IT was in the early 2000s when two woven garment producers from Lahore proposed creating a larger cluster of small- to medium-sized apparel exporters of bottom-wear for increasing their economies of scales and reducing their costs.
About 17 manufacturers came to the first meeting to discuss the details, but only eight saw the long-term benefits of collaborating with each another and stayed back to form the Lahore Woven Garments Consortium with an aim to conduct joint operations while maintaining their individual identity.
Those were different times. The going was getting tougher for the small to medium-sized exporters of value-added textiles from Pakistan in the wake of terror attacks on the American soil followed by the Nato invasion of Afghanistan.
The West was taking actions to control and monitor shipments from Pakistan that sharply raised the cost of exports as buyers virtually stopped visiting this part of the world owing to travel advisories issued by their governments.
With one and a half decade of cooperation that started with the development of a common pool of information and high level of trust in one another, some producers are now contemplating a merger, their ‘next logical step’
Several foreign companies decided to pull out of Pakistan amid uncertainty triggered by the country’s involvement as a front-line state in the US president George W. Bush’s ‘war on terror’.
On top of that, textile quotas were all set to phase out in 2005 that changed the dynamics of international textile trade and impacted on the guaranteed market share of Pakistani products in the world.
The larger exporters did not suffer much. However, small- and medium-sized garment exporters were being squeezed from both ends because of their size: the buyers forced them to give huge price discounts and the suppliers extorted them because of their smaller purchase orders.
“That was altogether a different world and nobody in the industry was sure of the future because of geopolitical development and changes in the international textile trade. The prevalent international trade and business conditions helped us see the benefits of collaboration,” recalled Jawwad A. Chaudhary, managing director of Musterhaft, during an interview with this correspondent at his factory last week.
Initially, they started by sharing information about their buyers, market, technology, cost of production, best management practices and so on. “That pool of information helped us benchmark our production, as well as move towards social, labour and other compliance long before the buyers started putting pressure. We have learnt a lot from each other,” Mr Chaudhary said.
“The benchmarking of our production and costs also helped us hold out to pressure from our customers to reduce our prices as half of our customers were common. The successful experience motivated us to move ahead to joint purchase of textile quota, raw materials, technology and so on. The collective purchase deals saved us millions of dollars that significantly brought down our input and doing business costs despite heavy technological up-gradation,” he said.
Their collaboration has paid off large dividends for the participants with their combined shipments surging by five times from $25 million in 2001 to $125m in 2017. Their business growth is 2.5 times greater than what national exports could manage in the same period.
“This cooperation has not only let us make profits and grow but also helped some of us survive the worst of the times that include the abolition of textile quotas, recession in the US and Europe, energy shortages, etc,” Mr Chaudhary underscored.
Though each member of the consortium has benefitted from their cooperation, not all have grown at the same rate. Some have grown much faster than the others because of various factors like the availability of cash to upgrade technology, invest in alternate energy sources during blackouts, debt-heavy investments, etc.
With one and a half decade of cooperation that started with the development of a common pool of information and very high level of trust and confidence in one another, what lies next for the group participants? One of them recently told a conference organised by the Lahore University of Management and Sciences (Lums) that the next “merger of the participating companies into one large firm was the next logical step in this collaboration”.
“We have already started working in this direction and commissioned a study. Mergers are not very common in our country but we realise that economies of scales could be achieved through mergers,” he said in answer to a question.
Nonetheless, they do not have set any timeline for this “next logical step” and not many are optimistic of them moving in this direction any time soon.
Published in Dawn, The Business and Finance Weekly, March 5th, 2018