“Most small and medium enterprises are cutting jobs and shutting their manufacturing capacities, partially or wholly, across a broad spectrum of the industry as the cost of doing business is spiking and the demand decelerating,” says Pervez Hanif, a former president of the Lahore Chamber of Commerce & Industry.
Light engineering industry and garments manufacturing are apparently the two major victims of the present difficult business environment. But the pain is also being felt strongly by the leather industry, sanitary ware makers, fan and cutlery manufacturers, surgical instruments exporters. It is just that different industrial sectors have different threshold of pain and capacity to absorb it.
Almas Haider, a leading auto vendor from Lahore, claims a 15 per cent to 30 per cent job loss in auto parts manufacturing industry due to reduction in demand. Besides, he says, several units are closed down because of losses.
Pervez says two-thirds of readymade garments units across the country have already gone out of business.
“The membership of the Pakistan Readymade Garments Manufacturing & Exporters Association in Lahore and Sialkot has dropped to 150 units from 450 or so. In Karachi, the number of PRGMEA member manufacturers has come down to approximately 350 from above 1200,” he claims.
The widespread closure in the knitwear sector over past few years is no news now, says Shahzad Azam Khan, chairman of the Pakistan Hosiery Manufacturers Association.
It is hard to verify the exact number of closures in the garments industry or retrenchments by auto parts suppliers because most small units in any sector operate in the informal economy and others don’t provide the exact data on their employees to the regulators. But the small to medium-sized industries, whether working for the domestic market or global buyers, are finding it real hard to cope with the rising cost of doing business when sales are falling.
“I’d say the entire small and medium sector, whether documented or not, is in trouble. And this trouble is spreading,” Ijaz Khokhar, an exporter from Sialkot, insists.
A Small & Medium Enterprise Development Authority official, who asked not to be identified, estimates the SMEs production cost to have risen by 20 to 40 per cent due to rising fuel prices, frequent power blackouts affecting production, skyrocketing raw material prices, wage demands, and so on.
“It largely depends on the type of unit you have, what technology you are using, how efficient or inefficient you are and so many other factors,” he says.
He says the small units working in informal sector of the economy with no access to finance are more prone to the economic slowdown and closures. “I can say that numerous SMEs have closed down in Sialkot, Gujrat, Gujranwala, Faisalabad, and Lahore but it is difficult to give the exact number,” he says.
“Many are no longer in position to survive as they were already in poor health and cannot absorb the recent cost and other shocks,” the Smeda official says.
“Time is fast running out for the small and medium sized enterprises as their cost of production rises and demand slows down,” contends Hashim Raza, a Lahore-based business consultant who has worked extensively on the Small and Medium Enterprises (SMEs) in the recent years.
“The survival of the SMEs, especially small manufacturers, already struggling in an unfavourable regulatory and business environment, has become far more difficult due to the sharp rise in their costs,” he says.
Manufacturers claim that the first blow to their business viability was dealt by energy crisis, which resulted in a steep decrease in production to the level where it becomes unviable to continue manufacturing.
“No small or medium unit can afford alternate power generation arrangement because of its costs,” says Shahzad. “Frequent power cuts for eight to 12 hours mean substantial drop in production, which few units could afford.”
On top of that come inflationary expectations, which mean increased cost of raw materials and higher wages. “It is almost impossible to pass on the cost burden to our customers,” says Ijaz.
The small and medium sector is an important but highly vulnerable part of the economy. Much more labour intensive than large industry, the SME sector is considered to be a major employer around the world.
Though no recent, reliable data showing their actual contribution to the economy exists, the government agencies estimated a few years ago that the SMEs constituted around 90 per cent of 3.2 million private entreprises in the industrial, services and trade sectors, and employed around 78 per cent of non-agriculture labour force. The SMEs also contributed over 30 per cent to GDP and 25 per cent to the total export earnings. Their share in the manufacturing value addition is estimated at 35 per cent.
The small and medium sized manufacturers are feeling greater stress due to spiking production costs, facing multiple problems.
They are struggling with issues like lack of access to banking finance and modern technology, over-regulation, unfriendly tax regime, poor quality production, absence of infrastructure, untrained or inadequately trained human resource, unavailability of raw materials locally, lack of marketing skills and information, and so on and so forth, which are hampering their progress as vibrant and competitive sector by breeding inefficiencies and lower productivity, and raising their production costs.
“Business failures are not uncommon in the world. Closures and losses are part of the business. But in our case, most businesses are doomed to failure from the very first day due to all kinds of bad, avoidable reasons. Unless we remove these business unfriendly factors, there is little hope for the SME sector,” says Shahzad.