The Apparel Industry In Sri Lanka Economics Essay

The apparel industry in Sri Lanka rapidly developed in the mid 80's after the implementation of the open monetary policy. Industrialization was given first preference in order to move the monetary structure from an agricultural base with an industrialized and service oriented structure by the federal government. Because of this policy the apparel industry was given special preference and steps were taken up to promote this industry amidst local and foreign industrialists.

The commencement of professional development zones and export zones directly benefited investors and enabled those to easily create their infrastructure needs. Aside from this, certain trade policies and agreements such as the multi-fiber policy, Indo - Sri Lanka Free Trade Agreement, the 200 Garment Factories Program and the recently offered GSP+ Concession etc. also directly influenced the boost in this sector.

Today as result of the above mentioned measures there are over 850 registered garment enterprises in Sri Lanka and there are over 1000 SME level garment enterprises that contribute towards the development of the neighborhood economy.

The present-day income made out of this industry exceeds over 42% (approx: $3 Billion) of the country's export earnings (Refer appendix - 03. Export structure Breakdown) and, on average, contributes over 45% of commercial production and around 6% of the GDP, thereby converting itself to be the highest foreign income earner for Sri Lanka. It presently employs over 350, 000 workers who account for around 15% of the country's entire work force. Majority of these employees are females and then the industry plays a major role in women empowerment in Sri Lanka.

The Threat - Withdrawal of the GSP+ Scheme

Since early 2005 the neighborhood apparel industry has been facing various difficulties including the withdrawal of the Multi Fiber Agreement in the year 2005, increased competition from low priced players such as China, Bangladesh, and India who are actually more preferred as manufacturing destinations and the credit crunch which led to from the Global Economic Recession in the year 2008.

The GSP+ is a duty free export concession awarded to countries which match the requirements set by the EU on good governance, compliance to international human rights conventions and labor standards.

On the 15th February 2010, the European Union (EU) decided to temporarily halt the GSP + concession which was extended to Sri Lanka due to violations of the EU agreement and causing further difficulties for the local industry.

Necessity for Value Chain Improvements

The impact caused because of the withdrawal of the GSP+ concession towards the sustainability of the industry is high as they have resulted in an direct upsurge in the purchase price (because of the enforcement of duty and additional tax payments made upon exporting) and thus has made local garment exports much more expensive than other exporters to EU countries.

This situation has led for the contraction of the industry and has also threatened the newborn firms (SME) because they are unable to obtain orders from the EU market due to the uncompetitive prices offered consequently of the import duty imposed.

Due to the above mentioned issue, industrialists today are thinking about to withdraw out of this sector as it is losing its attractiveness in terms of profitability, profits on return and due to several other macro factors such as lack of government support, tight financial conditions with high borrowing costs etc.

Therefore its about time that relevant parties investigated this matter to be able to rescue the industry by providing various facilities required and ideal for an industry vision for future years which is targeted upon value chain improvements in conditions of quality, lean costs, reduced lead time in production and sustainability.

Furthermore organizational restructuring in conditions of technology, techniques and infrastructure will also need to be incorporated in to the vision of the industry in order to stamp a existence in the global market.

Potential Publications

A case based on the aforementioned issue faced by the neighborhood apparel industry has been produced and would like to seek publication in the next professional journals or magazines.

Sri Lanka Garments -

A Journal Published by the Sri Lanka Apparel Export Association (SLEA) by using an gross annual basis and has a reader base of over 4000 apparel industrialists and investors. The journal mainly features valuable insights of the apparel industry covering regions of the export market, industry issues, future developments and trends. The editorial policy of this journal mainly stresses on the fact that articles regarding the industry would only be published at the mercy of a prior verification on the credibility of sources and facts utilized by the writer.

LMD - Published by Media Service Pvt Ltd.

Lanka Monthly Digest, an area business magazine published monthly and currently has a reader base of over 20000 corporate and individual clients within the island. This magazine mainly involves articles which relate with the local business organizations, Colombo Currency markets performances and also features special articles based on a specific theme.

Financial Times

This is an everyday Business newspaper which is published by the Wijeya Newspaper Ltd and currently has a mass reader base covering over 28, 000 households island-wide. This news paper mainly contains a comprehensive coverage of local and international business news.

Request for Publication

I personally think that this article about the loss of the GSP+ Concession that i have forwarded for publishing will be a great value addition to your journal (Sri Lanka Garments) as this post explores a major issue which impacts and threatens the industry. This information provides an alternate strategy how the industry could recover from its current position as the united states cannot afford to reduce the revenue made from this industry at the same time when the economy is within a recession.

The following article includes a significant issue which has emerged inside our local apparel industry due mainly to political factors, and since a journal which analyses various problems about the apparel industry and the neighborhood market performance, this post would help market analysts to judge various issues pertaining to employment, trade condition, future demand and supply conditions etc in a more realistic manner which would enable those to explore the industry further.

Therefore, as a journal which established fact because of its credibility, sound editorial policy and composition of a multitude of articles regarding various apparel industry issues, I believe that my article merits publication as it addresses a significant threat relating to the industry in nature and must be communicated to all or any relevant stakeholders on the market (Investors, Buyers, Government etc).

Word Count: 1067 words

The GSP Trade Concession

The GSP, also know as the Generalized Preference System is a particular trade arrangement granted by the European Union (EU) where they get excited about providing special usage of the EU market in types of reduced tariffs and taxes.

The Generalized Preference System (GSP) is mainly provided to 176 developing nations for an interval of 3 years and can be an incentive that is granted with the objective of reducing poverty, providing sustainable development also to promote good governance. The total value of imports under the GSP amounts to around 58. 6 Billion and the nominal duty loss is estimated at over 2. 5 Billion by year 2008.

Apparel and textiles, machinery items, minerals and gems, plastic and rubber items, footwear are the leading segments of imports which use the GSP scheme. (Refer appendix - 04. GSP preferential imports composition - 2007)

The GSP is provided to nations in three main forms,

Standard GSP: a general system which covers 6, 244 products and provides a standard preferential treatment which is given in form of reduced duty tariffs that is provided to all 176 nations.

GSP+ : this trade preference is provided to vulnerable nations which ratify and implement international conventions relating to human rights, labor standards, sustainable development and good governance. This preference is currently provided to 16 nations (refer appendix - 01. Countries covered under the GSP+ Scheme) including Sri Lanka and concessions to around 6, 336 products in terms of duty free coverage and reduced tariffs in specified taxes.

Everything But Arms (EBA): is a particular quota and duty free concession provided to 7140 products aside from arms and related items for the 48 least-developed nations.

Situation of Sri Lanka

Sri Lanka (SL) is amongst those 176 countries which receive the standard GSP. However, in the year 2005, the EU decided to consider SL as a "vulnerable state" predicated on its criterion and awarded the GSP+ scheme (refer Appendix - 02. Vulnerable nations) as SL's export portfolio was limited in terms of diversification (refer appendix - 03. Export structure breakdown) and due to increasing degrees of poverty which was further frustrated by the 2004 Tsunami and the 30 year long civil war. This trade concession further expanded work at home opportunities available, especially in the apparel sector within the EU region. SL were able to grasp them using the GSP+ scheme and thereby become one of the top 5 beneficiaries of the GSP+ scheme.

In the start of the year 2008, the intensity of the civil war started to increase and the united states geared itself up with an try to bring this conflict to a finish. This move created by the federal government caused significant uproar within the international community and many allegations were leveled at the SL government accusing them on violations of the next treaties listed under the ratification list of the GSP+ scheme. (Refer Appendix - 02. Vulnerable nations)

International Covenant on Civil and Political Rights (ICCPR)

Conventions Against Torture (CAT)

Convention on the Rights of the Child (CRC)

These issues prompted the EU to appoint a particular committee in October 2008 to investigate the amount of compliance and ratification of human rights as it is a key obligation which needs to be fulfilled in order to get the GSP+ concession. According to the committee's report, three major violations of human rights was discovered in terms of civil and political rights, torture and child protection.

Even although SL government blatantly denies these allegations predicated on the reported findings, the EU Regulation council decided on the19th October 2009 to temporarily withdraw the GSP+ concession for an interval of six months in order to rectify these issues.

The suspension of GSP+ Preference has directly caused a dent in political ties and international relations especially between United Kingdom and the other EU nations and the impact of this issue has extended itself into bilateral trade relationships between these nations and SL. Because of this, the apparel segment, the footwear exports industry and agricultural exports have directly been affected.

The Loss of GSP+ : Impact on the Apparel Sector

Industry nature

The apparel sector in SL constitutes around 1850 large, small and medium enterprises (SME) and currently employees over 350, 000 people directly and over 250, 000 indirect personnel in terms of support services. The industry in SL has positioned itself as a core manufacturer and middle man in terms of value addition because the industry has specialized itself in carrying out manufacturing of the garment, whereas the customer has to find the designs, fabric and all other input separately done. At present around 85% of the industry are in the export market business and the US, EU, Australia and Canada are some of the key clients of the industry.

The apparel industry attractiveness at this time is over a declining phase due to increased competition, increased costs of raw materials, reduced government backing etc (refer - Appendix 6. Industry Analysis). This example has been further aggravated by the removal of the GSP+ preference scheme due to various external factors explained above.

Impact

Currently around 50% of the apparel export is bought directly by the EU and SL at the moment holds around 1. 6% of market share of the full total EU market. China dominates the marketplace with over 46% of share and is also accompanied by Bangladesh which holds around 13% of the EU market (Refer - Appendix No 7. EU Market share analysis). Therefore, because of the suspension of the GSP + preference scheme, the local apparel industry is directly faced with a risk of losing its market share to other opponents in the EU market.

"If GSP were to go away, it is this phenomenal and compliant industry that will be hurt very badly. The consequences would see the rural economy facing hardships and women employment and empowerment would greatly be damaged"

- Mr. Kumar Mirchandani. President - SL Apparel Exporters Association.

The re-imposition of the trade tariffs would directly make the SL manufacturers apparels more costly to the EU market and so would directly place the SL apparels at a competitive disadvantage. At the moment, SL is the best priced EU apparel exporter (refer Appendix - 5. Average Prices of garment imports to the EU) and for this reason situation apparel exports to EU within the very first Quarter of the year has declined by 18% and therefore paving just how for global rivals such as China, Bangladesh, Vietnam who are popular for their more affordable apparels with an possibility to directly benefit through this example.

The limited diversity of the SL apparel exports in conditions of markets also have contributed adversely to this situation. At the moment the revenue made out of this industry is estimated around $3. 4Bn and 90% of the turnover is generated through the united states (44%) and EU (46%) markets. Thus an increase in prices within the EU would be an extreme sensitive issue as it would directly contribute towards a decline in turnover levels and so lead to a lack of market share.

Furthermore when contemplating the need to increase prices, SL manufacturers pose little or no power in conditions of bargaining mainly due to the marketplace structure which dominated by strong competition. (Refer - Appendix 6. Industry Analysis)

Therefore, the withdrawal of GSP+ alongside the other industry problems such as increased labor costs and regulations, energy costs, reduced government facilitation and increased financing costs have made this industry a hard one to operate along with many uncertainties which have to be addressed promptly.

Value Chain Improvements

Since a price increase would be detrimental to this sector, the majority of the SL apparel manufacturers must face the GSP+ challenge through considering options on internalizing the upsurge in tariffs with specific changes to their value chain through cost and margin improvements.

Special emphasis must be positioned on the SME segment because in an industry where SME constitute the majority, it is imperative to ensure the sustainability of these firms because they are directly linked to the rural economy of SL and are also key players in empowering women. SMEs also play a essential role on the market by providing various support services for large firms and thus indirectly ensuring their sustainability.

However it is this segment that faces the majority of the adverse consequence since their ability to control change is limited.

In order to overcome this situation, all firms should focus more on their primary functions specially relating to manufacturing and logistics segments which could be vastly improved using technological innovations and infrastructure support. Investments in these areas would enable businesses to increase their margins as they'll be able to reap the benefits of economies of scale, increased efficiency and reduced overhead costs.

Ex: Adopting the use of an Computer Aided Design (CAD) system in the process of cutting fabric. Remove capacity bottlenecks by investing on latest machinery and equipment.

Larger companies would view this option more feasible because of their strong financial background where as the SME sector will face difficulties in coping up with this move due to financial constraints.

Ex:

MAS Intimates - the main apparel exporter in SL opened its first custom built ECO - Factory for Lingerie manufacturing in the year 2009.

Hirdarmani Group (SL) investment in high tech garment engineering technology.

Additionally, firms should also try to stream line their value chain by improving value adding activities such as improved quality levels, lead times etc. and also by concentrating on removing and reducing non value adding activities such as raw material wastage, idle labour and machine hours, rejects and reworks etc.

The implementation of basic 5 S principals, Continuous improvement techniques (KAIZEN), standardization and total quality management principals would directly allow firms to benefit from increase yield, productivity and a lean cost structures which would directly facilitate improved margins.

The 2nd option mentioned above would become more encouraging to the SME segment because unlike the sooner option the financial resource requirement is a lot more less which is also far more convenient for SME owners to implement and monitor.

Furthermore, businesses should invest on employees by providing them with satisfactory training and development in order to improve their skills and learning rather than considering lay-offs. This would enhance employees performance and motivation levels and would also enable firms to develop a strategic asset which would deliver permanent sustainable margin improvements.

Changes in Marketing Professional's role

"Sri Lanka reaches the point of any great resurgence and the united kingdom acknowledges that there surely is great potential in your community as well. This means that marketers have more robust challenges here than elsewhere on the globe. To be able to capitalize on the opportunities that are emerging from other countries in the region, marketers in SL have to build up themselves"

Mrs. Janet Ford. Head - British High Commission Trade and Investment.

Marketing at its basic level is vital to driving revenue, pushing the bottom line and satisfying customer needs so that marketing professionals in the apparel segment, it is important for us to go out from our comfort zones and take part in this new paradigm of business which is constantly facing change.

In order to ensure this transformation, the real essence of marketing should be practiced at its highest level consistent with organizational objectives and customer needs thus requiring marketers to be more proactive in the industry.

Hence, marketers should take the initiative and create a difference by promoting their corporate identities within the segments they operate in (especially in the export market) because this might enable firms to develop equity in their organizations and would also assist in their bargaining power.

Marketers should also persuade and negotiate specific deals which incorporate new ventures, partnerships that would enable the firms in the industry to sustain and mutually benefit themselves in the permanent (Ex: MAS Intimates partnering with NIKE, Victoria's Secret, Speedo and GAP). Strong communication and negotiation skill would be vital for a marketer when convincing partners with an enterprise case and negotiating deals.

Additionally, marketers also needs to take the initiative and act in the capability of the change agent by introducing new trends, technological advancements and improved production techniques in to the business to be able to build up a competitive advantage to successfully maneuver this function, a marketer would require strong leadership and change management skills to be able to convince and incorporate these innovations.

Furthermore in conditions of skills, a marketer must also have got sound finance, commercial and technical knowledge to allow him/her to build up a much better judgment in decision making and to justify his/ her case when getting together with customer, cross functional teams and various other stakeholder queries.

It is also important a marketing professional in the SME sector ensure that they change their organizational scope from a traditional sales/product oriented organization into a marketing oriented organization which would ensure the development of a separate marketing function that will enable the business to actively take part in promoting their products and identities.

Therefore, these behavioral changes and improvements in skills would permit marketers in this field to broaden their thinking and allow them to face and adjust to any environmental challenges successfully.

The Way Forward

It must be noted that trade concessions in nature tend to be more focused upon the short-term development of the industry. Firms cannot be based upon them forever plus they need to strategically utilize them to build up resources while they are available to develop and establish themselves on the market.

Therefore, rather than depending on trade concessions such as GSP+ to battle out competition the industry needs to concentrate on continuous improvements in conditions of production, quality, technology etc. to outrun other players compelling the marketers in the industry for taking the lead role in actively participating and introducing new trends, technology and developing partnerships with leading brands to be able to ensure the sustainability of the industry.

Word Count: 2200 Words

Appendix

1. Countries covered under the GSP+ Scheme

Armenia

Azerbaijan

Bolivia

Colombia

Costa Rica

Ecuador

El - Salvador

Georgia

Guatemala

Honduras

Mongolia

Nicaragua

Paraguay

Peru

Sri Lanka

Venezuela.

The above countries are covered for a period of 3 years (2009 -2011).

Presently Sri Lanka and El - Salvador have been temporarily withdrawn from the GSP+ beneficiary list due ongoing investigations regarding human rights violations.

2. Vulnerable Nations

In order to be classified as a vulnerable nation the following criteria must be satisfied.

Any country shouldn't be classified as a "high-income or developed nation" and where its 5 largest portion of its GSP covered imports are definitely more than 75% of its total GSP covered imports, and

Where its GSP covered imports are less than 1% of the full total GSP covered imports.

Ratification and effective implementation of

16 core human and labor rights and 11 environment and good governance conventions.

(Ex: International covenant on Civil and political rights, forced compulsory labor convention, Kyoto Protocol, Mexico Conventions against corruption etc. )

Sri Lankan situation predicated on this classification

3. Export structure breakdown

4. GSP preferential imports composition - 2007

Note: It is clear that over 13Bn (22%) of apparel imports to the EU in the 2007 is performed under the GSP preference Scheme.

5. Average Prices of garment imports to the EU

Note: Even prior to the withdrawal of the GSP+ Preference scheme the SL export price per Kg of apparel was the best at 15. 91 amidst other competitors.

6. Industry analysis

The attractiveness of apparel industry can be analyzed the following using the 5 forces frame work which was developed by Michael Porter in the entire year 1979.

Barriers to entry - Low

At present there is no significant barrier to entry. Any investor willing to enter the market could achieve this task. The Export zones and the professional zones that happen to be established across the county can be considered as added incentives for new entries into the market.

Competition - High

Competition levels can be evaluated in two aspects.

Local - competition within the industry is at a higher level as there are multitude of players (1850 garments) involved with this industry to provide towards the export market.

International - Competition levels on a worldwide scale is also at an increased level and is mainly dominated by low cost manufacturing nations such as China, Bangladesh, India, Vietnam etc.

Bargaining power of customers - High

Customers do contain the privilege of demanding an improved bargain out a deal because of the vast option of a great many other suppliers in the market.

Ex- If a SL manufacturer proposes for a cost improve the customer could easily refuse it and place the order with another supplier (locally or internationally).

Bargaining Power of suppliers - Medium

Most of the input within the industry is imported and in most occasions it is only the labor component which is sourced from the neighborhood market.

7. EU Apparel Market share Analysis

Sri Lanka at present holds around 1. 6% of the EU market which is evidently dominated by the Chinese and Bangladeshis who holds cumulative share of 62%.

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