REFLECTIONS
FROM THE SECOND DECADE
A selection from LMD’s Cover Stories
NOVEMBER 2005
APPAREL IN AND BEYOND 2005
The Chairman of MAS Holdings Deshamanya Mahesh Amalean speaks to Yamini Sequeira about the need to leverage existing favourable conditions
Q: How has this year panned out for the garment industry so far – especially compared to what you were expecting since the MFA was completely phased out on 31 December 2004?
A: Although the apprehension hasn’t died down as yet, Sri Lanka is doing pretty well this year. We had expected things to begin falling apart sometime in June 2004; but with China not being in a position to ship out products because of limited quota, which expired in early October 2004 for them, a lot of the business in the last quarter of 2004 was placed alternatively in Sri Lanka.
But as soon as the market opened up in 2005, China exploded – its exports of textile and clothing went through the roof! There was a lack of interest from customers to look at other markets, as they were concentrating on establishing a clear position for themselves in China.
But China’s rapid growth in several garment categories created concern in the Western world. Soon, the US came down heavily with ‘safeguards’ to restrain China. And on the European side too, the EU introduced restraints on China. So customers started looking elsewhere. If not for the restraints and safeguards placed on China, what was predicted for the local industry here would have happened, with the second half of the year being difficult for us.
In addition, Sri Lanka was also successful in gaining duty-free access for Sri Lankan apparel into the EU – based on certain criteria, which are fairly stringent. Although this status was to come into effect on 1 April 2005, it was delayed to 1 July 2005 since the EU was unable to enter into a base agreement with China. Of course, the tsunami helped speed up this duty-free status.
Q: How many garment factories/buying offices have closed down since? How are the smaller garment units surviving?
A: Some smaller factories – those with approximately 100 machines – started closing down in early 2004. Others looked at linking up with larger global players, giving rise to partnerships, strategic alliances or the leasing out of factories. The fact that we are not hearing so much about major losses shows that concerns expressed in 2003/04 did not materialise.
I’m sure it is still not easy for small and medium-sized manufacturers, as customers are aggressively restricting their sourcing base and working with fewer vendors worldwide. For example: Gap, which had over 750 vendors before 2005, is now in the process of concentrating its sourcing to just 50 strategic vendor partners; and Nike, which had 260 vendors, now has eight strategic vendors for deeper penetration of markets.
These vendors will look for sufficiently large manufacturers to support them, take some of that head count, and use it to focus on the retailing and marketing aspects of the business.
Q: Have there been instances of larger garment companies taking over smaller units?
A: The larger global players – those with strategic relationships with customers and brands, and larger retailers – have expanded their manufacturing base. In the last year, MAS alone has added five manufacturing operations – of which we started one, bought three and have partnered with one. The idea is that the smaller units will work as satellite operations to existing businesses.
Q: Would garment manufacturers have to specialise in niche products to stay afloat in the medium term – for example, as MAS has done in lingerie and swimwear?
A: Most of Sri Lanka will have to be niche market-based. We will never be able to compete with larger players such as China and India in other categories. These two countries will dominate the mass markets. And we will need to find our niche.
The companies that have invested in developing relationships with customers in niche markets and those who have invested in customer needs (for example, those providing fabric sourcing, and product and design development) are beginning to see rapid growth. That is what is happening with MAS – and we are struggling to cope with that growth!
Q: How beneficial will Sri Lanka’s new duty-free status into the EU prove for the local industry? And are garment manufacturers making optimal use of this facility?
A: The duty-free component of 12.5 percent is given to either those who perform double transformation – where the yarn to the final garment is made from local raw materials – or those who add 50 percent value in Sri Lanka, which means you can import fabric in unfinished form into Sri Lanka and then do the finishing here before it is converted into a garment.
Sri Lanka is just about making that 50 percent mark. We are working with the EU to get that 50 percent figure down to about a 35 percent duty-free finished fabric import. But those providing the links in the supply chain – fabric mills and accessory manufacturers – are already seeing a surge in their businesses.
Q: Do you see large buyers switching to Sri Lanka to avail themselves of this advantage?
A: I don’t see buyers falling over each other to come to Sri Lanka but those who are already here have established relationships and understand what Sri Lanka can do for them. So they are strengthening their positions here. Earlier, business went to the centre where quota was available, manufacturing was established and the supply chain grew from there. Quota drove businesses to different parts of the world.
But now, the trend has turned 360 degrees: manufacturing is moving to where fabric is available. Buyers don’t want to get involved with complicated logistics. For example, we have been seeing business moving to Sri Lanka in intimate apparel because of investment in the supply chain. We have to create a compelling reason for buyers to want to come to Sri Lanka and work with us.
Q: In retrospect, how effective have preparations for gearing up for the completion of MFA phase-out been?
A: We should have started preparations much earlier. We are just about holding our position now. Yes, we are growing but better preparation would have helped us grow more to our true potential…
Q: Does backward integration – i.e. textile mills/accessories supply – remain a pipe dream for Sri Lanka? If so, how can it be achieved – and why has it not been addressed?
A: I often asked myself: “Why should the customer come to us? What are we doing different from say, China? How are you going to differentiate yourself and seem more valuable?”
Unfortunately, those who were involved in the manufacture of casual wear, children’s wear and outerwear didn’t see the rationale in making those huge investments in the supply chain. In the last six years, almost 60-70 percent of MAS’ investment has been in the supply chain. Only 30-40 percent is invested in design and product development.
I was asked at a MAS meeting why we are investing so much in the supply chain of the business – a thought that I also debated in my mind. But today, we are in a position to provide ‘design-to-delivery solutions.’ If pressure is placed on China beyond 2008, which I think will happen, then the Sri Lankan apparel industry will continue to grow.
Whether in the form of safeguards, restraints or something else, China will be curbed by the West. But Sri Lanka will need to have a good supply chain: a good textile base on which business can be leveraged.
Q: Are there new, emerging garment manufacturing markets that are grabbing Sri Lanka’s share?
A: Vietnam is coming through as a very good alternative to China for customers; and so is India, which is growing at a rate of 30 percent. The infrastructure India is putting in place in its textile and apparel sector runs into billions of dollars.
Q: Many Korean garment buyers are switching to Vietnam and China. How can this trend – of buyers moving away from Sri Lanka – be stemmed?
A: I believe that if we are successful in establishing bilateral relationships with other countries and manage to establish a strong relationship – or even a free trade agreement (FTA) – with the US, we could be successful. I think we need to work on these aspects more.
Q: Have buyers worldwide changed their mode of conducting business – for example, by eliminating middlemen?
A: Yes. For example, Marks & Spencer, which earlier sourced business through British manufacturers, has now established its own offices in India, China and Turkey. Buyers are gradually changing their strategy of going through intermediaries to working directly with suppliers in the region.
Customers such as Gap, NEXT and Nike have embarked on the same path. The role of intermediaries has shrunk significantly. Now, vendors are being asked to perform the intermediaries’ role.
Q: Is there a major squeeze on prices – and how is Sri Lanka performing on that count?
A: We have growth volume and value at similar rates over the last year. We have been able to maintain our prices but only by offering a product with greater value addition. If you look at China, it has achieved phenomenal growth by offering a substantial discount over 2004 price points.
Q: Larger companies are going offshore, and setting up factories in other countries such as India and Bangladesh. Does this not display a lack of faith in the local industry?
A: Leveraging strengths of the region also provides customers with the stability of a multi-location sourcing base. In the event of a natural or man-made disaster – or in case of political instability – the customer has confidence that you are in a position to support the business from another location.
I am of the view that this should strengthen the industry, as Sri Lankan companies are now in a position to gradually become competitive away from home.
Q: With such capacity lying vacant in Sri Lanka, why are such companies venturing offshore by appointing representatives in neighbouring countries – rather than wooing buyers in the US and the EU? Does it not mean the local industry is once again being reduced to being a tailoring unit of sorts?
A: Sometimes the decision to locate offices in different countries is driven by customers. Our objective is to leverage relationships we have with customers and grow our business through that. The strongest link in the supply chain is the one with the customer.
Sometimes customers require products from multiple locations based on pricing, specific products or merely to benefit from trade agreements.
We see it as our challenge to provide that service to the customer. As you grow with the customer and become a strategic supplier of specific categories, you become a dominant supplier since the customer is assured you can provide an uninterrupted flow of products – ensuring that the customer’s shelf is never empty.
Q: What are the buyers’ attitudes towards Sri Lanka post-quota?
A: The buyers’ perception of Sri Lanka is certainly more favourable from 1 July 2005, when trade benefits into the EU came through. We are getting more calls, more visits and greater commitment from buyers, which should translate into orders. Due to this interest in Sri Lanka, medium-sized companies will also benefit.
Q: Are the garment organisations still being led by personalities rather than the industry as a whole?
A: There is much more unity now than there was in the past. The Joint Apparel Associations Forum (JAAF) is the best thing that happened to us. When Ranjit Fernando, the then Secretary – Ministry of Enterprise Development, Industrial Policy And Investment Promotion invited us to draw up a five-year strategy for the apparel industry – a committee I was requested to chair – one of the vehicles to achieve our goals was JAAF, through which the industry speaks with one voice.
We have achieved much more in the last two to three years than we achieved in a decade. Now, those who speak up are being heard. In any organisation, you have a few who steer and drive – and this organisation is no different. But equal stature and respect is given to large, small and medium companies. Now, there is greater clarity and unanimity in deciding what is necessary for the industry. JAAF has become the voice of the apparel industry.
Q: Why is it that – given that Sri Lanka does not have fabric infrastructure and so has to import fabric – India, being a large fabric manufacturer, is not attracting Sri Lankan factories/groups to tie up with Indian mills… so as to present themselves to buyers as a fully integrated unit since buyers are looking for ‘packages’?
A: Whilst Indian textiles have a great tradition, the fabric that the country produces is not used in Sri Lanka so much. And prices are either too high or service levels don’t match up with what we get from Far Eastern textile suppliers.
Since India’s local market is so strong, it dominated the country’s capacity and determined the behaviour of its textile mills. Whatever fabric was produced – whether ‘A’ grade or lower – they had a market for it locally. India has never had a crying need to export fabric before. But investments have been made in the last five years and things have begun to move forward. New mills are emerging in India whose primary focus is supporting the apparel sector locally and overseas.
Q: After the tsunami, there was talk of duty-free/reduced duty benefits into the US. What is the current status… is this likely to transpire? What is the government – and the associations – doing in this respect?
A: There are two bills under consideration by the US currently. The TRADE (Tariff Relief Assistance for Developing Economies) bill has already been presented; and though Sri Lanka was not included in it initially, subsequent to the tsunami, our name was added to the bill. This bill advocates duty-free access into the US for certain developing countries.
Q: The EU is known to be a high value/low volume market. Does this solve Sri Lanka’s problem of filling capacity and keeping order books full? Wouldn’t the US – known to be mostly high volume/low value – be more what Sri Lanka needs?
A: So far, access to the US has been much easier for us. But in the last four to five years, with the abolition of quota into the EU, there has been considerable growth of business into the EU. And now, with total duty-free access, Sri Lanka’s exports into the EU will continue to grow.
Q: Based on the Indo-Sri Lanka FTA, India allowed a certain quota of garments to be exported to India under duty-free/reduced duty measures. Are garment companies here taking advantage – and if not, why?
A: The FTAs with India and Pakistan are good starting points but the concessions are not significant enough to entice Sri Lankan apparel manufacturers. In fact, it is hard work and restricts both Sri Lankan exporters and Indian importers. The countries need to re-look at the trade concessions and streamline the process of trading with each other.
Q: Are there any lacunae in the FTA, in your opinion?
A: There are so many constraints, particularly at the Indian end, on protecting local industries that it makes it difficult for the exporters. The FTA falls short of expectations and hampers the ability to utilise them effectively. Which Indian apparel manufacturer will send Indian fabric to Sri Lanka to be manufactured and shipped back again, when apparel manufacturing is available right at their doorstep?
So we have been pushing for them to use Sri Lanka for manufacturing along with third party raw materials. Although India is operating in an era where trade barriers are being brought down, its trade barriers are still fairly strong.
Q: The local Indian market is booming – not just for exports but sales of newer brands in the local markets. Are any of the local groups considering targeting the vast Indian market?
A: Being 22 miles south of a population of a billion, we naturally want to be able to supply to that market. And I believe that, given the right conditions, we can compete in the Indian market in the same manner.
Q: Is an FTA with the US a possibility in the near future? What is the government doing in this regard?
A: I feel we were almost at a stage when an announcement would have been made to commence negotiations towards an FTA between Sri Lanka and the US. But due to a change in the political environment in Sri Lanka and alteration in policy guidelines that favoured the FTA, the process became hard. And the FTA took a back seat.
It is critical for a country such as ours to develop a strong, preferential trading relationship with the US, which is one of the largest markets in the world.
Q: Sri Lanka’s garment exports to the EU fall far short of the Generalised System of Preference (GSP) Plus offered. What is Sri Lanka – and its apparel organisations – doing to fill the gap to avail ourselves of GSP Plus benefits?
A: Since Sri Lanka does not have a strong base in woven textiles, we can use the double transformation benefit only when it comes to knitted fabric.
Also, the 50 percent component of the other benefit of value addition needs to be reduced or else we will not be in a position to maximise its benefits. Most of the fabric coming out of South Asia is in finished form – which once again makes us unable to optimise that benefit. We need to reduce the component to about 35 percent.
Q: Has there been a retrenchment of garment workers in 2005?
A: There has been no major issue about unemployment in the garment sector, perhaps because of mergers and acquisitions, where workers were absorbed into new ventures. Owners of businesses have certainly changed; but in most cases, the employees are not out of work.
Q: Is there an influx of garment workers from places like Dubai? If so, how are they being accommodated into the local garment industry, considering that many of them are trained and qualified workers?
A: Countries such as Bahrain have picked up considerably and operations that closed down in Dubai have moved there, taking the workers with them. I think Bahrain already does have – or is on the verge of obtaining – an FTA with the US. We were very concerned about the potential influx of unemployed repatriated workers into Sri Lanka but it has not happened.
Q: Could absenteeism be minimised if garment manufacturers spend money on setting up hostels and better facilities?
A: China has been very successful with this concept of having boarding facilities next to manufacturing units. The 200 garment factories scheme directed the industry towards the approach of taking work to the workers – rather than getting the workers to the place of work. Most workers come to work from their homes, which is also not a bad thing. This ensures the socioeconomic stability of the village. But perhaps factories close to urban centres may have to consider lodging facilities.
Q: Does local labour continue to be an issue – or is something being done by the government to smoothen out the rough edges?
A: There is a need for labour reform, and this is being done in bits and pieces. But the problem is that it is such a sensitive issue in this country.
At the same time, it is important that the government does not – for reasons outside economic ones – raise the cost of Sri Lankan labour at the end of the day. After all, the garment industry is a labour-intensive one. If the cost of labour becomes prohibitive, then whatever we do will be insufficient to keep the industry going.
Q: How does the high cost of electricity affect factory overheads?
A: The cost of electricity, and the availability of both water and electricity, are very relevant – especially for the supply chain of a manufacturer.
As a result of the high cost of electricity, the cost of production also goes up. Thus, Sri Lanka’s cost of fabric and trims is higher than that of India and China. These raw materials constitute 60-65 percent of the product, which makes us uncompetitive instantly.
Q: What level of delays does the country’s poor infrastructure impose on delivery schedules?
A: With a majority of the industry’s manufacturing facilities located in rural Sri Lanka, poor infrastructure facilities result in a three to four day increase in lead time for a basic product – and as much as two weeks for more embellished products.
Given that Sri Lanka targets a niche market of better retailers and brands – to whom speed and flexibility is critical – the increased lead time is a significant disadvantage.
Q: Could you list out the main achievements of TAFREN?
A: TAFREN’s main achievement has been in looking at assessing the damage caused by the tsunami holistically, providing a framework for the implementation of reconstruction in all sectors within a short period of time and getting key funding agencies such as the World Bank, the Asian Development Bank (ADB), the Japan Bank for International Cooperation (JBIC) and other donors to commit their financial resources for reconstruction.
The media is underestimating the extent of destruction – and also, the resources required for reconstruction. Even large donor agencies do not have the capacity to cover such a wide area of destruction. Moreover, the state machinery does not have the skill base to cope with this.
Q: Why are NGOs still complaining of inadequate communication if TAFREN is supposed to be the focal point?
A: There are issues on both sides. There may be issues that TAFREN needs to address with regard to communication and issues where the NGOs are answerable. In the area of housing, most of the smaller donors are already handing over homes to the beneficiaries. Larger NGOs are also struggling… building capacity, conscious of the fact that people are getting impatient.
Criticisms of NGOs that are not necessarily completely accurate make the rounds but they are also constrained by the speed of the state machinery. The enormity of the task, the non-availability of capacity – in terms of masons, engineers and so on – and the speed of state machinery have contributed to a slowdown in the reconstruction process.
And yes, donors also have convoluted bureaucratic processes of administration – and that too hasn’t helped.
Q: What is TAFREN doing about lobbying the government to decide on buffer zone areas? Why is there so much delay in releasing land?
A: I think there was clarity in the statement for a buffer zone within 100 metres of the coast and outside, and also when the policy was defined. Exceptions to this policy were also clearly stated especially when it came to the tourism and fisheries sectors.
The government is right not to make too many exceptions to the rule; otherwise, there will be too many people taking advantage. Now, the coastal conservation department will determine whether a particular area needs to be treated differently.
Q: In your opinion, what percentage of reconstruction remains to be completed?
A: Almost 80 percent!
Q: Is too much being expected of the tsunami funds received to date? For example, for righting all the wrongs ailing the country’s infrastructure?
A: Everybody is under the impression that tsunami funds are in the hands of the government. But the fact is that the funds are in the hands of NGOs and other institutions. These organisations deal directly with contractors for reconstruction. Until now, only 10-20 percent of pledged funds have been spent.
The process of releasing land and getting approvals was halted because the survey department went on strike. Also, the Urban Development Authority has never had to work under such pressure – and it too is struggling to cope.
Q: Are there any tsunami affected areas that need greater attention than others?
A: Schools are not coming up as fast as they should. And neither are hospitals. So I feel the health and education sectors – apart from shelter and livelihood – are areas that need to come up fast.
Q: Would you say the relief stage is actually over in the sense that people are back to their livelihoods/earning incomes independent of handouts?
A: An element of relief still lingers – because unless you give them their homes and livelihoods, complete recovery is not possible. We have been unable to reach out to all of them as yet.
Q: ILO findings indicate that microfinancing remains an urgent requirement but that many banks hesitate because applicants do not have collateral. Is TAFREN doing anything about this?
A: The central bank has set aside some funds to help small businesses but I believe that these funds have been exhausted. I am not aware of any more details.
SWOT ANALYSIS
APPAREL INDUSTRY
STRENGTHS
The ‘Sri Lanka’ brand…
People understand international business, and adopt ethical and reliable business practices
Manufacturing good quality products, not providing a sample that is great and the bulk quantity of a different standard
Compliance with health and safety standards
English language skills in comparison to China, where just a few people may speak English in the entire factory – and if they are not available, you can’t get anything out of them Disciplined, literate and skilled workforce
WEAKNESSES
Being slightly behind other countries in:
Not having a supply chain and proper textile infrastructure
Not having dedicated zones that provide utilities such as electricity at competitive rates
Not having a base for other supply chain services
No technical and design skills
No proper merchandising skills
OPPORTUNITIES
With pressure on China, lots of buyers, retailers and brands are looking for alternatives to China
Sri Lanka has a tremendous opportunity to position itself as an outstanding alternative in active wear, children’s wear, casual wear and intimate apparel
THREATS
We have to be careful about being competitive internationally – not only in comparison to countries such as India, Vietnam and Indonesia
I believe there is another way of looking at this: we can’t view ourselves in isolation. We have to look at ourselves in relation to the rest of South Asia and see how we can leverage on each other’s strengths to perform well as a region. If we attempt to play in the huge global arena by ourselves, it will be a daunting challenge.
GLOBAL PERSPECTIVE
SRI LANKAN EXPANSION
Q: Has Sri Lanka’s percentage of global garment manufacturing decreased or remained the same
in 2005? What are the projections for the medium term?
A: The percentage of Sri Lanka’s business has grown! Our exports into the US have grown because of constraints placed on China, as better brands want to work with us since we comply with international standards. The average Sri Lankan factory is far superior to most factories in the apparel industry in the region.
Brands such as Victoria’s Secret, Abercrombie & Fitch, Nike, Marks & Spencer, Banana Republic and Gap are growing steadily in the country. We are optimistic about the fact that we will end the year on 15 percent growth, with the second half of this year being much better than the first. Instead of becoming a disaster story for the industry, 2005 is turning out to be a year that is changing the course of the industry in this country – and changing the way we do business… a year that is creating a more focussed supply base. This is expanding the role of suppliers, from being just suppliers of products to suppliers of value.
THE NEXT GENERATION
BILLION DOLLAR ENTITIES?
Q: On a level playing field, Sri Lanka is considered more expensive than neighbouring countries. The cost of basic amenities and essential utilities is increasing, instigated by spiralling inflation. Should the government be offering subsidies to exporters, as there is a lack of foreign exchange in the market?
A: The fact that funds have been set aside for small and medium enterprises at subsidised rates is already an incentive. But I think there will be a need to provide utilities at competitive rates. But as fuel costs are so high presently – and the government is already subsiding that – it is less open and encouraging towards concessions to the industry, as resources and funds are scarce.
It is important for the government to create an environment for at least 15-25 Sri Lankan companies to become one billion US Dollar multinational enterprises that form the backbone of the local industry by say 2010-2015. We also have to redefine the role of small manufacturers, and put in place policies and incentives to create this new breed of companies.
THE EXPORT SECTOR
SUSTAINING THE AGRARIAN ECONOMY
Q: What else needs to be done to boost the country’s export sector in general?
A: Historically, other sectors such as tea and rubber have played their role. But I am of the view that there is a need to bring professionalism into these sectors, to upgrade technology, and improve productivity and quality.
This need goes beyond these sectors to other categories such as agricultural products as well. Sri Lanka, which was primarily an agrarian economy, embraced industrialisation without having a clear strategy on how we could sustain the agricultural economy side by side.
One of the successful sectors to take root was the apparel industry. Unfortunately, we missed the opportunity in moving ahead in the IT sector.
POST-TSUNAMI RECONSTRUCTION
COVERING LOST GROUND
Q: How do you see Sri Lanka in the post-tsunami reconstruction phase? What do you feel will be the long-term negative effects that will need addressing?
A: The first step is to restore what we have lost. Not only what was lost due to the tsunami but also due to hostilities between the government and the LTTE. We have yet to first recover from that. It could take a decade of growth, at a minimum rate of 10 percent, to cover lost ground.
The key area the government needs to focus on is improving infrastructure – because if the main arteries of business are closed, how can you expect economic development? Whether it is roadways, ports, electricity or water, the environment should be conducive and business-friendly. There should be a healthy dialogue between the government and the private sector. There should be conditions for greater competitiveness in the industry to compete globally.
