How do we beat our competition – China, India and Bangladesh? CEO’s and Senior Managers offer insights
By Fareeha Qayoom
Pakistan is going through a deep decline in its apparel exports – the hardest hit sector of the economy seems to be the knitwear industry, the effortless money maker in the past. U.S. imports from Pakistan increased 10 percent in 2003 to reach $2.5 billion. Pakistan was ranked as the 59th largest export market for U.S. goods according to a study by US Government. Roughly 72 percent of Pakistani exports to the U.S. consisted of textiles and apparel, while U.S. exports to Pakistan were mostly intermediate capital goods. 2005 changed all that growth.
There are three major centers of Knitwear industry in Pakistan. Lahore, Karachi and Faisalabad, all of them seem under fire. What are the specific issues that are holding Pakistan back? TKFR asked the leading Industry leaders to evaluate issues and provide suggestions on how to turn imminent crisis in to competitive opportunity in the global markets after 2005.
Zafar Sheikh, the CEO at Combined Fabrics feels the government should facilitate the exporters by eliminating needless red tape, lowering essential utility costs and providing a stable image abroad. “The exporters only want a level playing field with Bangladesh, India, and China – we’re in a race with one foot tied down. Quota was a limit and a financial burden. In post-quota scenario, exporters are facing even more fierce competition since government policies hinder exporters instead of facilitating them. For example, government gave exporters one facility in the research and development (R&D) area but it’s so cumbersome that most exporters can not avail it. The government doesn’t play its part. Their systems are not efficient – take sales tax for example. Government policies’ implementation is always a problem, even if their intentions are good. I fail to understand why can’t the State Bank pay up if exporters supply genuine bona fide proof of re-export? We are not asking for any facilities – just smooth running of their basic systems. Another problem that can be attributed to the government directly is the high cost of utilities – the cost of production is very high for the simple reason that the utility costs are so high. I am not saying the exporters are running efficient units. We have to contend with low levels of literacy and barely skilled labor force. This increases the cost of production also but our biggest problem is regular uninterrupted power supply. Power outages happen fifty times a day. Exporters have been forced to purchase power plants to maintain efficiency and production. All these costs add up at the end of the day. Most factories have to keep diesel generators as a back up. It costs twice as much as WAPDA supplied power. Capital costs increase. Pakistani government earned thirty billions in the last ten years from quota alone. Part of this money should have been invested back in the industry by opening training schools. Where did all that money go? EPB spends millions on advertising on image building exercises – what’s the point of announcing that they reached US $ 10 billion mark- what’s the big idea? Another major issue that exporters have to contend with is the poor image abroad. Security is a big thing for most European and US buyers. Even if we offer half a dollar cost advantage over India, buyers prefer India. We haven’t been able to import duty free sundries, (SRO 410). There are so many hassles that exporters prefer not to use this SRO for small quantities. The knitwear situation is pretty bad right now. One of the pioneering units in Lahore – Sarah Textiles closed down – its parent concern, Ammar Textiles is working on 10% of its original capacity. Where are the leading companies? Others will follow in the same path if government policies are not implemented in their true spirit.”
A CEO of another vertical knitwear factory on Ferozpur Road, who didn’t want his name quoted, was very upset with the role of the government. “They say Pakistan is a cotton efficient country but what’s the point of having home produced cotton if you can only purchase it at the same price as any international buyer? What’s the advantage in that? Our sales tax is stuck with the government. Petrol prices are impacting the economy negatively – I have been forced to close my knitting and dyeing units and had to let people go. Things can’t stay at this level – they are bound to improve. I at least hope so.”
Waseem Bukhari, GM production at 6sigma, a Pakistani based US and European importer selling pre-sold goods in those markets, feels it’s not possible to launch a Pakistani private label abroad because of high costs of production and wastages, low vendor capability and lack of innovation, and imperfect operating systems. “It costs too much. Right now, it’s not feasible to launch our own label abroad. We specialize in sourcing, buying and managing pre-sold goods for our US and European customers. Its not that Pakistan is not a good supply market – it is, if you can manage your vendor base and product correctly. We used to ship blank A&F t-shirts – three years ago, we decided to progress beyond the basic product – we took on the embellishment and wash processes in Pakistan too. This year we shipped 2.5 million t-shirts with heavy embellishment and wash, it took us three years to get our supply chain right – we had to go through a bad patch first, Pakistan was not geared up for such a product – we had to deal with lead-time issues, embellishment issues, bad suppliers, we ended up creating a complete supply chain in the process.”
“Typically in the past, most vendors and suppliers would refuse or not develop new products that would come in the market for pricing and development,” he continues. “Pakistan failed to realize that the product was changing in the meantime. Refusing new products built and developed other markets because they built this new capability at buyer’s expense. Pakistan failed to do so. Furthermore, most local vendors failed to build expertise in the existing product offering. Our costs of production are very high. The major reason is failing to control wastages at each process. Fabric costs about 60%, knitting wastage is one to two percent, dyeing losses are 7-9%, panel wastes are 5-7%, marker cutting wastes are around 17-20%, and this doesn’t include the 3 to 5% excess garment that is already planned to counter wastages and quality rejections, then there are embellishment, print and wash wastages which are around 2%. There is no control. Vendors don’t work on controlling fabric weight for example – the proper way is to understand the process and then implement the systems, you need to follow basic rules of knitting; all machines have variable widths, you can not treat each fabric in exactly the same way. High end customers don’t compromise on the fabrics and they will not give tolerances. There are high rejection levels. No records are maintained on the preproduction processes, after approvals, production repeats the same process all over again. This is probably the reason why sometimes the production approvals take so long. Like the whole country, even our industry suffers from ad Hoc strategies – take any area – planning, finance – we are working on short term goals. The vendors need to sort out their bulk issues. Prices are another big issue. Many vendors work on bank refinancing and are performance driven. They have to take orders at any price to show performance to their banks, so this causes a huge disparity in price within the same market. Our tailors are not cross trained. They can’t stitch a full garment on their own, they only know a single operation. You don’t call this expertise. Furthermore, the quality inspectors are not doing their jobs honestly. Negligence at each stage adds costs to the garment. There is no accountability. Tailors need to know their jobs. Sewing is the most neglected area in the factory. In the past, the customers were absorbing these costs, now they refuse to do so. Our government is not in touch with reality if they think things are good in Pakistan. There is only growth at the individual level. Collectively, this industry is going down. In a country of 150 million, labor shouldn’t be a problem. The cost of living is very high in Pakistan. Tax payers don’t get any benefits from paying their taxes. The consumers in this country are paying 78% indirect taxes in addition to direct taxes. How can you progress?”
Raza Ahmed, MM at Target Corporation thinks that the vendors had not factored in WTO. “We have lost on tops and gained on woven bottoms. Nishat, Gulistan, Sapphire and Kohinoor all expanded their capability in anticipation of 2005 post quota environment. Top leaders of the market determine what’s going to happen to a market. It can’t be done at the government level. We could have diversified in to other product lines. Nishat is a Gap fabric supplier for example, they are talking about conversion. There are no failure stories in the woven apparel industry. They are working with Europe and USA. Knitwear industry on the other hand is suffering.”
“Lahore is Pakistan’s show room,” he says. “It has to have the lead, for any textile buyer, Lahore is an important market in Pakistan. All major buyers have offices here. Unfortunately, going vertical was not the way, big set ups carry overheads, besides, wearing too many hats means you don’t excel in any area. All major knitwear units followed Ammar’s lead and bought 30” diameter machines, the layouts may have been different but they were all working from the same feasibility. You have to use the fabric you produce in your in-house knitting and dyeing units, if your fabric is rejected, your margin is gone so fabric is one area that can’t be improved in the vertical model without making these processes independent and commercially viable profit centers. Having all processes under one roof is not necessarily the best way it just means that all areas become cost centers, instead of profit centers. No effort was made to improve processes. Commercial dye houses and knitting houses on the other hand are more efficient since they were forced to improve to generate incomes.”
“Take stitching, long term investment in this area was not done either,” Raza continues. “White collar salaries are being paid to blue collar jobs. Tailors make fifteen to twenty thousand per month since they earn on piece rate. No effort is made to stitch quality garments. Speed is more important than accuracy. A lot of work needs to be done in this area. The tailors can not afford for the salary system to work – of course, there will be resistance and they will create hurdles. The only option is to hire fresh workers and train them separately. Women can be developed as skilled tailors in this area, you also eliminate the problem of turnover and manageability, the only downside with women workers is lack of flexibility on overtime. Developing skilled tailors will cost you one year only in patience and will power. But most factories are driven by short term goals so no effort is made to improve this area or improve costs and efficiencies. We even have to import dyestuff. India has its own so this is another major cost. There are no two ways about it either you reduce your prices or your value proposition. Our product quality is good in comparison to our competition. We rarely hear about stitching claims. Our major weakness continues to be the fabric area. China, India and Bangladesh also get price subsidies from their governments, we don’t. We have a huge advantage in the level of commitment displayed by the work force – no other industry has the same level of hard working dedicated people who will put in such long hours with very little rewards, it’s not a norm in any other industry in Pakistan. We just need to work smarter. We should move into data base management. Reports are generated each day but data is not analyzed and patterns are not studied. Data is key in performance evaluation. The buyers want value, price, quality and service you have to be seen as a mass supplier. Value proposition means the buyers get something extra, saving in lead time, price or quality.”
“Buying houses can not drive business it is purely linked with factories. You are only as good as your supply chain. Why won’t we do nylons, warp knits? We need to get out of the vertically integrated mind set. Karachi is doing the right thing,” he concludes.
Azfar Hassan, the CEO of Matrix Sourcing is fairly optimistic. “Maintaining status quo is not an option. We need to work on our human resources and improve our service package by building in more value, which is meaningful for our clients. We need to work on efficiencies and accounting systems and stop blaming other people. Our industry is by no means finished, we haven’t tried everything. Factories are not being managed well. There is no middle management. We need to work in this area. There are no training programs, empowerment or tolerance for mistakes, then there is wide spread corruption – kickbacks in all process abound. These are major issues. Moving production off shore will not solve our problems. Besides, only the home textiles industry is thinking of moving their manufacturing to Bangladesh due to anti-dumping by EU. As far as knitwear industry is concerned, the best place to manufacture goods is our own country. We need to get our basics right. You will save lot of money if you can get the fabric and sewing right. Jordan was able to do what we were not able to accomplish in Pakistan – they set up training units by putting 50 machines on the side and cross trained their tailors. They have skilled salaried labor, which is more efficient and cost effective than paying piece rate and what’s more it didn’t cost them a lot to develop in time or money. This can be done in Pakistan too. We need to manage the implementation of change. Business comes automatically if you have the capability. It’s only tough when you are selling off the grain. A lot can be done to improve management, skills and by controlling production costs. You can only solve a problem by recognizing that you have a problem in the first place.”
Azhar Iqbal, the CEO of Leisure Textiles also feels that collective improvement can only come with better management. “Quota was an edge for Pakistan. It hid carelessness, inefficiencies and wastages. How can a new buyer come in the market? JC Penney, VF did so. What’s the reason they have not grown beyond a certain point in Pakistan? We need to think about these issues. Our supply chain was okay ten years ago and gave Pakistan a good chance in the global market. ”
First published in the print edition of The Knit-Xtyle Fashion Review, issue 13, 2006