Identifier | Created | Classification | Origin |
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06COLOMBO533 | 2006-04-05 03:29:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Colombo |
1. (SBU) Summary: Sluggish growth in apparel exports has prompted Sri Lanka to re-design its textile and garment industry strategy. While new growth targets have not been set, the new strategy will focus on promoting two broad categories of apparel and enhancing productivity. In addition, a key industry advocacy group has recommended increased Government involvement in the sector, new marketing strategies, increased supply-chain integration and more regional accumulation of inputs. While the industry is pushing for more Government involvement, it would do well to reflect on the success of the private sector in building the garment industry. Nonetheless, industry advocacy does reflect a key US assistance goal of promoting economic sector-led industry development. End Summary. 2. (SBU) The value of Sri Lankas garment exports rose 3.1 percent in 2005 to $2.9 billion, significantly lower than the 12 percent annual growth rate forecast in the 2002 5- year apparel industry strategy. The strategy projected that exports would reach USD 4.7 billion by 2007. While data on volumes are not yet available, it is widely suspected that volume has increased significantly, but that export value is victim to a free-fall in prices due to the expiration of the Multi-Fiber Agreement (MFA) quota system. Mr. T. Cooray, Secretary General of the Joint Apparel Association Forum (JAAF), told EconFSN that the industry is totally out of step with its previous growth targets, which prompted them to revisit the strategy. According to Cooray, smaller factories which operated on very thin margins are having severe difficulties. Meanwhile, bigger players are reducing margins and expanding production. Sri Lanka's top end producers, who contribute about 70 percent of exports, have gone high-tech, consolidated their supply chains, cut costs and lead times, and have formed close ties with garment buyers. 3. (SBU) JAAF, an industry advocacy group established to address post-MFA challenges, has recently conducted a strategic planning session to revisit the five-year apparel industry strategy adopted in 2002. According to Cooray, while the final report is not yet ready, a main recommendation will be to focus on the development of two key product categories, casual wear and intimate garments. These categories have recorded very high growth rates in the past year. The original strategy identified four broad d product categories to be developed in the post quota era casual-, intimate-, sports- and childrens-wear. JAAF has proposed dropping sportswear and childrens-wear as they have not performed particularly well in the post-MFA era. 4. (SBU) Another key recommendation is the need for a new strategy to compete in the US market as the prospects for preferential market access are slim (Note: Sri Lankas garment sector has been pushing for a Free Trade Agreement between the US and Sri Lanka and has also been a strong lobby for duty free access for Sri Lankan goods as a tsunami relief measure. End Note). JAAF has also proposed SIPDIS establishment of a separate cabinet ministry for the garment sector (Note: new cabinet ministries are often viewed as the solution to any problem in Sri Lanka there are currently 35 cabinet ministries and 25 non-cabinet ministries. End Note). Further, the organization has suggested enhancing information technology capabilities and and productivity, using social compliance as a key marketing tool and consolidating ties with regional countries to enhance the supply chain and comply with rules-of-origin requirements that allow for regional accumulation of inputs. 5. (SBU) While garment exports, being the main success story of the Sri Lankan economy, contribute to nearly 50% of export earnings and the industry is lobbying for a new ministry, the industrys phenomenal success has been primarily due to private initiatives. Successful initiatives of local and foreign investors, as well as skills of high caliber professionals managing the industry, helped Sri Lanka to make maximum use of the quota regimes COLOMBO 00000533 002 OF 002 under the MFA and produce for international apparel brands. In light of the MFA phase-out, these companies banded together through the JAAF to restructure the industry and promote investment in modern equipment, advanced technological processes and to provide improved facilities for their workforce. 6. (SBU) The governments role was largely to manage the quota regime and offer tax holidays for foreign investors, build export processing zones and canvas for trade liberalization such as the EU GSP-plus program, the Indo- Lanka Free Trade agreement and a US-Sri Lanka Free Trade Agreement. The industry also deals with various government agencies, such as ports and customs, on a daily basis for business purposes. The request for a separate ministry looks in part to be a move to attract greater government attention to the industry and to lobby for increased business facilitation from various government agencies (including canvassing for low cost power plants and fewer holidays - two key problems faced by the industry). 7. (SBU) A leading industrialist who built 30 factories under former-President Premadasas 200 garment factory program told Econoff that he did not see a need for a separate ministry as less government involvement was better er for business. He was especially glad that the MFA was phased-out as the quota distribution in Sri Lanka was subject to corruption and political patronage. According to this industrialist, the absence of quotas has made it possible for companies to grow through their own initiatives and marketing and not by becoming dependent on artificial market forces. Since the MFA phase-out his company has re-opened 10 factories that were closed and is negotiating to open an exclusive infant line with a UK buyer. 8. (SBU) Comment: We will report on the labor impacts of the MFA expiration septel. The industry is in a period of consolidation and faces a period of uncertainty. We believe JAAF has shown itself to be an incredibly positive force in preparing Sri Lanka for the post-quota world, and also believe that its current effort to rationalize its projections will provide good input and guidance to the industry as it moves forward. Perhaps more importantly, the garment sector has provided Sri Lanka with a much needed example of industry banding together and leading itself (something the USG is promoting through our USAID Economic Growth initiative The Competitiveness Program). End Comment Lunstead |