Textile Sector of Pakistan – SWOT Analysis [An Academic Report]
Textile Sector of Pakistan – SWOT Analysis [An Academic Report]
ABUNDANCE OF RAW COTTON
Over the years, Pakistan has enjoyed the benefit of plentiful supplies of its own raw cotton, available at most competitive prices. Moreover, the industry has developed like a hot- house plant, with imports of fabric and finished goods discouraged by high tariffs and lately on account of exports of its textile goods assured under successive MFA quotas.
The government has always come to the rescue of the textile sector because it knows the importance of this industry. Every year new incentives are announced to the growers and the textile industry as well to revitalize this sector. The government has fixed the export target of US$ 9bn in an aim to reducing the trade deficit. Complementing the government’s aggressive export target is the fact that cotton prices have made Pakistani exports more competitive in international markets.
It has also announced the Textile Quota Management Policy for 2000, with a focus on quota allotment based on performance and a check on quota trading which has been prevalent in the market for quite sometime. The policy has been effective from 1st January 2000. To promote the textile industry the government has taken effective steps, which include:
- Reduction in sales tax from 18% to 12.5%
- 10% on regulatory duty on all imports has been abolished
- Corporate income taxes have been reduced.
- Free imports are allowed for the spare parts of the weaving and finishing units.
- Interest rates have been reduced which will lower the cost of BMR.
- Imports of processing machinery are being liberalized as well.
GOVERNMENT SUPPORT FOR BLENDED FABRIC
The government and the industry to help and vitalize the value-added sector of the textile industry in recent years have taken a number of measures. One of these is to try to correct the imbalance, caused by the dependence of the entire country’s economy on a single commodity, raw cotton.
Serious efforts have been made by the industry to increase substantially the domestic production of polyester fibre, whose supplies can be technically pre determined and controlled by man as against raw cotton, being always on the mercy of Mother Nature. Consequently, there is a growing trend for going in for blended fabrics, especially polyester/cotton in garments and other made-ups, like bed sheets, as it is found that the polyester content in the blended fabric produces an aesthetic appeal that 100% cotton cannot produce.
This change can also help the national economy apart from revitalizing the textile and cotton industry. For example, basing on crop size of 10 million bales, if our textile industry sets a target to utilize 7 million bales of cotton, and the balance requirement is met through man-made fibers, we will release 3 million bales of cotton for export, thus bringing in valuable foreign currency.
SFDAC (Synthetic Fiber Development and Application Center) in Karachi is providing an invaluable service to the industry, by demonstrating in its pilot plant, the benefits of appropriate specifications for blending with Pakistan’s cotton, that is, medium tenacity, medium molecular weight, high modulus and denier value of 1.4 to 1.5 with ideal staple length of 32 mm.
In recent packages of incentives to the industry the government has allowed manufacturing in bond facility for exports for which nearly all imported inputs are allowed duty free.
ESTABLISHMENT OF FASHION HOUSES:
An institute of fashions has been set up at Lahore by the Export Promotion Bureau in co -operation with the noted French fashion house of Oliver Lipids.
Export Promotion Bureau has also assisted SFDAC to set up an Eco- textile laboratory in Karachi for which Hohenstein Textile Institute of Germany has provided technical advice.
All these foreign consultants have emphasized on human resource development and technical education through out the industry and especially in the value added garments sector, which, all of them agree, has a great potential, provided the industry is re structured on a more scientific basis.
DEREGULATION OF COTTON TRADE
Deregulation of cotton trade has allowed manufacturers to import cotton in periods of low cotton output or in periods of excess demand. As mentioned before, the cotton being an agricultural product, its production and supply in any given year cannot be predicted accurately.
|IMPORTS OF RAW MATERIALS|
1993-94 to 1997-98
|Polyester Staple Fibre|
|Viscose Staple Fibre (tons)||Acrylic Staple Fibre (tons)|
Following the deregulation of cotton trade in 1992, raw cotton prices have risen by 182%. Yarn prices have increased by 88%.
DEPENDENCE ON ONE SOURCE
The predominant reliance on a single commodity, raw cotton, however, has proved to be the feet of clay, when in 1993 the crop was attacked by white fly and Curl Leaf Virus and the total crop was a miserable 7.7 million bales as against 12.8 million bales in 1991-92.
Since 1997, however, the government has been following the government has been following an Open Policy, allowing free import and export of cotton. The main objective is claimed to be the government’s desire to ensure international prices to the cotton growers in Pakistan.
Being an agriculture commodity, one can never be sure of its production or quality, therefore the textile industry must reduce its dependence on cotton. The obvious direction to follow is the synthetic route, because of its local availability as well as plenty of stocks on the world market.
LACK OF DOWNWARD INTEGRATION:
The textiles industry, over 50 years of its existence, has shown very poor record of self-sustained balanced growth through downward integration. The textile industry in Pakistan is concentrating on cotton spinning only and little downstream integration has taken place, restricting the possibilities for exports of value added goods. Investments in garments and apparel making, in weaving, and in dyeing and printing and finishing have been neglected far too long. This has led to the present export scenario where we earn only around $ 5 billion from our textile exports, as they are not value added.
In the organized sector spinning, with approximately 8.23m spindles and 0.143m rotors, is the biggest industry. As textile manufacturers relied heavily on yarn exports, spindle capacity significantly increased over the years. At the same time, the actual capacity utilization has fallen from 94% in 1959 to 79% in 1998. Spinning sector suffers from over capacity because it was not complemented by corresponding increase in capacities of downstream industries.
As a matter of fact, the real textiles sector comprises value addition downstream industries, weaving; finishing and manufacture of made ups, including garments respectively. But spinners have always dominated the industry and huge increase in spinning capacity is the result of the concentration of effort on the export of this low value added product category.
The table shows that cotton yarn made the largest contribution. Second in line is the cotton cloth and third is the ready-made garments followed by made-ups of textiles.
Share of raw cotton varied because of fluctuations in the quantum of cotton available for exports
Thus Pakistan exports earnings still primarily consist of raw cotton and intermediate textiles products. The latter, unfortunately, are low quality and fetch low prices.
PRODUCT AVERAGE PRICE
FINISHED GARMENTS US$5 Per Pound
RAW COTTON US$0.70 Per Pound
COTTON YARN US $1.40 Per Pound
COTTON FABRICS US $2.0 Per Pound
MFA SAFETY NETS:
Pakistan, owing to its true comparative advantage in t&c, could have immensely benefited by MFA restrictions on large suppliers. But, on the contrary, MFA safety net appears to have hindered her production and export of high quality and high value-added products. Pakistan enjoys large quantities in upstream categories. Not only that these products have low value addition, the allocation of quota on the basis of quantity exported rather than on price realization prompted many producers to sell low quality in large volumes at lower prices.
Further, since the imposition of MFA there has been, in the meantime, emergence of even lower cost suppliers in the Far East.
Hedge trading in cotton is still not allowed by the government. Therefore the cotton manufacturers and growers are not able to save themselves from the harmful effects of speculations in the cotton prices. Manufacturers abroad have the advantage of hedging cotton prices in the futures market and so are financially more secured. Hedging for cotton in the futures market was disallowed in Pakistan in 1980 in the Ziaul Haque regime.
The textile industry being an important industry of Pakistan is subject to numerous taxes and duties. The major ones are listed below:
- Corporate Income Tax
- Turnover tax on local sales
- Turnover tax on exports
- Excise Duty
- Municipal Taxes
- Sales Tax
- Custom Duty & Surcharge on import of raw material and machinery.
- Social Taxes.
The prices of cotton are generally higher as compared to the international level. Apart from basic factors like area under cotton, seed quality, pesticides, poor water management, rains and winds and other vagaries of nature, the cotton pundits (growers, ginners, exporters, mill owners, dealers and others ) keep on releasing cotton crop estimates from time to time to safeguard their interests. Such a situation results in erratic fluctuation in cotton prices in the cotton market. Immediate corrective action is needed so that only the “estimate committee” appointed by the government releases the crop production data and estimates. This will enforce stability in the cotton prices and will be helpful for the textile manufacturers in buying cotton stocks at reasonable prices.
SMALL SHARE IN WORLD TRADE
The world trade in clothing and apparel has shown very substantial changes since about 1990. According to World Trade Organization – global trade in Textiles and Clothing was $311 billion in 1995. Out of this the share of textiles was $153 billion and of clothing $ 158 billion. Around 38% of textile exports and 45% of clothing exports were from the Asian countries. Yet, Pakistan’s share was less than 2%, in spite of its claims of being a cotton country.
As against this, the countries of the Far East are big exporters of textiles and clothing, proving that it is not necessary to have one’s own raw cotton to be a big exporter of textile and clothing. Even Bangladesh and Sri Lanka have shown better export performance than Pakistan in the matter of clothing exports in particular.
NO RELATIONSHIP BUILDING WITH THE CUSTOMERS.
The volume exporters of Pakistan try to solicit orders by offering lower prices and seem to be interested in “one shot” business rather than developing long term relationship with the customers. They have developed no mechanism for internal and external feedback from their customers.
HIGH COST OF PRODUCTION
The textile industry is burdened by high cost of inputs and many innovative taxes. Electricity rates have been raised by 13.6% to make textile products completely noncompetitive in the international market. We have sufficient power generation capacity but the electricity distribution is extremely poor. Frequent power outages and fluctuations cause havoc with the production. All the new textile machines come with sophisticated electronics that cannot afford fluctuations, which is rampant in Pakistan. Exporting industries are not in any position to bear additional burdens. Cost of electricity should be reduced, availability guaranteed with no power shortages or fluctuations.
According to APTMA, billions of rupees of the textile industry are stuck up with the government since long on account of over due refunds of sales tax, income tax, and duty-drawback. Despite repeated representations at all levels, over due refunds have not been released. This has raised the cost of production for the Pakistani manufacturers in relation to its other world competitors and forced the industry to borrow to continue and survive. The government is also continuing with the its raw materials policy whereby the textile industry is forced to buy both cotton and polyester staple fiber at prices higher than the international prices. The textiles sector is also faced with severe liquidity crunch due to extremely selective working capital and that too at high mark-up rate.
The international buyers have a choice to go to our competitors who are offering better prices due to favourable conditions and better infrastructure in their respective industries.
LACK OF DIVERSIFICATION
There is not enough diversification of value addition in our cotton and other textile fibers. Within cotton we do not have any ladies garments or shirting fabrics for exports. Either the quality of our products is not up to the standard or the prices are not competitive. On the other hand India has got silk, synthetics, cotton, blended as well as wool. Unless we diversify into different products and different fibers, our exports cannot be expected to increase. And the diversification has to be both raw material diversification and product diversification.
The Pakistani products are very cheap in the international market as they cater to the low-end market. That is why accusations were made that it was dumping the goods in the European market and thus the European Commission clamped anti-dumping duties for a period of five years on our Grey cloth and cotton yarn of 20s respectively. Japan followed suit and imposed them as well to protect the local industry there. These are really hurting the textile industry and the Pakistan’s exports badly. This has been one of the principal reasons for the poor performance of some composite units. APTMA is alone fighting against the anti-dumping to get them lifted and the GoP is not supporting it at all.
More than 50% of Pakistan’s fabric production is in the form of grey cloth. But the imposition of anti-dumping duty on the export of gray cloth by the European Union has threatened the potential for exports and export earnings by Pakistan. At present Pakistan is one of the world’s major suppliers of cheap quality gray textiles. This is a low priced value added cloth and bulk of the exported quantity is used as curtain linings, coverings, dusters etc.
Production of gray cloth (000 sq m)
EXCHANGE RATE FLUCTUATIONS
Pakistan’s currency is pegged to the dollar and its major exports are to the Far Eastern and the European states. Due to these currency’s depreciation against the dollar, it has made their imports expensive thus causing a loss to Pakistan. Apart from that there are frequent devaluation from the part of the government, which even though makes the export cheap, at the same time it also increases the cost of production as well. Thus there is not benefit and we lose out, the only gainers being the importers.
POOR PERCEPTION OF QUALITY
Pakistan is generally not perceived to be a preferred supplier by buyers in the exports markets. Its T&C industry is generally considered to be the one which does not appreciate competition oriented dynamics of market, as it lacks innovative ideas and supplies a limited product range of lower than average quality levels.
These problems are present to a varying degree in all textiles producing developing countries. But many countries have resolved them in part and are reaping the dividends, while lack of diversification and low quality of Pakistani T&C products have eroded country’s comparative advantage even in the quota markets.
Due to a Pakistan’s poor image as a textile exporter, Pakistan was suffering from low price realization for its textile products. The following comparison with china states this point:
|Country||Value Of Exports||Volume Of Exports|
The textile industry in Pakistan has for long being operating in a regime of protective captive markets in the USA, EU, Canada and the Scandinavian countries, proving like crutches to a vast number of mediocre textile manufacturers and exporters. No wonder our goods are facing very low prices as compared to other countries, essentially because the “Made in Pakistan” label is at present perceived by the buyers around the world as products of low quality. This certainly does not apply to all the companies in Pakistan but unfortunately, this has become the general impression.
According to Mr. Keith Stuart Smith of Gherzi Textile Organization, renowned consultant, of Switzerland, who knows Pakistan’s textile industry very well, has calculated that Pakistan’s cotton yarn fetches as an average Euro 2.94 as against overall average price of Euro 3.30 per kg. In woven shirts, Pakistan gets an average price of Euro 9.15 against world average of Euro 13.60. In blouses, Pakistan’s average unit price realization is less than 50% of the average price of all EU imports.
Commodity Pakistani prices World average
|Cotton yarn||Euro 2.94 per kg||Euro 3.3 per kg|
|Woven shirts||Euro 9.15||Euro 13.60|
|Blouses||Less than 50% of world prices|
In cotton yarn, for instance, India, a large supplier, realizes significantly higher prices for its medium and higher count yarns, much of which is semi-processed yarns. Incidentally most of it is spun and processed on India’s own manufactured spinning machinery, which speaks credibly for the quality of Indian textile machinery.
Pakistan textile manufacturers of goods are finding it difficult to come up to the quality requirements of importers as set internationally, mainly because of their old fashioned methods of production and non-induction of modern techniques and technology.
In one instance it has been found that Pakistan manufacturers have mostly found it difficult to come up to the standards specified by the EU. Similar cases of inability of the Pakistan manufacturers to fulfill the standardization requirements of goods, have been found when import orders were placed with Pakistani firms along with the standardization specifications.
In view of this situations the Government of Pakistan has been insisting on the manufacturers to standardize their products so that export orders are available more and more on this account and such orders could be met accordingly.
One way of meeting standardization requirements of the importers of Pakistani goods is to get ISO 9000 certificate for the exportable products by their manufacturers. For this purpose the Quality and Standardization Authority which was so far working under the Federal Ministry of Industries has now been brought under the Ministry of Science and Technology which is considered the appropriate authority to handle the subject, and standardization mainly needs improvement in production methods and induction of new and sophisticated technology.
Only 24 companies in Pakistan have got ISO- 9000 certification so far. Out of them only 4 are textile exporters and the remaining 20 are multinationals and big firms.
It is stated that, although the government is pressing for quality control of exportable goods for which institutional requirement has been met by the establishment of Quality and Standardization Authority, it will be difficult for the manufacturers to meet the standardization requirements of foreign importers which will have many options as sources of their required materials with standardization specifications. That is because exporters all over the world are now going for induction of hi-tech methods because of the competition which is going to be tough in view of the market access provisions given by the WTO. These provisions include eliminating tariff an non tariff barriers in trades bilaterally or multilaterally and of the phasewise withdrawal of quota facilities in ten years particularly those which were available under the MFA (Multi-Fiber Arrangement)Agreement. Countries like Pakistan which were previously enjoying quota facilities under this agreement will have to compete with its rivals from all parts of the world including technically advanced countries. Naturally without employment of modern production techniques and introduction of new and sophisticated technology Pakistan’s textile manufacturers will not be able to compete with the technically advanced rivals.
UNBALANCED STRUCTURE OF THE INDUSTRY:
The structure of the industry is as follows:
This imbalance makes the spinning sector all the more powerful and they are able to enforce their vested interests.
MYOPIC VIEW OF THE INDUSTRY:
Although Pakistan’s textiles industry enjoys enormous advantages compared to other manufacturing activities of the country, it has so far failed to achieve competitiveness in terms of quality, value addition and price optimization through Balancing, Modernization and Restructuring (BMR). Pakistan’s textiles producers kept the myopic view of the market and spared themselves the investment efforts which could have brought the industry and the country the dividends of long-run viability and sustainability of high GDP growth rates respectively.
GOVERNMENT’ROLE IN CURRENT STATE OF THE INDUSTRY:
The government policy has been equally responsible for the ailment of Pakistan’s textiles sector. For example the nationalization of Pakistan’s banking industry in the 1970’s was followed by very liberal industrial financing policies of the government to offset the private investment effects of the nationalization of the manufacturing units. The policy of liberal industrial financing helped in expanding both the vertical and horizontal base of the textiles industry. Unfortunately this windfall was disbursed and availed in an unplanned manner by the lending and borrowing parties respectively. The common place of over invoicing resulted in eroding the viability of projects. As a matter of fact the debt/equity ratio of Pakistan’s manufacturing sector as a whole was drastically changed to include the extra-added risk of further nationalization. It went from 60:40 to 70:30, then to 80:20 and finally ended up in 90:10. In some cases, financial institutions provided 100% capital. Resultantly, the textiles industry, specifically its spinning and waving sectors, is currently under heavy debt burden. Despite frequent rescheduling and all efforts of the government and the banks, the default levels are high and recovery position is very weak.
According to State Bank of Pakistan’s Annual Report of 1997-98 textile sector was the biggest defaulter of the bank / DFIs with Rs. 47.4 billion of 32.4% of the total amount of stuck up loans.
As for the new policy, according to local manufacturers, the new quota policy is still the same, but for minor cosmetic changes. The main impetus would still lie with the government to encourage local manufacturers’ move towards value addition. In order to facilitate this move the government needs to structure the quota policy in such a manner as to convert gray cloth quota into processed cloth quota for items like twill and poplin, which command better margins and prices.
POOR RELATIONS WITH THE GROWERS:
The fortunes of both the Pakistan’s economy and the textiles industry are closely tied to the cotton growers. Although Pakistan is among the top five cotton producing countries, its cotton yield is much lower compared to many other cotton producing countries. The cotton yield in Pakistan is 597 kg/hectare as against 1720 in Israel, 1280 in Australia an 1128 in turkey.
The main buyers, spinners, did not invested any efforts towards improvement in quality. By buying whatever was available in ginning factories and producing yarn accordingly, they failed to give any standardization system to upstream producers. In other textiles producing country, especially in USA, the spinners guide the breeders and growers about the required fiber properties.
FAMILY OWNED UNITS:
A major weakness of many manufacturing units in Pakistan is that they are family owned and managed. At the initial stages, when the companies are small, such organizational structure may be efficient. But it becomes increasingly inefficient as the companies grow.
MANAGEMENT AT THE TEXTILES UNITS:
It may be true that some of the mills may have genuine reasons for getting sick, but in most cases, the sicknesS has been due to inexperience and inefficiency of the management.
Middle management in many of the units is often thin, senior management overloaded and decision-making too centralized in hands of a jut few. The evolution from ‘ownership control” to “management control” often helps accelerate the change needed to keep pace with the dynamics of the market. Producers in Pakistan able to change their existing management culture accordingly will have a better chance of success in this century.
Inadequate and inefficient transport, storage facilities and telecommunication act in the textiles industry to limit the supply side response. But the problem is especially serious at the institutional level. Institutions and their rules have a strong bearing on an economy’’ efficiency and growth prospects. At the institutional level Pakistan lacks a transparent, legal and regulatory framework including company and bankruptcy laws and investment codes. As a matter of fact the absence of an effective institutional network which promotes entrepreneurial, managerial, technical and marketing skills has constrained a to a large extent the value addition growth in Pakistan’s T&C sector.
WEAKNESSES OF FINISHING SECTOR
The finishing processes reflect market requirements and are in part a factor of current market trends. At present the bulk of finishing capabilities in Pakistan is in simple bleaching and winch finishing. If Pakistan is to move into the supply of high value added products, the scope and flexibility of the finishing industry will need to be restructured accordingly.
In Pakistan, processing is carried out on a semi continuos and batch basis, involving relatively short runs. Only some woven cloth finishers employ semi- continuos processes for bleaching, dyeing or mercerizing. But all cloth finishers employ batch processing techniques. Shorter runs not only mean lower output and higher use of raw materials, energy, water and labor but also create technical problems in processing to determined standard.
Constraints on the performance of finishing will adversely affect the ability of the textile industry as a whole to improve margins and increase value addition. There are a number of basis constraints in the development of finishing.
The Pakistan textile sub sectors generally and, in particular the garment producers are not innovative in terms of design and product development. Finishing units are not involved in initiating new developments and are generally slow to react to fashion and technology changes. On the other hand small independent finishers with limited capital resources are unable to respond to market trends as they rely on old technology.
The quality levels of finished goods to date have been low to medium and the move in demand for more sophisticated and better finishing will seriously strengthen local resources. For small operators, it may be impossible to achieve. It is true that technical know-how in finishing is very limited in Pakistan, particularly as there is limited feed back an liaison with the weaving and made up sectors on quality and product development. The lower literacy rate on employees severely restricts the ability to introduce new technology.
HIGHER TRASH CONTENT IN LOCAL COTTON
In times of shortage of locally produced cotton, as in the past five years, imported cotton has come to the rescue of the textile industry. Because of using imported cotton, Pakistani manufacturers have noted that the imported cotton, particularly Australian, is trash free, while our local cotton had a much higher content of trash. The high percentage of contamination remains a serious problem for our industry. Although measures are being taken against eradication of trash in our cotton but these measures are not sufficient.
During the last few years, we have lost our cotton markets to India, Bangladesh, Sri Lanka, Dubai and China, where raw material prices were relatively lower than ours. In India cotton was about Rs. 400 cheaper than Pakistani cotton. This allowed these countries to erode our market share in export markets.
ABSENCE OF TIMELY BMRs
BMRs were not undertaken when they made huge profits, instead the industry preferred to increase production capacity. Doing this period, quality of product and productivity suffered resulting in the set back in the export market. At this stage, the mill owners were forced to realize the need for BMRs, but the cost of imported machines had become extremely high. Huge funds/loans were required from the banks and the DFIs, which every mill could not manage resulting in the continued deterioration of the most of the plant and equipment.
The Pakistani textile industry is suffering from excess capacity. The reasons for it are:
- Huge investments in the spinning sector
The situation has arisen mainly because the investors did not heed the advice of the All Pakistan Textile Mills Association (APTMA) in early 1990 when it urged them not to setup spinning units at a time when was large scale recession in the world yearn market. A spinning unit of around 17,000 spindles needs almost Rs. 1 million annually to make up for routine wear and tear in addition to a liquidity of around Rs. 100 million to lift cotton during the harvesting season. Only the bigger parties in the business can do this and others are bound to pay the penalty for their poor assessment for marking investment in the sector. The units established in recent years by obtaining loans from banks on commercial rates of interest, ranging between 18 and 20% are in dire straits as they are supposed to earn at least 25% profit to reach a break even position. This seems beyond the capacity of many and hence the closures.
- Low crop yields
- Higher raw cotton prices
- Soaring utility and financial cost
LACK OF TRAINED PROFESSIONALS
Pakistan has a serious dearth of skilled and educated labor force and professionals in its textile sector. This is a big threat for the future growth in this sector due the increase in intentional competition. That is why we have classified this constraint as a threat for the future viability of the textile industry.
We do not have even one good institute of international standard to impart training in manufacturing, designing and merchandising facets of the business. Pakistan badly needs institutes in Lahore, Karachi and Faisalabad to educate and impart skills of knitting, dyeing, finishing, printing, cutting sewing in the manufacturing area. This must be supplemented by merchandising marketing and designing training.
We do not have the training professionals to run these institutions. For this we require assistance of foreign teachers and syllabi in the setting up of such schools. China, Malaysia, Indonesia, Sri Lanka and India have set up such schools and have reaped benefits in a short span of a year or so.
THE END OF MULTIFIBRE ARRANGEMENT ERA
Since 1st january1995, international T&C are going through fundamental change under the 10-year transitional program of the WTO’s agreement on textiles and clothing (ATC). Under the agreement the WTO Members have committed themselves to remove the quotas by 1st Jan 2005 and fully integrate T&C trade into GATT rules. Thus it calls for the removal of MFA which is an international commodity agreement among over 50 producing and consuming countries. It specifies a s maximum amount of cotton, wool and synthetic fibres that each exporting country may ship to each importing country.
There are two major categories of developing countries’T&C exporters. The first category includes the countries, which currently have a strong comparative advantage, like India and china, and whose market access has been tightly restricted, and which therefore will benefit from the abolition of MFA related restrictions. In the second category, on the other hand, there are countries, which may suffer due to transitional costs. Pakistan, unfortunately, lists in the latter category. The problem escalates when the account is taken of the relatively large quotas Pakistan has been enjoying and fully utilizing. As given in the following table, Pakistan was allotted the largest quota in
MFA QUOTA OF SELECTED ASIAN EXPORTERS IN THE EU MARKET
The EU market after South Korea and its quota utilization rate has been the highest of all its Asian competitors.
Pakistan is the largest exporter of cotton yarn in the world and the fourth largest exporter of the cotton fabric. But Pakistan T&C industry is at a phenomenal disadvantage compared to South East Asian (SEA) countries, including Japan, Hong Kong, south Korea and Indonesia are main markets for Pakistan’s yarn exports. These counties re-export textiles after substantial value addition. As documented in the following table, in recent years, Pakistan’s competitive position in the world market has further weakened relative to its Asian competitors. Except for Indonesia and India, share of all Asian competitors in world merchandise exports value more than doubled in 16 years. Compared to Pakistan, even India’s share is substantially higher in 1996 from 1980 level.
MERCHANDISE EXPORTS VALUE OF SELECTED ASIAN ECONOMIES
|Region/Country||%Share in world trade1980 1996||Annual Percentage Change1995 1996 1997|
|Asia||15.01 27.63||18 1 5|
|Pakistan||.13 .18||9 17 -6|
|India||.42 .62||23 7 3|
|Thailand||.32 1.05||26 -1 3|
|Indonesia||1.06 .94||13 10 7|
|Malaysia||.64 1.47||26 5 1|
|South Korea||.86 2.45||30 6 5|
|Taiwan||.97 2.19||20 6 5|
|China||.89 2.85||23 2 21|
Pakistani yarn, the largest foreign exchange earning item of her exports, is now facing competition from Indian varieties in its traditional markets of the Far East, particularly Japan. In the non-quota markets, buyers of Pakistani cloth and yarn are heavily concentrated in East Asia. Now the Chinese, Indian, and other Asian countries can supply even these products at lower prices and since these buyers are highly price sensitive, this is a major threat.
Not to speak of large countries like china and India, it is a matter of great concern to note that even a small country Bangladesh which does not produce a gram of cotton has emerged as a major competitor for Pakistan’s garments exports. Realizing its limitations, Bangladesh did not go for the establishment of upstream industries and availed the advantage of low-cost manpower for manufacturing the highest value addition products, garments.
Ready made garments and knitwear products account for more than 70% of the total foreign exchange earnings of Bangladesh in 1998. Further, Bangladesh is figured among those traders which expanded their exports faster than world trade through 1985-94.
Finally, as it presently appears, Pakistan’s textiles industry which cannot stand without outright favors going to be a laggard in the world market after 2004 when new trading order begins and MFA safety net is no longer available to provide protection from strong competitors in its traditional markets, EU and north America. Indeed ruthless competition is likely to be offered by countries such as India, china, Thailand, Malaysia Mexico and a number of others especially in the crucial area of higher value-added industries. In the present situation of low competitive levels, market liberalization in the next millenium threatens to woo away even its established customer base. It will be difficult to find the even the cozy domestic arena in which a business might hide. Any domestic or international market large enough to be attractive is going to be subject to the normal activities of world producers looking for additional market share.
EMERGENCE OF REGIONAL BLOCS:
The emergence of regional blocs may adversely affect the exports of textiles and apparel from developing countries in case they are not members of these blocs.
The newly formed regional trading blocs have given importance to specific industries. Textiles and apparel is one of them, which has been given special emphasis. It will get preferential treatment through tariff and non-tariff concessions, for inter-regional trade.
NAFTA and EU are continuously growing both in width and depth and now cover virtually all major markets of Pakistan’s T& C exporters. The spokespersons of NAFTA and EU often attempt to camouflage their global trade liberalization rhetoric by arguing that both developing countries and this countries would benefit from the trade creating effects of these regional arrangement materialized into the stimulus to growth and thus import demand in the member countries. Although to assess the magnitude and spread of trade diverting effects of NAFTA and EU is beyond the scope of this duty, it could be argued that there are reasons to think that diversion effects in T&C will enormous. The anti-dumping duty imported by the EU during 1997, on the imports of unbleached cotton fabric from Pakistan was triggered by the campaign jointly launched by the textiles producers in Greece, Spain, Portugal, France and Italy, because the prices of unbleached cloth they produce were incompetitive, making them unable to capture their own market. MFA dates back to the times when EU was an intermediate, half functioning common market and the poor relations, Greece, Spain and Portugal, were not even considered to be qualified for its membership. Once MFA’s binding obligation is over, these countries may resort to any measures to protect he interests of their textile producers within the wide, and continuously expanding, EU market. This could further increase the degree of marginalisation of Pakistan’s T&C exporters who have become accustomed to the protection provided by the quota regime.
During recent years Pakistan has devalued its Rupee (thrice in 1998) and the Rupee now stands at 51.9 to a dollar. But the desired objective of an upsurge in exports has not come about. The reason being that Pakistan is an import oriented country. With every devaluation the cost of inputs for manufacturing export products, cost of the imported machinery, spare parts and accessories, the investments in the infrastructure and foreign loans repayments, and their servicing charges etc have necessarily gone up to the extent of the devaluation of the rupee. The result will be more inflation with each and this spiral of successive devaluation cuts at the very vitals of the country’s economy.
BUYERS CHANGING PREFERENCES
Another threat is that major buyers of Pakistani yarn in Far East Asia are gradually moving out of textiles industry. For future growth, exporters will have to tap new markets in a world where the already stiff competition is increasingly getting fierce.
The following statistics pertain to world trade in textiles clothing:
|Year||Value in US$(bn)||Percent Share of the Market|
The foregoing market statistics clearly show that focus of the major markets of the world was changing to apparel production. In spite of this, Pakistan’s textiles industry continued to produce yarn and Grey clothe with negligible growth in the downstream industries. Thus it is operating in the wrong direction. The other countries in our region were responding quickly and correctly to global changes in the textile trade. For e.g. Thailand which has raised its textiles exports from less than 100mn US$ in 1980 to about 4.6 bn in 19995-96. Even Bangladesh had overtaken us in exports of textiles clothing.
The growing emphasis of eco-textiles in the importing countries, especially in Europe and on the insistence on ISO 9000 Standards will also pose new threats and challenges to the textile manufacturers and exporters in Pakistan.
Ban on the use of Azo-dyes and rapidly growing consumer preferences towards Eco-friendly textile, particularly in European Union, have created a new scenario in the export market world over.
In the process of making textile products, from cotton cultivation or fiber production, spinning and weaving, dyeing, printing and finishing to garment manufacturing thousands of chemicals are used. All these chemicals are harmful to the environment or health if they exceed certain limits.
Faced with the growing environmental consciousness on the part of the consumers, many textile manufacturers in the international environment saw it to their advantage to mark their goods as natural, non-toxic, environment friendly, free of toxic substances etc as their “Eco- collection” – with no back up certifications of their labels whatsoever.
Such first generation imaginary eco-labels caused confusion, instead of providing a reliable basis for consumers purchasing decisions.
A list of 130 dyes fall in the prohibited category that come from 20 banned amines. The food laws and controls having firm roots in the European Union, are being modified or amended to cover textile chemicals. The Pakistani textile industry will not only have to meet the Eco-standards that are already set, but also make preparations for the more rigid future requirements.
The challenges to our textile products due to Eco-toxicological and environmental factors are immense. We anticipate that environmental issues, particularly the question of Eco-standards and Eco-labels in the apparel and textile industry, shall be fast assuming great significance for successful export and market promotion. Exporters will have increasingly powerful competitive advantage, if their products can be promoted as certified and labeled according to recognized Eco-standards. The reverse also holds true -a in the absence of following the Eco-standard the market can shrink.
In Pakistan, there are over 2000 small and big industrial units involved in dyeing, printing and finishing of textile products. Only a few organized big units, having accessed and appreciation of the Eco-norms and laws have taken appropriate corrective steps. Unfortunately, majority of the units in the unorganized sector lacks detailed information and the ability to change their processes to cope with international Eco-requirements. More than 70% of the dyes consumed by the wet processing industry are chemically of undefined nature and origin or source. There is no concept of prohibited As-dyes. Control of any sort on this supply will be extremely difficult. Furthermore, highly sophisticated and well-equipped laboratories are required to analyze and certify the Eco-safety of textile products according to accredited standards.
The question is whether the entrepreneurs and manufacturers will be willing or financially capable to introduce such latest and sophisticated technology.
PROSPECTS FOR EXPORTS AND GROWTH OF READY-MADE GARMENTS
Pakistan’s ready-made garments industry has achieved significant progress and has acquired capability of producing a large volume of quality garments for domestic consumption as well as for exports. Exports of woven garments have grown rapidly in recent years and now account for over 50% of Pak garment exports.
Local demand for ready-made garments during the past five years increased manifold due to an increase in GNP rate of urbanized population. Ever increasing tailoring changes will also induce the people to purchase ready made garments in larger quantities in the coming years.
The potential for exports of ready-made garments is estimated at $ 1.8 billion in the year 2001. But this can only be realized if appropriate steps are taken to solve the problems being faced by the value- added industry.
In this connection fashion shows should be held twice a year under the auspice of the Export Promotion Bureau. The dates of the shows should be coordinated with the dates of Indian fashion shows, which are held twice a year.
Ready-made garment exhibitions/ fairs should be arranged abroad, especially in USA and Europe, with effective participation from the existing importers abroad.
Export of ready -made garments
|Year||Quantity (million dozens)||Value(in million Rs.)||Value (in million) US$|
Export of ready-made garments -major countries (value in $ million)
GROWING POPULARITY OF THE KNITTING INDUSTRY
Within the textile sector, knitted apparel has emerged as the largest sub-sector. Knitted apparel earns about $ 750 million from exports. Overall this sector has made impressive improvement in quality and volume growth, particularly since 1991.
Pakistan seems to have created a competitive edge in knitted apparel internationally. Brand names like Nike, Tommy Hilfiger, Calvin Klien, Chaps, Ralph Lauren, Timberland, Gear for Sports etc are all sourcing from Pakistan. The main centers producing this merchandise are Lahore, Karachi, Islamabad, Multan and Sialkot. In terms of plant and equipment, building layout, safety and health conditions, labor practices and environmental sensitivity, we have probably the best manufacturing facilities in south Asia.
Knitted apparel therefore, has the potential of leading Pakistan’s textile sector to the forefront of international textile trade. Realizing this potential depends to a great extent on two major factors – the availability of trained manpower and the overall macro-economic management of the economy.
CHEAP LABOR AND DOMESTIC RAW MATERIAL AVAILABILITY:
So far, unfortunately, Pakistan has not been able to take advantage of its cheap labor and domestic raw material availability to capture a significant share of the world’s T&C market. However, the opportunity still exists and can be exploited as was done by Bangladesh and India.
POOR PRICE RISK MANAGEMENT:
Since the 1970s world cotton prices have been very volatile. Trying to remain competitive in world market has already been a challenge for Pakistan’s cotton and ex industries. Managing price risk has been extremely difficult for both mills and cotton grower. Future markets, used by many developed and developing countries’ competitors are largely unfamiliar to Pakistan’s producers. If competitors are benefiting from the ability to manage price risk, it will be difficult to survive without being involved. The instrument of options provides an effective method of managing risk. Apart from their unfamiliarity, Pakistan’s cotton and textiles producers have been hesitant to use options because of their high-perceived costs. However, option spreads can be used to cover the cost.
MARKET IN AFRICA
An opportunity of a new market exists for Pakistan in African countries. A recent combined report of UN and USA research groups has predicted a serious problem of water availability for the countries’ in the next 10-15 years and identified 25 flash points at various rivers where there is a threat of war between countries for water. So now the future policies of these countries will be advising the growers to substitute their crops of rice and cotton which needs lots of water to other crops. So Pakistan can avail the opportunity of tapping this market in the next 10-15 years.
PORTER’S FIVE FACTOR COMPETITIVE ANALYSIS
Assessment of industry attractiveness
Threats of new entrants
- High capital requirements and significant economies of scale of existing producers are major deterrents for new entrants in the integrated/composite sector
- Quota system for the west secures access to major export markets. Established access to Japan, Hong Kong and South Korea non-quota markets secured through comparative advantage
Bargaining power of suppliers
- Most of the cotton grown is low count. Consequently product differentiation is minimal and switching cost slow
- The textile industry’s fortunes are closely tied to the cotton growers and vice versa.
- Deregulation of cotton trade allows manufacturers to import cotton in periods of low cotton output or excess demand.
- Many manufacturers produce low quality yarn and fabric. Vertically integrated units rely on in-house sources of supply.
- Spinning over-capacity discourages cotton growers to integrate forward.
Bargaining power of customers
- Buyers of Pakistani yarn and cloth are heavily concentrated in East Asia.
- Competitors can supply similar products at lower prices.
- Buyers are highly price sensitive due to commodity nature of items.
- Little threat of backward integration
Threat of substitutes
- Polyester Staple Fiber (PSF) considered the best for cotton increases in importance during periods of poor crops. It also complements cotton. The PSF to cotton consumption ratio has risen from a historical 20:80 to 35:65, in keeping with international trends.
- Reduced tariffs and adequate PSF capacity in Pakistan has led to price reductions
- Manufacturers encouraged producing blended fibers that fall outside quota restrictions.
Rivalry among existing firms in the industry
- Existing competitors engaged in price undercutting to retain market share
- Excess spinning capacity has eroded margins while growth has been mainly in the value added sectors
- Capacity utilization of integrated mills was a mere 48% in Fiscal Year 1997 but is on the increase. Textile products face tough price competition from Indian and Chinese products.
- Comparative advantage of cheap labor and land are under threat from other Asian rivals like Bangladesh and is likely to intensify in future.
THE RESTRUCTURING CHALLENGE OF TEXTILE INDUSTRY
The restructuring challenge faced by the textiles sector of Pakistan is explained below. There are positive factors, which need careful hatching for profitable sustainable reproduction of the sector. Negative factors, on the other hand, frequently causes infection and is immune from all the vaccines. They are:
- The major challenge for Pakistan’s T&C producers is to enhance the competitiveness, which is presently threatened by the internal weaknesses. Monitoring for quality is the biggest challenge, because quality may be multi-dimensional, un-quantifiable in some respect and may contain an irreducible subjective element. However, a market economy devises various institutions to cope with the certainty about quality. These include brand names, advertising, guarantees, warrantees, client relationships, service contracts and most importantly effective information system. For maintaining and enhancing competitive edge, the producers must develop these institutions. Substantial investment in real time systems is required for using information technology to respond to changing customer preferences within the shortest possible time. Maintaining competitive edge in the 21st century necessarily requires improved relationship with the customer.
Suppliers who can give rapid response to satisfy their customers will invariably be the winners. On-line facilities such as order status inquiry, delivery timetable, video conferencing, new order booking and customer inquiries will help to improve competitiveness. A s a matter of fact, essential intelligence about customer and other suppliers, specialized product knowledge and updating operational information are increasingly becoming more and more important inputs. These inputs must be produced, nurtured, managed, preserved and above all effectively utilized.
- Government policies which create an environment for industry to invest in upgradation / modernization and expansion, especially with a view to improve export focus, need to be formulated. Given that there is a greater value addition in fabrics and garments, the Government policy must recognize the need for enhancing their finishing quality to the market competitive levels. To accelerate the implementation of ISO9000 and ISO14000, the Government should provide consistent incentive packages to the export oriented industries. Both the Government and exporters are responsible for lower unit price realization of Pakistan’s textile exports in the past. The quota policy has always been remained tilted towards volume exporters against those who make efforts to improve quality standard.
During the transition period, the Government still has a good chance to encourage the exporters in achieving higher unit price realization through quality improvement.
3 A Textiles University, joined funded by textiles producers and the Government, needs to be established for upgrading technical knowledge and efficiency at all levels of production. Further, a National Textile Commission, consisting of textile producers and market experts, should be setup to examine the most important global trends during the first decade of the next century. Given that even the best financial and business strategies get it wrong a lot of time, the commission should particularly focus its attention on predicting when and how significant changes might occur. Without such preparations, life for textiles producers is not going to be easy in the coming years.
4 there are even suggestions for “Ministry of Textiles”. Currently, day to day affairs of the textiles sector are dealt by different ministries, including Ministry of Commerce, Ministry of Finance and some line departments. The creation of ‘Ministry of Finance’ can provide a ‘One Window Operation’ facility and will certainly improve the performance Pakistan’s two major South Asian competitors, India and Bangladesh, already have Ministry of Textiles in operations.
- Mutual consistency of fiscal, monetary and trade policies is the most important prerequisite to increase the efficiency of all economics sectors, including textiles. However, this is a necessary but not sufficient condition. What is additionally required is a reduction in bureaucracy, which currently hampers efficiency at all levels. Specifically important are custom clearance formalities and sales tax refunds and duty drawbacks. The Pakistan Government has imposed sales tax on cotton at ginned stage. Since more than 90 percent of the cotton either in raw form or in the shape of yarn, fabric or ready-made garments is exported, it means that the tax paid has to be refunded. On the one hand, net result of this futile exercise is the administrative cost for collection and refund of the tax, on the other it further adds to the liquidity problem of the textiles sector due to delays in settlement of claims.
- Addressing the problem of regional and financial instability as a result of Pakistan having gone nuclear; efforts to restore the international economic and political relations; adjusting the value of Pakistani Rupee in relation to the currencies of other developing countries’ competitors: addressing the anti-dumping duties on a tripartite base which requires dialogue between producers’ representatives, Pakistan Government and duty imposing importing countries. Pakistan has experienced repeated imposition of provisional anti-dumping duties on unbleached 100 percent cotton. During 1997, the EU imposed anti-dumping duties on the imports of unbleached cotton fabric from Pakistan. Presently, the Ministry of Commerce and Ministry of Law do not have experts to defend Pakistani exporters against dumping allegations. The Government and APTMA are forced to hire foreign experts and pay them fees in foreign exchange. It may be out of context to mention here that the Ministry of Commerce does not even have people for quota negotiations. For a long time, negotiations were conducted by a chartered accountant who had worked as consultant to the Ministry. Even the Textiles Quota Management Directorate does not have the experts in question and had re-employed one of past directors on contract basis after his retirement. The last director general until 1996 was from the DMG group. For decades, people have headed the Export Promotion Bureau from civil services groups. Since Pakistan is one of the ten members of WTO’s Textiles Monitoring Body (TMB) to supervise the second stage, 1998-2001, implementation of ATC, now it has a good opportunity to do away with the shortcomings and defend the interests of its textile producers during the transition period and beyond.
- First of all, full implementation of WTO agreement by all signatories. Even when this prerequisite is met, there are certain crucial factors, which are going to be beyond control of Pakistan’s and other developing countries’ textile producers. Firstly, even when the Uruguay Round trade liberalization agreements are fully implemented, trade in T&C would still be highly subject o both direct and “indirect” non-quota barriers. It appears that, apart from post-Uruguay Round tariff peaks which are going to escalate with the level of product’s processing, restrictive measures such as anti-dumping actions are going to be increasingly used to restrict imports from developing countries. The number of anti-dumping action reported to the GATT Secretariat shows a steady rise since 1990 [GATT (1994)]. Further, integration of the T&C sector under GATT system may be replaced by another set of restrictive practices in the next round of trade talks. There are sound reasons behind author’s apprehension that extraneous issues, such as environment, social concern and ambiguous labor standards, will played up by the developed countries in the next round of trade talks to the extend of achieving explicit deliberations.
- Secondly, another challenge is the risk of being left out of proliferating free trade areas and custom unions. Particularly, NAFTA and EU are continuously growing both in width and depth and now cover virtually all major markets of Pakistan’s T& C exporters. The spokespersons of NAFTA and EU often attempt to camouflage their global trade liberalization rhetoric by arguing that both developing countries and this countries would benefit from the trade creating effects of these regional arrangement materialized into the stimulus to growth and thus import demand in the member countries. Although to assess the magnitude and spread of trade diverting effects of NAFTA and EU is beyond the scope, it could be argued that there are reasons to think that diversion effects in T&C will enormous. The anti-dumping duty imported by the EU during 1997, on the imports of unbleached cotton fabric from Pakistan was triggered by the campaign jointly launched by the textiles producers in Greece, Spain, Portugal, France and Italy, because the prices of unbleached cloth they produce were incompetitive, making them unable to capture their own market. MFA dates back to the times when EU was an intermediate, half functioning common market and the poor relations, Greece, Spain and Portugal, were not even considered to be qualified for its membership. Once MFA’s binding obligation is over, these countries may resort to any measures to protect he interests of their textile producers within the wide, and continuously expanding, EU market. This could further increase the degree of marginalisation of Pakistan’s T&C exporters who have become accustomed to the protection provided by the quota regime.
Thirdly, it is expected that over the next decade the further introduction of micro-controllers (the while collar microprocessor equivalent of the blue-collar) in textiles, machinery will facilitate the shift of T&C manufacturing back to the developed countries. Already with open end spinning techniques, shuttle-less looms, multi-phase looms, double knitting machines, non-woven fabrics and programmed pattern printing comparative advantage seems to be shifting back to developed countries. Although it is still not clear how the slump in the world economy and the on going “Asian crisis” will effect productivity and demand globally but companies that emerge survivors from the “Asian crisis” will be those that have the management who understands the stakes and is skilled enough to take the calculated risk.
Economic projections about the benefits in the next millennium to developing countries from the Uruguay Round generally and from the abolition of MFA specifically should not simply reassure and lull textiles producers and policy makers about a future with many uncertainties. Trade and trade liberalization does not produce wealth and jobs; they only help in the distribution of demand and jobs. Pakistan’s T&C industry faces in the next millennium both great opportunity and even a greater threat globally for it to survive and grow. Many of the changes that will occur are outside the control of Pakistan and her textile producers. It is the responsibility of Pakistan’s Government to assist the producers in their effort to prepare themselves for the looming challenge by keeping pace with the market dictates and dynamics. Although Pakistan needs quantum leap, it may have better chances of retaining and eventually increasing its market share even it is succeeds in achieving marginal increase in textile quality and productivity every year during the transitory period. AS the world economy become, increasingly integrated external influences have an ever-greater impact on countries domestic economic. In reality the many external and domestic factors that will determine Pakistan’s T&C industry performance in the world market do not operate independently. There is a complex interaction, both positive and negative: a factor in one category can interact with others in the same category, and developments in external factors can improve or worsen the effects of domestic factors and vice versa. Tariff escalation in specific sectors, including T&C and other non-quota import barriers will continue to be a feature of developed countries trade practices in the post-Uruguay Round world of the next century. Given all these challenges, global business success will more likely happen to those who earn it, not to those who fall into it. The competition is getting increasingly fierce and the only selling point is quality at competitive price.