Sri Lankan auto-parts maker rides global demand wave

By Marwaan Macan-Markar 

Nikkei Asian Review: BIYAGAMA: Across a brightly-lit factory floor in a free trade zone in Biyagama, a commercial town on the eastern fringes of the Sri Lankan capital, Colombo, workers in white baseball caps are hunched over long tables, methodically threading wires into matchbox-sized containers.

The factory, which makes impact sensors for seat belts and vehicle airbags, enjoys the automobile industry’s much-sought-after 1PPM (parts-per-million) quality safety standard, meaning that only one defect is permissible for every million parts produced.

Lanka Harness Company, which owns the factory, trades on this record as its calling card. “This is the global standard for a critical component in a car that can decide between life and death for a passenger,” Rohan Pallewatta, the company’s executive chairman, told the Nikkei Asian Review. “It requires the highest quality level; there can be no exceptions.”

That may explain a remarkable surge in orders since October 2015 for this 11-year-old company, which had a turnover of $ 40 million last year. To cope with demand, Pallewatta has expanded into an adjoining building, sharply increasing his army of nimble fingered workers to 1,000.

The new orders have nearly doubled monthly production to two million sensors, from a previous average of 1.2 million a month. The surge in demand followed a global scandal that has shaken the automobile industry: defective airbags in millions of vehicles, which continue to be recalled following a string of deaths and injuries of passengers.

Most of Lanka Harness Company’s fresh orders are for Takata, a Tokyo-based auto-parts company that supplies impact sensors to Toyota, the world’s biggest car maker, which is one of the automobile companies affected by the faulty airbags.

Sri Lankan analysts have noted the niche that Lanka Harness Company enjoys, despite its location in a country with no automobile sector to speak of. “It is amazing for one company in Sri Lanka to be part of such a high-value chain in the car industry,” said Anushka Wijesinha, chief economist of the Ceylon Chamber of Commerce, a Colombo-based business body. “Catering to Japanese quality standards and retaining such a market share is unusual.”

But there is something even more noteworthy about Lanka Harness Company: It belongs to a small but growing number of medium-sized enterprises in Sri Lanka’s free trade zones that are tapping into the growth of global production networks, often producing highly specialised components.

“A country does not have to produce a whole car to reap the gains from the rapidly expanding global demand for automobiles,” said Premachandra Athukorala, professor of economics at the Australian National University in Canberra. “It can specialise in a given slice of the production process of automobiles, as the Lanka Harness case vividly illustrates.”

According to Athukorala, who specialises in global production networks, this shift in the global supply chain is fertile ground for emerging economies with relatively cheap but skilled labour. Sri Lanka has companies supplying knitted components to multinationals such as Nike, the US sportswear supplier, electronic components for lighting devices to Japanese companies, sensors for Airbus, and metal components to other companies in the European Union.

All this is part of the development of a system of ‘international production fragmentation’ that is replacing much bilateral trade between countries, Athukorala said.

Sri Lanka’s government is eyeing this shift as it tries to widen the country’s export base to grow its $82.3 billion economy. In late October, Prime Minister Ranil Wickremesinghe made the case while delivering an economic policy speech to parliament.

“Our export base has remained the same for over 30 years and is dependent on a narrow export base of garments -- tea, rubber, gemstones and tourism,” he said. “The economy cannot experience growth based on such limited exports.”

According to the Central Bank of Sri Lanka, the country’s total exports fell to $5.9 billion in the Jan.1 to June 30 2016 period, from $6.3 billion for the first half of 2015. Garments and textile exports were worth almost half the total at $2.9 billion in the latter period, compared with $2.8 billion.

Wickremesinghe underscored the problem by drawing a parallel with Bangladesh, a South Asian competitor, which rapidly increased the value of its garment exports from $5.2 billion in 2003 to $26.6 billion in 2015. Sri Lanka’s annual garment exports have risen over the period from about $2.5 billion to $5 billion, according to the prime minister.

Japanese lessons

Lanka Harness Company’s success could provide a model for the government to build on through investment and tax incentives aimed at expanding Sri Lanka’s role in the global production network. Behind the company’s success, however, is a 30-year record of perseverance and entrepreneurism that began in 1985 when Pallewatta, then just 16, spent a year as a high school exchange student in Japan.

After mastering Japanese and excelling in karate and judo, he signed on for educational tours of Japanese conglomerates, including car manufacturers. It was after one such tour that he realized Sri Lanka might be an ideal location for making impact censors, which were made by hand rather than on automated production lines. “It was completely a hands-on operation and ideal for Sri Lanka’s labor conditions,” he said.

For the next two decades he worked on samples, offering his products to prospective Japanese partners, but being regularly rejected until the safety standard reached the required 1PPM level. “I was completely obsessed with this product,” he recalled. His shipping documents reveal that it was worth it, since he now supplies impact sensors to car makers in the EU and Japan.

Further opportunities beckon, with Latin America, where Lanka Harness has recently opened a Mexican factory, the next frontier. “I want to show that Sri Lanka is capable of producing specialized parts in industries which we are not known for at home,” said Pallewatta.