In recent years, Pakistan’s textile sector has not proven particularly attractive to foreign investors, but with the EU’s decision to grant it 'generalised scheme of preferences plus' (GSP+) status, which gives Pakistani textiles and other goods duty-free access to the region, the tide could be about to turn.

According to Pakistan’s central bank data, annual net FDI in the country's textile sector averaged just under $35m annually over the past 10 years, or about 2% of total FDI in the country. The first half of the fiscal year ending in June 2014 saw a net FDI outflow of about $3m from the sector.

Importing expertise

Pakistan’s textile ministry has been trying to attract foreign investors in the sector since 2006 in the hope that a transfer of technology and management skills will pave the way for a new era for textiles in the country. But these efforts have been largely in vain. The government could not even attract textile investors from China, which is very active in other sectors in the country.

Data obtained from the Securities Exchange Commission of Pakistan shows that there were 41 companies of Chinese origin active in the country as of December 2013 – of which, six moved into the country after the new Pakistani government took office in May of that year. The total number of local companies with Chinese directorships stood at 438 in December, with more than one-quarter of these having been opened or acquired in the past five years. 

While the majority of these Chinese companies are clustered around the infrastructure, telecommunications, banking, mining and energy sectors, there has been very little interest in the textile sector. This is despite the fact that Chinese textile businesses have been increasingly losing competitive advantage due to rising labour costs, whereas Pakistan offers cheap labour and abundant supply of good-quality cotton. 

Overnight success

However, with the GSP+ status granted to Pakistan by the EU in December 2013, the market has seen an unprecedented influx of Chinese textile investors, almost overnight.

In mid-January 2014, Shandong Ruyi Science & Technology, a leading Chinese textile player, signed a memorandum of understanding with the provincial government of Punjab to invest $2bn in the region's textile sector. A few days later, Masood Textile Mills, a vertically integrated Pakistani firm, told investors that Shandong Ruyi had expressed an interest to acquire 52% of its shares in a deal expected to be worth about $57m. Analysts expect other Chinese players to follow suit, eyeing opportunities in garments, cloth (including denim) and dyeing businesses.

A source in Pakistan-China Joint Chamber of Commerce & Industry, closely involved in bringing and facilitating Chinese investors to Pakistan, says that while several Chinese investors are interested in complete buy-outs, Pakistani textile owners are looking for joint venture-opportunities.

“Pakistanis want to raise finances and learn from the Chinese management to increase productivity. But at the same time they don’t want to lose out on the bright export prospects to the EU,” says the source, who spoke on the condition of anonymity.   

Investment needed

The Pakistani government estimates that the textile sector needs to invest about $5bn to $6bn over the next four to five years to take full advantage of the country's GSP+ status. Even by the more conservative estimates, such as that by Mirza Ikhtiar Baig, former advisor to the textile ministry, at least $2bn to $3bn is needed to expand capacity and improve product quality.   

Then again, the EU may not be the only market for these expansions. “Given China’s growing needs and rising per capita income, China itself can become a good market for Pakistani made-ups”, says Shaukat Ellahi Shaikh, CEO of Nagina Cotton Mills, which belongs to the Pakistani textiles group Nagina Group.

If that is the case, China may well be making Pakistan a production house to meet demand back home. 

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