Apparel exports lose colour

• Anticipated 8-10% YoY dip this year
  
   

By Cheranka Mendis

Backed by the rising costs, effects of the loss of GSP+ and the struggling economies of the West, Sri Lanka is likely to end 2012 with an 8-10% dip in apparel exports year-on-year.

Sri Lanka Apparel Exporters Association Chairman Rohan Abayakoon

Sri Lanka Apparel Exporters Association Chairman Rohan Abayakoon told the Daily FT that based on the present decreases in apparel on a monthly basis, with August recording a 7% decrease YoY, the industry expects to end the year with an 8-10% drop YoY. 

“We were at about US$ 4 billion last year as an industry and we are expecting it to be down by 8-10%,” Abayakoon said. “This is a setback considering the fact that we want to be a US$ 5 billion industry by 2015.”

While the EU and US markets, the apparel industry’s key exporters, remain unstable – a minus point for the local apparel industry – a further cause for woe are the now-surfacing effects of the loss of the GSP+ facility.                         

“The effects of the loss of GSP+ are now beginning to show.” The industry is down 12-13% over the last three/four months, month on month, to the EU, while recording an overall decrease of 9% in 2012,” Abayakoon asserted.

There has also been a 20-30% increase in the costs within the past 18 months, affecting the viability of the industry.

The industry is anticipating a 30% wage hike on the minimum rate within the next two months, which would primarily affect the small and medium businesses. The hike has been approved by the Wages Board and gazetted as well, he noted.

“This will heavily affect the small and medium businesses, not really the bigger companies because they are already paying 25-30% above the minimum rate. So I would think the small and the medium scale businesses will feel the pinch.”

Abayakoon expressed that since wages take up 50-60% of the industry costs, the move to increase would have severe effects on the industry as a whole.

Fuel costs too have steadily increased along with a 20-25% increase in utility costs within the past 18 months.

However, he acknowledged that the rupee devaluation came at the correct time, which somewhat offset the rising costs. “Nevertheless, it has not helped with margins to infuse capital or to expand. Everyone is holding back to ride the tough times. That is the status quo of the industry as at now.”

The negativities will also impact the US$ 5 billion target for the industry. Abayakoon explained that the target is to have a US$ 4 billion industry from the generic business and the remaining one billion to come from the new hub proposal.

“The new hub proposal is now at the final stages of implementation. It has been approved in Parliament and gazetted. We are just ironing out the mechanism.”

He stated that within the next two months, the plan will be ready for takeoff. “That opens up a whole new area for businesses, and not only for apparel but any other value adder as well.” The expectation is to generate US$ 1 billion from this venture within the next two years.

The industry would also do well if the country enters into bilateral or multilateral agreements with other countries. Noting that it is always easier to tell industries to look for new markets, he stated that entering the markets is harder still.

“In the world today, lot of countries are going into multilateral and bilateral agreements; Sri Lanka does not have any right now. We do have something with India but it is very restrictive,” he explained.

Furthermore, facing competition without the backing of the GSP+ while competitors such as Bangladesh and Cambodia enjoy it, adds to the restraints for Sri Lankan exporters looking to enter new territories in the apparel export business. “This is an area that must carefully be looked at,” Abayakoon observed.

The industry has identified a few markets and is looking at countries like Brazil, China, Japan, and Russia, but is in need of some kind of leverage for those markets to spend resources in sourcing from a new market.

“It all costs money. A lot of customers are now going very narrow and deep and for them to have multi-country sourcing is not very viable. Unless we get some kind of incentive at least for a short period of two to three years for businesses to develop, it will be tough.”

Citing examples, he noted that the duties in the Brazilian markets are anything between 30-40%, which makes the task of accessing the country a daunting task for new markets. “Unless we have some bilateral arrangement for two years or so where we reduce that kind of tariff and bring it down to 20% and give them an incentive to come down to Sri Lanka as well, it is very hard to penetrate in to new markets and be sustainable.”

However, despite the negativities, the industry remains optimistic, Abayakoon said.

“We have a lot of experience. We are resilient. We are innovators. The industry is moving into directions to improve service levels to our customers, and we have many advantages in those areas. It is going to be a tough 12 months ahead, but if we dig in our heels and survive it, the industry can prosper for another good five to six years.”