The result of the agreement, it is argued, had been that production and investment was decided by quota size rather than by a country’s competitive advantage.
The new year brought a new look for the global textile market, with the expiry of a quota system that has coloured it for three decades. Whether this is an improvement on the old look depends on who you ask.
The World Trade Organisation’s Multi-Fibre Agreement, which ended on January 1 this year, is now viewed by many as having distorted world textile trade. The result of the agreement, it is argued, had been that production and investment was decided by quota size rather than by a country’s competitive advantage.
Countries with well-developed textile sectors are now scrambling to grab their share of the quota-less market, while poor countries with less developed sectors but yet a high dependency on textile exports are bracing themselves for a massive loss of jobs and a raft of bankruptcies.
From the perspective of the well-developed sectors, the supply chains that existed in the textile quota age were unnatural and created a false sense of vertical integration. Countries like China and India but also Pakistan and to some extent Turkey, that have their own complete vertically integrated industries – meaning they have the raw material and the finished product – expect to do well in a quota-free world. The countries with less-developed sectors, with vertically integrated industries that developed only because of the quotas – for example Mauritius, Madagascar and Bangladesh – will struggle to compete.
It is feared that China will capture the bulk of new trading opportunities presented by the removal of quotas. If so, India will surely come in second, albeit a distant second.
“We expect our business to increase,” says Anuj Bhagwati, managing director of ATE Marketing, an agent for many leading textile manufacturers in India and neighbouring markets. The company also has manufacturing joint ventures with companies such as Truetzschler, Zinser (Saurer group), Stork and Erhardt+Leimer, and a licence from Monforts.
“The end of the quotas, coupled with India’s own domestic policy initiatives and growing economy, should increase the textile business in India,” Mr Bhagwati predicts. “That means more investment, and so more business for quality manufacturers like those in our group and the companies we represent.”
India on the rise
Overall, the business for larger, more organised, high quality and high producing textile manufacturers should increase, Mr Bhagwati believes. Companies that are less efficient will struggle unless they have special products or niches. “As India has an established chain in textiles starting with raw materials, [there will be more] winners than losers and the overall textile manufacturing business will grow,” he says.
An assured supply of raw materials, a competitive supply chain, quality-conscious production processes and respect for intellectual property rights are the core strengths of the Indian textile industry. These factors will serve India well as it seeks to take advantage of the lifting of quotas.
Indian textile exports were constrained by the quotas for the past four decades, says Subodh Sapra, president for the polyester sector of Reliance Industries, India’s largest private sector company with gross turnover of Rs74,418 ($17bn).
Subodh Sapra: ‘quotas were hamper-ing the growth of the industry’
For 2003, total Indian exports were $13bn compared with Chinese exports of $17bn. In some categories, Indian quotas were less than the quotas of competitors like Bangladesh and Sri Lanka. These countries are highly dependent on imports for textile raw materials like polyester or cotton, while India is self sufficient in both man-made fibres like polyester, viscose, nylon and acrylic, and natural fibres like cotton and silk.
“Even though India has a rich heritage [of textile producing], quotas were hampering the growth of the industry,” Mr Sapra says.
To support incremental demand from the textile industry, Reliance is expanding its polyester capacity by more than half a million tonnes this year. By the end of this year, total polyester capacity will reach two million tonnes. Reliance says it is already the largest producer of polyester in the world and the only fully integrated polyester producer (from refinery to polyester). After acquiring specialty polyester producer Trevira last year, the company now has manufacturing facilities in India, Germany, Denmark and Belgium, and exports to more than 90 countries.
Other countries, too, could snap up new business. Pakistan will be a strong contender. There is likely to be enhanced trade regionally between the countries of the South Asian Association for Regional Co-operation, especially India and Pakistan. Both countries have strengths that complement each other, and both stand to do well out of the enhanced trade.
“While China and India stand well placed to benefit from the quota abolition, and rightfully so, Pakistan’s prospects should not be discounted,” says Osman Saifullah Khan, CEO of the Saif Group, a diversified industrial and services conglomerate with interests in the textiles, telecoms, power, real estate, and oil and gas sectors. Headquartered in Islamabad, the Saif Group has two yarn producing units (Saif Textile Mills Ltd and Kohat Textile Mills Ltd) with a production capacity of 20 million kilogrammes annually, and an annual turnover in excess of $60m.
Osman Saifullah Khan, CEO of the Saif Group
A producer of cotton and man-made fibre and the largest yarn exporter in the world, Pakistan has a strong and modern weaving industry and a fledgling processing and apparel sector. It also has in place the kind of vertically integrated supply chain that will be an essential ingredient to success in the post-quota world. Having invested more than $5bn in upgrading existing plants, and adding new capacities and new products, Pakistan’s textile industry believes it now has the necessary scale and product quality to compete with the likes of China and India.
While Pakistan’s labour costs are still competitive, a rapid improvement in productivity is needed. “We have in Pakistan a lack of expertise in certain areas in the downstream industries but I think over time we can make up these deficiencies,” says Mr Khan.
From a logistics standpoint, there has been considerable improvement in the state of the country’s roads, and several legs of a nationwide six-lane motorway have been completed. The port of Gwadar on the Arabian Sea is being developed, and facilities at Karachi Port improved with a view to more efficient and cost-effective services.
Pakistan, with a strong home-furnishings textiles segment, is the largest importer of extra-long staple US Prima cotton in the world, used in the production of high thread count bed linen. The spinning and weaving capacities in this market segment are increasing but what is more encouraging, says Mr Khan, is the increase in its domestic processing/finishing capacity. Producers are also benefiting from the relocation of industry from Europe to Pakistan, and the formation of long-term outsourcing and marketing arrangements.
Weak sector grows
The garment/apparel sector, which is traditionally one of the weaker links in the industry, is also undergoing massive growth and investment, as part of an industry-wide focus on moving into value addition. The Saif Group is already experiencing the effect of the removal of the quota regime in the difference between the yarn prices it fetches in export compared with what it obtains locally.
“Locally, the market is growing and new applications for our yarn are being found,” says Mr Khan. “You will see less and less export of yarn from Pakistan and more and more export of the finished product.”
The Saif Group sends yarn to Europe for the manufacture of shirts; it is one of the few companies in Pakistan making shirting yarn. The group currently exports primarily to Italy and to a smaller extent to Portugal (and on the bed linens side to Dubai and Bahrain). However, Mr Khan expects that eventually the demand for its yarn will fall and that business will shift either to eastern Europe or Turkey, which has a clear advantage in terms of its proximity to the European market. “But we are hopeful here and investing further in textiles,” he says.