Apparel Industry contributed 52% to the total export revenue of Sri Lanka in 2021. It is the leading foreign currency earner as well as the leading employer with 400,000 approx. direct employees and a further 2 million indirect employments. Therefore, it makes sense to keep a close eye on the industry to understand where it is heading and how well it is navigating the difficult financial and geopolitical challenges.
However, it is important to be vigilant and understand the market trends and potential challengers ahead. If we look at what’s happening with the leading buyers of Sri Lankan apparel sector, it is clear some challengers are inevitable.
Consumers in EU countries also suffering from the inflation and to make matters worse, their battling many natural disasters such as forest fires, droughts, and heat waves. All these events have a negative impact on the apparel sales as people have much more pressing issues to worry about.
Sri Lanka’s biggest apparel market is the USA. Though first six months of 2022 shows promising figures, it is important to understand the rising inflation and its adverse effects on the apparel sales. So far, US customers are resilient, and first six months sales were up by 11% (YoY) according to Statista.
As we discussed above, from the customer front, Sri Lankan apparel industry in a flux. Market is controlled by the buyers hence working closely with them will ensure continuous orders. Upcoming winter season is a major concern for EU & UK with the looming energy crisis. With already high inflation, this could result in lower apparel sales as customers struggle to meet the ends needs.
The top apparel manufacturing company in Sri Lanka working on a strategy to overcome this challenge by shipping all raw materials, especially fabric to South India and getting them airfreighted to Sri Lanka so they could minimize the delays. For the time being this is a workable strategy but not all the factories have the resources or the capacity to do so. Further, many airlines also reluctant to service Sri Lanka due to the US dollar payment issue. Essentially, this means opting for charter flights to bring the cargo. However, it’s not cheap to do so and may not an option for all.
Expanding capacity of the local mills and establishing fabric mills locally are the best solutions to avoid lead time challenges as well as to minimize the currency outflow. Going by this, it is great to see a new fabric mill entered the local market recently. Browns Fabric Mill which produces knit fabrics entered the market with a US$53 million investment. In another development, MAS holdings acquired BAM knitting, adding to the already impressive MAS fabric cluster. This will enable MAS to offer seamless product solutions to their buyers.
Another encouraging outcome is the support extended by apparel buyers towards the local apparel industry. Vast majority of buyers sympathize with the current situation in the country and have come forward to help in many fronts. Italian fashion brand Calzedonia promised to continue to place the orders with Sri Lanka despite the delivery challenges. Many other European and US buyers agreed to give longer lead times, reducing the risk of airfreights. On another major development, UK government included Sri Lanka also to the list of countries considered for the new trade agreement called Developing Countries Trading Scheme (DCTS). Sri Lanka would be entitled to export goods to UK with preferential rates, making them competitive with the landed price.
Sources:
1. Latest figures
Sri Lanka has set a target of US$6 billion for the apparel industry export revenue for the year 2022. With seven months in to the 2022, let’s see where the industry stand. As per the Export Development Board of Sri Lanka, by end of July 2022, total value of apparel exported stands at US$3.4 billion. This includes, US$1.4 billion to USA, US$ 965 million to EU, US$455 million to UK and another US$485 million to other countries such as Middle East, Japan, and Australia. This leaves US$2.7 billion to be made over the next 5 months. Good news though, compared to year on year (YoY) figures, for the first seven months, apparel exports have increased to all the destinations. This is encouraging and need to keep the trend going.However, it is important to be vigilant and understand the market trends and potential challengers ahead. If we look at what’s happening with the leading buyers of Sri Lankan apparel sector, it is clear some challengers are inevitable.
2. Challenges faced by buyers
UK battling a whopping 40-year high inflation. As a result, fashion retail has dropped nearly 5% so far. UK consumers are continuing to tighten their purse strings amid the cost-of-living crisis. Inevitably, this results in excess stocks with the buyers which may lead to smaller order quantities compared to first half of the year.Consumers in EU countries also suffering from the inflation and to make matters worse, their battling many natural disasters such as forest fires, droughts, and heat waves. All these events have a negative impact on the apparel sales as people have much more pressing issues to worry about.
Sri Lanka’s biggest apparel market is the USA. Though first six months of 2022 shows promising figures, it is important to understand the rising inflation and its adverse effects on the apparel sales. So far, US customers are resilient, and first six months sales were up by 11% (YoY) according to Statista.
As we discussed above, from the customer front, Sri Lankan apparel industry in a flux. Market is controlled by the buyers hence working closely with them will ensure continuous orders. Upcoming winter season is a major concern for EU & UK with the looming energy crisis. With already high inflation, this could result in lower apparel sales as customers struggle to meet the ends needs.
3. Logistical challenges
Another notable challenge faced by Sri Lankan apparel industry is the lack of vessels calling in to Colombo port. Due to the current financial crisis and more specifically, the lack of US dollars to pay for the services, many shipping companies opting out calling in to Colombo. This leads to raw materials, especially fabric being difficult to import on time. Said logistical challenge affects factories in two fronts. Firstly, the high shipping cost. Second and the most impactful challenge is the on-time delivery of finished goods. Since its difficult to import the fabric as per the T&A, getting the manufacturing done on-time becomes a major challenge for the local manufacturers.The top apparel manufacturing company in Sri Lanka working on a strategy to overcome this challenge by shipping all raw materials, especially fabric to South India and getting them airfreighted to Sri Lanka so they could minimize the delays. For the time being this is a workable strategy but not all the factories have the resources or the capacity to do so. Further, many airlines also reluctant to service Sri Lanka due to the US dollar payment issue. Essentially, this means opting for charter flights to bring the cargo. However, it’s not cheap to do so and may not an option for all.
4. Fabric replacement challenges
As we know, once fabric received from a mill, it is essential to carry out an inspection to ensure the quality. Due to the current scarcity of vessels, most fabric consignments reach factories late. This leaves very little time to inspect the fabrics and to get any replacements. Mills are unable to ship replacement fabrics due to the last-minute inspection reports and high shipping cost. This inevitably force manufacturers to short ship orders in many instances. It is noted that many mills identified this issue and starting to ship additional quantities for any replacements. This helps in most cases but still it’s not a long-term solution.Expanding capacity of the local mills and establishing fabric mills locally are the best solutions to avoid lead time challenges as well as to minimize the currency outflow. Going by this, it is great to see a new fabric mill entered the local market recently. Browns Fabric Mill which produces knit fabrics entered the market with a US$53 million investment. In another development, MAS holdings acquired BAM knitting, adding to the already impressive MAS fabric cluster. This will enable MAS to offer seamless product solutions to their buyers.
5 Energy crisis
Sri Lanka is facing a massive challenge when it comes to supplying electricity and fuel to the nation. Currently the power cut stands at 3 hours per day and all the signs are there to predict longer cuts. Fuel also distributed in rations and inevitably it hinders the movements of people and goods. This dual crisis impaired many small and medium scale factories from meeting their delivery obligations, causing them to either cancel or airfreight goods. The large manufactures getting around these issues by importing fuel themselves and where possible buying large quantities from the local refinery. This enables them to run the generators to generate electricity and to pump the vehicles to move employees and goods. Unfortunately, many SME companies do not have a budget or storing capacities to follow the same strategy.6. Positive outcomes
For the exporters, the most welcome positive outcome of the current financial meltdown in Sri Lanka is the devaluation of rupee. Until March 2022, US$1 = LKR200. Since March Central Bank of Sri Lanka let go its hold on the rupee and today it stands at LKR362. Essentially, this gives much needed break for the manufactures. Salaries for the employees remain largely the same hence most factories are cash rich. It is noted that some factories are getting carried away and organizing parties and organizing staff meetings in star class hotels and refurbishing buildings and so on. This might be little premature as having a tight control on the finances at times of uncertainty is important. Due to the high inflation in the country, which stands at 69% (according to CBSL August report), it is possible that in near future, workers would be demanding increased wages. In order to avoid any disruptions to the manufacturing process, companies will have to comply. Therefore, saving the extra income is vital.Another encouraging outcome is the support extended by apparel buyers towards the local apparel industry. Vast majority of buyers sympathize with the current situation in the country and have come forward to help in many fronts. Italian fashion brand Calzedonia promised to continue to place the orders with Sri Lanka despite the delivery challenges. Many other European and US buyers agreed to give longer lead times, reducing the risk of airfreights. On another major development, UK government included Sri Lanka also to the list of countries considered for the new trade agreement called Developing Countries Trading Scheme (DCTS). Sri Lanka would be entitled to export goods to UK with preferential rates, making them competitive with the landed price.
Sources:
- Export development board of Sri Lanka
- Central Bank of Sri Lanka
- Financial Times