Knitwear industry in dire straits: Fall in export orders
By Nasir Jamal
LAHORE, April 17: The knitwear exporters, who have hugely expanded their production capacity in the last five years in view of abolition of quota from 2005
, are forced to operate far below their capacity and lay off surplus workers because of low volumes of export orders.
"I have laid off 230 workers because I do not have enough orders to keep them busy," knitwear exporter Babar Agha told Dawn on Saturday.
"Same is the case with the other major knitwear exporters," he said, citing the instance of another exporter who has closed down one of her newly completed unit.
The knitwear industry has not gotten over the crisis which was precipitated by the fateful events of Sept 9, 2001, the exporters say.
"Hosiery exporters, who were earning 12-14 per cent net margin before 9/11, are now suffering a net loss of about 10 per cent as unit prices and export volumes continue to drop," Mr Agha says.
"The prospects of increasing export before 9/11 were so bright that exporters almost doubled their manufacturing capacities," he said. The events of 9/11 turned everything topsy-turvy and buyers went to other, safer destinations for uninterrupted supplies. The export volumes dropped 40 per cent during 2002, Mr Agha said.
Although the situation in the 2nd half of 2002 improved due to an early conclusion of the US-led war on the Taleban and Al-Qaeda in Afghanistan, but the prices remained under immense pressure as exporters starving for business allowed buyers to "manipulate the situation to their advantage".
The depreciation in the value of the dollar and the withdrawal of rebate put further pressure on the exporters as "they lost the cushion available to them to absorb losses of price reduction".
"The appreciation in the value of the rupee in three years and around 12 per cent inflation have together left about 20 per cent impact on our earnings since 9/11," Mr Agha says.
"As the knitwear exporters were trying to adjust themselves to the fallout of 9/11, the year 2003 saw the cotton prices to go up by an average 45 per cent, leading to a staggering 16 per drop in their profits. Although the volumes increased by 20 per cent, the unit prices fell by another 10 per cent during 2003," he said.
It is not that the knitwear exports haven't picked since 9/11, but the rise is due to duty free access to Europe and grant of an additional 15 per cent quota in recognition of Pakistan's role in the war on terrorism.
However, Mr Agha said, "the decline in the unit prices and the reduction in the orders from the US has tremendously affected our business, profitability and capability to utilize full capacity as America remains the biggest market of knitwear products."
The exporters feel that they can offset their losses "provided they get 10 per cent duty drawbacks on their exports or manage to increase the volumes of export."
Since they are not getting sufficient orders to enable them to utilize their full capacity, they demand of the government to provide them 10 per cent rebate to help them absorb their losses. In China and India, knitwear exporters get 10 per cent and 13 per cent rebate.
"So it will not be easy to compete with them in the post-quota era," says Mr Agha. Former PHMA chairman Shahzad Azam Khan added: "Most buyers have already gone to India or China. Others will also follow them. The buyers also want us to further reduce our prices by 10-15 per cent if we want business in the post-quota world.
How can we do so? We'll be the losers anyway. If we reduce rates, we will suffer losses. If we refuse to slash prices, we wouldn't get orders and forced to shut down our units. This is exactly what is happening at present."
The country manager of an American company says Pakistan would be faced with challenges in the quota-free environment. "The most mature sector of the industry, knitwear sector, is likely to face stiff competition. During the past two decades, this industry has focused on horizontal expansion to build capacities, with little attention to enhancing capability and moving up the value ladder.
Also, under the umbrella of quotas, this sector did not feel need to enhance it's efficiency and control wastage. At the same time, several low-cost countries have caught up and established a basic capability offering similar products at cheaper cost," he said.
"As quota protection is removed, new sourcing options would be opened up to the buyers, taking market share away from Pakistan. Some of this shift in sourcing direction is already being witnessed, and this has put severe price pressure on Pakistani manufacturers. This trend is likely to continue and there will be a period of consolidation where the most efficient manufacturers will survive," he said.
