Connect with us

Business

Reimagining the future of Sri Lanka’s apparel industry

Published

on

By Shirendra Lawrence

The emergence of apparel and textiles as a significant contributor to Sri Lanka’s economy began post-Independence in 1948 when a few pioneering industrialists saw opportunities in its domestic market. Following the liberalization of the economy in the late 70’s, the industry ventured into exports, bringing in much needed foreign exchange, and before long, established Sri Lanka’s reputation as a manufacturer of quality products.

During the 90’s, facilitated by the 200 Garment Factories Program, manufacturing that had until then been located in free trade zones was expanded across Sri Lanka. This played a key role in the upliftment of the country’s rural economies.

The last decade has seen a further evolution, focused on end-to-end partnerships and complete customer solutions. However, an in-depth assessment of the sector’s strengths and competencies indicates that its full potential is yet to be realised.

With the pandemic causing significant disruption to Sri Lanka’s economy, our vision of elevating the country to a US$ 8 billion global apparel hub by 2025 is now perhaps more critical than ever. This growth is envisaged through value addition and further evolving from contracted apparel manufacturing for Buying Offices to end-to-end solutions for leading Global Brands and Retailers, spanning innovation to last-mile delivery.

With the pandemic gradually receding, apparel sector stakeholders have renewed collaborative efforts to achieve these goals.

Current status

In pre-pandemic 2019, the value of global apparel exports was estimated at $492 billion. Most would agree that with Sri Lanka’s contribution being just 1% of this, at $5.3 billion, the industry’s aspiration to grow it to $8 billion is not unreasonably ambitious.

Sri Lanka enjoys a reputation as a trusted partner within the supply chains of some of the world’s leading brands and retailers. The country’s apparel industry comprises a few large groups, supported by a strong ecosystem of Small and Medium Enterprises (SMEs). This is a symbiotic system; the larger players have developed meaningful Customer Partnerships, whilst the SMEs have created niches, including supporting the larger Groups to meet their supply chain requirements.

Despite its smaller scale and Sri Lanka’s apparel sector having relatively higher labour costs than some of its regional competitors, along with less preferential export market access, it has still progressed by leveraging other sources of competitive advantages. Sri Lanka ranks high in terms of reliability and product quality, which have elevated the country’s reputation and overall positioning. This is best reflected in the impressive list of global Brands and Retailers served by Sri Lankan manufacturers, including Victoria’s Secret, Marks & Spencer, Boss, NIKE, Calvin Klein, GAP, Levi’s, Ralph Lauren, lululemon, Calzedonia, Intimissimi and Tommy Hilfiger.

This elevated positioning also extends to talent attractiveness, with the country’s apparel sector appealing to the better professional talent, unlike some of our regional counterparts. A case in point is India, where professionals would often see other industries such as automobiles, electronics and IT as more attractive. Furthermore, the Island benefits from its strategic geographical location along major shipping routes as a regional logistics hub.

From an infrastructure standpoint, fabric manufacturers, who require process water, have established their factories within the BOI facilitated Free Trade Zones, which include advanced water treatment processes, whilst those in relatively labour-intensive apparel manufacturing have located themselves in rural areas across the country, providing direct and indirect employment to those communities, accelerating the development of those areas.

Leveraging on trade shifts

Whilst all of this progress has been well invested in, for the country to realise its apparel sector’s true potential, it is essential to fully leverage these strengths while understanding and aligning with the trade shifts that are taking place.

Studies indicate that the impact of increasing political and economic tensions between the Far East and the West will result in the movement of significant amounts of trade from China. Whilst these movements appeared to have commenced pre-pandemic, customers in western markets have delayed this process, not wanting to add additional dimensions of risk on top of pandemic-induced challenges. However, the shift is expected to gather momentum in 2022 and beyond.

Apart from direct business migration, opportunities would include potential FDI inflows from companies in the Far East seeking to augment their existing bases by establishing manufacturing locations in South Asia to mitigate their risk of losing customers. The industry and policymakers are mindful of potential opportunities that could arise as a result. The leadership of Sri Lankan apparel companies, with the support of the industry umbrella organisation, the Joint Apparel Association Forum (JAAF), and its constituent associations, including the Sri Lanka Apparel Exporters Association (SLAEA), are reimagining the sector’s future. These stakeholders are crafting strategic plans to facilitate the process of achieving the sector’s vision.

Maintaining competitive advantage

‘Doing the right thing’ has been the driving philosophy of Sri Lanka’s apparel industry, and this was key in attracting reputed Brands and private label retailers to Sri Lanka during the 80’s and 90’s. Marks & Spencer, in particular, saw Sri Lanka as a credible alternative for the migration of its western manufacturing bases at that time. This catalysed Sri Lankan manufacturers’ alignment with the expectations of the Ethical Trading Initiative (ETI), Worldwide Responsible Accredited Production (WRAP) and other organisations and standards focused on social responsibility and differentiated us from our competitors.

Moving to the present, what were competitive advantages have today become ‘hygiene factors’. Sri Lankan manufacturers have maintained their reputation for ethical manufacturing through environmentally responsible production, strong connections with existing and emerging organisations such as the Sustainable Apparel Coalition (SAC), and investments to reduce their Carbon Footprints. Significant strategic initiatives include the conversion of fossil-fuelled boilers to biomass and introducing other environmentally friendly energy sources such as solar. This also aligns the industry well with the Government’s efforts to increase renewable energy to 70% of Sri Lanka’s total requirement by 2030.

Sri Lankan apparel groups have also grown their businesses through geographic diversification. These efforts seek to minimise customer concerns of single country sourcing, leverage on bilateral and multilateral trade agreements and augment Asian manufacturing locations with a capacity closer to markets.

Improved trade access is vital

Greater preferential market access to existing and identified key export markets would substantially boost Sri Lanka’s apparel exports. However, it is vital to retain existing concessions under the EU and UK Generalized System of Preferences (GSP) Plus schemes while securing tariff reductions to other countries. Considering our success in penetrating key markets such as the USA, where tariffs for apparel exports are as much as, or in some cases even more than 30%, there is a significant opportunity to be had if the industry were provided with tariff waivers or even reductions.

Substantial opportunities also exist in large developing nations. Sri Lanka needs to increase its export quota of 8 million garment items per year to India, one of the fastest-growing regional economies. The Chinese market, too, presents vast potential.

Need for conducive policies

While recent initiatives to modernise trade facilitation, including the digitisation of customs clearance processes and administration of payments through online gateways, are welcomed, much more policy reform is needed. For example, if Sri Lanka is to evolve as an innovative apparel hub, a safe and conducive environment for innovation is required. This is only possible if Intellectual Property and data protection laws are given priority. Similarly, reforming colonial-era labour laws to reflect the very different world that we live in today is essential.

Favourable policies and incentives should be provided for investments related to backward integration and automation. The Eravur Fabric Processing Park is an important development in this regard, and the industry acknowledges the contributions of multiple state agencies in this initiative.

In conclusion, evolving Sri Lanka’s apparel industry will, without doubt, continue to bring benefits to the country – both directly and indirectly – increasing FDI, employment opportunities and export earnings whilst improving innovation and technology inflows.

With all stakeholders working in collaboration, the vision of making Sri Lanka a fully-fledged apparel hub is well within the country’s reach.

(Shirendra Lawrence is an apparel industry veteran and is the Deputy Chairman of the Sri Lanka Apparel Exporters’ Association. He is also an Executive Director of MAS Holdings. Shirendra holds a Mechanical Engineering (Honours) Degree from Imperial College, University of London, and is a Chartered Mechanical Engineer. He counts over 35 years of experience in manufacturing, business development and organisational leadership in the UK and Sri Lanka.)



Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Business

Conclusion of phase 1 of private placement of Ordinary Shares of JKH to ADB

Published

on

Krishan Balendra Chairman JKH

Following is the text of a letter addressed by JKH Deputy Chairman/Group Finance Director Gihan Cooray to the CSE’s Chief Regulatory Officer Renuke Wijayawardhana.

Further to the announcements to the Colombo Stock Exchange on 22 November 2021 and 22 December 2021 regarding the Private Placement of up to a maximum cumulative amount of the Sri Lankan Rupee (“LKR”) equivalent of USD 80 million to Asian Development Bank (“ADB”), through the issuance of up to a maximum of 122,500,000 new ordinary shares of the Company in two phases (Phase 1 & Phase 2), we wish to inform that Phase 1 of the Private Placement of ordinary shares of the Company to ADB was concluded on 19 January 2022.

Accordingly, 65,042,006 ordinary shares (“Initial Placement Shares”) of the Company were allotted to ADB at a price of LKR 154.50 per share on 19 January 2022 for a consideration of the LKR equivalent of USD 50 million. The Initial Placement Shares results in a post-issue dilution of 4.70 per cent in Phase 1 of the transaction.

Additionally, in terms of Phase 2, the Company has issued 39,025,204 non-tradable/non-transferable options (“Options”), which will entitle ADB to subscribe for additional new ordinary shares of the Company (“Option Shares”), for an investment amount of up to a maximum of the LKR equivalent of USD 30 million.

Therefore, the maximum number of ordinary shares that would potentially be issued under the entire transaction, assuming all Option Shares are subscribed for, will be 104,067,210, thereby capping the post-issue dilution on the conclusion of both phases to a maximum of 7.31 per cent.

The salient details of the Options are as morefully detailed in the Shareholder Circular dated 29 November 2021. Based on the subscription date of the Initial Placement Shares, the Option Exercise Period will be from 19 October 2022 to 18 January 2023.

Continue Reading

Business

Bangladesh – Sri Lanka Preferential Trade Agreement: Gains and policy challenges

Published

on

By Asanka Wijesinghe and Chathurrdhika Yogarajah

0espite enhanced trade partnerships in South Asia, intra-regional trade is far from reaching its theoretical potential. Similar production patterns and competitive sectors can be the causes. However, bilateral discussions to further lower trade costs continue. The ongoing Bangladesh-Sri Lanka discussions on a preferential trade agreement (PTA) will benefit from knowing the potential gains from reducing bilateral trade costs. In addition, knowledge of products with higher potential for export gains will help optimise the economic benefits from a trade deal.

Bangladesh – Sri Lanka Trade:
The Current Status

In 2018, when discussions on a PTA began to firm up, Sri Lanka’s exports to Bangladesh were USD 133 million, while imports from Bangladesh were USD 37 million. Despite the low trade volume, Sri Lanka’s exports to Bangladesh have grown (Figure 1). In addition, Sri Lanka records a bilateral trade surplus with Bangladesh, which is encouraging given the country’s trade deficit concerns. However, weak growth of exports from Bangladesh to Sri Lanka can be seen from 2001 to 2016 (Figure 1).

The current trade deals between the two countries are still partially restrictive. Both countries keep a sensitive list of products that are not eligible for tariff cuts. Sri Lanka maintains a list of 925 products sanctioned by SAFTA (South Asian Free Trade Area) while Bangladesh keeps 993 products. Sri Lanka’s sensitive list covers USD 6.2 million or 23.8% of imports from Bangladesh. The sensitive list of Bangladesh covers USD 77.6 million or 62% of imports from Sri Lanka. Thus, the elimination of sensitive lists may benefit Sri Lanka more.

Figure 1: Trade Intensity between Bangladesh and Sri Lanka

Source: Authors’ Illustration using Trademap Data.

Theoretically, bilateral alliances deepen trade by removing weaknesses in existing multilateral trade arrangements. A trade deal between Bangladesh and Sri Lanka can simplify trade regulations further. In addition, Bangladesh needs alternative preferential access as graduation from Least Developed Country (LDC) status will take away preferential access to its key markets. For Sri Lanka, increasing bilateral participation in production value chains, especially in the textiles sector, might be an economic motivation. Financial support extended by Bangladesh to manage Sri Lanka’s foreign currency pressures might be a political motivation for a trade deal.

Eliminating sensitive lists can lead to trade creation, although it may not happen due to political and economic reasons. When it comes to tariff cuts, both countries will act defensively as certain products in the sensitive lists are vital for employment and revenue generation. Thus, the success of a trade deal depends on how many products with high export potential are under its purview. In this direction, a group of products with specific characteristics can be identified as an offensive list. For example, Sri Lanka’s offensive list includes products that Bangladesh imports from anywhere in the world, produced by Sri Lanka with a capacity for expansion. Sri Lanka has a comparative advantage in exporting that good, and Bangladesh already has a tariff on the product.

Export Gains from Tariff Elimination

If tariffs on the sensitive lists are eliminated, there will be modest export gains for Bangladesh and Sri Lanka in absolute terms. Sri Lanka will gain USD 24.7 to 49.7 million of exports to Bangladesh, while Bangladesh will gain USD 2.1 to 4.5 million of exports to Sri Lanka. Potential export gains are given in a range due to assumptions on elasticity values used in the partial equilibrium model. Elimination of sensitive lists will generate a higher tariff revenue loss to Bangladesh, ranging between USD 13.5 million to USD 19.1 million. By contrast, Sri Lanka’s revenue loss will be slight at USD 1.4 million to USD 1.9 million.

Whatever the arrangement, it is crucial to include the products with high export potential in the offensive lists (See Table 1 for the major products). Out of 39 products in Bangladesh’s offensive list, 21 are intermediate goods, while 18 are consumption goods. Similarly, 75 out of 115 products in Sri Lanka’s offensive list are intermediate goods. Tariff cuts on intermediate products may induce fragmented production between two countries, which would harness country-specific comparative advantages. Major intermediate goods in the offensive lists are dyed cotton fabrics, cartons, boxes, and cases, plain woven fabrics of cotton, denim, natural rubber, and smoked sheets of natural rubber (Table 1).

The ex-ante estimates predict modest gains for Sri Lanka and Bangladesh in absolute terms, even after completely removing the sensitive list. But complete removal is politically challenging for both countries. Moreover, Bangladesh as an LDC may expect special and differential (S&D) treatment. Thus, the outcome can be a limited PTA in line with weaknesses in existing trade agreements governing South Asian trade. The impact on trade of regional trade agreements in force is negative primarily due to stringent general regulatory measures, including rules of origin (ROO), sensitive lists, and prolonged phasing-in. Given that the estimated modest economic gains of a Bangladesh-Sri Lanka PTA do not justify a trade deal that requires substantial resources for negotiations,the PTA should have fewer regulatory measures and tariff concessions for the products on the offensive lists to maximise the economic benefits of a PTA between the two countries.

Link to the full Talking Economics blog: https://www.ips.lk/talkingeconomics/2022/01/20/bangladesh-sri-lanka-preferential-trade-agreement-gains-and-policy-challenges/

Asanka Wijesinghe is a Research Economist at IPS with research interests in macroeconomic policy, international trade, labour and health economics. He holds a BSc in Agricultural Technology and Management from the University of Peradeniya, an MS in Agribusiness and Applied Economics from North Dakota State University, and an MS and PhD in Agricultural, Environmental and Development Economics from The Ohio State University. (Talk with Asanka – asanka@ips.lk)

Chathurrdhika Yogarajah is a Research Assistant at IPS with research interests in macroeconomics and trade policy. She holds a BSc (Hons) in Agricultural Technology and Management, specialised in Applied Economics and Business Management from the University of Peradeniya with First Class Honours. She is currently reading for her Master’s in Agricultural Economics at the Postgraduate Institute of Agriculture, Peradeniya. (Talk with Chathurrdhika: chathurrdhika@ips.lk)

Continue Reading

Business

Expolanka boosts bourse by adding 21.7 points to ASPI

Published

on

By Hiran H.Senewiratne

CSE trading started in negative territory yesterday due to heavy profit- takings but after 1 pm the market began to recover, triggered by index heavy counter Expolanka, which gained by adding 21.7 points to the All-Share Price Index. The stock market yesterday produced a creditable recovery to finish on a positive note after early losses amid a relatively low but healthy turnover level. The Expolanka share price appreciated by 2.5 per cent or Rs 9.50. Its shares started trading at Rs 386 and at the end of the day they shot up by Rs 9.50.

Amid those developments both indices moved upwards. The All -Share Price Index went up by 42.8 points and S and P SL20 rose by 7 points. Turnover stood at Rs 4.9 billion with a single crossing. The crossing was reported in Expolanka, which crossed 100,000 shares to the tune of Rs 39.5 million and its shares traded at Rs 395.

In the retail market, top seven companies that mainly contributed to the turnover were, Expolanka Rs 715 million (1.8 million shares traded), Browns Investments Rs 336 million (19.9 million shares traded), ACL Cables Rs 261 million (2.1 million shares traded), LOLC Finance Rs 231 million (8.1 million shares traded), JKH Rs 193 million (1.2 million shares traded), Expack Corrugated Cartons Rs 162 million (seven million shares traded) and  Softlogic Capital Rs 161 million (11.3 million shares traded). During the day 154 million share volumes changed hands in 37000 transactions.

Yesterday, the US dollar was quoted at Rs 202.91, which was the controlled price of the Central Bank. The actual price would be more than Rs 250, market sources said.

Continue Reading

Trending