Challenges ahead for the Sri Lankan garment industry

Many see Sri Lanka as the next “tiger economy” in Asia. It is not hard to see why. The country has stabilised after the end of the conflict in 2009. Economic growth has been around 7% for a while now. However, exports have been in decline recently. In 2000, exports stood at 30% of the Gross Domestic Product. By 2014, it had gone down to 15%, indicating a reduction of 50% percent.
The issue is that the manufacturing sector is lagging behind, according to  the Prime Minister Ranil Wickremasinghe. In his November budget statement he seemed also to suggest that the apparel industry should no longer be seen as the mainstay of the manufacturing sector, calling instead for a diversification which could include car assembly and car component manufacture as well as high tec manufacturing.

So where is the emphasis going to be? Well according to Prime Minister Ranil Wickremesinghe:

I see Sri Lanka’s economic future as a services hub;  a niche manufacturing destination to produce goods which plug into regional and global value chains, particularly light engineering; and a location for high-value agricultural products such as fruits, vegetables and dairy, both to service the rapidly growing tourism sector and for exports, especially, to the Middle Eastern and Indian markets”.

Exports need a boost and it seems that this is targeted to come from the development of “light engineering”, not something Sri Lanka has much experience of. So whether this will turn out to be a wise decision is something that will come out in the wash.

 An emerging economy

Sri Lanka has a lot going for it right now,  and the pre-conditions for strong economic growth look to be in place.

  • increasing political stability
  • the undoubted quality of the labour force,
  • high levels of literacy amongst the workforce
  • a strong business culture
  •  the emergence of a new breed of young ambitious entrepreneurs
  • a go-ahead government with ambitious plans to fast track growth and with  a clear vision for the future

So it isn’t that surprising that Sri Lanka plans to achieve an economic growth beyond 8% in the next three years.

The Megapolis project (see my blog posted 24/02) is a further example of the ambition of the current government as it seeks to leverage a number of locational advantages:

  1. Location; Sri Lanka is perfectly placed to come a transportation hub. It is equidistant between Europe and Far East,  on the major East-West shipping lanes and with easy access to lucrative Middle Eastern markets and rising African markets. India the major industrial player in the region is just 20 miles to the North.

lanak location

credit; sagt.lk

2. Improving trade relationships with its neighbour, India, with the EEC and the USA ( see the Indo-Sri Lanka Free Trade Agreement for example.)

3. High levels of support and investment from China

So where does that leave one of Sri Lanka’s traditional stars; the apparel industry?  Is it in danger of being ignored? What part, if any, will it play in the development of the new economy?

The garment industry has long been a standard bearer for Sri Lankan manufacturing. So what price it can make an increasing contribution to export performance and economic growth? The portents are not promising.
Prospects and Challenges for the Sri Lankan Garment Industry

A note on the role of the textile industry in the development process:

The textile industry often plays a part in the development process for a number of reasons

  • the technology is relatively accessible and affordable
  • there is a large global market to compete in
  • the industry is price sensitive so emerging economies with lower labour costs enjoy a comparative advantage
  • textiles/garments are labour intensive and create significant employment
  • the industry develops industrial/manufacturing skills in the labour force
  • it also makes use of existing skills in the population and draws on existing cultures

The garment industry is already a major industry in Sri Lanka; the question is how can it evolve to help drive the economy forward?

Some key facts

  • In 2014 Textiles and garments accounted for 44% of exports (Export Development Board (EDB) Sri Lanka) and 39% of industrial production
  • it employs nearly 1 million workers both directly (300,000) and indirectly (600,000)
  • the industry accounts for 1 in 5 of all industrial establishments in the country
  • In 2013, earnings from textile and garment exports were 4.5$billion  making it the highest foreign exchange earner
  • Exports to the EU and the US, the two main markets recorded annual growth of 6.8 and 21 percent respectively.
The World Bank View

Accounting for $4.4 billion of its exports, Sri Lanka’s apparel sector outperforms other South Asian countries in terms of quality, lead time, reliability,  social compliance and sustainability.  Although its apparel prices are higher than competitors, Sri Lanka produces more sophisticated products. As China gradually scales back its apparel manufacturingSri Lanka stands to gain market share, but currently not as quickly as some Southeast Asian countries.

However, In order to maximize its competitiveness, a new World Bank report recommends that Sri Lanka should:  

  1.  Enter into more trade agreements to help diversify export destinations for existing products, such as active wear and intimate apparel
  2. Expand into new products such as formal wear and high-end outerwear that require higher skills,
  3. position as regional apparel and textile trade hub taking  advantage of its infrastructure advantage
  4. Attract foreign investment through adopting clear investment policies, which currently remains at only 2 percent of GD Increase integration with South Asia and reduce tariffs for the import of man-made fibers, which accounts for 50% of Sri Lanka’s industry inputs, while encouraging domestic growth
  5. Promote industrial relocation
  6. Attract more female workers to relieve its labor shortages

The main players

The industry has some big players notably MAS Holdings and Brandix plus a number of small and medium factories make clothing for a number of global brands: the list is impressive: Nike, Victoria’s Secret, Next, Gap, Speedo and Tommy Hilfiger; and it supplies major supermarket chains such as Marks and Spencer and Tesco.

 

textile-industry-in-sri-lanka-7-638

The Location of the Industry

30% of all factories are located in Western province (around Colombo and Gampaha), especially the larger enterprises whilst the small and medium enterprises tend to be more dispersed. There is also a significant presence in the industrial export zones; see maps below

western-province-map

Western Province

source: Maps of the World

 

zones

Export processing zones

source: BOI Sri Lanka

The Garment Industry: a SWOT analysis

Strengths; 

  • location ; situated on the main sea routes is an attraction for manufacturers.
  • Availability of skilled labour, educated and trainable work force
  • Some of the most modern factories to be found anywhere in South Asia
  • a significant competitive advantage in terms of certain garment types: The lingerie, swimwear and sportswear segments, which require a high degree of skill and utilisation of advanced technical fabrics for manufacture, stand as Sri Lanka’s main apparel strengths.
  • ability to handle high volume orders
  • a reputation for quality short lead times and on time delivery; Sri Lankan manufacturers are now leading the way in terms of reducing  design – to needle – to delivery,  down to a matter of weeks rather than months: this from Sriyan de Silva Wijeyeratne, managing director and CEO of Textured Jersey Lanka.

“It is also about speed.  Brands are now moving towards fast and reactive fashion models. Where lead times were six months a few years ago, they are now six weeks. This makes supply chains much more compressed, and hence the challenge to be nimble.” This is where Sri Lankan companies expect to maintain their  advantage, thanks to a history of fulfilling orders to deadline for international brands and sourcing agents.

  • a reputation for conforming to the highest standards of working practices, working conditions and labour laws (although this last point has been challenged by two visiting EU commissioners recently).

see Daily mirror article 27/04

Listen here to Sami Bandara, general manager of a medium sized apparel company based in Colombo on the strengths of the industry

Weaknesses

  • Lack of marketing skills and a low level of marketing information, and knowledge about export marketing.
  • the need to import all raw textiles
  • high absenteeism and labour turn over.
  • availability of employment in other industries and foreign employment opportunities
  • too concentrated in Western province; needs to decentralise into rural areas, but a factory culture has not yet established among workers in rural areas
  • low labour productivity and Increasing labour cost
  • the absence of a growing “local” market in neighbouring countries which would provide an alternative or addition to the USA and Europe
Sami’s view on weaknesses

The labour leakage/shortage is a critical issue because it means that factories are working at maybe only 70-80% capacity. It makes meeting delivery targets that much harder. At present the leakage rate is anything between 3% and 7% per month depending on the company according to Sami Bandara

Sami again; this time on possible solutions

Cultural factors are at play here plus there is a stigma attached top working in factories. In addition women are harrassed on their way to and from work by men, which is both unpleasant and unnecessary. The long hours and often poor conditions in workers’ hostels are also factors which it seems discourages women from working in factories.

Opportunities
  •  re-instatementof GSP+ now looks to be a a strong probability. This will  allow Sri Lankan garment manufacturers to export to Europe without incurring taxes or quotas
  • the major players like Brandix for example look set to expand textile production in Sri lanka, thus reducing reliance on imported textiles. The country already supports four main fabric mills, with companies like Textured Jersey – a subsidiary of Brandix – having expanded regionally in recent years. and this is necessary because the GSP+ scheme mandates that apparel exports be manufactured using regionally sourced fabrics, meaning Sri Lankan garments made with fabric from major source markets in East Asia will not benefit from GSP+.

    A note: 

The EU’s “Generalised Scheme of Preferences” (GSP) allows developing country exporters to pay less or no duties on their exports to the EU. This gives them vital access to EU markets and contributes to their economic growth. the standard/general GSP arrangement, which offers generous tariff reductions to developing countries. Practically, this means partial or entire removal of tariffs on two thirds of all product categories.

GSP plus: the “GSP+” enhanced preferences mean full removal of tariffs on essentially the same product categories as those covered by the general arrangement. These are granted to countries which ratify and implement core international conventions relating to human and labour rights, environment and good governance.

Threats

  • increasing competition especially in terms of lower labour cost from Bangladesh, Cambodia Laos and Vietnam Myanmar
  •  Sri Lanka’s labour costs are increasing at a faster pace than productivity
  • competition for labour with other emerging industries especially in Western Province ( see Prime Minister’s commets re manufacturing “mix”
  • the necessity to reduce lead time from the manufactures to the shop, and the distant suppliers’ inability to deliver the value added garments on time
Capturing the Niche Market
  • Large companies like MAS Holdings and Brandix are now moving to a complete integration of the manufacturing process where design, manufacture and packaging are all sourced “under one roof” which cuts costs but more importantly cuts down the time iot take sto bring new designs to market
  • They are also moving to establish own high quality brands
  • increasingly Sri Lankan companies are developing niche products which gives them a competitive advantage in the global market place

Sami’s company Textile Lanka occupy a specialised niche in the market which gives them a competitive advantage. Listen here for a run down of the way his business world

The Future

It seems inconceivable that Sri Lanka should ignore one of its most successful industries as it continues its march towards higher levels of prosperity. Hi Tec industry will come to Sri Lanka but as yet there is a shortage of highly trained and qualified personnel for the communications and IT industry. Similarly where are the engineers? Developing them will take time.

And in the meantime Sri Lanka needs to nurture is garment industry. However, where are the state of the art garment research institutes? Is there a college or institute specifically aimed at creating the next generation of marketeers and entrepreneurs? Should more emphasis be placed on developing home grown fashion designers and should fashion design be given greater status within the education system? How about a bringing major international fashion show to Colombo? Finally how about the government getting behind the industry both in words and deeds. The garment industry is a real “gem” that deserves recognition and support from senior ministers.

Solving the labour shortage is also a key issue. Quite why the industry has such a low status is a puzzle but a long term campaign to win the hearts and minds of potential workers needs to be undertaken. Perhaps TV programmes which don’t show the  industry in such a negative light will help, as would encouraging words from senior members of the government. In the meantime harassment of female workers has to be stopped.

Plus,  pay and working conditions need to be improved. Although many owners argue that they pay a competitive wage they may need to review  their approach. 27,000 rupees per month is not a high salary. If it was men and women would be clamouring to work in the factories rather than leaving in droves which is what seems to be happening. Sami argues that people driving tuk tuks would be better employed in the garment factories. However, if they can earn as much or more driving a tuk why would they work in a factory?

The garment industry has the capacity to evolve to meet oncoming challenges, and it will need to do so if it is to remain viable. The UK lost its textile industry 100 years ago because it did not move with the times. The same does not have to be true for the Sri Lankan garment industry.

Listen here to the full interview

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