The apparel export industry from its modest beginnings in the 1970s has emerged as the country’s leading foreign exchange earner accounting for approx. 60% of the total industry exports from Sri Lanka for year 2000, generating direct and indirect employment to approximately 1,000,000 people.

The liberalization of the economy in 1977 gave an impetus to the then fledgling industry when local entrepreneurs sensing the opportunities in the apparel business seized the opportunity and invested their resources into building up their operations.

Major markets

The apparel export industry has recorded phenomenal growth and development in the past two decades primarily due to the quota system under bilateral trading agreements of the Multi Fibre Arrangement. The Multi Fibre Arrangement (MFA) introduced a quota system for the exports of textiles and apparel products to developed countries, mainly to the USA, EU and Canada. The quota system provided a protective umbrella for developing countries, such as Sri Lanka, which assured market access to the huge markets of US and EU which otherwise may not have been accessible to the developing countries. Over the years successive governments have placed increasing importance on this industry as it generates the highest foreign exchange earnings in the industrial sector and also because this industry is the second highest provider of employment next to the plantation industry.

The industry has a very large installed capacity. The high level of technical and managerial skills available in the industry, low cost land and the skilled and literate workforce provide the industry with a comparative advantage in the Region. English language proficiency is very high among the managerial levels and moderate to fair among the lower grades which is a great advantage to foreign investors.

The industry’s core strength lies in its ability to produce high quality goods at competitive prices, combined with an industry structure which is flexible and capable of servicing leading international brands. The Sri Lankan apparel industry is also recognized for its laudable standards of social compliance.

A wide range of reputed international branded clothing such as Victoria’s Secret, Liz Claiborne, Pierre Cardin, Abercrombie and Fitch, Ralph Lauren, Tommy Hilfiger etc. are manufactured in Sri Lanka. Major global importers & retailers from the USA, EU, Australia and Japan are represented in Sri Lanka, some of whom have been carrying out operations in Sri Lanka for over 5-10 years. These companies are locally owned enterprises and joint ventures or totally foreign owned.

Classification of factories

There are 891 garment factories. 574 factories (65%) are located in close proximity to the Colombo Port and the Airport. The others have been located in the rural areas of the country, with a view to curtailing rural migration and are serviced by a net

work of roads and a modern telecommunication system to negate the disadvantage of distance. More than 71% of the garment factories are located in the Western Province, employing over 65% of the work force. The industry is serviced by two servicing agencies, namely the Ministry of Industrial Development and the Board of Investments of Sri Lanka. The factories serviced by the Board of Investments are referred to as

Servicing Agencies

BOI factories and the factories serviced by the Ministry are referred to as Ministry factories. The factories located in the export processing zones are also serviced by the BOI. Nearly 50% of the textile and apparel companies operating in Sri Lanka are BOI approved ventures and account for almost 90% of the total garment exports.

The BOI was established in 1978 by a special Act of Parliament to promote and facilitate Foreign Direct Investment (FDI). The BOI operates as an autonomous statutory body and is structured to function as a central facilitation point and ‘one-stop-shop’ service centre for investors. The BOI is empowered to grant concessions and incentives from various existing laws operating in the country such as Inland Revenue, Customs and Exchange Control.

Sri Lanka offers a wide range of incentives for investors. These incentives are available to both foreign and domestic investors, without preference, provided the investment is undertaken through a company incorporated in Sri Lanka. Incentives offered fall under two classes or "regimes" and the investor may be eligible for incentives provided by either of these regimes.

These are: BOI incentives under Section 17 of the BOI Law and General incentives under the "normal laws" of the country.

When an agreement is signed with the BOI the incentives granted and commitments made cannot be changed by successive governments.

The grant of incentives depends on the type of the project proposed. Enterprises, which meet the specific criteria, qualify for incentives under Section 17 of the BOI Law, the incentives include: Tax holidays for 5 to 20 years; Concessionary tax at 15% after expiry of tax holiday; Import duty exemption from capital goods.

Import duty exemption on raw materials if utilized for export; Exemption from exchange controls; No restriction on repatriation of dividends and profits; Free transferability of shares and Concessionary taxation on expatriates income.

Export Processing Zones

Sites are available for investors in well-developed and fully serviced industrial estates at competitive costs within 30-50 km distance from the Port/Airport. The Katunayake Export Processing Zone in particular, has served as a model zone in the Asian region. Additionally investors have the option of locating their enterprises outside export processing zones or industrial parks and are able to lease the site or purchase land outright.

There are 13 Export Processing Zones/Industrial Parks which are:

Raw material base (backward linkage)

Both foreign and local companies have setup textile mills/finishing plants and many accessory manufacturing industries to support the thriving apparel export industry. Raw material and accessories currently being manufactured are knitted fabric, woven fabric, buttons, zippers, hangers, yarn, thread, interlining, elastic, padding quilting and packaging. The, services offered range from dyeing and finishing, screen-printing, embroidery and washing. With the introduction of high tech machinery and capital infusion, many existing factories have been automated and upgraded.

Human resource development

One of the most important factors which has contributed to the rapid development of the apparel industry in Sri Lanka has been the highly trainable, skilled and literate workforce. Sri Lanka has a proud record in human resource development and is among the leading developing nations that have made significant headway in this area. While many enterprises carry out in-house training for their workforce, the state training institutions and private sector training institutions provide specialized training courses to cater to the specific needs of the industry.

The technology levels of enterprises vary considerably with the large enterprises having a higher standard than the small and medium enterprises. Foreign owned companies and joint venture partnerships with foreign collaborators have helped in the process of technology transfer and training, the main source for technical information have been the suppliers of machinery and equipment and local research organizations.

Technology and R & D

Research and Development activities in the enterprises are low. While most of the enterprises concentrate on producing from sketches and designs received from the customer very few companies have design and design development capabilities. The comparative safety of an assured market on account of the prevailing quota regime has encouraged the Sri Lankan apparel industry to develop a strong manufacturing culture. Accordingly the industry has over the years geared itself to selling capacity to the buyers, and regrettably has neglected the need to strengthen the marketing capabilities and product design and development skills which are essential to prepare itself to compete in a quota free era.

Phase out of the Multi Fibre Agreement (MFA)

Prior to the establishment in 1974 of the MFA, individual importing countries entered into bilateral agreements with other countries to suit their specific needs. Generally, the importing country resorted to a trading agreement which was more favourable to them which in effect was limiting the growing textile exports of developing countries. In the early 1960’s bilateral agreements were arranged to limit the exports of cotton products from Least Developed Countries (LDC’s) to the developed countries. In 1974 the MFA-I began to replace the old agreements and a quota system based on volume was introduced which was followed by MFA-II in 1978, MFA-III in 1982 and MFA-IV in 1986. The current MFA was reached at the end of 1993 under the GATT Uruguay Round maintaining volume restrictions in the form of quotas for sensitive/vulnerable categories. The MFA should be phased out by end 2004 following the GATT intentions with integration programme as follows without the introduction of quota again for such products in the future:

January 1995 - Integration of at least 16% of the import volume of 1990 for textiles and clothing; January 1998 - Integration of at least 17% of the import volume of 1990; January 2002 - Integration of at least 18% of the import volume of 1990; January 2005 - Total integration of textiles and clothing and in January 2005 all remaining products, representing 49% of the 1990 import volume should be integrated.

By January 1st 2002 there will be a 51% increase in quota growth rates providing greater market access for our apparel products to US and Canada. The four EU quota,categories which were under restraint for Sri Lanka were removed in March 2001 under a bilateral agreement between Sri Lanka and the EU thus providing quota free access for Sri Lankan manufactured apparel products to the EU countries.

(Please refer to page 44 for quota categories of apparel products to US and page Sl for quota categories of apparel to Canada)

Strategy for Sri Lanka

The apparel industry has consistently accounted for more than 50% of the industrial exports of the country. If the industry is not adequately prepared to face the rigours of a liberalized global competition, the fall out would be catastrophic for the country which for over several decades has depended heavily on this industry for foreign exchange earnings and more importantly as a major source of employment generation.

Half way through the seventh year into integration it would be prudent for the industry to take stock and put in place the industrial adjustments necessary to be prepared for total free market competition on a level playing field with the strongest players in the field.

Background

While the main focus has been on the phasing out of the quota restraints, the international trading scenario has been changing dramatically and at a faster pace than anticipated. The significant changes are in the retail sector where large scale consolidation is taking place with considerable rationalization of the supplier base; Technology becoming the enabler in the industry and the emergence of strong regional trading blocs providing special trading concessions to its trading partners

Industry Focus

The Sri Lankan apparel industry will need to focus on the following areas in order to remain competitive in the years ahead: 1. Build strong relationships with customers and buyers:

Today, there are more joint venture partnerships and trading alliances with foreign collaborators than five years ago. There are also several medium/small well managed companies who are working closely with larger companies providing capacity support when needed. In a market environment where the vendor base is continually shrinking, it is imperative that manufacturers establish long term trading relationships with their customers.

2. Invest in technology: This arrangement has paved the way for technology and skills transfer to smaller companies, helping in the process of technology and factory upgrading. There is a need for improvement and upgrading technology at every level and stage of production and a more structured and determined programme needs to be implemented to ensure an overall general improvement in this area.

3. Increase productivity and become price competitive: Productivity is a critical element for improving the competitiveness of the apparel industry. The present level of productivity is low due to the high proportion of unskilled and undertrained employees and weak management. In the present context, technology improvement is a pre-requisite to productivity improvement under the guidance of well-informed management.

4. Manpower Development: In a labour intensive industry, such as the apparel industry, developing human resources is a fundamental requirement for the development of the industry. The Sri Lankan apparel export industry is characterized by a very large proportion of unskilled workers. This major weakness in the human resource base must be addressed by both the private sector as well as the government.

Product design and development are generally unknown in Sri Lanka except in a few large companies. An industry, which thrived on a manufacturing culture to date, relies on the customer to provide the details of the products to be manufactured including the specifications for material accessories. Therefore, the process of product development from the market information to the finished sample is almost unknown. In attempting to foster a marketing culture it has become imperative that we develop our own designs and products which we could promote, advertise and sell in a globally competitive market scenario which will be emerging after 2004.

We need to develop design capabilities and competencies in the industry and develop people with the requisite skills who will be engaged in the industry so that they will be able to develop designs and develop products which have a market potential in the major markets and also for emerging future markets.

5. Pursue an aggressive marketing strategy: The industry needs to make a paradigm shift from a manufacturing culture to that of a marketing culture. A strategic marketing approach to the management of the apparel sector becomes imperative in the intensely competitive market scenario. Market selection, product design and development, market entry strategies, marketing communication, product distribution modes and systems are some of the core areas of knowledge and skill that marketing personnel in the industry must develop as a matter of urgency and utmost importance.

References: Sri Lanka Apparel Exporters Association, ‘Comprehensive Industry Document’; Tertiary a & Vocational Education Commission, Vocational Education and Training Plan; Board of Investments of Sri Lanka ‘BOI Incentives’; Ministry of Industrial Development; Textile Quota Board; Sri Lanka Customs Department and the Central Bank of Sri Lanka. (Sri Lanka Garments)

Top 25 Apparel Exporters — 2000

Rank by Export value (US $) Source: Sri Lanka Customs

Rank Company Name

1 Mast Lanka Pvt Ltd

2 Bodyline Pvt Ltd

3 Tri Star Apparel Exports Pte Ltd

4 Smart Shirts Lanka Ltd.

5 Courtaulds Clothing Lanka PVt Ltd

6 Slim Line Pvt Ltd

7 Polytex Garments Ltd

8 Star Garment Ltd

9 Growth Lanka Pvt Ltd.

10 Orit Apparels Lanka Pvt Ltd

11 Ceylon Knit Trend Ltd

12 Unichela Pvt Ltd

13 Laws Garment & Knitting Factory Ltd

14 Hirdaramani Ltd

15 Shadow Line Pvt Ltd

16 Readywear Industries Ltd

17 Martin Empres Ceylon Ltd

18 Ansel Lanka Pvt Ltd

19 Eam Maliban Textiles PVt Ltd

20 Smart Shirts Trading Pvt Ltd

21 M. Samson Silva & Co Pvt Ltd

22 Desmonds Mercury Pvt Ltd

23 Union Apparels

24 Jewelknit Ltd

25 Timex Garments Ltd