The Joint Apparel Association Forum of Sri Lanka (JAAF) recently highlighted the challenges Sri Lanka’s apparel industry faced, leading to a decline in its global market share compared to Bangladesh.
According to JAAF Secretary General Yohan Lawrence, the softening market conditions in the US, the European Union, and Britain, along with concerns about a global recession and the Russia-Ukraine war, had resulted in a significant decrease in demand. By March of this year, Year-on-Year (YoY) export volumes shrunk by approximately 11%.
In 2022, Sri Lanka’s apparel industry, which supplies major global retailers like Marks & Spencer, Victoria’s Secret, and Nike, generated an export revenue of $ 5.93 billion. This accounted for around 46% of the country’s overall export revenue.
Lawrence expressed concerns about Sri Lanka losing market share to neighbouring Bangladesh. While Sri Lanka experienced a 10% increase in apparel export revenue from $ 5.07 billion to $ 5.59 billion between 2021 and 2022, Bangladesh witnessed a substantial growth of 28%, from $ 35 billion to $ 45 billion.
The significant growth of Bangladesh’s apparel sector, almost double that of Sri Lanka’s entire market share, is a matter of deep concern. Lawrence remarked: “If that does not frighten Sri Lanka, I don’t know what will.”
One of the core reasons behind this disparity lies in trade agreements. Bangladesh, as a Least Developed Country (LDC), benefits from more favourable trade terms, allowing it to export apparel to the European Union and the UK duty-free under Everything but Arms (EBA) trade agreements.
Consequently, the Sri Lankan apparel industry faces price competitiveness challenges when compared to Bangladesh. Lawrence emphasised the need for Sri Lanka to advocate for improved trading terms.
The repercussions of this situation are also affecting smaller manufacturing facilities. As more giant factories encounter difficulties, the subcontractors that used to handle excess orders during better times are now facing a decline in business. Some of these subcontractors may even be forced to shut down as a result.
An executive from a leading apparel manufacturer, speaking under condition of anonymity to the South China Morning Post, explained: “This year, we have had to move away from the subcontractors [as the orders declined], so some of those plants will actually shut down.”
The observations and concerns expressed by industry insiders highlight the urgent need for Sri Lanka’s apparel industry to address the loss in market share, prioritise trade agreement improvements, and find strategies to remain competitive in the global marketplace.
Challenges in the US and the UK
Addressing the external factors impacting the Sri Lankan export industry, Export Development Board (EDB) Chairman Dr. Kingsley Bernard acknowledged the economic downturn and highlighted the UK and the US as the most promising markets. He further noted that many European countries were burdened with debt, making them less viable options for trade.
“In light of the declining global economy, we are facing challenges in both the UK and the US, which are currently the best markets for us,” Bernard stated. “Our aim at the EDB is twofold. Firstly, we are actively seeking new markets where Sri Lankan industries can thrive. We possess a diverse range of products and services and we have established a Country Readiness Index (CRI) to identify potential markets.”
Bernard emphasised the need for diversification in exports while focusing on national interests. The EDB has implemented a realistic strategy for the period of 2018-2022, closely evaluating export performance and identifying areas for improvement. “We are in the process of developing a new five-year plan, which will specialise in certain sectors. Additionally, we are exploring opportunities to collaborate with the United Nations,” Bernard added.
The EDB recently conducted a brainstorming session involving stakeholders from various sectors within the country. The aim was to formulate guidelines for enhancing institutional development and establishing effective frameworks. “We are actively engaged in supporting exporters by addressing internal issues related to rules and regulations. Our instrument covers these concerns and we are working closely with relevant authorities to resolve them,” Bernard explained.
Effects of the global recession
In a recent conversation The Sunday Morning Business had with National Chamber of Exporters Chairman Jayantha Karunaratne, the pressing issues impacting the apparel industry were brought to light.
According to Karunaratne, the industry is grappling with a global recession, resulting in a decline in the buying power of major markets such as the US, the UK, and Europe. Furthermore, the cost of manufacturing has surged due to recent increases in electricity tariffs, taxes, and rates.
He also pointed out the concerning trend of skilled and unskilled workers leaving the country, posing an additional challenge for the industry.
“There’s a global recession. The buying power of our main markets – the US, UK, and Europe – is declining somewhat. In addition, the cost of manufacturing has also gone up. Recent increases in electricity and various other tax rates have increased costs. Further, there is a problem of skilled and unskilled workers leaving the country,” Karunaratne explained.
Given these circumstances, the apparel industry is in dire need of cost control measures, particularly to address the soaring manufacturing costs.
Karunaratne addressed how the Government could support apparel exports by reducing production expenses. He stressed that the Government had the power to bring down costs, especially pertaining to electricity, fuel, and other expenses that had experienced a substantial surge.
“To improve exports, the number one suggestion is that the current cost of product manufacturing should be reduced. There are many things the Government can do to reduce the cost, especially in reducing electricity and fuel costs plus various other expenses which have increased significantly. The Government may even be in a position to reduce them now,” Karunaratne suggested.
He further added: “It can definitely reduce costs for certain things like fuel and electricity – petroleum and electricity are State-controlled. I don’t want the Government to suffer losses, but it can make arrangements to not profit unduly because it is doing so at the expense of manufacturers and exporters.”
Karunaratne’s insights highlight the urgent need for collaboration between the Government and the apparel industry to tackle the challenges hindering the sector’s growth. Addressing manufacturing costs and implementing strategic measures to retain skilled workers are crucial to ensuring the industry’s resilience in a difficult economic landscape.
From resilience to revival
By JAAF
On 20 March, the International Monetary Fund’s (IMF) Executive Board approved a four-year Extended Fund Facility (EFF) arrangement for Sri Lanka amounting to $ 2.9 billion. This was post agreements with China and India – Sri Lanka’s biggest lenders for additional financial assistance and the first steps in getting Sri Lanka’s economy back on track.
External financial support and debt restructuring alone, however, will be insufficient.
Firstly, Sri Lanka will have to rely on restoring its trade and exports to pre-pandemic levels but in a changed world. The Generalised System of Preferences Plus (GSP+), an EU trade regime that gives Sri Lankan exports duty concessions, expires at the end of 2023 and regaining access to the new GSP system will be crucial.
At the recently concluded EU-Sri Lanka 25th Session of the Joint Commission, the EU delegation commended Sri Lanka on the resilience of its democratic institutions and the Government’s progress in stabilising the economy. The group also presented the new EU GSP+ Regulation, which is expected to enter into force on 1 January 2024 for the next 10-year cycle.
In the coming months, as Sri Lanka works its path out of the crisis with support from multilateral institutions, there will be reforms and a restructuring of different sectors and perhaps the entire economy itself. Countries that have fostered longstanding relationships with Sri Lanka including Germany, whose businesses have decades-old operations in Sri Lanka, will assuredly step in to support this transformation process.
As one of the most important economies in Europe, Germany added its voice to that sentiment. A Federal Foreign Office spokesman said Germany was committed to a sustainable solution to the current economic crisis in Sri Lanka and supported the country’s negotiations with the IMF.
In 2021, Sri Lanka’s exports to the EU were just under $ 3 billion and more than $ 750 million or 25% of that $ 3 billion was in exports to Germany [1]. This indicates the importance of Germany for Sri Lanka’s trade economy. In 2019, trade with Germany crossed $ 1 billion, growing at around 8-10% a year.
The combination of the pandemic and the economic crisis has been instrumental in halting that growth, or at best, dampening the growth momentum. Apparel comprises about 44% of total exports and 33% of direct and indirect employment. The specialisation, innovative capacity, and ethical manufacturing practices are the unique selling points for German entities to do business in Sri Lanka.
Dial Textile Industries
Germany’s Ahlers AG, the second largest manufacturer of men’s fashion in Europe, helped set up Dial Textile Industries (DialTex) in Sri Lanka in 1979. The company’s portfolio includes jeans, pants, chinos, and cargo pants, all of which make Sri Lanka critical to its supply chain.
“Ninety percent of what we produce here in Sri Lanka is sent to our parent company for very discerning premium customers,” said DialTex Managing Director Sean Umagiliya. “All processes are done in-house, which means there is an intense focus on quality. Government support for exports right throughout the challenging times ensured that we continued production without any issues.”
As testimony to his company’s confidence in Sri Lanka, Umagiliya points to the company’s investments in modern technology; DialTex uses laser technology and wash processes that are not only environment-friendly but also add a quality finish. “Countries like Bangladesh and Pakistan differentiate on cost and volume, but we picked Sri Lanka because it innovates better and provides a more personalised service,” he said. DialTex has been in Sri Lanka for over 43 years and will continue to look at opportunities in and around the country.
Eskimo Fashion Knitwear
Eskimo Fashion Knitwear, another fashion and apparel retail brand based in Chemnitz in the state of Saxony, Germany, also established a manufacturing subsidiary in Sri Lanka in 1982. Eskimo produces winter accessories including gloves, shawls, socks, tights, and caps. Eskimo was also one of the apparel companies that set up operations in the war-torn northeast of the country as the 30-year-old conflict came to an end in 2009.
“More than 95% of our products are meant for customers like Decathlon and Next in Europe,” said Eskimo Knitwear Sri Lanka Director/CEO Indika Liyanahewage. “When Eskimo set up in Sri Lanka, the plus points were the country being an open economy, having a quality workforce that was easily accessible, and there being other companies that were already well established.”
When asked how Eskimo was navigating the economic crisis, Liyanahewage said he was confident the crisis would end. “We basically go back to basics,” he added. “We optimise resources, manage costs efficiently, and while doing that, we protect our people, ensuring their livelihoods are stable.”
What of the future? “We will be making investments in machinery and equipment, but that’s directed at maintaining quality and meeting customer expectations,” Liyanahewage said. “We are not planning any expansion just yet as we are still monitoring developments in our markets globally. Our German owners love Sri Lanka and are very happy with the work environment.”
Prym Intimates
While Eskimo and DialTex have been in Sri Lanka for 40 years, there have been more recent entrants from Germany such as Prym Intimates, a Joint Venture (JV) between Germany’s William Prym and UK’s Stretchline. With a legacy of close to 500 years, Prym Group is the JV supplier to global intimate wear brands, which was set up in Sri Lanka in 2002, manufacturing hook-and-eye closures, bra wires, rings and slides, bra straps, and other components used in intimate wear.
“While we export mostly to the US, about 35% of our products are for the European brands of which approximately 10% goes to Germany,” Prym Intimates Lanka CEO Vasu Wijegoonawardena said. “Plans are afoot to increase our market share in Europe by over 50% over the next few years as we see potential in this region,”
He said that the crisis had not dampened optimism or confidence: “Prym has been in Sri Lanka since the war and this is not our first crisis,” he said. However, he acknowledged that the high inflation and the unrest were concerning, leading to buyers wondering about fulfilling delivery commitments. “But we managed these concerns and Prym met all timeline commitments,” he asserted.
Like the others, Prym established operations in Sri Lanka because it seemed a good prospect at that time. “In the 20-25 years of being here, we have a whole new pool of talent that has developed to serve the needs of the apparel industry,” Wijegoonewardena pointed out.
Future access to GSP+
All three companies differ in operational scale and product mix, but all agreed that continued market access to the EU under the GSP+ regime mattered. Another aspect they concurred on was that the Government must stay committed to ensuring that Sri Lanka remained under that GSP+ regime.
“Access will not be lost on 1 January 2024,” DialTex’s Umagiliya said. “There will be a two-year grace period in which Sri Lanka can make its case and continue to have GSP+ privileges for another two years until the end of 2025. In that time frame, Sri Lanka must do whatever is necessary to maintain market access to the EU under GSP+.”
They also agreed that pursuing an FTA would be a good option as well.
Perhaps most importantly, all three companies have made serious commitments to worker welfare in multiple ways, especially during the pandemic and the current macroeconomic crisis by providing cost of living adjustments and other non-cash benefits. In tandem, they are also investing in building capacity and in communities through diverse sustainability initiatives designed to empower and sustain both the worker and the business.
Reference
- Export Development Board, Market and Country Brief, Germany 2022