accounts for significant portion in Pakistan's export proceeds. The small share of Pakistan's textile exports in the world's total is the result of increasing world competition. Pakistan's economy is largely dependant on its cotton crop and its related products whereas a change in cotton crop production directly affects the exports thus foreign proceeds. Unlike other competitors', whose economy is more broad-based and their exports are of diverse nature, Pakistan is dependant on textile exports which goes up to 65%. Similarly, much of the employment in Pakistan is provided by the textile sector, which further generates economic activity in other sectors such as packing, transport and in service sectors like banking, insurance, clearing and forwarding sector. Their performance is in sharp contrast to that of other countries in the region. Much of the sector has serious weaknesses-including outdated technology, poor quality and low productivity-although significant gains in output mainly in men's wear and knitted garments have been made over the last many years. High proportions of operations are in medium to small sized companies having 50 machines or below which tends to be inefficient and lacks potential to impact overall industry positively. There are a few good business houses which are organizing themselves with the passage of time and are progressing as well despite all the hardship. This sector is one of the privileged sectors' of Pakistani economy and have facility available like duty free import of machinery and certain tax exemptions. This sector has tremendous export performance potential. Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA), the governing body of the readymade garments in Pakistan, is constantly demanding several concessions from the government since long.
In response to that, Ministry of Textile (MINTEX) is striving hard to make such improvements in this sector by providing high quality cotton, implementing international best practices, expanding textile sector to produce value added garments along with new innovative products, developing a state of the art infrastructure, investment in human resource specially management and enlarging clothing exports. MINTEX has planned to build three state of the art garments cites in Lahore, Karachi and off course Faisalabad and for this purpose they have allocated Rs. 1.4 billion and 700 acres. It is expected that after development of said project, this will not only attract foreign investors but will also add significantly in the value added readymade garment exports of Pakistan. Textile Garments Skill Development Board was set up in late 2005 and is providing skilled workers with the objective to extend the tanning to over 10,000 stitching machine operators in a year. Prime Minister of Pakistan has recently approved the new Textile Policy (NTP) which will help increase the output of textile products, improve global competitiveness and generate employment in this industry. The new policy targets a 40% increase in exports while meeting growing domestic demand and creating 3.5 million new jobs in the country.
Over the period, SBP has given various incentives to this sector however recently it has raised serious concerns on declining trend of exports despite huge supply of subsidized loans to the sector and termed the situation as gravely disappointing. This sector is presumably totally dependent on the financing; though every business needs debt but business acumenship should also be shown which we rarely see in this sector. Due to increase in production cost, sector is heavily relying on more subsidized loans and incentives to the exporters.
Global trade is continuously changing and in the post-quota regime, the era of concession is fast diminishing where global trade is swiftly marching towards a level playing field. Inspite of totally relying on governmental concessions, management needs to concentrate on their strengths.
Almost all the readymade garments exporting countries including India, China and Bangladesh, one of Pakistan's biggest rather toughest competitors' in the region, have recently announced their new textile policy which can invoke concerns in Pakistan. Industry experts believe that this will affect Pakistan's export market; some of them even claim that it will badly shake already shaky Pakistani textile industry. It is interesting to note that all the associations of textile ñ there are no less than six associations in textile sector ñ apparently claim that they don't need any sort of relief or package but intend to realize government of its role so that they could make favorable polices for textile sector. It is essentially unjust with the government to expect from them only to provide level playing field for Pakistani exporters in this competitive world. Exports should also take some corrective measures themselves first.
Soil and weather conditions in India are not very much different than Pakistan, even then its cotton crop production have been increasing up to 20% yearly for the last few years. Thus Indian cotton market is not only able to feed its own industrial requirements but also have surplus quantity of export quality cotton. India announced an export package comprising of enhanced Duty Entitlement Passbook rates by 3% for nine sectors, including textile, rate of interest on pre and post-shipment credit has been reduced by 2% and Export Credit Guarantee Corporation premium has been reduced by 10% duty-free import of textiles and garments machinery, government support for infrastructure, cotton productivity, training and development, Textile Parks, export marketing finance program, export product development program, program for funding R&D up to Indian Rupee 150 million at the rate of 50% concessional interest rate, and over 5% subsidy on capital investment. As a direct result of these measures, Indian government is trying to neutralize the adverse impact of rising rupee on exports and achieve export growth at 12%. Likewise, Bangladesh has also given various incentives to its exporters, gas rates in Bangladesh is lowest in the region for captive power generation, minimum wages are equivalent of Pak Rupee 1,500 per month, 5 percent cash grant on local yarn and fabric, 7% export refinance including for yarn and duty-free import of raw materials and machinery. Comparing China's initiatives, it gives 11% subsidy on textile exports; duty-free raw material and machinery and industry clusters provide established and high-grade infrastructure. Due to this, Pakistan's textile products will instantly become costlier by almost 20% to 30%.
Cotton, which is a raw material for yarn, has fallen short due to low production, giving rise to yarn prices in the local market that has surged up by 10% recently. During the last two months cotton price reached Pak Rupee 3,225 per mound from Pak Rupee 2,800 per mound, similarly, yarn price had gone up to Pak Rupee 510 per 10 pound, mounting from Pak Rupee 460 per 10 pound. Garment manufacturers and exporters claim that though there is reduction in cotton production but prices have artificially been escalated by yarn producers to some extent. It is alleged that yarn producers prefer to export cotton and create artificial shortage. In order to analyze the gravity of the issue, readymade garment manufacturers have offered to the input providers to sell yarn to them even at rates on which they are exporting, with this they need assurance, quite logically, of smooth availability of yarn. The trade in textiles is directly affected by the phenomenon of globalization that is further influenced by the lower tariffs. According to the industry experts, there is high likelihood that Pakistan might lose international export orders of value-added garments worth US$750 million during the third quarter of 2007 due to shortage of cotton resultantly soaring prices of yarn in the local market. It is estimated that approximately 60% of the export orders are mostly offered by the international buyers during the first six months of Pakistan's fiscal year i.e. July to December on account of huge sales in the Western markets ahead of Christmas season. We are in the first quarter of fiscal year 2007-08 and shortfall in export target of value-added products has been estimated around 20% by the end of current fiscal year. Shortfall is certain whereas it is near to impossible to recover deficit in export targets in the remaining six months of the fiscal year. Exporters are showing reluctance in getting fresh orders because of their estimated pricing which is based on the existing and probable cost of raw material and other cost components. Experts expect that the leftover orders of Pakistan will divert towards China, Bangladesh and India in particular.
Textile sector is the lifeblood of Pakistan's economy by providing largest employment and revenue-generating opportunities in the country. There is a constant disproportionate increase in the prices of the input and cost of production which onward creates problems for the manufacturers to generate export proceeds. Readymade garment industry is facing certain hardships since long out of which few are as follows, (not in any order of importance);
* Mark-up/ Interest rates on financing have been moving up and down during the last few years. Like a traditional business approach, readymade garment industry relies heavily on external finance from both local and foreign banks and institutions. Due to heavy reliance on debt with high interest rates, KIBOR in particular, is increasing their financing cost many folds. KIBOR is presently above 10% after coming from less than 4%, it is estimated that if financing cost would have stayed at 2005 level (i.e. 4%) then most of the existing loss making companies would be in profit despite increase in their other cost of production. At the same time, this increase is leading businesses towards serious defaults, bankruptcies and closure of several industrial units in the country.
* One of the problems that not only business community but common man too faces is continuous change in the prices of utility services (gas, electricity, water and telephones). Like all other business circles, textile industry is confused as to how to estimate their internal cost while quoting prices, usually remains static till the completion of shipment which takes months, to their international buyers ,and.
* For some time, petrol prices have not been revised by OGRA whereas furnace oil prices are regularly increasing worldwide. Most of the power plants are furnace oil based and WAPDA recently got permission from NEPRA for increasing the electricity tariff by 10% despite consistent power failures. There are numerous scheduled and unscheduled load shadings in the country which is hampering economic activities. In addition to this, sudden power outages also cause damage to the sophisticated equipment. This in turns increases maintenance cost of equipments.
* It is observed that gas prices have increased by more than 35% during last two years from Rs 172 to Rs 238 per mmbtu. It has caused increase in cost of production along with the increase in the electricity prices of the captive power plants.
* There is an increase in wages of labors of around 84% since 2004 (from Pak Rs 2,500 to Pak Rs 4,600); for few people it might not be a considerable reason for increase in the production cost but in Pakistan's case it is one of the contributing factors in incremental cost of production.
* Over the period of time, this sector has earned bad name in terms of maintaining financial transparency. It wouldn't be wrong to say that this sector is notorious in maintaining more than one set of books of accounts. Not all entrepreneurs are alike and it has undoubtedly happened due to few black sheep. This is one of the real serious issues yet no one has ever dared to even touch it properly at any appropriate forum. Financial transparency is multi faceted and covers large range of activities including over/under invoicing to maintaining books of accounts to tax related issues. Due to doubts on their financial results, no one takes them that seriously even their genuine concerns get ignored because of suspicious and hidden profits/margins.
* It is commonly said that most of the garment exporters are in loss; this means that they are loss making companies. In strict financial terms, loss in income statement accounts for various non-cash items whereas cash flow matters the most. If cash generation from operating activities is negative then it's alarming and that business would be termed as real loss making business.
* Quality control procedures of most of the exporters are not up to the mark. Though almost all are ISO certified companies yet they lack required quality and have high rate of rejection.
KEY ISSUES IN DEVISING STRATEGIES
Apparels/garments generate highest value added product among the textile items. The government can only be a facilitator whereas industry had to survive on its own strength and parameters. One must remember that any subsidy or incentives given to any particular sector are generally given at the cost of other sectors or sections of society. Present government like previous governments also took numerous measures for textile sector, for instance rescheduling, waiving of loans and accumulated mark-up through a circular duly issued by the SBP including innovative solutions such as Research and Development support. Subsidy packages have been offered to the textile sector to facilitate in the budget 2007-08. But these subsidies and supports are not of permanent nature. In order to properly address the changing structure of the global apparel industry, maximum focus must be devoted to address certain corrective measures; few of them can be as follows, (not in any order of importance);
* Government has increased custom duties on procurement of caustic soda to 20% whereas previously it was 5% under SRO 567. It is suggested that previous concession be restored besides inclusion of procurement of caustic soda in zero-rated sales tax.
* In one of highly courageous move, Bangladesh garment industry leaders have revised wage rates in order to improve the working conditions of their workers ignoring its impact on production cost. They not only increased wages but also successfully persuaded foreign buyers to agree to high prices for their ready-made garments. Most of foreign buyers such as Wal-Mart Inc and JC Penny etc have shown their willingness to raise prices if factories ensure social compliance. Ironically we can't even think this in Pakistan rather GOP recently raised minimum wages which was strongly opposed by certain business circles. In contract to this, worker's condition in Pakistan is not very encouraging where women are mostly employed in the readymade garment industry. Sustainable Development Policy Institute has recently conducted a survey where it was observed that workers mainly women get the lowest wages besides having no protection of their job as less than 2% of the workers only have appointment letters while the rest work on daily wages. This issue needs special attention because giving incentives to workers improves their working style which onward improves quality of the garment. Textile manufacturers and exporters should implement strong quality control measures. In general, a manufacturer hardly gets second chance from foreign buyer if his goods get rejected. It has been witnessed that rate of rejection is quite high among exporters. Likewise, manufacturers and exporters should also check wastage of inputs at different levels of production in order to become cost efficient and competitive in the world market.
* Financial transparency is important. Every business hires financial experts and those persons should be utilized positively instead of emphasizing only on maintaining books of accounts. Similarly, strong internal controls and best practices should also be implemented.
* It is quite easy to blame or put burden on others shoulders, Pakistan's textile issue is so big that one can't exert all the pressure on one stakeholder i.e. government. Instead of relying only on government's incentives, industry should be proactive and take certain corrective measures themselves including checking the high rate of wastage, rejection and efficiency of their machines.
* There should be a proper mechanism in price setting process of utility services. By doing this, it would be comparatively easy for exporter to estimate internal cost and profit margins thus provide lot of margin to negotiate with his foreign counterpart as well.
* In addition to the quality, reliability, efficiency in delivery schedules, sufficiency in well-developed infrastructure in terms of communication, services, export procedures, appropriately trained manpower, material inputs and transport facilities, as well as stable enforceable contracts with foreign investors are also needed. Otherwise maintaining global market share would be difficult.
* Yarn producers get unreasonable at times. In order to address that government should purchase all lint cotton in the season through Trading Corporation of Pakistan at fixed price and sell to spinning mills through out the year. In this way availability of lint cotton at certain price will be assured and everyone will get same price.
* It is an accepted fact that there is a direct correlation between Pakistan's economic progress and its cotton crop size. Pakistan's cotton crop size is unpredictable and also a source of speculation. The actual crop size has reduced from the last year. The raw cotton that our industry is getting is full of trash and contamination and the relevant authorities have totally failed to check it. This should be checked at appropriate level so that garment industry could get high quality input material.
* It is vital to understand the strategy of competitor, if one wants to survive in international business world. It would be a better strategy for Pakistani policy makers to closely study the policies and incentives given by other countries of the region. . On the basis of that, review Pakistan's textile policy and make similar changes or defy competitor polices.
* There are various textile associations in Pakistan, which need to be consolidated. Instead of taking advantage of their potential and participating in policy making process they react like trade unions sometimes.
Summing up, garment industry of Pakistan is sensitive yet highly lucrative sector. On one hand, it has become inevitable for the government to give some serious thought to what the textile industry has been saying for the last several months. While on the other hand, other concerned market players must realize their role as well. While good governance in garment industry in the form of collective efforts will be helpful. Needless to say that if we fail to grasp the situation at this moment, our regional competitor will take the market from us. Losing market share will definitely have trickle down affect like closure of numerous ancillary businesses resultantly giving rise to mass unemployment, which Pakistan can never afford.