Apparel sector SMEs struggle with GSP+, plight and concerns

by Devan Daniel

The apparel industry of Sri Lanka, which contributed more than 45 percent to the country’s export earnings in 2007, is struggling to stay alive.

Inflation, an acute labour shortage, the end of the Multi Fibre Arrangement and financial and marketing constraints are making it ever so hard for the industry to remain competitive and consolidate its market share in the international sphere, except for the large companies who have expanded beyond our shores.

With all these issues, if Sri Lanka loses GSP+ the industry will be pushed further down the hole it is already in. The Executive committee of the Sri Lanka Chamber of Garment Exporters (SLCGE) spoke to the Island Financial Review about the plight and concerns of the apparel industry, particularly those of the SMEs.

Post MFA and GSP+ era issues

Over the years as competition from the region intensified, especially after the Multi Fibre Arrangement (MFA) expired, the SMEs have become indirect exporters because they lack both financial and marketing resources to compete with the region.

Many of the SMEs are subcontractors to the large manufacturers and have little choice but accept the prices offered to them in order to stay alive. While many SMEs closed down, others found it extremely hard to survive and could only do so because the larger players contracted their orders to the SMEs.

The SMEs are already making low profits as result of being ‘price takers’ and inflation, high electricity and fuel costs have further forced down margins.

"While the SME sector is still recovering from the adverse effects of the suspension of the MFA, if the country loses GSP+ it will be a terrible blow and the industry will find itself in a deeper hole," the Executive Committee (ExCO) said.

"Leaving the possibility of losing GSP+ aside, after the post quota era (MFA), the industry has been struggling to stay alive because rising inflation, rising interest rates and high manufacturing costs, which are the highest in the region, forced our margins down just so that we can compete with the region. We are still in the process of addressing these issues," they said.

Protecting GSP+ government’s responsibility

The ExCo said that it was concerned that GSP+ will be lost for reasons beyond the control of the apparel industry and for a reason that had nothing to do with the industry, which they said was not a reasonable or fair thing to happen to an industry directly and indirectly employing up to a million people while accounting for almost half the country’s export earnings.

They said that it was the governments responsibility to understand the situation and do all it can to safeguard the industry.

The government, they said, should build faith with the EU on the human rights matter. They said however, that according to what they had heard the government is still finding it difficult to convince the EU that the country’s human rights record was untarnished.

Exports to the EU sector amounts to about US$ 1.4 billion, out of US$ 3.2 billion in total exports of garments and if Sri Lanka loses GSP+, the country will lose up to US$ 100 million in export revenue, they said.

Every month, Sri Lanka had been losing its hold on the US apparel market because of stiff competition driven by prices but has made significant gains in exports to the EU because Sri Lanka has earned credibility by meeting international quality and delivery standards and complying with international conventions on labour and ethical working conditions. The duty concessions of the GSP+ scheme itself, helped bring the buyer to Sri Lanka.

The benefit of GSP+ is that buyers from the EU get duty concessions to import garments, and over 7000 other items, from countries possessing GSP+ certification.

Without GSP+, the ExCO is sceptical that buyers will continue to want to base their purchases solely on quality and ethical standards in manufacture. Buyers will demand for the same prices, and this is expected to reduce margins by a further 10 percent.

For as long as we have had GSP+ and with the duty free concessions in the GSP+ scheme, buyers have still haggled and pressured our apparel manufacturers to bring down prices.

Banks create more worries

Banks too have begun to show an interest in the GSP+ issue and are reluctant to finance apparel projects or even finance the working capital requirements of the SMEs, because they (the banks) are unsure, just like everybody else, whether Sri Lanka will get an extension.

The ExCo said that banks have begun to question them on how existing loans would be settled if GSP+ is lost, because the apparel sector had been scoring in favour of the banks when GSP+ brought in the desired results. And true to form, banks are not there for anyone who needs financing the most, like Bob Hope once said, a bank will always lend to those who don’t need money.

Possible price war

Twenty five to 30 percent of all apparel exports are accounted for by the SMEs, but this does not take into account the outsourced productions carried out for the larger companies, which many of the SMEs depend on for sustenance.

If GSP+ is lost, it will prompt a price war amongst the SMEs seeking contracts from the larger companies and here too many SMEs may find that they are no longer able to sustain themselves.

And even the large companies will have to cut margins in order to stay competitive or they may even consider taking their operations to countries where production costs are cheaper.

Life support

GSP+ it seems, is just about keeping Sri Lanka’s apparel industry alive in an extremely competitive environment, to lose it will no doubt spell the beginning of the end.

Only the fittest survive and only time will tell who the fittest are. Large companies have done well because they have had large resources. SMEs were handicapped after the phasing out of the Multi Fibre Arrangement and are still finding it hard to stand comfortably—without financial resources to build capacity and market themselves, the SMEs have come this far thanks to GSP+.

However, the ExCo feels that the duty free concessions will not be removed entirely because the country is in compliance arguably with all but one of the requirements, the most important one at that too it seems. Human rights.