Financial Times

Threat looms over apparel trade
Apparel exporters are bracing for an onslaught of cheap clothing from producers like China as textile quotas are phased out by January 1, 2005 with the full impact of the quota-free era likely to be felt starting around the middle of the year when orders are placed for seasonal shipments.

"By June-July we'll know whether buyers are waiting to place orders with us or not," said Ashroff Omar, head of the Joint Apparel Association Forum, the industry's apex body. "Personally, I believe that this year will not be much of a problem because we have quotas till the end of the year."

The industry has been preparing to face tough competition when quotas are phased out and has drawn up a strategy that includes consolidation among garment factories, exit strategies for the weak ones and over all effort to upgrade skills in design, production and marketing.

It was also hoped that a free trade deal with the US, the biggest market, would come into place but these hopes were dashed when preparations were disrupted due to the crisis triggered by President Chandrika Kumaratunga's take over of three ministries last November.

This delayed the US announcement to Congress of its intention to negotiate a FTA with Sri Lanka. Congressional approval is the precursor to formal talks on a FTA, which had not yet begun.

So far, there has been no indication that buyers might turn to cheaper sources but exporters expect to get a feel for the new environment later this year.

"A lot of buyers still include Sri Lanka in their sourcing plans," Omar said. "However, they believe that a thing like the US Free Trade Agreement would help them to solidify their souring plans. If we don't demonstrate we're competitive and fast, then we can fall out."

Normally orders are placed 4-6 months in advance with two main or bulk periods - spring and fall. Orders for spring start shipping out of Sri Lanka from the end of September, going on till December, with January-March shipments covering summer.

A good indication of the threat faced by exporters to the US is the manner in which big manufacturers of luggage were forced to close after 2001, when quotas for five categories, including luggage, were ended.

Sri Lankan exports of luggage to the US fell to 10.5 million kg in 2002 from 18.9 million kg in 2001 after quotas were lifted. Their place was taken by China whose exports rose to a phenomenal 159 million kg in 2002 from a mere 16 million kg in 2001.

"That item never recovered," sad Omar. "There were huge Korean bag factories employing 3-4,000 people here which vanished virtually overnight." But small factories such as Hands International, which went in for making branded products and tied up with Samsonite, survived and prospered, indicating how manufacturers can perform even without the protection of quotas.

"It's an opportunity as well as a huge threat," said Omar. But a few manufacturers surviving is not enough for Sri Lanka to retain her place as a source of apparel to Western markets, said Lyn Fernando of Creations.

"We need a critical mass of around 3-400 factories to produce the volumes required for international apparel buyers to keep the island in their sourcing plans."

Asked how he felt the industry would fare when the quota protection was taken away, Fernando said: "It will be very tough. But if we get our act together, make our industries competitive, then we have an opportunity to make use of the ending of quotas."

Omar, also a director of Brandix, formed by the merger of two big apparel exporters, Phoenix Ventures and the Jewelknit group, said the industry has taken "an aggressive attitude" to face the quota-free era and intends to double turnover in five years at an estimated 12 percent annual growth to over $4.5 billion from $2.3 billion today.

The industry was improving productivity, education in marketing, logistics and infrastructure, and building its image with buyers. "I don't believe it will be small or big. It will be efficient, nimble, focussed, fast versus slow and backward. Size will be an advantage but not the deciding factor." A good example was how exports of dressing gowns or sleepwear robes jumped to 293,000 in 2002 from 178,000 dozens in 2001 after the removal of quota restrictions.

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