Endeavor to develop Sri Lankan Apparel Industry

Endeavor to develop Sri Lankan Apparel Industry
Sri Lanka is an agro-based economy. Main exports items are textiles & garments, tea, diamonds, rubber, petroleum, fisheries and gems. The major targeted areas of these exports are US, EU, Canada and Japan.

The Central Bank of Sri Lanka reported that the economy in 2005 is expected to grow by 5.5 percent despite the impact of the Tsunami. IMF has already declared that it is not likely to be that high. They expect it to grow at between 4 to 5 percent.

After its unexceptional beginnings in the seventies, textile and apparel industry is now a largest contributor to the country's economy. It stands for 54 percent of total exports and 71 percent of Sri Lanka's total industrial exports. The garment exports form a contribution of near about 7 percent to the overall economy.

Sri Lanka's export earnings increased by 10.7 percent to US dollars 560 million in July 2005, out-performing the 2.5 percent growth observed in July 2004. Cumulative exports for the first seven months of 2005 observed the increment of 11.4 percent from US dollars 3,112 million in 2004 to US dollars 3,466 million in 2005. Though, exports of textiles and garments, which calculated to 47 percent of overall exports, reduced slightly by 2 percent to US dollars 263 million in July 2005. In the first seven months of 2005, in spite of the stagnated prices, textile and garment exports grew at 6.4 percent.

Conclusion

The Sri Lankan garment industry is at a turning point. The confront lies in developing its competitiveness. One approach is to change the position of the Sri Lankan garment industry from a South Asian context and faster competitiveness by developing vertical integration, reaching peak scale of economies, targeting on horizontal specialization, integrating innovative designs and structuring a stake in global marketing networks.

A recent report by RIS (2004) contends that the region as a whole could satisfy the challenge together if it followed horizontal integration, i.e., teamwork in the same or similar lines of production and exports. Such a South Asian strategy visualizes a specific South Asian country that has received export specialization in particular textile or clothing product lines working as a host for relocated plants from other South Asian countries. In this method, the textile and clothing sector can have a regionally incorporated sector as countries vacate specific lines of production and achieve in other lines of production according to their competitive advantage in the global market. Such restructuring would support intra-South Asian investment streams that would be trade-making vis-�-vis the global and regional markets. Vertical integration from one step of processing to another according to comparative advantage can be adopted in the consequent step. South Asia would thus not drop the value-added chain.

Ramaswamy and Gereffi (1998) observed that the buyer-determined value-added chain is important in garment manufacturing. One way of come in the chain is by having a share in the global marketing network. For example, in the tea sector, the Indian company Tata acquired the global marketing network of Tetley. A likewise plan can be adopted in the garment sector, but a regional approach in this regard will be more useful than an individual South Asian country effort. A report states: "Much of the value addition in garments for instance takes place at the stage of branding and marketing. The South Asian countries should consider setting up South Asian level mega-companies to foster an integrated South Asian garment sector.In order to secure their market overseas and to realize a greater proportion of value added, the South Asian exporters should consider taking over a few marketing and distribution chains in their lines of production in developed countries. Given the scale of resources involved in such takeovers, it may be beyond the capacity of individual exporting companies or individual member countries. However, this could be done by forming regional consortia of the South Asian exporters."

The Sri Lankan garment industry has experienced a tumultuous time and is now confronting new challenges. The groundwork has already been arranged and confronts this challenge. What Sri Lanka would like to find out is a minimum trouble in the modification process because the garment sector is the biggest foreign exchange earner and main originator of employment.

Though, if Sri Lanka can no longer sustain its comparative advantage in the garment sector, then new sectors will exists to replace it; in a negligible period of time however, the economy will experience a significant cost from such industrial restructuring and there will be social costs. It is for this ground that both the Government and private sector industry are exercising themselves in support of the garment sector.

Given the chance to enhance productivity and decrease costs, the companies will be much better placed to draw attention European buyers and enlarge exports either through the creation of joint venture partnerships or through enlarged export potential. The programme will offer practical assistance within the selected enterprises through a structured training and coaching programme. This will then offer technical and business advice immediately to the participants and will be significant in their prevailing requirements.

The distribution of the project will be made by a progression of preplanned events, in specific an initial standardize exercise to conclude the current operating parameters of participating companies And a sequence of productivity improvement workshops and seminars will be organized and monitored by in-house coaching and implementation assistance. The project expects to increase the capability of company managers to execute the functions according to preplan activities, increase competitiveness relating to price, quality and delivery performance, relating to international standards, covering customer compliance needs etc.

The curriculum of the workshops will be designed for the participants in section wise, meaning that selected representatives of the 30 companies will require for attending all 6 workshops in order to gain a comprehensive and holistic insight into the complexities and requirements of doing business with EU companies. Their progress will be assessed frequently, against preset standards.

The main project upshot is a group of companies trained to increase their effectiveness through improved productivity and keep or retain market contribution within the EU. This upshot is anticipated to have a ripple effect whereby the industry as a whole will have to respond and to get better management and business practices. It is projected that joining companies will be capable to expand their productivity by at least 15 percent over a period of 12 months.
The project requires for increasing the capability of company owners, primary managers and middle management personnel to plan in advance, improve competitiveness relating to price, quality and distribution performance, relating to international standards, covering customer compliance requirements.

At the policy level, it is projected that the sector will accept best practice methods; specifically for those encouraged by the major retail buying organizations of the EU. These will cover practices as those developed by WRAP, SA 8000, and other ethical and social trading programs practiced by the most important buying organizations.

Sri Lanka's Handloom Cotton Industry

The Handloom Textile Industry of Sri Lanka is centuries old. In trading textiles it has a long history. Handloom cotton items from Sri Lanka have received international praise. Sri Lanka exports a large quantity of cotton items to the US, UK Japan, Germany, France, and Netherlands. In the current years Sri Lankan exports have increased significantly to a great level. Individual innovative designs, craftsmanship, color combinations & old patterns with modern material and handing techniques have provided handloom textile products from Sri Lanka its own noteworthy recognition today. Sri Lanka's handloom industry can provide a range of designs and colors, which covers ladies sarees, upholstery fabrics and curtaining, bed linen, table linen, kitchen linen, readymade garments, and soft toys etc. Japan, U.K., South Korea, U.S.A., France and Netherlands etc countries are the targeted destinations for exports.

On 26th December 2004 the Tsunami resulted earthquake of 9.0 in the Richter scale, affected the coastal line of Sri Lanka and has made immense damages to lives and property, forcing the country to employ massive relief operations hitherto never undertaken. On this time, Real Medicine USA had taken many efforts in Sri Lanka. The eastern province, particularly the district of Ampara were not receiving enough interest with regard to recovery & reconstruction, Real Medicine determined to initiate a micro level livelihood development project for a selected group of families who were earlier occupied with the handloom textile industry. Many districts in the Eastern province were harshly influenced, while Ampara district depicted most number of damages. It is the object of Real Medicine 15 families initially who distressed in the village of Maradamunai in Ampara district to recreate their business. The direct out comes of this project are the 15 families who were earlier occupied with the Handloom Weaving Industry, but lost their machineries due to the Tsunami waves.

Imports increased at a comparatively lower rate of 8.5 percent in July 2005 to arrive at US dollars 721 million in July 2005 from US dollars 664 million observed in July 2004. Overall imports for the first seven months increased by 10.1 percent to US dollars 4,838 million in 2005 from US dollars 4, 396 million in 2004. Imports of textiles and clothing reduced slightly by 3 percent from US dollars 136 million in July 2004 to US dollars 132 million in July 2005.

Sri Lanka's contribution of the world apparel market is just about 1 percent. Sri Lanka exports 60 percent of its products to the USA. Sri Lanka's market contribution in the US is 1.2 percent. Ninety percent of the garment exports to the US are depended on quotas. Another 33 percent of its total products are exported to EU countries of which only 25 percent is depended on quotas.

The garment industry in Sri Lanka

With the phasing out of the Multi-Fiber Arrangement (MFA), the Sri Lankan economy, very much dependent on garment exports, has become vulnerable to the changing scenario, influenced this industry in the global trading system. In such a global environment, increasing competitiveness of the garment industry has turn into a sine qua non for Sri Lanka to remain one of the suppliers of preference in her major markets. The industry therefore requires expressing a new response mechanism to tackle the emerging challenges. A practical course of action should include addressing the major restraints in both the supply and demand sides of the industry.

An overview

Sri Lanka's garment industry took off immediately after linearization of economy in 1977, as a consequence of these quota-hopping East Asian garment exporters who were involved by the country's liberal trade system and relocated their existed well-developed garment businesses to Sri Lanka. This shift assured local traders to start their own garment enterprises to develop markets guaranteed by quotas, supported by the liberal trade system for importation, and consequently, incentives granted by the Board of Investment (BOI) to particular industries. In contradiction, protectionism in the mode of MFA quotas assisted to Sri Lanka and many other developing countries to expand their export-oriented garment industries by protecting them from direct competition from established producers.

Earlier, Sri Lanka did not have a well-established export-quality textile industry base; neither did it have a strong foundation for garment industry accessories. Thus, earlier, the garment production was established on imported inputs and the value added remained low - close to 30 percent. By about the early 1980s, garment exports were rising swiftly and by 1986 garments reached to the biggest contribution of all exports (27 percent). By the late 1980s, garment industry in Sri Lanka was illustrated as "glorified tailor shops" because, regardless of a decade of growth, its connections with other industries stayed to low and the value added stayed to low as before.

In 1992, BOI existed and it proposed an appealing incentive package to entire garment manufacturers to shift to rural areas of Sri Lanka under the so-called 200 Garment Factory Programme (GFP). A textile quota board was set up in the same year to make more effective the allocation of quotas for the garment industry, covering those coming under the 200 GFP.

This Programme attracted well-developed garment manufacturer to open a rural branch and furthermore, new companies with no background in garment production existed in the manufacturing to utilize the quotas. By 1992, the garment industry had become the biggest foreign exchange receiver in the country (US $ 400 million) - surpassing the tea industry.

By 2002, textile and garment sector of Sri Lanka accounted to 6 percent of GDP, 39 percent of industrial production, 33 percent of manufacturing employment, 52 percent of total exports and 67 percent of industrial exports.

The above data point out that Sri Lanka is extremely dependent on the industry for both employment and foreign exchange earnings. Foreign direct investment (FDI) has been extremely important in the sector, calculated to 10.4 percent of total cumulative FDI in 2003. According to the accessible data from BOI, foreign investors possess approximately 50 percent of total garment factories and reached nearly 50 percent of total textile and garment exports (USITC, 2004). Larger dependence on imported textile materials points out that Sri Lanka has a big export-oriented garment sector, but a small textile industry that has no ability to provide the quantity or quality of yarn and fabrics needed by the garment industry.

In the early 1990s, an intensive effort was made to support backward linkages in the garment industry. To attract large textile producers to Sri Lanka, government appointed delegations to visit overseas countries. A various textile manufacturers that had came up during the pre-1977 import-substitution system and had seen it hard to survive in the liberalized economy were privatized in the early 1990s. In spite of all such efforts, the development of backward linkages from the garment industry to the textiles sector was extremely slow for several of reasons. In 1997, the textile industry confronted a major setback.

The East Asian catastrophe had started currency depreciation in Indonesia and the Philippines - two of Sri Lanka's competitors in devaluation of the Sri Lankan currency, and set lobby the Government to this effect. Since the Government did not permit a devaluation of the currency, the garment industry lobbied for duty-free status for textile imports with the objective of carrying down their production costs. The Government approved this demand without allowing for the repercussions on the domestic textile industry. As a result, the textile industry nearly collapsed and no effort made by the government, for example, by providing subsidized interest rates to rescue the textile industry, had any major influence. In fact, three of the privatized textile factories (Veyangoda, Pugoda and Mattegoda) that were slowly changing to manufacture textiles to satisfy the requirements of the export-oriented garment producers had to be closed down.

Today, the Sri Lankan garment industry stays at a low value-added industry, even if some backward linkages had built up by the mid-1990s. There were 891 garment factories in operation in 1999 - out of which 18 percent was classified as large, 50 percent medium and 32 percent small. In 1999, 72 percent of the establishments were geographically situated in the Western region. Just 12 percent of the factories managed around 72 percent of the exports. Some of the top manufacturers have built up strong and reliable links with well-known international retailers indirectly by buying intermediaries.

Sri Lankan garments that were very well quota-dependent in starting have now turn into less dependent on quotas, with 47 percent of exports falling under the non-quota system in 2002. Most Sri Lankan garment exports are targeted United States (63 per cent) and European Union (30 per cent); hence, there is not much market dissimilarity. The main ranges of garments that Sri Lanka exports are: HS 6204 (women's or girls' suits, and similar items under this category), HS 6203 (men's or boys' suits, and similar items under this category), and HS 6206 (women's or girls' blouses, and similar items under this category).

Sri Lanka is recognized as a large exporter of women's lingerie. Sri Lanka's garment industry has a comparatively good status in the international market. Sri Lankan garment exports to the United States market managed well with the emergence of NAFTA in 1994 regardless of many pessimistic views articulated at that time.

Sri Lankan garment entrepreneurs have started factories in Bangladesh, Maldives, Jordan, Kenya and Mauritius, among others and are performing well. The Sri Lankan garment industry has experienced tumultuous times; for illustration, during the 1988-89 civil conflict; in 1993, when countervailing duties and embargo were obligated by the United States; and in 2001, when war-risk premiums and surcharges were compelled after the bomb attack on Colombo International Airport. The industry at present occupies with around 330,000 people and sustains the livelihood of around 1.2 million others.

Competency of Sri Lankan garment industry

The hard-hitting strength of the Sri Lankan garment industry is supported by cheap labor, a literate labor force, high labor standards, investment-friendly government policies and strategic shipping systems. On the other hand, there are also viable weakness, such as long lead times, weak marketing, lack of product development and low labor productivity partly because of old technology. In 1983, Sri Lanka undergone by civil conflict and many foreign investors, covering foreign garment industrialists, shied away from the country. Some shifted to Bangladesh; others shifted to newly expanding low labor-cost East Asian countries, such as Cambodia and Viet Nam. Labor costs were somewhat low in these countries and, by the mid-1990s, Sri Lanka could no longer struggle on the basis of low-cost labor and measures had to be used to enhance the productivity of the sector. Low productivity has counteracted to some extent the low labor-cost benefit of Sri Lanka.

A report on the productivity of the garment sector proved that there are various issues relating to low labor productivity in the garment industry and that there is substantial room for improvement. One area that needs improving is the development of human skills to cope up the technological changes arises in the garment industry. To satisfy the increasing demand for semiskilled workers in the industry, two training institutions, viz, the Textile Training Centre and Service Centre and the Clothing Industry Training Institute existed, both in 1984. In addition, a private sector training institute, the Phoenix Clothing Training Institute set up in 1998.

Various design schools have existed with the Department of Textile & Clothing Technology in the University of Moratuwa becoming the apex body for design. Design courses have been offered with the collaboration of the London School of Fashion Design to compete with the latest fashion trends in the world and to train workers to cop up the demand. The Asian Development Bank (ADB) has offered a grant to establish a major fashion school at the University of Moratuwa.

Labor costs, though calculated to 15 to 20 percent of the overall cost. Therefore, there are several non-labor aspects that contribute to low productivity. The use of CAD/CAM machinery to the garment industry has been observed slow. Most companies have practiced less effort to make high value-added garments and there is a heavy dependence on buyers to channel garments to international markets (about 65 percent of garment exports). Until recently, most garment orders made on a no foreign exchange (NFE) basis and many garment manufacturers favored such orders because of low risk. Insufficiently, effort has been put at the firm level to decrease wastage and improve the quality of work.

Due to the lack of a fabric and accessory base (lack of vertical integration), the turn-around time of Sri Lanka's garment industry stays around to 90-150 days in against the ideal international lead time of around 60 days. This large turnaround time is a problem in consideration of competitiveness, mainly when Eastern European countries turned into major suppliers of garments to the European Union, and Mexico and Caribbean countries turned into major suppliers to the United States under preferential tariff arrangements. Furthermore, this dilemma is of specific concern at a time when "just-in-time" delivery has happen to an accepted principle and need in the global market. Sri Lanka's lack of competitiveness in garment products is not exclusively settled on low labor productivity, firm level inadequacies and high turn-around time but also by government policies.

The cost of production in Sri Lanka has risen in recent times due to the high cost of public utilities, such as electricity, water and telecommunications. If Sri Lanka is to attempt itself to the post-2004 challenges, a various restructuring actions have to be taken in the garment industry. Some actions have already been done. Until recently, the Sri Lankan garment industry did not have a strategy or plan for its prospective development. In 2002, the industry existed with a five-year strategy report.

This information covers with a comprehensive analysis of "strengths", "weaknesses", "opportunities", and "threats" (SWOT) and suggested a strategy for removing weakness, consolidating strengths, making use of opportunities and minimizing threats. The report claims for the organizing for a special research cell for the industry to maintain track of international trends in garment trading, and this cell started late 2002. In order to get a common goal, garment industrialists and stakeholders established the Joint Apparel Association Forum (JAAF), in 2002 a consortium of five different associations, viz:

1.Sri Lanka Apparel Exports Association
2.Free Trade Zone Manufacturers Associations
3.National Apparel Exporters Associations
4.Sri Lanka Chamber of Garment Exporters
5.Sri Lanka Garment Buying Officers Association

In the meantime, the airport bomb attack in mid-2001 acted the industry a wake-up call. After this incident, a war risk insurance charge was set on Sri Lankan exports undermining the competitiveness of the garment industry. This caused a social engineering process in the industry whereby various companies had practiced various cost-cutting actions to make the industry more competitive.

Though Sri Lanka supplies garments to many leading retailers, such as Victoria's Secret, Liz Claiborne, May Department Stores, Marks & Spencer and C & A, the country does not have well-known local brand names.

The majorities of garment exporters do not possess direct contact with the final buyer and hold suppliers to such leading stores via buying offices. To tackle this lacuna, the industry offered a garment marketing course in collaboration with the Chartered Institute of Marketing in the United Kingdom. By identifying the requirement for a brand that could withstand shocks in the Western market, two leading companies (Phoenix Ventures and Jewelknit) carried actions to merge and develop a branded product (Brandix) in 2003. This was a constructive sign in the overall growth of the garment industry in Sri Lanka.

New tendency in the worldwide trading: experiences the challenges

The garment industry of Sri Lank not only needs to develop by putting more aggressive steps to cope up with the post-2004 quota-free global challenges, but also has to obtain cognizance of the new tendency in the global trading environment. There are new drifts in the European Union and United States markets, whereas the appearance of China as an important global supplier is also a significant issue.

In March 2001, Sri Lanka profited from quota-free status entry to the European Union market with the prospectus of better garment supply to that market. Sri Lanka presently experiencing competition in the European Union market from (a) less developed countries (LDCs), such as Bangladesh, which has duty- and quota-free access to the European Union under the Everything-But-Arms (EBA) scheme; (b) African, Caribbean and Pacific (ACP) countries, which profited from preferential market entrance to the European Union under the Cotonou Agreement; and recently (c) Eastern European countries which have got the recognition as a member of European Union Members and to which some European garment factories have moved to utilized cheaper labor and closeness to their market.

An evaluation of Sri Lankan export accomplishment with other countries' export succession in that market during 2000-2003 does not give strong supports, which the quota-free entry has affected in important gains for Sri Lankan garment exports. It explains that the window of prospect for European Union market consolidation has been lost due to the comparatively late quota-free entry.

Though, Sri Lanka has achieved from a decrease of the European Union of GSP rates for Sri Lankan garment exports. Sri Lanka has handled comparatively high labor standards in factories to satisfy European Union inspectors that working conditions in factories are quite satisfactory. There are doubts whether these grants would be considerably helpful considering the fact that GSP grants are provisional on satisfying the SAARC rules of origin.

After the passing of the Trade and Development Act of 2000, the United States approved the Caribbean Basin Trade Partnership Act (CBTPA), the Andean Trade Preference Act (ATPA) and the African Growth and Opportunity Act (AGOA) in 2001-02. Under these acts, garment exports from Caribbean, Latin American and sub-Saharan African countries are allowed to quota-free and preferential duty entry to the United States market after satisfying some conditions.

These provisions are mostly connected to chosen textile and garment articles and satisfying the applicable rules of origin (or reverse preferences) covering the application of United States fabrics and other inputs, which the United States claims as a quid pro quo and is denoted as the "yarn-forward rule". There are varied observations as to the effectiveness of these measures. While some opponents demanded that the fixed reversed preferences governing these agreements have nullified the preferential advantages. Others have contended that, in spite of the reverse preference conditionality, there are overall improvements from these agreements. In fact, various Sri Lankan garment traders and manufacturers have established businesses in Mauritius, Madagascar and Kenya as well as other African countries to take the advantages of AGOA, just as East Asian quota-hopping garment manufacturers did in Sri Lanka in the late 1970s to receive the quota advantage there.

The United States' exit from multilateralism is not restricted to these arrangements. Of late, the United States has been providing bilateral agreements to various countries on the basis of "WTO-Plus" acceptance. Chile, Singapore and Jordan have previously finished bilateral free trade agreements (BFTAs) with the United States. These contracts were signed on the basis of previous contracts called trade and investment framework agreements (TIFAs).

Sri Lankan garment companies noted that if a United States-Sri Lanka bilateral free trade agreement can be worked out any time soon, Sri Lanka could strengthen its garment export contribution in the United States market (2.7 percent of United States garment imports in 2003 were from Sri Lanka, and 63 percent of Sri Lankan overall garment exports are intended for the United States market) and hence could confront the post-2004 challenges more successfully. In July 2002, the two countries signed a TIFA and since then considerable groundwork has been work out to adapt the TIFA to a well-developed bilateral free trade agreement. Sri Lanka's interest for a bilateral free trade agreement with the United States was such that, at the Fifth WTO Ministerial Conference, held in Canc�n, Mexico, the country move off completely from the position of the developing countries on certain matters and confirm the position of the United States. Clearly, it was a quid pro quo to speed up the probable United States-Sri Lanka bilateral free trade agreement.

What is obvious is that a United States-Sri Lanka FTA has been belated due to the fact that 2004 was an election year in the United States with the political set up under pressure for more protectionist actions by the clothing sector, and it was also an election year in Sri Lanka with significant political volatility. The tragedy that came out from the December 2004 Tsunami may direct to more delays as immediate government priorities placed elsewhere. Such delays may direct to the assumption of an FTA that may be too late to be of essential helps, likewise to the European Union quota-free status cited above.

The Indo-Sri Lanka bilateral free trade agreement came in to existence in March 2000, and aim of this agreement was to give Sri Lankan garment exporters a chance to diversify and capture a share of the Indian market. Though, provided with the various para-tariffs and specific duties using in that market and the rules of origin governing the agreement, Sri Lankan garments have not been extremely aggressive, to the size that only a small number of garments have been exported to India and the quota under the ILBFTA stays considerably unmet.

China's risk to garment exports from other developing countries is significant and cannot be put aside. The World Bank has forecasted that China's share of garment exports in the world will increase to 50 percent by 2010. In other words; Chinese exports are likely to double in six years, generally at the expense of other developing countries. By now, the swift increase of China's garment exports in specific categories after earlier quota removals has demonstrated how China could consume share of garment exports of other developing countries.

China benefits from a disciplined workforce, economies of scale through large-scale production, and the presence of many transnational corporations (TNCs) in the garment industry in addition to possessing a low wage rate per worker (average US $ 40 per month). Furthermore, upon its agreement to WTO in December 2001, China benefited from MFN status for its exports - an opportunity that did not arrived before. The number of product items under quota in China was calculated to 20 percent of Chinese garment exports before 1 January 2005, which is a large number. Thus, it is assumed that there will be noteworthy dominance by Chinese clothing in the post-2004 period.

Though, it has also been contended that the risk from China may be exaggerated. First, it is contented that, with WTO entry, China will have to become clear and some of its past performances to preserve low cost of production may have to be discarded. As a result, the low cost advantage may become rather eroded. It is also noted that, although labor wages in the provinces stay low, there has been a noteworthy rise in wages in the eastern coast, where the key garment manufacturers are located. Monthly wages in some of these factories surpassed US $ 90, which is greater than the monthly wages in Indonesia, Bangladesh, Viet Nam, India and Sri Lanka.

Secondly, there is a remark that the United States and the European Union will have considerable control over the spreading out of Chinese garments in their particular markets due to two prevailing legislative regulations: (a) the safeguard regulation from 2005-2008; and (b) the anti-dumping regulation from 2005-2015. It is noted that both of these regulations will provide the United States and the European Union important power to guard against an abrupt influx of Chinese garments and thus protect the accessible foothold of other developing countries in the United States and European Union markets. It is also noted that the United States may apply pressure on China to revalue its currency - the yuan - as it happened with Japan in 1971.

A revaluation of the Chinese currency would further worn down the competitive price advantage of Chinese garments. It is hard to precisely say what threat China will set to a garment exporter in Sri Lanka. At least from the Sri Lankan experience thus far, the threat observes to be valid. Three items - bag and luggage (670), W/G [Women's or Girls'] Coats (835), W/G Suits (844) - that were detached from the quotas in January 2002, went totally out of production by mid-2003 due to competition from China. Two main manufacturers of some of the above-mentioned items, which used a large number of people, consequently had to shut down.

The existing ambiguity has been aggravated by the WTO agreement on textiles and clothing (ATC), which specifies the phasing out of the MFA. Developed countries did not firmly stick to the phase-out device of the MFA. For instance, by 1 January 1998, related with the target of 33 percent of product integration, the United States and the European Union had incorporated only 1 percent and 7 per cent, in that order. Furthermore, developed countries have exploited an excuse in the MFA, where the ATC does not put any compulsion on countries to limit their incorporation to specific products subject to restrictions. Hence, Sri Lanka will not experience the full effect of the final phasing out of the MFA until early 2005.

It has been projected that the items for which restrictions were relaxed in 2002 comprised with only about 4 percent of all restricted products exported by Sri Lanka to the United States. The outstanding 96 percent were under control until end-2004. Therefore, a sense of satisfaction is necessary in among garment companies for making the required modifications, although this changed somewhat after the social engineering process that started after mid-2001 and may change altogether in the course of 2005.

An earlier report emphasized on the fact that almost 40 percent of its garment manufacturers will go out of production after 2004. It claims that a number of new mergers and acquisitions will happen in the industry. Some large manufacturers may way out to subcontracting through small units, while small units that not succeed to receive orders will have to close down. To sustain small and medium-sized units in the garment industry, the government has started a credit guarantee scheme, as projected in 2004 budget. Under this plan, loans could be gained without collateral.

In its Five-Year Strategy, JAAF has contended that Sri Lanka should now move from the low end of the market to the middle and upper levels. At present only 10 percent of local end up in specialty brands, while 50 percent is completed by foreign department stores and the balance by foreign discount stores. For the period of the five year, ending in 2007, the industry set up to rise prospect into specialty stores by 20 percent and department stores by 60-70 percent and decrease the dependence on discount stores by 10-30 per cent. The plan designs for receiving these objectives with a complete argument on: (a) a strategic structure for implementation; (b) a strategic initiative and applicable action plans for the industry; (c) a further strategic initiative in support of small and medium-scale enterprises; (d) implementation plans; and (e) cost approximation for the strategic plan.

The industry has created eight committees to look into a scope of views of the industry: (1) bilateral and multilateral issues; (2) marketing; (3) logistics and infrastructure; (4) backward integration; (5) small and medium-scale enterprises; (6) human resources, technology and productivity; (7) labor; and (8) finance. The government has offered Rs. 100 million to enhance productivity in the garment industry through the Five-Year Strategy.

The Sri Lanka Joint Apparel Association Forum organizes the planning management. The Association has employed a number of skilled professionals to coordinate and support its work. Although strategies have been employed to face the post-2004 challenges successfully, the claims continue for the post-2004 scenario - both positive and negative outlooks have been expressed. Positive viewers, such as the Central Bank of Sri Lanka, have given the following viewpoints: first, it is noted that, since 12 percent of the garment manufacturers control 72 percent of exports, there are cause to believe that these top-end factory units are well-developed; strong market niches and thus well-positioned to satisfy the post-2004 challenges.

It is claimed that these top-end manufacturing units can used up some of the smaller factories and increase their production to be viable in the market. Secondly, it is noted that the non-quota exports currently to 47 percent of garment exports; hence, a quota phase-out will not make an acute problem. Thirdly, it is noted that, if the high-end of the market could be took over by producing value-added garment products - which larger units have completed - Sri Lanka need not anxious about challenging world market. Whereas one can agree with the first point, there are acute reservations about the others. First, it is unsuitable to make a judgment based on rising non-quota exports because what is a non-quota product for Sri Lanka may be under quota for another country, such as China.

The representation of such a non-quota product when the same product reach out of quota in China - at least if one set out by past experience - may not be positive. Second, the top end of the market is likewise aggressive; other countries that witness their quotas in this segment detached with will also be intending at this segment and competition would therefore make stronger at this end of the market as well. Sri Lanka will confront a rising battle to be competitive at the top end of the market; to the some viewers on the other hand, claim that whatever the percentage of exports that is managed by the top 12 percent firms, the garment industry as a whole is not reasonably sufficient to show a better performance in the post-2004 period. From the global demand side, it is noted that the threat from China will be tremendous. Furthermore, it is noted that the contributions managed by other Asian countries is likely to decrease from the current 32 to 20 percent by 2010.

Therefore, there will be competition among Asian countries to take over these shrinking parts and in that practice Sri Lanka may not inevitably be a winner. In addition, insufficient preparation for the post-2004 period because of the back loading factor of the MFA phase-out is also emphasized by the positive viewers. From the local market, the poor development of backward linkages, weak forward integration, low labor productivity and increasing production costs, inter alia, are considered by the positive viewers to highlight the lack of competitiveness. Those who claim along these lines declare that at least 100,000 workers will drop their jobs and a variety of new device will have to be planning to look after those shifted from the garment industry.

A jumble picture exists from current trends in the garment industry. On the negative aspects it was noted that, out of the 859 firms operating in 2001, about 150 had shut down by mid-2002. Garment factories are practiced a shortage of labor because of the poor working conditions and accommodations provided in some of the factories. In 2003 and 2004, garment exports have observed a reduction in operation compared with the year 2000. On the positive aspects the top 12 percent of factories are working well, there has been a rise in the number of international orders, and a number of foreign garment companies, such as Levis, are starting establishments in Sri Lanka. Provided with the strong foundations of the garment industry, Sri Lanka still has a possibility of being a supplier of choice in the major international markets; though, to preserve such a position, considerable restructuring is needed.

Therefore, irrespective of the existing assorted picture, there is a burning requirement to restructuring the industry to cope up the post-2004 period, without contentment about a possible United States - Sri Lanka FTA that will come to Sri Lanka's release, or that the ATC will not be realized correctly after 2004, because of concerns in the European Union and United States markets.

.Increase the Sri Lankan apparel industry earnings from its current level of US$ 2.30 billion to US$ 4.5 billion by 2007.
.Convert the industry from a "manufacturer" to a contributor of a "fully integrated service".
.Increase market entry in to the premium market sectors of the global apparel industry.
.Become internationally well-known as a largest producer of specific product categories.
.Merger and strengthen the industry to satisfy the challenges of the free market.

The fast development of this industry could be attributed to the following:
.A steady market because of the quota system
.Cheaper labor cost
.Liberal economic and trade policies
.Tax benefits and the industrial grants

Sri Lanka: ECCSL fetches experts to increase SME Apparel Sector in Sri Lanka
At the cost of other Asian and sub-continental nations, China and India are receiving outstandingly in the export market on the post-quota arena. While Sri Lanka's exports have grown slightly, even as a GSP Plus beneficiary, it is observed as only a part of the apparel pie. There is an urgent requirement to tackle this deficiency, if Sri Lanka, which is dependent totally on tourism and its apparel exports as forex earners, is to carry on to exist in the uncompromising market.

With the beginning of recently, the European Chamber of Commerce of Sri Lanka (ECCSL) in association with the Joint Apparel Association Forum (JAAF) is executing a 20-month project to offer improved local management skills to 30 selected apparel producers from the SME group currently exporting or planning to export their products to Europe. It is estimated that this procedure will have an advantage to productivity improvement and cost decrement in the SME apparel manufacturing sector prior to the participants looking for investment partners or increased export opportunities within Europe. The project is co-funded by the EU and falls under its Asia Invest programme, by chosen participants would have paid a one-time nominal fee of SL Rs 10,000 VAT.