Sri Lanka Textiles 2003 - Global Business Reports

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SRI LANKA
A Prospect of Peace
A Special Report by Arnaud Burtin and Özgür Ergüney
Ateardrop ‘
from India –
that’s the way Rudyard
Kipling described Sri
Lanka, or Ceylon as it
was called in his time.
This lush island won its independence
from Britain in 1948 and, at the time,
the newly created country of 20
million inhabitants was described by
the World Bank as having one of the
most promising futures of all the
countries of Asia.
Unfortunately, although still
remarkably beautiful and unspoilt,
the country still remains among the
poorest in the world. One of the
factors underlying this inability to
realise its potential has been the
prolonged civil war between the
government and the separatist Tamil
Tigers, a conflict that has blighted
the country for more than 20 years.
These 20 years have not been kind
to the country and, rather than
marvel at the beaches, ancient
temples and palaces that are features
of the island, the world watched in
horror at all the carnage and death.
However, life has gone on and the
garment sector has coped – some
would say thrived – through such
oppressive times, with annual
growth rates of over 16% per annum
for the past two decades. The
industry has become the real engine
of Sri Lanka’s economy, providing
more than 300,000 jobs (30% of
manufacturing employment) and
almost half its foreign earnings. This,
despite the fact that the country has
had to continuously divert funds and
resources to support the conflict,
instead of improving infrastructure,
education, health and other areas so
necessary to support an emerging
economy.
The conflict aside, the macroeconomics
of the island are pretty
robust, with average annual growth
rates of approximately 5.3% over the
last five years, an unemployment rate
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of less than 9% and steady inflation
rates. The welfare policies of most of
the post-independence governments
have given Sri Lanka a very high
literacy rate (95% for males and 90%
for females), comparable to the most
developed Western countries, and a
health record enviable in the minds
of other third-world countries. With
English commonly spoken and an
impressive passion for cricket, Sri
Lanka has very strong links with UK –
links that are exemplified by the fact
that its apparel exports to the EU are
almost completely focused on the
UK.
Before independence, Sri Lanka’s
economy was centred on plantation
crops (tea and rubber products).
While agriculture remains important,
the economy has since become
considerably more diversified. The
garment industry really started in the
mid-‘70s, as the economy was
liberalised and oriented towards
export-led industries, growing thanks
to the quota system and a very
cheap labour force. Quotas allowed
garment producers to stay focused
on improving manufacturing skills,
and also on strengthening their
relationships with buyers.
The industry started by manufacturing
garments for the basic
markets, such as discount stores,
although now it is progressively
going up-market, working for
department stores and brands that
are among the biggest players in the
industry. Household names such as
JC Penney in the USA, and Marks &
Spencer in UK, are regular buyers
from the island.
But Sri Lanka has rapidly evolved
from a simple contract manufacturing
base and has attracted some
of the major manufacturing players
to set up operations there.
Subsidiaries of global players such as
Esquel and Fountain Set have
established local subsidiaries, Polytex
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and Ocean Lanka, respectively. There
has also been the establishment of a
number of joint ventures with local
operators such as Courtaulds Lanka
or MAS Holding.
Like many industries, the garment
sector in Sri Lanka has evolved to
become increasingly consolidated. In
2001, 12% of local exporters
generated 72% of the country’s
export revenue in the garment sector.
Having established themselves as the
leading companies, with established
production facilities and strong
customer ties, these companies are
now concentrating on moving
upmarket. This has entailed
developing more of the value-added
services that high-end buyers expect
from their suppliers. From the initial
fabric design, through to the final
delivery, these firms are becoming
increasingly competent in providing
the complete solution to their clients.
The issues faced by the industry
today are many and varied – issues
that will ultimately have an adverse
effect on growth. The lack of a local
fabric-production base means that
most producers can only provide a
90-day lead time, as opposed to the
60-day standard that many other
Asian countries are able to work to.
Other factors include low levels of
productivity and, of course, the
internal conflict that has scared many
buyers who may have otherwise
been tempted.
Despite these handicaps, the
growth of the sector has been
constantly good to the extent that, if
the country manages to solve these
issues, its advantages will become
even more compelling. Given the
high literacy rate, developed social
compliance regulations and low
labour rates, the country has many
attractions.
After numerous attempts at peace,
the current ceasefire and subsequent
negotiations in Thailand have given
the whole country the feeling that
the end of the conflict is finally in
sight. The garment sector is naturally
anxious for current talks to continue
and ultimately succeed in bringing
lasting peace, which would in turn
bring improvements in infrastructure,
business climate, investment
potential and, of course, living
standards.
Like many other countries, Sri
Lanka is under pressure to put in
place an attractive economic
environment and an up-to-date
industry before the complete liberalisation
of the world apparel market in
less than two years. Locally, many
view 2005 as the death knell for
small to medium-size enterprises,
which only exist today through the
protection that current quotas bring.
The government and key-players are
aware of the threat and have already
decided to launch a common
strategy for the next five years, to
equip the industry and the whole
society for the challenges of 2005.
With the peace process bringing
prosperity and stability to Sri Lanka,
the country has one less major
headache to worry about.
Many, among the 25 top exporters,
have already provided, or are on
their way to providing, integrated
services with a good level of
compliance with production and
social standards. At the same time,
they have to maintain competitive
prices and market their abilities to
their customer base. They also want
to have a more balanced market
between the US and the European
Union, and – by improving efficiency
and the services expected by the
more discerning buyers at the top
end of the market – to continue
moving up the value scale.
The island of Ceylon has a long
tradition of trading between Asia
and Europe. Today’s Sri Lanka wants
again to become a regional hub on
the back of its thriving garment
industry. Much of the groundwork
has already been done, as the
country is already established among
some of the biggest buyers in the
industry, despite its obvious
handicaps. Now the country has
identified the ways in which it must
concentrate its resources, and how it
must apply itself to meet the new
challenges it will face in 2005. There
is still every chance that Sri Lanka can
become the shining Asian star that
the World Bank once predicted – it
may just be a matter of time. FBI
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Peace Process
Ushers in
New Era
The garment market is
arguably the most globalised
in the world and, because of
political uncertainty, countryrisk
rating has become a key element
for major buyers and potential
investors.
Unfortunately, Sri Lanka has fallen
into the higher-risk category for
some time, due to the merciless civil
war that has plagued the country for
over two decades. The separatist
group, LTTE, more commonly known
as The Tamil Tigers, was fighting
Colombo’s central power with the
explicit aim of creating an
independent state in the northern
and north-eastern area of the island.
For years, Sri Lanka has been
headlining the world news with the
latest Tamil Tiger terrorist attack,
such as the daring raid on Colombo’s
international airport in July 2001,
which destroyed nearly half the
national airline’s fleet.
The conflict has its roots in
colonial-era migration. The Tamil
Tigers portray themselves as
representatives of the local Tamil
population. The Tamils were brought
to Sri Lanka from southern India by
the British, to pick the tea leaves, a
career option that did not attract the
indigenous Sinhalese. With
independence, the by then
substantial Tamil population became
increasingly marginalised, as the
Sinhalese shut them out of
government and out of many aspects
of everyday life.
The situation came to the boil
during the 1980s, when more
militant elements in the Tamil
population took matters into their
own hands and began demanding a
separate state within the island – a
demand that ultimately led to the
tragic armed conflict.
“For Sri Lanka, the biggest
problem is that very few people
know about us… The main issue
is to bring people here.”
At the beginning of 2002, with a
new government elected, talks with
the LTTE were launched, achieving a
ceasefire agreement that has proven
to be more stable than previous
attempts. As Professor G.L. Pieris,
Minister of Enterprise, Development
and Constitutional Affairs – in charge
of the Peace process – summed up:
“What is important is the conviction
that the peace process itself is the
only way. There is no other way. Both
parties have established a rapport,
they started the discussions and it is
moving forward.”
The latest peace initiative has
certainly been a major boost for all
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sectors of the country’s society. As Guhan Nanayakkara,
managing director of Forbes, explains: “It is a major
change in our daily lives and also in the way we do
business. During the civil war, buyers were reluctant to
come and visit us so we had to meet them in Hong Kong
or Singapore.”
Shirenda Lawrence, managing director of Courtaulds
Lanka, a subsidiary of Courtaulds-Sara Lee, says: “Now the
buyers are keen to come and visit us, marking a real
improvement and a great opportunity for us.” All the key
players are persuaded
that, if the buyers “Those who come do not
come, they will be
leave disappointed!”
convinced. As Ashroff
Omar, chairman of MAST Lanka, the island’s second
largest garment exporter, states: “Those who come do not
leave disappointed!”
Bringing more buyers is obviously the main expectation
from the industry, but for a lot of people it is far more
than that. Lyn Fernando, chairman of Creations and
former chairman of the Sri Lanka Apparel Exporter
Association, explained what can be expected: “The
massive amounts of money that our government spent on
the war effort will now be used to make the country
more competitive and more attractive through improving
the roads, railways, ports and other infrastructure crucial
for local business.” This should have a considerable effect,
bearing in mind that the government is reckoned to have
spent approximately $750 million a year on the conflict.
Both the government and the industry want to take the
opportunity of peace in order to go further, by trying to
get Free Trade Agreements (FTA) with the US and the
European Union. Everyone agrees that FTAs and improved
infrastructure would bring much more competitiveness to
the industry, but to succeed, the existence of peace has to
be known abroad.
And that is certainly one of the main disadvantages of
the country, as Omar admitted: “For Sri Lanka, the biggest
problem is that very few people know about us… The
main issue is to bring people here.”
However, having met the challenge of peace, the task of
attracting the buyer’s dollar and investor’s pound should
be a little easier now.
FBI
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Planning
for the
New Order
Many, rightly or wrongly,
anticipate the approach
of 2005 with fear and
trepidation – something
akin to judgement day. It seems,
having interviewed textile executives
across the globe, that only the
Chinese could be excused for
looking forward to this date!
Sri Lanka is no exception, as it
fears the phasing-out of a quota
system that has so helped it to build
a thriving industry – an industry that
has formed the backbone of the
local economy. Different surveys
point out that at least 40% of the
850 major companies active in the
sector will shrink with the
dismantling of the Multi-Fibre
Agreement.
In response to this perceived
threat to such an important earner
(half of the island’s exports
originate in the textile sector), the
public and private sectors have
joined together to identify
the industry’s failings and to
formulate solutions in
response. Part of the
“Regaining Sri Lanka”
programme, designed to
stimulate a lack-lustre
economy after 20 years of
civil war, the resulting fiveyear
strategic plan is the
industry’s bible for future
growth and prosperity.
Thanks to the quota
system, the local garment
industry grew at an amazing rate
over the past two decades. Exports
grew from $468 million in 1989 to
$2.34 billion in 2001. The protective
blanket of the system allowed
companies time to invest in and
develop their businesses, with the
result that many leading Western
brands have become regular buyers.
For example, the island’s responsible
social and environmental standards
have attracted the likes of Nike and
Marks & Spencer.
But the industry as a whole knows
that it would be almost impossible to
compete in the volume markets with
much lower-cost countries like China
and Bangladesh in a post-2005
environment. Mahesh Amalean,
chairman of MAS Holdings, explains
the general mood in Sri Lanka:
“Competing with them would take a
lot of energy, and I would rather use
our resources and energies to
penetrate niche markets”.
Lyn Fernando, chairman of
Creations, goes further: “Competing
with very cheap countries would
mean giving up our level of social
compliance. To avoid this dilemma,
we have to go up-market.”
The first issue that Sri Lanka must
face, in order to achieve its up-market
ambition, is what the “5-year strategic
plan” calls backward integration. Sri
Lanka currently imports over 40% of
the raw materials needed by the
garment industry.
“Yarn and fabric producers were
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reluctant to settle here, because of
the lack of local market,” explains
Sam Speeza, managing director of
Hayleys MGT, an Australian-based
company. Fabrics and yarns are
mainly imported from Hong Kong,
China and India. The goal of the
industry is to reduce the current
lead-time from 90 days to the 60
days increasingly demanded by
buyers.
There are two options to consider
here. The first would be to establish
local weaving mills, which would
reduce lead times but would require
massive amounts of capital and
considerable development time. The
few mills settled in Sri Lanka –
including Ocean Lanka (owned by
MAST Lanka), Hideramani Group and
Fountain Set – are nevertheless very
dynamic and have good-quality
products. They are all planning
massive expansions.
Man-Kue Pow, director of Ocean
Lanka, said: “We already have three
plants and we want to set up
enough facilities to triple our
production capacity.” By
combining the power of the
country’s second and third largest
exporters with the global might of
the world’s leading yarn
manufacturer, the idea is
to draw upon
expertise from both
up- and
downstream of
the production
process.
The Sri
Lankan
Board of
Investment
(BOI) reckons
that for this
plan to work
effectively, the
country needs a
minimum of two
woven fabric mills
to supply local
demand sufficiently.
The BOI wants to
attract companies
that are currently
seeking for relocate
mills established in
expensive Europe or Northern Asia
(for example in South Korea).
The second track is a more
pragmatic and easily realisable.
Ashroff Omar, chairman of MAST
Lanka, told us: “We are trying to
create closer links with countries like
India and Pakistan, who have
relatively quick delivery times.” With
the signing of a free-trade agreement
with India and Pakistan, local
suppliers can now rely on tariff-free
fabrics.
Amalean sums up the need for
backward integration: “We have to
both strengthen Sri Lanka’s fabric
base and also look how to better use
regional fabric. Giving Sri Lanka a
fabric base should not be given a
second priority, because flexibility
and speed are paramount in our
business.” With local companies
already buying $1.5 billion annually,
international companies would do
well to work take notice.
One of the underlying
assumptions of the
strategic plan is that
the local industry
must move away
from the lower-end
market and look to
engage more
demanding higherend
clients.
Currently,
around 40%
of Sri
Lankan
production
goes to
discount stores
and between
50% and 60% to
department
stores, with only
10% to speciality
stores and the
brands. The goal is
to increase this
final figure to at
least 30% within the
five years.
Like many other
garment manufacturers
around the
world, the local
industry has also been
encouraged to provide increasingly
sophisticated services to its
customers. MAST Lanka’s Omar, who
is part of the ‘Regaining Sri Lanka’
team, reckons that: “We are trying to
educate the industry about following
fabric fashions and trends. Providing
a complete solution is what we have
to emphasise.”
Product development and sampling
are common services among the top
apparel producers. Not surprisingly,
companies such as Hoodvian and M.
Samson Silva already have their
sights aimed higher, by employing
their own design teams. Indika Silva,
of M. Samson Silva, explains: “Our
strategy is to provide costumers with
a global solution.” Amalean, of MAS
Holdings, underlines the strategy:
“We have to provide a total service
to the customer, which involves
being active in the entire supply
chain to ensure that we get the
‘freshest’ products on to the
shelves.”
The phasing-out of quotas is an
issue for any garment producing
country, but Sri Lanka is perfectly
aware of the threat hovering over it.
Instead of competition among
companies, the garment sector
appears united in facing the
challenges to come, with strong
support from the government.
Important goals, such as achieving
peace and solving the lack of
backward linkages, are crucial if the
industry is to maintain its ability to
provide Sri Lanka with external
earnings and massive employment.
Coupled to these investments at
home, the country must look to –
and is currently in the process of –
extending the number of Free Trade
Agreements (FTA) with key
destination markets, mainly in
Europe.
By providing the answers to all the
questions that hang over its future,
the industry aims to grow its current
export figure to $4.5 billion by
2007, which is ambitious but
realistic, if Sri Lanka can inform the
world about its specific qualities –
advantages that no other country in
the region has been able to
develop…so far.
FBI
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The Power of
Global Thinking
Although only 25 years old, the
Sri Lankan garment industry
has spawned an impressive
accessory industry. First among
these is global player Mainetti, one of the
largest garment-hanger suppliers in the
world, with operations in 25 countries.
The growth of Mainettech, the
company’s local production facility,
exemplifies how the presence of
accessories suppliers is crucial for apparel
manufacturers. But it is the backing of a
global company that has allowed this
demand to be converted into the largest
range of products and services that the
industry could possibly expect.
Established 10 years ago, when the
garment sector was still in its infancy,
Mainettech is today the island’s leading
supplier of hangers and, in turn, Sri
Lanka is now the company’s strategic
hub for the Indian subcontinent.
Mainetti’s success in developing a hub is
a lesson that many in the local industry
are looking to replicate.
Jeyam Perumal, the company’s regional
director, explains the philosophy of the
group: “A Mainetti hanger produced in
Sri Lanka is absolutely identical to
another Mainetti hanger produced
elsewhere in the world.” With garment
manufacturers expected to supply their
garments quickly, flexibly and at a
constant quality, so the hanger
manufacturer is expected to work under
similar criteria. “Our systems and
facilities have evolved to ensure that we
become an essential part of the supply
chain. Most importantly, our success
relies on the fact that we think globally,
but act locally.”
“Our success relies on the fact
that we think globally,
but act locally.”
Apparel manufacturers expect a lot
from a hanger supplier, which has to be
flexible, to insure a constant quality of
products and delivery. Perumal explains
the company’s approach to fulfilling
these requirements: “We have evolved
systems and facilities to ensure that we
become an essential part in the supply
chain. It is a partnership approach that
defines us.”
With a catalogue of over 350 hanger
models, it is important for the company
to be able to provide the type of hanger
the buyer requires. Perumal goes on: “To
achieve this we depend on technically
advanced equipment, produced within
the group by Mainetti Tecnologie. We
design, develop and manufacture
leading-edge robotic systems and
automated equipment for the
production of high-quality garment
hangers at the lowest possible cost.
Perumal explains his recipe for success
in this business: “It is very important to
think globally and act locally, to be able
to have the quickest response for this
just-in-time industry. Our mission is to
support our costumers in their sourcing
operations.”
As people such as Perumal work
increasingly closely with the local
market, their ethos and mindset will
surely influence others, especially the
more dynamic, middle-ranking players
who do not have the luxury of studying
international methods on extended
international trips.
The strong support that Mainetti has
shown its local company has helped
Mainettech become the first local hanger
producer to obtain the ISO 9002 certification,
in 1998. By bringing international
standards and internationally trained and
experienced managers to the local
market, manufacturers such as Mainetti
are helping evolve the local market. In its
continuing quest to respond to clients’
ever-changing needs, Mainetti lives by
the slogan: “More than just a hanger.”
Maybe local garment producers will
learn from the example and adopt a
similar slogan: “More than just a
garment manufacturer…” FBI
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Social Compliance
Gives Sri Lanka an Edge
In a world of borderless trade, the
theory of comparative advantage
states that when country A is able
to produce and export a specific
product for less than country B, then
country A has a comparative
advantage in that product.
Nowhere has this theory been more
ruthlessly applied than in the world
of textiles, where buyers from
around the world continuously seek
to source increasingly cheaper
textiles from countries that have a
comparative advantage in producing
textiles.
Unfortunately, this theory contains
a major flaw. It does not allow for
equality in standards – not the
standards of the final product, but of
the environment and social welfare
in the place where the garments are
produced.
All over the world, garment
manufacturers are struggling to
provide the best quality products at
the lowest prices within the shortest
space of time. But is this enough to
get orders? The whole garmentmanufacturing
sector in Sri Lanka is
convinced that, to be successful, it
has to go further.
And the area where Sri Lanka is
proudly head-and-shoulders above its
competitors within the region is its
compliance with international
standards in terms of labour laws,
environment protection and respect
for human rights.
In recent years, mass retailers and
the biggest brands have been under
huge pressure from consumers
groups and the ever-vocal lobbies in
the Western countries, forcing them
to source from countries and
companies that comply with international
labour standards and human
‘Sri Lanka has a tremendous
advantage, especially in
comparison with its neighbours’
rights. Damning reports on such
high-profile retailers as Nike and
Reebok have forced both companies
to search for more ‘suitable’
suppliers, whilst also spending
millions on building their image as
caring employers.
And in terms of standards
compliance, Sri Lanka has a
tremendous advantage, especially in
comparison with its neighbours.
Firstly, owners throughout the
country proudly point out that there
is no child labour, nor sweatshops,
nor forced labour. Wage rates,
overtime and workers’ holidays are
strictly covered by law and, as
Channa Palansuriya, CEO of Orit,
confirms: “Big buyers actually refuse
to work with producers that are not
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socially and ethically compliant. As
these issues become increasingly
important, Sri Lanka has a real
competitive advantage over other
regional players.”
Even though low, production costs
in Sri Lanka are not the cheapest in
the region. It has therefore been
necessary to develop other
advantages. Rami Wiersch, CEO of
Hoodvian Ltd, comments: “It will be
an even more important subject in
the years to come because social
compliance is part of the WTO. For
an equal price, buyers are
definitely choosing the
company with the highest
level of compliance.”
But it does not just make
sense from the buyer’s
perspective. There is also an
advantage for the industry as
a whole. Gihan Nanayakkara,
CEO of Forbes, explains: “If
you are not compliant in
today’s business, there’s no
point in marketing yourself
and no way to get orders.”
Big buyers are increasingly
sensitive to the way workers
are treated in the garment
factories where they place
their orders, and it is an issue
that will become even more
important. Rizvi Farouk,
chairman of the Sri Lanka
Buyers Association, said: “I
think that, if we can adapt a
higher compliance policy like in the
US or in Europe, efficiency will
dramatically improve and it will allow
the hard-working people to earn
more.”
It does not take rocket science to
realise that, by improving working
conditions, companies can look
forward to gains in efficiency and
productivity, not to mention reduced
absenteeism and employee turnover.
Shirenda Lawrence, managing
director of Courtaulds Lanka, which
has an impressively modern factory,
illustrates this: “As soon as we
started providing meals as well as
transportation from home,
absenteeism fell immediately and
dramatically.”
If the whole industry seems to be
fully aware of the necessity of
compliance, its leaders also point out
the need to update labour laws to
maintain the industry’s edge over the
competition. Farouk, from the Sri
Lanka Buyers Association, explains:
“Sri Lanka has labour laws from the
‘60s, which are not practical for
today’s business. Labour laws are
one of the first things an investor
needs to be comfortable with. Ours
are slightly outdated and could be
more appealing, to attract foreign
investors.”
R.E.V. Casie Chetty, chairman of the
Sri Lanka Apparel Exporters
Association, goes into more detail:
“The government has to step
forward to amend obsolete laws,
particularly with regard to the
termination of employment and
overtime limitations, to make the
industry globally more competitive.”
In addition to social standards,
environmental protection appears as
a major concern. Indika Silva, CEO of
M. Samson Silva, says: “As a Buddhist
country, environment protection is
considered as natural behaviour.”
That’s why water treatment plants
are very common within Sri Lankan
factories.
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Whilst the more forward-thinking producers of the
region have realised that these standards are de rigueur if
they are to attract the best and most reliable buyers, Sri
Lanka has in fact proven herself capable of applying the
theories right across the board. Although considered
outdated by the locals, the current labour laws are years
ahead of some countries who would not wish to be
advertised. Equally impressive is the level of openness and
support for such initiatives, a far cry from a country such
as Indonesia, where players can only complain about the
restrictions placed on them by labour laws.
At the end of the day, it is not always the price level
that determines a country’s comparative advantage, but
also its willingness to comply with the peripheral – or
should it be central? – needs and requirements of their
destination markets.
FBI
USEFUL CONTACTS IN SRI LANKA
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