Can Sri Lanka Apparel Industry Face Future Challenges?

Can Sri Lanka Apparel Industry Face Future Challenges? 1. Sri Lanka has traditionally been an agro-based economy from the ancient time. With the Industrial Revolution taking root in Europe and later spreading to the rest of the world, Sri Lanka too had to take its place in this scenario. Factory scale production of ready made garments in Sri Lanka had its beginnings in the early 1950s to become the largest industry in the Sri Lankan economy. During the pre-liberalization era (pre-1977), the domestic textile industry was essentially an import substitution industry confined to a few large-scale textile industries run by the government. The textile industry did not make much progress during this period. The garment industry has its origins in the mid- 1960s, but unlike the textile industry, the former was mainly run by the private sector. Initially, almost all of the garments produced were for the domestic market and there were hardly any exports during this period. A large share of the industry was in the hands of few companies. Since the importation of textiles was either banned or restricted, locally produced textiles mainly fed the garment industry. GARMENTS: All external and internal finished common clothing items such as shirts, T shirts, pants, dresses, sports clothing, fashion garments, under garments etc. APPAREL : finished clothing that can be considered as supporting clothing or accessories such as jackets, lingerie, leather clothing, knitted garments, shoes, hats, gloves, fashion accessories etc. 2. The period after the late 1970s saw a rapid expansion of the garment industry in Sri Lanka. The phenomenal growth during this period can be attributed to three major factors: a. The first is the market-oriented liberal economic policies introduced in 1977, which placed greater emphasis on the export-led industries. b. The second is the supportive measures taken by the government through the Board of Investment, such as duty free importation of industrial inputs, off-shore borrowing facilities, tax holidays or concessional taxation, etc. These measures together with the availability of labour- intensive industries such as garments. c. The next important factor which contributed to the Sri Lankan apparel industry is the Multi Fibre arrangement ( MFA ). AIM 4. The aim of this research is to discuss about the apparel industry in Sri Lanka and analyse the future challenges. CHAPTER TWO METHODOLOGY STATEMENT OF THE PROBLEM: 1. The apparel sector had grown tremendously after introducing the open economy. Now it has become the leading export industry replacing the traditional tea and rubber. It is the most significant and dynamic contributor of Sri Lankan economy. 2. The major drawback in the Sri Lankan apparel industry is that it has not upgraded with latest technologies and modern consumer demands to compete with the other countries, mostly the South East Asian countries. National economy will definitely be affected if the country fails to address the drawbacks in the industry. 3. The aim of my research is to identify the weaknesses in the apparel sector and to suggest favourable and appropriate solutions to secure the industry. RESEARCH HYPOTHESIS 4. It is hypothesized that the reason for not upgrading with the latest technology and consumer demands is lack of capital, incompatible demands and high competition.    SCOPE OF THE STUDY 5. The scope of the study covers an assessment of the ready made garment industry in Sri Lanka taking three well known factories in to consideration. Factors that had been an impact to the industry will be identified through the research and the root causes of the problem will be then be identified. Recommendations will be made for the improvement. METHOD OF DATA COLLECTION 6. The required data for the research will be drawn from the following sources; a. Primary sources Primary sources will include information collected by interviewing resource personnel in the garment sector. b. Secondary sources Information will be gathered from relevant books, journals, the internet, treaties, conventions as well as international and local enactments of relevance. CHAPTER THREE OVERVIEW OF THE APPAREL INDUSTRY HISTORY   1. The textile and clothing industry had emerged from a modest beginning in the early 1950s A few pioneering industrialists who started out on an uncertain course at this time , confident their manufacture to only some popular items of garments and catered essentially to local demand. By the end of the 1950s there was a reversal in policies and the economy moved towards restrictions on imports and a policy of import substitution in industry began to be perused. While the major basic industries were reserved for the state; a wide range of consumer goods industries were opened to the private sector , which was provide with various investment incentives and a protected market. Over the decade of the 1960s as many as 300 categories of industrial products began to be manufactured locally. Among this range of products a major item was textiles and another ready made garments, though from the outset raw materials required for the garments industry were imported. 2. It was in the late1960s that Sri Lankas ready made garments began to break into export markets. Sri Lankas shirts had found acceptability in markets such as the UK and Soviet Union and a leading shirt manufacture began exporting up to Rs:2 million worth of product annually to the USSR, within the bilateral trade agreement between Sri Lanka and the USSR. 3. Around 1972 there was a change in outlook towards the industry as existing policy was altered to allow certain sectors to adapt an export oriented approach. Special foreign exchange allocations and other fiscal and tax incentives were offered to selected export oriented industries under this package. In the first six years of the 1970s over 2500 industrial units received approval from the Local Industries Approve Committee (LIAC) and of these nearly 2000 were in the product group of Textiles and Textile based industries. By the mid 1970s wage/ pries inflation and imposition of trade quotas on exports of traditional Asian Suppliers of made-up garments such as Hong Kong , Taiwan, South ,Korea and Singapore made Sri Lanka more attractive location for the industry. New units began to be established in collaboration with foreign capital/marketing, while production was being upgraded through import. 4. The period after the late 1970s saw a rapid expansion of the clothing industry in Sri Lanka. The impressive growth witnessed during this period can be attributed to two major factors. The first is the market-oriented liberal economic policies introduced in 1977. The market friendly economic reforms, which identified the private sector as the engine of growth, places greater emphasis on the export-led industries. 5. The second important factor which contributes to the remarkable expansion of the Sri Lanka textile and clothing industry is the Multi Fibre Arrangement ( MFA ). Sri Lanka is one of the countries that benefited from the quota hopping investments. The overseas manufactures of garment who relocated their production facilities in Sri Lanka include firms from both and Newly Industrialize Countries ( NICs) in East Asian and Europe. While the NIC firms moved their operations mainly as a means of quota hopping the motivation for producers of countries such as Germany and the UK to move into Sri Lanka was the rising production costs in their home countries. Given the ability to separate to different stages of the clothing industry, these overseas producers were able to disintegrate their production lines into low-cost countries like Sri Lanka without much difficulty. Investments by these two categories of foreign manufacturers fuelled the growth of the Sri Lankan clothing industry to a lar ge extent. In fact, the factories set up as joint ventures and wholly owned foreign companies account for almost half of the total exports earning from garments. MULTI FIBRE ARRANGEMENT 6. The Multi Fibre Arrangement (MFA) is a system of quotas designed to protect garment industries in first world countries by slowing down the pace of globalization. The MFA does not apply to the expanding garment trade between rich countries. 7. The MFA has had a complex but crucial impact on the development of the garment industry. In the Third World, by imposing limits on poor country exports, it encouraged investors to shop around for new countries. This because of the increase in volumes of ready made garment entering developed countries caused concern and eventually led the developed countries to seek the occurrence of The General Agreement on Tariffs and Trade ( GATT) to protect their markets. The reason for this concern was due to the fact that the industrialised countries never caused to be textile and garment manufactures because the industry employed a large number of women specially minorities and immigrants in the USA and Europe. GATT,s solution to the dilemma of the industrialised nations was the Multi Fibre Arrangements (MFA) which imposed quota restrictions on certain garment categories, there by limiting the quantity of apparels that could be exported to the developed countries by any single developing cou ntry. This curtailed the potential of countries like Hong Kong, South Korea, Mexico and Yugoslavia which were advanced textile manufactures. In turn it allowed countries like India, Pakistan and Sri Lanka to enter the industry with guaranteed markets. It was first introduced in 1974 and will end in 2005. As a result there was a world wide boom in the textile and apparel export industry in the mid 1980s. 200 GARMENT FACTORIES PROGRAMME (200 GFP)   8. In view of the infrastructure facilities and close proximity to the port and airport facilities etc. most textile and clothing manufacturers concentrated their operations in or around the Western province, where the countrys capital is located. As a result, unemployment one for the major problem faced by Sri Lanka continued to remain high in the other parts of the island. Growing unemployment resulted in youth unrest in most of the rural areas. Thus, in 1990,a Cabinet Sub-Committee recommended that garment factories should be opened in provincial areas other than the Western Province. Consequently, the 200 garment factories programme (200 GFP) was launched with the idea of opening at least one garment factory in each of the 200 Assistant Government Agent (AGA) divisions. The main incentive which encouraged the private sector to take part in this programme was quotas. For this purpose, the remote areas of the country were classified into three categories, namely non-difficult, difficult and most difficult. Quotas were allocated on the basis of the location for the industry. The more isolated and difficult the area, the higher was the quota allocated. While about 40 percent of the areas were identified as difficult, just over 40 percent fell within the most difficult category. The rest, just fewer than 20 percent, were classified as non difficult. In addition to quotas, the factories setup under the 200 GFP were also offered various other incentives such as tax holidays or lower corporate taxes, duty-free importation machinery and raw materials, loans from foreign currency banking units, etc. as the main thrust behind the 200 GFP was the high unemployment in the rural sector, each factory was intended to employ at least 500 workers. By the end of 1996, there were 154 factories in commercial operation under this programme, providing 76,821 employment opportunities.   CHAPTER FOUR THE ROLE OF TEXTILE AND CLOTHING INDUSTRY IN THE SRI LANKAN ECONOMY 1. The common features of developing countries are high rates of population growth, high rates of unemployment, low savings, insufficient capital formation, low investment, high capital output ratio, rudimentary technology and cheap skilled and unskilled labour. These countries are also mainly exporters of primary agriculture products. Further being too small to achieve economies of scale in their domestic markets, these countries have adopted export led growth policies which are designed to generate foreign exchange and expose the productive factors of the country to the stimulus of competitive influence. 2. The textile garment industry there for became the initial response of developing countries to this call for export led growth. Being a labour intensive industry requiring a small capital base. Production of textile and apparel shifted to developing countries in the 1960s. It provided employment for a large number of persons earned foreign exchange allowed for diversification of the export industry and paved the way for industrialization. Some countries attracted foreign investors by opening up free trade zones. Many critics called it textile led growth. 3. At the time Sri Lanka began to pursue liberal economic policies in 1977, the textile and clothing industry played only a minor role in the countrys economy. In the light of the broad based economic liberalisation and the benign impact of the MFA, the industry since then has recorded a remarkable growth and assumed a key role in the economy. While garments accounted for the largest share of all commodity exports (27 per cent) in 1986, it became the largest foreign exchange earner (US$ 0.4 billion) by 1992, by 1995; garments export exceeded US$ 1.5 billion, nearly half of all commodity exports. 4. Of the 21 percent contribution made by the manufacturing industries to the countrys economy in 1996, 40 per cent was from the textile and clothing sector. The growth of the garment industry was particularly rapid in 1992 and 1993 due to the attempts taken by the government under the 200 GFP decentralise the industry away from the Western Province. Although the textile and clothing sector registered a slow growth of 5.1 per cent against 14.8 per cent in 1995, it still accounted for 33.7 per cent of the growth witnessed in the private sector industrial output. (The slow growth in 1996 was primarily because of the continued power cuts due to prolong drought). According to the Ministry of industrial Development, there has been a total of 859 garment factories at the end of 2001 while the number of textile manufacturing firms stood over 140, with less than 10 companies accounting for most of the output. The largest garment factories (in terms of employment) were located within the free -trade-zones (FTZs) run by the Board of Investment of Sri Lanka (BOISL) the authority responsible for the promotion of foreign direct investment. 5. Today the textile and clothing sector has replaced the tea industry the traditional front line export industry as the leading foreign exchange earner. Specially, the growth of garment export has been highly impressive. For instance during the period 1980 to 1990 the value of apparel export increased from US $ 100 million to US $ 620 million. In terms of quantity, the exports grew from 52 million pieces to 212 million pieces during the same decade. Exports of garments, which were only 10 percent Sri Lankas total export in 1980, reached nearly half in 1993, registering in average annual increase of 30 percent. In 1996 the textile and clothing sector accounted for 46 percent of the countrys total export earning. Its share among the industrial exports reached as high as 63 percent. The highest growth, (21 percent) was in the woven fabric categories. 6. The textile and clothing sector has also been an outstanding source in generating employment opportunities. Being a highly labour intensive industry, this sector has been successful in absorbing a fairly large number of workers. By end of 2001, garment sector provided direct employment to approximately 391682 personal. The garment sector as whole represented about 14 percent of the 5.5 million of the countrys total employed work force. Approximately 40 percent of which was engaged in the textile and clothing sector. Of the total work force employed in the textile and clothing industry, more than 60 percent was with the clothing sector. CHAPTER FIVE PRESENT POSITION OF THE SRI LANKA APPAREL INDUSTRY MAJOR MARKETS OF SRI LANKA 1. Since more than 90 percent of exports from the Sri Lankas textile and clothing industries consist of ready made clothing, the focus here is on clothing. Sri Lanka currently maintains bilateral textile agreements in the context of the MFA with Canada, the EU and the USA. More than 90 percent of Sri Lankas exports of clothing are accounted by only two markets, the EU and the USA. The USA continues to account for about 60 percent of total clothing exports from Sri Lanka. About 90 percent of exports (by value) to the USA consist of quota items. The bilateral agreement between the US and Sri Lanka contains more than 30 quota categories, covering over 50 clothing items. While the quota performance against the US market is generally high, utilisation rate of certain quota categories such as knitted shirts and blouses, trousers, underwear, coveralls, and overall, terry and other pile towels etc. has reached almost 100 per cent during the recent years  [1]  . 2. The EU has been absorbing about 35 percent of Sri Lankas total exports of clothing every year. The largest buyer of Sri Lankan garments within the EU is the UK (about 45%) which is followed by Germany (about 20%), the Netherlands (about 9%), France (about 5.5%), Belgium- Luxembourg (about 5% ) and the rest Sri Lankas exports to the EU has been subject to quotas under four categories namely, trousers, blouses, shirts and jackets. The utilisation rate of quotas of the first three categories (most sensitive ones) during 1996 was 84 percent, 100 percent and 73 percent respectively, while the rate of the fourth category was nearly 30 percent. Canada continues to account for about 1.5 percent of Sri Lankas total exports of garments. While Sri Lankas bilateral textile agreement with Canada contains about 15 product categories under quotas. THE ABOLITION OF QUOTA SYSTEM 3. Sri Lankas apparel industry is now a major contributor to the countrys economy after its modest beginnings in the seventies. It represents 54% of our total exports and 71% of Sri Lankas total industrial exports. The garment exports make a direct contribution of 7% to the overall economy. The rapid growth of this industry could be attributed to the followings: a. A stable market because of the quota system. b. Low labour cost. c. Liberal economic and trade policies. d. Tax benefits and the concessions granted to the industry. 4. From its inception the quota system was a boom to Sri Lankas apparel industry. The availability of a stable market eliminated the danger of competition from established industrialists in the international field, and attracted direct foreign investment and helped Sri Lanka prosper in this industry. 5. Although the abolition of quota system in 2005 had a negative impact on the industry it also opened up an expanded free market. As such the future of the garment industry in Sri Lanka will depend on our ability to face competition. One third (1/3) of the total exports from Sri Lanka are done by 25 large scale manufacturers. These organizations are in a position to restructure and sustain themselves in a competitive market according to surveys. But the survival of the other small and medium scale industries is at stake, making the situation critical because these small and medium scale manufacturers are the biggest employers in the apparel industry  [2]  . SWOT FOR THE APPAREL INDUSTRY 8. Strengths.   The product quality level for the current market segments is considered high Reputation as a country which follows labour laws and good working conditions. The product price ranks second with large customers confirming that price quality relation of Sri Lanka is good On time delivery is the third best strength with effort towards reducing lead-times. Availability of skilled labour, educated and trainable work force and management of production capacity and ability to handle high volume orders are also considered strengths the Sri Lankan industry presently possesses. Apart from those the geographical size of the country facilitates easy movement with in the country serves a further advantage  [3]  . 9. Weaknesses. The weaknesses in the Sri Lankan industry can be listed down as follows; a. Lack of marketing skills with over dependence on buying officers, and allocation of quotas. b. Low level of marketing information, and knowledge about export marketing with hardly any marketing activities. c. Lack of fabric base and over dependence on input suppliers with long lead times d. Lack of a strong work ethic along with high absenteeism and labour turn over. e. Warm climatic condition of the country which reduces productivity f. Increasing cost of labour and availability of employment in other industries and foreign employment opportunities 10. Opportunities. To overcome the loss of orders due to the expiry of Multi Fibre Arrangement after year 2005, the position in the traditional export markets in the USA and UK by should be strengthened by establishing a strong relationship with distributors and buyers and developing an expansion strategy for the markets with good potential. Thereafter the opportunity exists to gain a higher market share by implementing an aggressive marketing strategy in the markets, where Sri Lanka has a weak positioning. Further there is a very good opportunity to capture a bigger market share in the EU: As at present Sri Lanka is not with in first 15 exporters to the EU. 11. Further opportunities exists in capturing the South Asian Market especially the High Price garments with designer wear and Intimate garments, a market where Sri Lankan Manufactures are now experts in producing and marketing. The available free trade agreements should be exploited in trade between India and Pakistan to export finished garments and to import fabric and accessories. It is also important to establish and identity for of Sri Lanka as a destination, which manufactures very high quality garments   12. Threats. The threats to the present Garment Industry are as follows; a. An intensification of the competition, especially from the sub Asian member countries, before and after the phasing out of the MFA. b. Improvement of the former socialist economies, who have a good textile industry and a large domestic Market which are highly potential and geared to meet the quality and delivery requirements especially from EU. c. The arrival of new competitors in the Asian sub continent such as Vietnam, Cambodia , Myanmar and Laos. d. Special advantages created for the USA market by the NAFTA, consolidation and other regional economic cooperation e. The increase in Sri Lankas labour costs at a faster pace than productivity f. The necessity to reduce lead time from the manufactures to the shop, and the distant suppliers inability to deliver the value added garments on time g. Successive government has not addressed the issue of low productivity, and even at this stage a government funded garment manufacturing and production management training institute has not been established and this posses a threat to the industrys future h. Geographical location of the country. Sri Lanka is located at the furthest end of the Indian Ocean, when compared with other competitive garment exporting countries, which export to the USA, EU and other wealthy nations. Almost all the countries, which are geographically located close to Sri Lanka are under developed and, low income countries struggling to survive. CHALLENGES FACED BY THE SRI LANKAN APPAREL INDUSTRY 13. In the recent past, the global garment industry has been subject to significant changes in terms of changes in consumer demands, changes in technology, and fierce competition. These changes have also filtered down to the Sri Lankan garment industry and there is now considerable pressure on the industry to each higher standard of production and service. 14. As the garment industry is a relatively low skilled and labour intensive operation, over time there has been a shifting of production from countries such as Hong Kong. South Korea and Taiwan to low wage countries such as Bangladesh, India and Sri Lanka. As this process of shifting (or shifting comparative advantage) has continued, Sri Lanka has gradually lost its low labour cost comparative advantage. 15. As the majority of Sri Lankan manufactures currently produce standard garments where competition is primarily based on price, Sri Lanka faces stiff competition from other developing countries of South and South East Asia where production cost is low (India, Bangladesh, Pakistan, Indonesia, Cambodia, Laos and Vietnam). China has also emerged as a dominant force in the global apparel industry with its massive supply capability and low costs of production. These countries have a lower ranking in terms of cost of production in comparison to Sri Lanka. Given this situation, there may be a need for Sri Lanka to move some of its exports to the top end of the market as a reputable and dependable supplier of quality apparel in Asia. In the higher value clothing segment, countries such a Malaysia, Korea, Singapore, Hong Kong and Japan are serious competitors  [4]  . 16. While Sri Lanka s global market share has been recorded at 1.5 percent, more recent estimates indicate that there has been a marginal increase, and stands at 2 percent of the global garment market. During the period 1995 to 2000, Sri Lanka maintained a 19 percent export earning growth in the garment industry. If there is a lifting of the US tariff barriers for Sri Lankas apparels, then according to some commentators there would be a significant increase of exports. As mentioned earlier, although over 90 percent of Sri Lankas garment exports are destined for the USA and the EU, Sri Lanka does not rank amongst the top exporting nations to the EU. Sri Lanka ranked 20th and 16th place among suppliers of apparel products to the EU and the USA market, respectively, in 1998. The positive feature is that the Sri Lankan garment manufacturers, in general, have built up a good rapport and sound reputation the world over. It is a great advantage when compared to her competing neighbours. 17. Buyers now have a range of sources from which to choose, and countries such as Mexico (supplying to the USA) and Turkey (supplying to the EU) have the added advantages of being in close proximity to their major markets, lower transport cost and shorter turn-around times. Moreover, Mexico and free of quota restrictions access to their major markets. 18. One factor contributing to this reduced level of price competitiveness is the increasing cost of labour in Sri Lanka compared to other garment producing nations. Labour costs have been steadily increasing and currently constitute between 15-30 percent of total production costs in the average Sri Lankan garment manufacturing firm, highlighted the hourly wage rates of a number of garment manufacturing nations and indicated that Sri Lankas competitors currently have relatively lower wage cost structures. For those competitors who gave higher wage cost structures (and higher global market shares), their strengths lie particularly in their high levels of productivity. HOW SHOULD WE FACE THE COMPETITION? 18. The researcher recommends the following changes to preserve the garment industry in Sri Lanka. Developing Skills Of Labour Force The skill level on high speed machines have been found to be in sufficient. This resulted in low efficiency levels and low Needle Down Time. Which are two important performance measurements in the garment industry. Intensive training to upgrade skill level, parallel to technological advancement is important to gain a competitive advantage in the garment industry. b. Establishment of a Government Administered Garment industry related training institute. It is recommended to the government, at least at this stage to focus on this issue, and establish a dedicated training institute for all levels of employees in the apparel industry, as the future of thee industry and employment of 350000 personnel will purely depend on countries competitiveness on productivity and cost of labour. e. Increasing Needle Down Time (1) Use of Modern Machinery Needle down time could be increased through training and use of modern advanced machinery. Introduction of modern machines as under bed trimmers and computerised machines will speed up the sewing process and assist the operator to use other advanced facilities of the machines. (2) Reduction of secondary activities Needle Down Time (NDT)could be further increased by following General Sewing Data Standards, which indicates the ideal movements by machine operators to reduced idle time and speed up the sawing process. f. Backward Integration. Due to lack of modernisation and technological advancement in the textile manufacturing sector the garment industry has to depend for its requirement on imported fabric. Therefore to be competitive backward integration is necessary, but it requires high capital expenditure- is around US $ 25-30 million. In Sri Lankan terms this is a huge investment. Therefore it is prudent for Sri Lankan to concentrate from processing stage onwards and import grey fabric from abroad. Given proximity to Asian producers fabric can be soured with minimal lead time. Joint ventures, strategic alliances, etc. will be ideal if can be so arranged. g. Export Alliance. A group of small / medium sized companies with not so unique products and only limited funds available for export market development can form an export alliance. This group of entrepreneurs exporting can exploit the market much more professionally than an individual. In addition they can benefit by sharing the very heavy marketing expenses and the orders received from buyers. h. Product Quality. As the cost of fabric constitutes a major share in the unit cost of garments, a great deal of attention has to be paid for quality controls at the fabric level. An integrated approach in quality assurance in the process from fabric to garments can be a powerful tool in using quality as a differentiation strategy for competitive advantage. i. Management of Lead Time. Lead-time taken by Sri Lankan exporters around 60-120 days is a