Exporters identify product differentiation and innovation as way forward

By Cheranka Mendis

Despite the rupee’s depreciation at the beginning of the year which was expected to support local exporters, 2012 was a testing one for the industry, leaving the stakeholders with a lower growth than that in 2011. Thanks to rising costs in labour and energy as well as the effects of inflation, 2012’s exports are likely to be less than 6% of 2011’s export growth, the industry said.

National Chamber of Exports (NCE) President Dr. Jagath Peiris last week noted that the slow growth is due to the poor product mix in the industry, more so than other issues, which need to be corrected going forward.

Dr. Peiris who was re-elected at the Chamber’s 18th AGM on Thursday emphasised on the need of a strategy that focuses on differentiation and innovation to take the industry forward which would better enable them to face stiff competition in the world market.

Despite the positivism of the rupee depreciation at the beginning of the year which many believed to be the ideal drive for exporters, by the latter part of the year all benefits gained were lost, he said. “This was because of other issues such as the increases in labour costs as minimum wages across the industry went up to about 30% while energy costs went up by 30-40%,” he said. “Everyone thought we would be able to increase our exports from 2011 but to my understanding, it is lower than 2011’s by almost 6%.”

He pointed out that the product mix we currently export is more or less the same that was exported years ago with little value addition. As Sri Lanka is no longer a country with cheap resources and does not hold the enviable position as a cost leader, the country must now seriously look at differentiation, letting the likes of Bangladesh hold the previous title.

“Our best strategy therefore would be differentiation,” Peiris acknowledged. “This could be done through innovation, better servicing, packaging, new additional product facilities and value addition to make unique products.”

Instead of competing with low cost strategies, the industry must now arm itself with products of high quality, higher customer service, and higher level of innovation. Having partnered with the National Science Foundation (NCE), the Foundation is now looking at newer ways to approach the market with better products and more value additions.

As a result of fruitful talks with Treasury Secretary prior to the 2013 Budget, exporters are now allowed to enjoy 300% setting off of expenses for R&D expenses carried out at private sector institutes. High taxes on solar and renewable energy equipment were also removed while BOI companies in sectors such as ceramics and apparel were allowed to increase domestic sales by 40%. Furthermore, a cess was imposed on several products, presenting an exporter friendly budget for the year.

“It is up to us to take it forward and to achieve the Government’s ambitious targets of US$ 15 billion by 2015 and US$ 20 billion by 2020. This could be done through innovation and improving productivity.”

Putting forward two requests to Industry and Commerce Ministry Secretary Anura Siriwardena, who was also the Chief Guest for the event, Peiris urged the Secretary to consider giving duty free vehicle permits for exporters and to allow excess baggage to be carried if a exporter is using the national carrier for a trade visit.

“I suggest granting a duty free vehicle permit of US$ 50,000 to exporters, initially to those who export for US$ 1 million or more. This will encourage smaller businesses to target higher as well.” The vehicles will be purchased for business purposes, he said. “I also request you to consider an additional 10 kg baggage allowance if we take the local carrier for market promotion visits to other countries,”

Commending the NCE for the foremost contribution towards Sri Lanka’s exports, Siriwardena assured that the requests will be discussed with relevant authorities. “We will most probably be able to get a positive reply,” he said.

Siriwardena also noted that one of the key policy objectives of Mahinda Chinthana Vision for the Future is to transform Sri Lanka’s industrial sector in to a high value added knowledge based industry by 2015 which will then contribute to the economic expansion of the country. Exports are said to play a major role in achieving the Mahinda Chinthana as the sector contributes nearly 17% to the GDP of the country.

“Export growth has indeed been satisfactory in 2010 and 2011 mainly due to the programs and policies of the Government. In 2012, due to the crises in all developed and emerging markets, especially EU and USA which absorbs 55% of our exports, the industry was affected,” said Siriwardena. He also noted that the decrease in exports was not an issue limited to Sri Lanka only and that other Asian countries such as India were also facing similar challenges.

“It is of utmost importance to make concerted efforts to turn around the export sector if we are to achieve the future export target. It must also be noted that Asian counties has substantial growth, with India and China expected to show strong growth in 2013 and 2014. Therefore, protection of these markets is expected to be very high and we are concentrating on developing strategies to diversify our markets.” Institutions under the Ministry such as the EDB and the Department of Commerce are in the process of formulating programs for this purpose.

Noting the importance of public-private partnerships, the Ministry Secretary acknowledged that a new Consultative Committee for Market and Diversification (CCMD), the first national market valuation effort by the Government in collaboration with several key ministries, Government institutes and the private sector, is currently looking for market solutions.

The EDB is also in the process of formulating a national exports policy and national export strategy in consultation with the private sector and other relevant agencies to create an environment conducive to promote exports.

Director General of Commerce P.D. Fernando, highlighting factors that would help the country reach export goals, stated that consumer protectionism is key for the industry. While imports must be monitored so that only those under quality specification come in, what goes out must also be of high standard, he said. Action must also be done to fast-track visas and medical insurance needed for local exporters to go abroad and he emphasised on the need for the team spirit of the Government and private sector to be kept afloat.

“The 2015 export growth is achievable,” Fernando said, adding that the time has now come for the industry to test new markets with new products. “Let us act beyond presentations, textbook marketing, etc. and work together. Let’s start making policies together. Maybe we can change the situations somewhat by working together.”

Institute of Policy Studies Executive Director Dr. Saman Kelegama and MTI Consulting CEO Hilmy Cader also delivered two presentations on enabling Sri Lanka for export excellence.

Looking at the macro picture of the industry, Dr. Kelegama noted that Sri Lanka’s share in global exports is minimal and that Sri Lankan exports as a share of GDP has declined over the years.

“In 2000, exports as a percentage of GDP reached a peak point of 32%. This dropped to 16% by 2010. Sri Lankan exports as a percentage of world exports in 2000 was 0.08% which reached 0.06% in 2011.”

To get out of the current position, Sri Lanka must move away from EU and US market penetration and produce more high tech exports. Currently close to 90% of Sri Lankan exports are simple products that could be copied by competitors, and the country’s share of high tech exports is only 1.8% compared to 7.5% in Korea, 27% in Thailand and 50% in Singapore and Malaysia.

The way forward is through ensuring a sound macroeconomic policy environment, driving forward new export sectors and niche sectors, maximum use of preferential and other trade agreements, increasing investment in R&D by the private sector, shifting from simple products to more powerful products, and by recognising innovation in the export sector, Kelegama said.

Pix by Sameera Wijeyesinghe