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Sunday, 5 May 2013

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Apparel industry will overcome challenges - Secretary General, JAAF

"The apparel industry in Sri Lanka has overcome difficult situations. Today we face new issues such as labour shortage and cost increase. We will use our skilled knowledge base and develop the front-end of the industry based in Colombo, providing services to manufacturers and market products using our brands as reputed apparel manufacturers. This is the new era of the Sri Lankan apparel industry," said the Secretary General of the Joint Apparel Association Forum (JAAF), M.P.T Cooray in an exclusive interview with Sunday Observer Business.

M.P.T Cooray

Q. How do you see the growth of the apparel industry during the past five years? Is there a setback or slowing down in growth?

A. In terms of exports there has been continuous growth since 2008 in the two main markets, the US and the EU except for a dip in 2009. In 2008, total apparel exports were at $ 3.3 billion and due to global recession it declined to $ 3.16 billion in 2009.

Since then export growth continued and it was $ 3.36 billion in 2010 and $ 4.03 billion in 2011. The industry had set a target of $ 4 billion in exports by 2016 and we reached the target in 2011. Again there was a 5.3 percent drop in exports in 2012 and the total apparel exports recorded $ 3.8 billion.

There are several reasons for the decline in 2012 and it is associated with the sharp increase of exports in 2011. In 2011, there was a significant increase in cotton prices and as a result, prices increased. On the other hand, the changing situation in other apparel exporting countries such as cost increase in China and Bangladesh and disturbances in Egypt created favourable conditions for Sri Lanka. When the GSP+ was withdrawn, it had no impact because by then orders had already been undertaken.

In 2012, the situation was different and both major markets were suffering from recession and imports had shrunk. However, the percentage decline in apparel exports was less than the decline of total exports to those countries.

Secondly cotton prices stabilised in 2012 and it affected turnover.

Thirdly, a few companies suffered as a result of the withdrawal of the GSP+, because they depended on concessions and they had to find new markets.

By and large the Sri Lankan apparel sector is no longer a footloose industry and could shift to other countries and stabilise. However, competition from countries such as Bangladesh, Vietnam and India is intensifying and we now face a competitive environment. This 5.3 percent decline is a result of all these factors.

We continue to be one of the main players in the EU market, because despite a distorted picture of Sri Lanka being painted internationally, we continue to enjoy the general GSP facility which reflects that we maintain labour and other standards. Other than this facility we don't have any other concessions.

The Sri Lankan apparel industry is always forward looking. In 2005, when the quota system was abolished it was envisaged that the apparel industry would collapse.

However, the industry decided to accept the challenge and we did it strategically. Concentrating on new initiatives in managing the supply chain and facing an increasingly competitive environment have been done successfully. As a result we became a total solution provider instead of low-end manufacturers.

Apparel exports have increased from $ 2.7 billion in 2005 to $ 3.8 billion today. No other industry in Sri Lanka has faced adverse situations as the apparel sector and we have confidence that we can overcome whatever adverse conditions we encounter domestically or internationally.

With regard to value addition, today the apparel industry of Sri Lanka is not totally import-dependent on raw material. Because we invested heavily on input-manufacturing such as fabric, packing materials and accessories. Today our value-addition is more than 55 percent and this gives us a competitive edge.

We also have established brands and Sri Lanka is known as a quality and timely apparel supplier. We continuously attempt to improve our position. Therefore we can say the apparel industry of Sri Lanka is growing despite challenges.

Q. Investments coming into the industry is declining while some of the leading manufacturers are shifting to other countries. What are the reasons?

A. We do not believe there is a decline in investments. We don't have statistics of Foreign Direct Investment (FDI) which come into the apparel sector. However, setting up factories overseas by large Sri Lankan apparel companies does not mean declining investments in the sector. In the event they close factories here and shift to other countries then the argument stands.

The investment in the apparel sector has changed over time. In 2005, when the Multi Fibre Agreement with the US was in place there were around 800 garment factories. But exports were low as $ 2.5 billion. Today there are around 350 factories but exports total $ 3.8 billion. Over time the industry has consolidated while companies depending on quotas faded away.

Today the apparel industry is in a competitive environment and companies have their own marketing strategies and are doing well. These large companies well connected to markets have become regional players in manufacturing. They get orders to Sri Lanka, manufacture it in other countries which have cost advantages, add value in Sri Lanka and export.

They are only looking for low cost centres and have not ceased their production here. To facilitate this new environment the regulatory framework has to be changed. Therefore, there is no decline in investments in the apparel industry and local investments are coming in.

Q. Labour shortage is a serious issue and there is an allegation by trade unions that the industry has not solved the real issues and merely carry out promotional campaigns. What is your response?

A. Yes we do have a problem. But we don't believe that workers are leaving the industry because we do not pay living wages to them. Our understanding is that the labour shortage is heavily felt by the SMEs concentrated in and around Colombo. Reports say that there are over 30,000 vacancies in EPZs, but the 30,000 are not all in the apparel industry, because most of the garment factories are not in EPZs.

One major reason for labour shortage is the perception of the people. The social stigma attached to the apparel industry is a major issue. Job security is another reason. Wages are not the issue because there are other industries or sectors that pay lower salaries but there is no shortage of workers. For instance, graduates prefer government sector jobs even at a salary of Rs. 10,000.

On the other hand, we are the only visible industry that grew over the past three decades. There was no competition in the labour market from other industries. With the peace dividend other sectors are emerging. New super- markets, the IT BPO industry, tourism projects are coming up and there is competition in the labour market. Young people prefer office-oriented work rather than a factory environment and therefore a labour shortage is natural.

However, most of the garment factories are in rural areas all over the country and they have not felt a severe labour shortage.

A proposal was made to JAAF requesting the right to import labour. But we unanimously rejected it because it was not commercially feasible. The cost that will be incurred will be dictated by various international regulations and there are other costs as well. If these costs can be paid then there is a possibility of diverting Sri Lankan migrant workers to the apparel industry. Today, that is what we are trying to do.

Despite all these issues, our wages are higher than the minimum stipulated wage. If we don't pay a living wage as claimed by some quarters, two things could happen. Workers will shift to other industries or migrate. Neither of this happened in garment factories in rural areas and in addition to reasonable wages they receive other benefits such as transport and free meals.

However, to address issues faced by companies in the Western Province we have implemented a plan to relocate these industries in rural areas. The apparel industry of Sri Lanka always faces challenging situations. In this case too we have a plan to use our highly skilled knowledge base and develop the front-end of the industry based in Colombo and provide services and market the products as reputed apparel manufacturers.

There is a new supply chain management strategy and new business plan. For this we need a new regulatory framework that facilitates trade, transshipment, logistics and a new method of manufacture. This includes obtaining orders and manufacturing in other countries. This will create business opportunities for ports, airports and other sectors. We started this process three years ago and this is also a solution to the labour shortage. With all these plans we have revised our targets and expect to achieve $ 5 billion exports by 2016. This is the new evolution of the apparel industry.

Q. How does the new electricity tariff structure impact on the apparel industry?

A. The electricity tariff increase will jam our cost structure and the tariff increase for apparel factories will be around 15 percent. The cost increase of textile manufacturers' washing and dying plants will be enormous.

During our discussions with the Public Utility Commission (PUC) we requested them to consider the serious impact of the tariff increase on the export sector and repercussions on the economy and give us opportunities to face global competition.

However, they have not considered our request and we are disappointed with the authorities not creating a conducive environment for export industries.

Competitiveness is the key element in the export industry. We produce for export not local markets. Our basic difficulty would be the demand for price increases by all stakeholders in the supply chain. Over 50 percent of the value-adding industry cannot absorb any other cost because there is no any preferential treatment and labour and other costs too have increased.

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