Textile Industry of Pakistan – Industry Overview
Textile industry in last years has grown very fast. In 1947, there were only 6 spinning factories in Pakistan, which have now grown to the figure 503. The main factor behind the growth was the reduction in duties. The import tariff on cotton factories was reduced from 85% to 50% in 1985 and then to 20% in 1988. Also, in 1988 the restrictions on renewal and expansion of spinning and weaving factories were removed.
Pakistan is now the fourth largest cotton grower in the world behind China, USA and India. Textile has become the most important industry for earning the foreign exchange. It accounts for 60-65% of the foreign exchange earned in a year, which is approximately $5.5 billion.
Current situation in the textile industry is not very promising. The process of cotton has increased in the recent period, in addition to this the electricity and sales tax have also increased. Cotton yarn price is decreasing and other input prices are increasing.
The textile process given below describes the activities taken in the textile industry
Ginning is the process in which picked cotton is cleaned and purified. The end product of the ginning is used to make yarn.
Spinning is the process by which ginned cotton is spun into yarn. Yarn quality is dependent on quality of cotton and spinning process.
Yarn is spun into Grey Cloth in the weaving process.
Grey cloth is printed and dyed through processing / finishing.
Fabrics are stitched into garments manufacturing process.
The slow down in economic activity in the Far east has begun to adversely effect Pakistan’s textile industry in terms of exports to Japan, South Korea and other South Eastern Asian nations are undergoing a recessionary period.
Many of the problems in the products of the spinning and the downstream industries are due to poor raw materials quality. Only about 5% of cotton crop is suitable for spinning up to count 50. Most of thee cotton grown is of thee short staple variety. It is the inferior quality of locally grown cotton that has led towards production of low count yarn.
The looms, spindles and rotors sector has been exposed to challenges of modernization and sophistication of competitors in world markets. Domestic machinery is of poor technology, scarcity of quality yarn and lack of institutional financing are also adding to its problems.
New markets are not being discovered and the rate of growth of yarn exports is lagging behind the rate of growth of domestic yarn consumption. Total profitability in the spinning sector of the KSE has been declining. The number of listed textile companies has shown decline in profits. Profitability is not likely to improve during 1998-99, as the domestic cotton crop is likely to be significantly lower than last years.
The spinning sector is thus not facing raw material or labor constraints. Its fundamental constrains on the supply side are technological obsolescence and financial mismanagement. It is these constraints which \prevent it from realizing its full potential in both the domestic and world market. Demand is major constraint. There is a glut in the international market and as inflation soars, domestic consumption of cotton based products will decline as people’s real income will fall.
Now the producers and exporters will only benefit from low mark-up are on export financing under the export financing scheme which provides loan 8% markup per annum. This low interest provides them an edge to get profit in the international market. The spinners are confident of earning an additional 500 million dollars from export of 30 counts of yarn.
Textile Industry is the largest Sector in Pakistan, but the export of textile has continuously declined during last five to six years. The major problem, textile industry is facing is the non- tariff barriers like ISO 9000 and ISO 14000. These standards lay greater emphasis on packaging, safety, and handling etc.
Although the Pakistani textile industry and subsequently spinning industry is faced with a lots of problems, but there is a ray of hope as this year a bumber crop of around eleven million is expected.The opportunity is the factor of low cost of production. Another opportunity for the textile industry lies in the formation of a Commission on textile Industry to look into problems and future planning aspects for the industry. These future aspects include creation of an industry engineering base for textile industry that include local availability of technical manpower, machinery and spare parts. For this reason the strategy of joint venture with European, Japanese and Korean companies will be followed
Price Fluctuation of Cotton in Pakistan
Raw cotton is called “Phutti” in Pakistan. The price of Phutti remained constant from 1972 to 1992, between Rs 300 to Rs 400/ Mound. In 92, due the intervention of some big players in the market, the price of phutti witnessed phenomenal hike, it rose to Rs.1000/Mound. The price of the phutti remain high for few years in line, but then it dropped to Rs. 350/Mound when governoment abolished the restrictions on its trade.
The reason for the phutti prices to remain low for all those years from 1947 to 1992 was that the spinning sector was very strong in monetary terms and it was in the interest of this sector that the prices of raw cotton should be kept low.
In 1992 some powerful politicians influenced the prices of phutti to rise artificially this rendered Pakistani exports unfeasible for the foreign markets, the phutti price was again lowered to make the export of cotton products possible.
The problem was that the government itself does not know the actual estimates of the cotton till it reaches the market for sale. In 1998 the government committed the mistake of relying upon the information collected through patwaries. They over estimated the cotton crop and even allowed the export of cotton this resulted in the acute shortage of raw cotton.
This year in addition to a bumper crop we also have last year’s imported imported cotton. The price of the cotton is therefore quite low.
ROLE OF GOVERNMENT
Privatization and deregulation has placed the private sector in the commanding position in shaping the market. The government has stepped aside to play a supportive role limited only to the provision of institutional framework to tackle market imperfection.
The Spinning Sector and The Trends of Yarn Prices in the Market:
In the textile sector in Pakistan, most of the investment came in the last three decades. In this sector we have the most advance machinery and thus our cotton yarn has high demand. There are approximately 500 spinning mills working in Pakistan. Their total yearly consumption is 8.5 million bales of cotton approximately. The prices of the cotton yarn vary directly with the prices of cotton but the cotton prices take sometime to effect yarn prices. This delay is dependent upon the production cycle time for cotton yarn
The brokers form a important part of yarn market, they act as middle man between the cotton grower and spinning mill. In 1992 when the cotton prices rose considerably and the spinning mills which were already heavily indebted lost their financial viability. It was during this period that brokers came into scene; they bought the yarn at about 5% less price and sold this yarn at 3% to 9% premiums to the weaving industry.
The point here to emphasis is that the spinning industry is still in the stranglehold of the brokers and to get out the influence of the brokers the spinning industry would need capital.
|Production Export and Domestic Requirement of Cotton Yarn|
|Period||Production||Mills Consumption||Export||Available For Local Market|
|Production Of Yarn Count Wise|
|Mixed & Hard||925386||1055228||1188270||123539||1326676||1380702||1475071||1530855||1542695|
|Market Share Position Of Yarn (Tonnes)|
|OTHER Asian COUNTRIES||43767|
General Threats faced by Spinning Mills
Spinners are contend with the export of course count of yarn to Japan and never bother to produce fine or super fine counts of yarn. The number of spinning mills is also out of proportion with the weaving and knitting units. This problem also has its roots in government policies of charging higher tariff to the machinery used in the weaving and knitting industry. Pakistan also has no textile engineering industry where these machines can be fabricated. This problem caused glut of yarn in the local market and the country was forced to export half of the yarn produced in Pakistan. This force Pakistan to remain exporter of low quality intermediate products likes yarn and grey cloth.
Offering area industry specific tax incentives encourages the setting up of spinning mill which has further pushed the investment away from the weaving and knitting industry.
The bullish trend prevailing in the capital markets in early nineties provided further impetus and a large number of Public limited units were established. This resulted in he phenomenal growth in the project cost. These units have large capital base and borrowed huge amounts. The equity was raised mainly through kickback. The cost per spindle, for a large number of the spindle worked out top be $110per spindle where as it should have been around $65 inclusive of the modest amount of kickback
The result is that most of these units are economically nonviable. The fixed costs are very high but the real problem is the exorbitant financial cost. These spinning mills suffer from low productivity and low quality. The other problem is that these mills are consume one and a half bales of cotton per spindle whereas they must consume at least two bales of cotton per spindle, this is the gross misuse of the facility and cotton.
Most of the mills persistently are producing course counts of yarn, which is causing two problems glut of course count and low unit price realization. The glut causes cut throat competition and low price realization effects the repayment ability of the mills.
Recent Surplus Cotton Crop
The question to investigate here is that how this surplus cotton crop is there, according to experts this year the spinners are caught at a wrong foot. Although there was no shortage of cotton last year they imported over one million bales that to at a very high price.
Traditionally, there are two pressure groups in cotton trade, these are growers and spinners. While the growers demand the highest possible prices, the spinners are willing to pay the lowest possible prices of the cotton. They also want the prices to continue to be less through the year. At the time of the release of the initial estimates of the cotton crop size the spinners and growers have a common motive that is an exaggerated output figure.
This unified estimate serves the motive of both the groups, as the growers want to give the high produce figure so that there will be no restriction on the export of the cotton. The spinners on the other hand try to project the high estimate of the cotton crop to either pull the prices of the cotton down or to hinder the upward revision of the cotton prices.
This unanimity in the estimation remains only for sometime as the governoment announces the cotton policy and the export orders start coming in the spinners change their stance and try to give an impression that there is shortage of cotton and there should be ban on export of the cotton.
This has been a regular feature from year to year. As during the last cotton season the initial estimate was 10 million cotton bales which was subsequently reduced to 8 million bales. The spinners also succeeded in convincing the government to urgently import cotton, hence one million cotton bales were imported.
BENEFITS OF REGULATED COTTON TRADE
According to some textile sector experts regulated trade of cotton can ensure its smooth availability as well as stability in its prices. The spinners also demand the regulated trade of cotton. The spinners have to learn to live with the ban on export of yarn of less than 20 counts. These counts have negative value addition or yield marginal profit the economic condition of the country demands high value addition. As the Yarn manufacturers are not ready to change their attitude there is a pressing need to change it through regulatory framework.
The reason for the persistent crisis in the textile industry is an absolute imbalance in spinning and weaving sectors. According to some experts, textile industry in the country is confined to spinning. It produces1.5 million tones of yarn every year. Out of this quantity 3% is consumed by the mills consume 3% ancillary sectors of weaving and knitting consume 64%and the 33% is exported to avoid the yarn glut inthe local market.
To a large extent the government of Pakistan is responsible for this imbalance but the industry can also not be pardoned for continued production of the coarse counts, misuse of superior quality of cotton for production of course counts and hardly any upward integration. Spinners are contend with the export of course count of yarn to Japan and never bothered to produce fine or super fine counts of yarn
CONTRIBUTION IN EXPORTS
Textile industry is the largest industry in Pakistan and a bigest source of earning foreign exchange, its salient features are as follows
Eport of cotton & cotton products (yarn, fabrics, Garment, & made up )
Constituted 54.91% of the total exports from Pakistan amounting to $4568.88 million of total export of $ 8320 million in 196-97.
Pakistan’s major exports are cotton yarn , cotton fabrics, ready made garments & other bed wear. Cotton yarn & cotton fabrics together constitute 32.3% in total annual export of the country. The textile industry is havily export oriented .Pakistan is exporting three types of cotton textiles to different countries of the world. Number one is cotton cloth, second is the cotton Yarn and the third one is cotton made ups.
MGM Corporation is very selective in the purchase of cotton. The highest quality cotton is used in all the production runs. To keep uniform quality, we acquire enough raw material during the cotton season which is sufficient for the whole year. The contamination is hand picked from the cotton before feeding it to the blow room to provide Maximum Contamination Control Yarn. It is also checked for color variation through Ultra Violet meter.
MGM Corporation’s standard line of production is cotton yarn ranging from 10 s/1 to 40s/1. Carded and combed for weaving and knitting with waxing facility. Due to excellent and consistent quality, MGM Corporation’s yarn enjoys high reputation in foreign as well as local market.
The following machines are involved in manufacturing process of high quality yarn.
Blow Room Trutzchler Shoot Feed System (Germany)
Card 24 sets Crosrol-MK4 (England0
Drawing 4 Sets Toyoda DYH 500 C (Japan)
Comber 4 Frames Hara (Japan)
Simplex 7 Sets Toyoda-FL 18 (Japan) 120 spindles each
Ring Spinning 36 Frames Toyoda-RY 5 (Japan) 480 spindles each
No. 7-11 Machconer 7 Frames Murata (Japan) 60 winding drums each
Humidification system LUWA (Switzerland)
Stand–by Generator 2 Units Caterpillar (USA)
Quality Control & Testing
Material being processed is carefully tested in a well equipped and the most modern laboratory to monitor the production of high quality yarn. The principle that we follow is
CHECK KNOW REACT = SUCCESS
MGM Corporation is a family business and according to company high ups the decsion making process is simple. In depth study and interviews with the officers has revealed that the decision making power rests solely with the chairman. Previously chairman used to deal directly with the brokers for purchase of cotton. As chairman is mostly out of the country he used to take these decisions from abroad. This resulted in losses as mostly the cotton purchased was over priced. But now this process has been changed. The open ended purchase and sale policy has been replaced with tight control policy. This has been done by appointing a general manager at the Karachi office, who is responsible for all the purchasing decisions. He comes under the control of Managing Director, who is the son of the chairman, and a foreign qualified professional. General manager remains in contact with the brokers, negotiates the price, brokers the deal and makes sure that the cotton is tested before cotton is delivered. General Manger is highly paid and earns nearly in six figures. Company has improved considerably since this new GM has joined the company. His over all image in the company is that of a honest and caring person. Most of the employees respect him and the directors also respect his decisions
Marketing & Sales
The sale process involves two segments one is the local sale and the other is the exports. Local sale is carried out by two techniques namely commission agents and direct sales by the Lahore office. Commission agents are the traditional sale agents operating in the spinning industry right from the beginning. They collect the yarn from the spinning mills and supply them to the weaving mills and in the process charge their commission. Some of the local sales are also carried out by the Lahore office. But the percentage of direct sales is very less. Customers within the country include all the textile and weaving mills. Around 250 to 300 customers exist only in Karachi and approximately 500 customers are in Punjab; this shows the potential of the market.
In case of exports the only channel used is indentures. These are again basically the commission agents who get orders from foreign customers forward it to the company and the company after receiving the letter of credit ships the goods to the customer. Again the agents get their commission. International sales are far more than the local. Seventy persent of whatever is produced is exported. The major target market for export is Far Eastern countries such as Korea, Hong Kong, and Taiwan.
Marketing efforts are mainly done by the Lahore office. Company’s marketing effort falls in the category of industrial marketing and the basic mode used for promotion is personal selling and word of the mouth.Exports to other major nations of the world such as America and Europe are limited because of quotes and other related issues. Secondly, after selling in local and traditional foreign markets nothing is left for these non-traditional markets.
Total average production of MGM Corporation is about 0.13 million bags per year that is approximately ninety five percent of the total capacity. Average cotton purchased during a year is 45000 bales/year; where as there are 160 Kilograms per bale and out of this cotton 82% is the final product (Yarn). Production is carried out in the mill under the direct supervision of the experienced mill manger. Another achievement of the company regarding production is the ISO 9000 certification for its production process.
There are approximately five hundred spinning mills operating in Pakistan along with that the major foreign competitors include SriLanka, Bangladesh, and India. This industry is highly competitive but the market is expansionary. Locally, there all the spinning mills and some of the weaving and knitting units that also produce yarn are competing with the MGM Corporation. However, the market size is large enough to provide room to all the players to sell their products.
MGM Corporations financial year starts from October 1 and ends at September 30th. Total asset base of the company has been approximately constant at around 353 million rupees. Company has been running in losses for the last many years. Cash flow position is also not very satisfactory and these are negative for the last two years. A careful look at the cash flow statement tells us some important facts about the liquidity. In year 1998 the cash flows from operations has been positive but cash flows from both the investing as well as financing activities has been negative. We can see that firm has invested in the fixed capital expenditure to the tune of Rupee 21,117140. Similarly company has reduced its financial burden by paying off Rupee 48,181,489 of its long term debt. Company’s cash flows have suffered from the financial burden. If this had not been the case the cash flow situation would have been positive.
If we look at the profit and loss statements for year 1997 and 1998 we can see that during 1997 cost of goods sold was approximately 91 percent of the sales, this percentage saw no significant change and was 92 in year 1998 resulting in approximately the same gross profit. Sales have grown by 13.54 percent which is quite a satisfactory figure but increase in CGS by the same proportion is not encouraging. Operating expenses have been under control and there is no dangerous increase in them. Even with such a high percentage of cost of goods sold operating profits are there, but again the financial burden cover up these operating profits resulting in negative net income.
Although the corporation is a family business of financially strong family the capital structure contains large amount of bank loans and debt, which results in financial charges of exorbitant levels washing away the operating profits.
The debt to asset ratio for the year 1998 is 92.5 percent which is highly alarming and accounts for the huge financial burden company has to face.
Experienced Mill Manager
The company has its manufacturing facility at Lahore- Faisalabad road and is managed by a very experienced manager. This manager has been associated with the textile industry for about 50 years. And he has been with the company since its inception. He has played a fundamental role in the design of the facility plus in he selection of the machinery.
Another strength of the company is the availability of the capital as the company is owned by a very rich family. The proprietor of the company also has a big business concern in UAE and has earned a reasonable financial fortune for the family.
The chairman who is also the proprietor of the company is a very experienced person, and has quite diversified knowledge about different businesses both locally and internationally. The Chairman of MGM Corporation is also the vice-chairman of Bolan Bank of Pakistan Ltd. And the managing director of a construction company in UAE.
The company has recently decided to stream line its important processes, which is evident from the fact that the process of buying raw cotton has been revamped. This practice, till the recent past, was solely done by the chairman. With whatever little market information chairman himself had, he used to broker the deals with the agents. Now the chairman has appointed a General Manager at the Karachi office to evaluate the offer and buy the cotton in response to the best offer only.
The location of the mill (Sheikhupura), marketing office (Lahore) and the head office (Karachi) add to the strengths of the company. As most of the local customers are around the Lahore region it becomes easy for the marketing manger there to deal with the brokers as well as the individual clients. Similarly Karachi is is the port city and MGM Corporation exports seventy percent of its products. This makes it easy for the export department to look after the exports.
The managing director of the company who is also the son of the chairman is a textile engineer, his qualification as a textile engineer is an added strength for the company. As he can understand the problems at operational level and is quite capable of handling them.
MGM Corporation is an active member of All Pakistan Textile Mills Association (APTMA). And this accounts for a major strength of the company as they are a part the forum that safe guards the interests of the entire textile industry. This forum provides a unified voice to industry in negotiating with different government agencies.
Periodic Financial Statements
Another strength of the company is the periodic review of financial health. Monthly financial statements are prepared and evaluated.. This practice enables the management to know where the company is headed and any contingency measures can be adopted. . This information results in the more effective control and planning of the company’s financial resources by the management.
State of the Art Machinery
Mill of the MGM Corporation boosts excellent state of the art machinery. Most of the testing equipment has been imported from Switzerland.
ISO 9000 Certification
The MGM Corporation is committed to maintain high quality standards throughout its operations. This is evident from the fact that the company has achieved the ISO 9000 certification for its production process. Which indicates the quality standards maintained at the company’s production facility.
The very first weakness of the company is the “Seth Culture” prevalent in the organization. As MGM Corporation is a family business thus typical Pakistani style of management is practiced in this corporation resulting in low level of employee satisfaction and motivation.
There are no employee training schemes or workshops. No refresher courses are conducted and there is no formal method of improving the employee performance levels. No training is given to the new graduates that join the company. Even the old or experienced employees follow the age-old practices and procedures.
Incentive or Reward Criteria
There is no performance evaluation method or reward based incentive schemes. Although there is a yearly appraisal system but that has a very limited importance. This results in lack of interest on part of the employees. The only criterion for increments is your relations with the Managing Director or chairman. These things contribute to the traditional leg-pulling attitude common in Pakistani organizations.
Lack of Interest in the Business
Chairman of the corporation has a diversified portfolio and is usually out of the country looking after other businesses. Income flowing from other businesses is quite hefty which has resulted in a very indifferent attitude of the chairman towards the business. Chairman seldom visits the company offices and the decisions he makes are often without any prior knowledge.
Use of Information technology is very limited. Even in the traditional area f accounts the use of modern technologies is restricted. Company uses the traditional techniques of book keeping. No data bases or networking is there. Data is stored in the shelf and it usually requires lot of effort if some old information is to be seen. Similarly it also becomes difficult to balance its accounts between the Lahore office and the Karachi office. The modern office equipment that can be seen at the head office are two personal computers without any networking or sharing.
In the present business environment the human resource factor has attained most important position than any other factor. The present business scenario is getting more knowledge intensive but as far as the work force at MGM office is concerned they still lack behind some of their competitors who have more educated work force. They have very low number of business graduates looking after their functions.
MGM Corporation is a typical Pakistani business and it shares some of the basic shortcomings that are inherent to Pakistani businesses. MGM Corporation is totally void of strategic approach. Most of the decisions are done without keeping in mind the long term objectives of the company. The company management lacks the strategic sense.
MGM Corporation follows the functional departmentation structure. However, the departments are so vaguely defined that there is no separation of concerns and mostly they are interfering in one another’s work. Accounts department is the main department and it overlooks all others. Another problem that this vague departmentation causes is that if something goes wrong there is no one who can be blamed or even in case of an achievement everybody claims for it. Similarly this vague departmentation has the effect that overall performance evaluation of different concerns like accounts, export and purchasing becomes more difficult. One man overlooking many areas, like Mr. Nadeem Naz accounts manager also takes care of exports, further complicates the situation and increases the burden on that person. Such arrangement even effects the performance of that person because in above case Mr Nadeem Naz is basically an accountant by profession and he has to look after the exports..
Company faces another threat of declining exports. Pakistan’s share in the world export of textile is declining. Pakistan’s share in world export of cotton yarn was 34.9% in 1992 that came down to 28.3% in 1995.
The seven-month period that is July 1998 to Jan 1999, witnessed a 13 % decline in export s of textile products as compared to the export performance in the corresponding period last year. The export of textile products included cotton yarn, fabrics and made ups constitute 60% of the country’s exports. According to available information, the textile exports registered a steep decline of Rs 8 billion during the month of Jan 1999.
The monthly export figures reveal that exports of cotton related products dropped from to Rs 12836 billion from Rs 20.60 billion by the end of the last year. All Pakistan Textile Manufacturers Association (APTMA) sources while expressing their concern, revealed that exported of cotton dropped from 25percent value and 15 percent in quality and cloth fell in 16 percent in value and 6 percent in quality.
Weakening Asian Economies
The decline is being attributed to market recession for our cotton yarn due to persistent financial crisis, confronted by the Asian Economies. Although despite the crisis these countries have not slashed their quota for cotton based textile imports. This is a clear indication that these countries have reduced importing cotton related products from Pakistan and are fulfilling their needs from other sources.
Use of PSF
In order to meet the short fall in the cotton yarn the textile industry has started using PSF a substitute for cotton Yarn in its production . Which is available to the textile industry at 25 percent more than international price due to the duty on the import of polyester.
Under Utilization of Resources
The considerable portion of the machinery used by the local industry is under utilized this is evident from the fact that out of 8.298 million spindles only 6.46 million were in operating condition. This shows under utilization of 22.3%. Similarly looms were unutilized by 62%. This under utilization is mainly due to the worse kind of machinery.
Globalization and Free Trade
The globalization and free trade are the upcoming problems the textile industry is facing WTO has an explicit plan for gradual phase cut of Multifibre agreement, by the year 2000. Pakistan felt jubilant that their exports to the developed world would increase as a result. Under a meticulously maintained scheme tariff barriers are to be replaced by non tariff ones in shape of free trade. The textile industry of Pakistan has to make itself competitive even under prevailing resource constrains & out dated machinery. After the implementation of free trade company will have to face fierce competition not in the run to capture foreign markets but to make it viable in the local market Serious attention has to be paid to the aspects of balancing, modernization and replacement (BMR) of the projects. The need is to invest in these aspects of balancing, modernization and replacement (BMR) of the projects instead of investing available funds in the associate companies, thus neglecting (BMR).
All the spinning mills, including the one under study, are extremely vulnerable to the government regulations and face serious threat of non-consistent government rules and regulations. The government earlier provided cotton at 30% of the prices prevailing internationally , but with the new policies implemented this subsidy has been withdrawn. There has been a mixed response to this policy, the APTMA is bitterly opposing this policy. Their argument is that it will take away the share and would made the local textile industry most vulnerable to the threat of competition. The subsidy provided by the government shields the local market from the high international prices, this also provide a cost advantage to the local industry. The Karachi Cotton association has favored this move as it will help growers to fetch high international prices for their raw cotton although the spinners have been complaining about the short fall of cotton & increased prices , but the KCA has rejected such claim. The demand of the KCA in support of free trade carries weight, especially when the export is not harming the local industry as only the surplus is allowed for export.
Labor Laws & Quota Restrictions
Third world countries like Pakistan have been under constant pressure from world agencies to improve their labor laws. These laws along with the quota restrictions have hindered the growth of various industries. In our case too, the quota restrictions in the countries like America have deprived the company to exploit these otherwise potential markets. These restrictions can get even tougher and can pose threat to the company. Antidumping duties are also the part of this propaganda and they also pose threat to the company’s exports.
Cut Throat Competition
There are around five hundred spinning mills operating in Pakistan. Along with that there are other units that are in weaving and knitting business but are also producing Yarn. This has resulted in cut throat competition in the market.
The severe competition in the market has give rise to a phenomenon called Market Glut. It is the phenomenon that Pakistan produces a lot of cotton and along with that a lot of cotton is imported which results in over production of cotton Yarn. However there is not enough demand and as a result company needs to export its product. Here the antidumping duties and quota system comes into play and company is not able to get the maximum price of its products.
Role of the brokers
Company follows the age-old practices of dependency on third party for its purchases as well as sales. This makes it vulnerable to the role of brokers. Like in 1992 brokers profited or exploited the liquidity crunch faced by the spinning mills, most of theses mills as well as MGM corporation is under constant threat of exploitation by these brokers or commission agents.
Non proportionate number of spinning and knitting mills
The number of spinning mills is also out of proportion with the weaving and knitting units. This problem also has its roots in government policies of charging higher tariff to the machinery used in the weaving and knitting industry. Pakistan also has no textile engineering industry where these machines can be fabricated. This again forces the company to export most of its products to foreign markets.
Dependency on Cotton Production
Cotton is the basic raw material of MGM Corporation and Yarn production depends solely on the cotton production. In a given year if the cotton production is healthy prices go down and in turn effect the yarn prices. Like this year because of the expectation of a bumper cotton crop cotton prices are very low as compared to the previous year.
The General Agreement on Tariff and Trade (GATT) under aegis of World Trade Organization (WTO) has provided Pakistani spinning industry to explore the new markets. It has also made it possible to reach the markets that were previously protected by duties.
Textile industry in Pakistan is provided with some tax incentives. Specially in case of spinning mills these incentives have caused the spinning units to outnumber weaving and knitting mills. There is a gap available and this gap can be filled by increasing the production of value added goods to the desired level. These incentive provide a good opportunity of the industry to control its expense and to invest in the value addition activities. This will help industry to grow and come out of the stagnation.
RECORD COTTON PRODUCTION
According to expectation cotton crop will surpass twelve million bales this year. This year the crop has not been attacked by viruses and timely rains and conducive climate has given us the hope that we can expect a bumper cotton crop. This will help the local spinning industry to get good quality cotton at a low price. This also assures the availability of quality cotton.
LOW COTTON PRICE
The bumper cotton crop of around 12 million bales produced this year and the cotton imported last year has caused the cotton prices to be lower in the market. Cotton price has hit the record lows this time. This again provides an opportunity for the spinning industry to buy cotton a low price and provide quality yarn to its customers..
The MGM Corporation has paid no attention in the field of automation so, by automating that is by introducing the information technology the company can save a lot of valuable resources, for example the company can reduce paper cost. Also the use of technology can help increase the efficiency of the office staff. The information technology can also provide a communication link between the two main offices of the company, one of which is situated in Lahore and the other one in Karachi.
The company management must try to work out a mechanism to hold formal company meetings on the periodic basis to review and analyze the company as well as the market condition. This will help management to better understand the current market forces at work. It can also help management to get the feed back from the employees and can also act as a medium for communicating company’s goal to the employees.
MGM Corporations capital structure is too much burdened by the debt and this debt results in exorbitant amount of financial charges resulting in losses. As the company is operated by a financially strong family it is recommended that equity base should be increased which in turn will lower the financial charges thus turning the company profitable ( keeping other factors at present level). MGM corporation has a debt to asset ratio of 92.5 percent which is very high by any standards.
The employees of the company are basically of two types the technical work force that works at the manufacturing facility and the office workers that work at both the offices in Karachi and Lahore. This workforce totals to five hundred approximately. As MGM Corporation has a quite large number of employees both technical and non-technical it can also start a training program for employees. This training can help employees to increase their knowledge about the company’s operations and develop work habits that can be used to the company’s advantage.
The MGM Corporation is structured on the basis of functional departmentalization but the ambit of activities for different departments is not clearly defined. The MGM Corporation can thus define the activities related to each department. This will help in fixing the responsibility for each employee to do a specific task.
The company’s mainline of business is manufacturing of cotton yarn. As the cotton yarn is the raw material for the knitting and weaving industry the company can also set up either a weaving or knitting plant. The production facility has enough space to install either a weaving or a knitting plant.
The company must have a research and development department in order to further develop the product quality. This function can help the company to develop and market a better product and penetrate into the market. The research and development function can also impart training to the technical staff to train them how efficiently they can use plant machinery.
The management at the manufacturing facility must confirm the production of fine or super fine counts of yarn. The production of the course count yarn will add no value to the stature of the company.
The most import party involved in the buying of the raw cotton and the sale of cotton yarn is the middleman that is the broker. All the brokers all basically the exploiters. They cash their contacts and earn the commission. The influence of the brokers in the industry increased during 92, when cash starved spinning industry agreed to sell cotton yarn at cheaper prices. The brokers at that time made cash payments and bought the cotton yarn at cheaper rates. They then sold this yarn at higher rates to the weaving and knitting industry. Thus they fully exploited the liquidity crunch, and as a result their influence in the industry increased considerably. Thus keeping the characteristics of brokers in mind the company must try to rely as less as possible on these brokers. It is therefore recommended that there must be a team that can perform the function of brokers. This team can contact the growers and can directly buy raw cotton for the company thus bypassing the brokers.SUGGESTED FOR YOU