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EU boost not enough to revive Sri Lanka garment industry

Sector has fallen well behind rivals such as Bangladesh

A machine operator stitches apparel at a factory in Sri Lanka owned by the Hirdaramani Group. (Courtesy of Hirdaramani Group)

COLOMBO -- Despite a recent move by the European Union to restore Sri Lanka to its highly favorable Generalized System of Preferences Plus program, the country will find it hard to catch up with Bangladesh, which has powered ahead in textile and apparel production in the last few years. Production and labor costs remain high compared to competitors, and analysts are skeptical that the government will be able to meet its goal of doubling exports by 2020.

The EU, which is Sri Lanka's biggest export destination, absorbing some 36% of total shipments, reinstated the country into the GSP Plus program in mid-May, removing import tariffs on more than 6,000 products, including clothing. Sri Lanka was dropped from GSP Plus in 2010 for human rights violations, but remained in the less-favorable GSP program, under which its exports were taxed at 9.6%.

That had had an impact. Total apparel exports fell from $4.7 billion in 2014 to $4.6 billion in 2015 and 2016, according to the Joint Apparel Association Forum, an industry body. Exports to the EU in 2014 stood at $2.1 billion, but dropped to $1.9 billion in 2015 and 2016.

The slump has continued in 2017, with apparel exports falling another 5.8% in the first five months, compared with the same period in 2016. But JAAF adviser K. J. Weerasinghe is fairly optimistic: "We are confident we can now receive at least an additional $400 million worth of orders from the EU initially, which will increase further, now that we have regained GSP Plus," he said. Weerasinghe, and some retailers, said it would not be possible to meet the government's target of doubling exports by 2020, although 2022 was a possibility.

Analysts say that Sri Lanka needs to do more to catch up with countries such as Bangladesh, which is now the world's second-largest clothing exporter after China. Bangladesh accounts for 6.4% of global clothing exports, compared with Sri Lanka's 1.2%.

Machine operators at work in a state-of-the-art garment factory in Sri Lanka.

Part of the reason for this is that Sri Lanka has fallen behind in terms of value chain creation. Bangladesh, for example, has set up spinning mills and knitting mills, which allow manufacturers to cut production costs and improve efficiency. This also puts Bangladesh in a good position to sell large volumes of cheaper apparel such as knitwear, woven shirts, sweaters and sweatshirts.

Amit Gugnani, an analyst at Technopak Advisors, a management consulting company, said Sri Lanka must adopt a similar approach to developing value chain capabilities. "In complete integration, it becomes relatively easier to look at cost engineering across the value chain," he told the Nikkei Asian Review.

Gugnani also suggested that the government should set up textile industrial clusters in the country's north and east by providing investment incentives, as part of the value chain creation.

Another aspect of making production cheaper is to concentrate on remote and backward regions. Wages in Sri Lanka are typically higher than in Bangladesh and Vietnam, making the country better suited to producing high-end garments such as swimwear, trousers and underwear, including lingerie for top brands such as Victoria's Secret.

According to the World Bank's "Stitches to Riches" report, released in April 2016, the minimum monthly wage in Sri Lanka is $120, compared with $70 in Bangladesh. Sri Lankan labor laws also limit factory workers to 57.5 hours per week, with fixed weekly holidays. This compares with Bangladesh's working limit of 60 hours and Vietnam's 64 hours.

Controlling costs

Gugnani said Sri Lanka should amend these labor laws. "It's important for Sri Lanka to look at providing lower minimum wages in backward and remote regions ... where the cost of living is comparatively lower," he said. "The industrial clusters in these regions can focus on basic products with minimal value addition and large volumes."

To cut production costs further JAAF has requested exemptions from Sri Lanka's 2% nation-building tax and a 7.5% port and airport development tax on the importation of machinery for the sector. "We don't have a problem with the government taxing our profits, but we have sought an exemption on some taxes for importation of machinery," Weerasinghe said.

Industry participants are also urging the Sri Lankan government to look at reducing duties, offering input tax rebates on raw materials sourced locally, and providing subsidies to factories that improve efficiency, to promote competitiveness with Bangladesh and Vietnam.

Anushka Wijesinha, chief economist of the Ceylon Chamber of Commerce (which uses an older name for Sri Lanka) said the country must also focus on becoming an easier place to do business. He added: "For a more sustainable and sustained increase we need to focus on competitiveness factors and factors that hold our exporters back -- like standards, bureaucratic and procedural delays."

Wijesinha said the government must help exporters to test products to meet international standards. Also, he urged the government to remove archaic laws such as the need for some exporters to obtain permits for each shipment. Sri Lanka is ranked 110th among 190 economies in terms of the ease of doing business in 2016, slipping one place, according to the latest World Bank annual ratings.

Gladys Lopez-Acevedo, an economist at the World Bank, has another solution. She said that Sri Lanka should explore the idea of exporting more to other countries, including China. "Sri Lanka must look at consolidating its position, and not only focus on higher-end and value-added garments," she said.

To this end, Weerasinghe said the industry was looking at manufacturing shoe uppers, having received interest from a large company in Europe. "We have the potential to diversify and go beyond from our current strengths," he said.

Hasitha Premaratne, chief financial officer of Brandix Lanka, the largest apparel exporter in Sri Lanka, with a customer portfolio that includes Victoria's Secret, Gap, Lands' End, Lane Bryant and Marks and Spencer, agreed that Sri Lanka must diversify. "The country can broaden its horizon into areas such as synthetic products," Premaratne said. "We have a strong presence in innerwear products. However, we could look at the development of our infrastructure in synthetic fabrics as this is a growing global trend." 

Aroon Hirdaramani, a director of Hirdaramani Group, a manufacturer for brands including Tommy Hilfiger, Levi Strauss and Nike, said his company started talking a week after the EU announcement to existing customers keen to increase sourcing and new customers looking to place orders. Hirdaramani and Premaratne were both optimistic that Sri Lanka's tighter labor laws and ethical standards could attract more European buyers.

However, Wijesinha said gains from the GSP Plus decision would not start to appear until 2018: "We will become competitive against others, and factories that were slowing down will see a boost in earnings and job creation, but this will not happen overnight. Order books for 2017 are mostly completed already, so we will only begin to see the gains from 2018, 2019 onward."

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