By Naween A. Mangi If you're planning to make it big in the world of textiles and clothing in the post-quota global marketplace, you'd better offer something more than the competition -- expecially if China is right in the neighborhood. Pakistan says it's up to the challenge, although its performance so far has led to some disappointment.
Long before quotas on U.S. and European textile and clothing imports were abolished on Jan. 1, China dominated all forecasts for the future (see BusinessWeek, 12/20/04, "Who'll Survive the Textile Trade Shakeout?"). As many observers had predicted, the American textile industry took a beating as China rapidly consolidated a giant share of the clothing trade. In just the first quarter since quotas ended, China's exports to the U.S. rose 62.5% compared with the previous quarter, and both Washington and the European Union are clamoring to bring back quotas on Chinese goods.
All the attention on China has given smaller players such as Pakistan the chance to build capacity. "Textile in Pakistan is clearly an advantage we need to exploit," says Prime Minister Shaukat Aziz. "I see Pakistan as one of the top 10 textile providers in the world." Indeed, many have predicted that Pakistan would easily snag the third position after China and India in the global textile trade.
SLUGGISH START. But a slow start in preparing for the end of quotas, coupled with the imposition of duties on some products by the EU, have hindered the growth of Pakistani textile exports for the time being. In the past five years, Pakistan's textile manufacturers have imported $2.2 billion worth of machinery to modernize their factories, according to data from the State Bank of Pakistan, the country's central bank.
The Pakistani Textiles Ministry says the industry has invested between $4 billion and $5 billion in building capacity, improving processes, and preparing for tougher competition. Khalid Iqbal, head of research at Invest Capital & Securities, a local brokerage, forecasts that textile exports will rise 10% to 12% in the fiscal year ended June, 2005. "[Penalties on China] will benefit Pakistan by stemming the decline in textile exports," he says.
Pakistan also has some distinct advantages. It's the third-largest cotton producer in the world, trailing only China and the U.S., and harvested a record 14 million bales in 2004. It also has plenty of trained textile workers willing to labor for low wages.
TEXTILE CITIES. The government plans to invest billions of rupees in building state-of-the-art infrastructure. Islamabad has drawn up plans to set up textile export zones -- known as Textile Cities -- in Karachi, Lahore, and the textile town of Faisalabad, complete with infrastructure facilities like electricity and efficient communication to encourage foreign and local investment in the sector.
"Infrastructure development by the government is where the bottlenecks to rapid growth lie," says Aziz Memon, chairman of the Karachi-based King's Group, a major knitwear exporter which counts Wal-Mart (WMT), J.C. Penney (JCP), Target (TGT), and Sears (SHLD) as its biggest U.S. customers.
The hope is that the improvements in infrastructure will give the industry the leg up it needs. After all, textiles are at the heart of Pakistan's economy. The industry accounts for 65% of total exports and provides 4 million jobs. The government's growing export targets are based largely on hopes that textiles will continue to deliver. Textile exports rose 11.2% in fiscal 2004, to $8 billion, and the government hopes to raise this to $14 billion in the next few years. So far, Pakistan has just 2.2% of the $400 billion global clothing trade.
FULL CAPACITY. The trouble is, Pakistan started its preparations for the abolition of quotas too late. The 10-year phase-out was ignored by most industrialists, who only began scrambling in the last few years to ramp up for the competition. Still, the aim to shift from the production of low value-added categories like yarn and fabric to high value-added categories like knitwear and garments is slowly being met. The share of low value-added goods in overall textile exports declined from 50% in 1997 to 35% in 2004, while the share of high value-added categories increased from 50% to 65% in the same period.
In the first seven months of the ongoing fiscal year -- July, 2004, to January, 2005 -- textile exports fell 1.2%, to $4.6 billion. (Export data has only been released through January.) Bed wear and garment exports took the biggest beating, falling 18%, to $639 million, and 6.75%, to $542 million, respectively. Knitwear, however, did well, with exports rising 28%, to $1.05 billion. "Some sectors, like garments, may be hurt, but they have to retool and become competitive," says Aziz. "We can help them retool, but they have to stand on their own feet."
Memon of King's Group says the garment and knitwear sectors have ramped up to full capacity over the last couple of years, and further growth is now constrained by capacity. His company, which produced 7 million garments last year, increased its sales by 30% in the first quarter (Jan. 1 to March 30).
EU RESTRICTIONS. What has hurt the industry most has been the imposition of duties by the EU. Pakistan had duty-free access to the EU from 2002 to 2004 under the Generalized System of Preferences. But this ended in December, 2004, and Pakistan has since been lobbying to get access under the new scheme, GSP Plus, which will come into effect in July, 2005, and give duty-free access to beneficiary countries. Since the EU is Pakistan's biggest buyer of textiles, with a 33% share (followed by the U.S. with 30%), ensuring continued access will be critical if the decline in exports is to be stemmed.
Shabir Ahmed, chairman of the Pakistan Bed Wear Exporters Assn. says the home-textiles segment has been the most affected by EU duties, with some 40 factories shutting down and capacity utilization sliding to 70% in the last 12 months. Home textiles, which account for $1.4 billion in Pakistan's exports, have been hurt in the first seven months of the current fiscal year, falling 18%, to $639 million, though January.
The main reason for this was the EU's imposition of a 13.1% antidumping duty on Pakistan's bed wear products in March, 2004. "If these duties go and true free trade is implemented, bed wear exports can easily cross $2 billion," Ahmed says. Pakistan supplies 28% of all the bedwear imported by the EU.
'MOMENTARY LOSSES.' Even if duty issues are resolved, the textile industry still has its work cut out for it as global competition heats up. Investments have to be ramped up further to ensure that Pakistan has sufficient productivity gains to allow it to compete with colossal China. Then, industrialists also have to work harder to ensure better working conditions and environmentally safe plants to keep getting business from overseas. And to speed up the pace of growth, Pakistan will have to reduce its dependence on cotton by increasing the use of synthetics, which currently make up just 20% of inputs (the other 80% is cotton).
Meanwhile, analysts say temporary dips in global sales shouldn't hurt the industry's long-term potential. "Investments undertaken over the last few years will take another three years to show," says Tanvir Abid, head of research at Live Securities, a Karachi brokerage. "Value addition is rising, and textile mills are opting for vertical integration, which will help them reduce costs. What we're seeing now are short-run, momentary losses. Eventually, textiles will emerge as one of the fastest-growing sectors, and Pakistan will benefit in the global market." If that happens, the post-quota world could be a prosperous one for the Pakistani textile industry. Mangi is a correspondent for BusinessWeek in Karachi