Enhancing Competitiveness of Pakistan's Denim Sector

Pakistan is deindustrializing prematurely, and this has resulted among other things in the loss of competitiveness of the country’s export sectors.  The failure of increase exports has led to a serious current account deficit as Pakistan struggles to service its import bill. To address this issue, it is pertinent to focus on sectors in which Pakistan has a significant global presence.

To achieve the above, the Pakistan Business Council (PBC) has initiated a series of studies aimed at increasing global competitiveness of Pakistani exports in selected sectors. The textile sector is the first sector which is being studied from the competitiveness perspective primarily because textiles make up nearly 60% of Pakistan’s exports. This report titled, “Enhancing Competitiveness of Pakistan’s Denim Sector” is the second in the textile sector series. This Study is part of the PBC’s Make-in-Pakistan initiative – an initiative which aims to revive manufacturing in Pakistan, leading to jobs, an increase in value added exports, import substitution, initially of labor intensive products and an increase in tax collection.

Exports of Woven ApparelTextiles, however, is a broad term and it comprises of a variety of products such as yarn, apparel, carpets, silk, and synthetic textiles. Among these sub-sectors, apparel dominated the textile landscape with a share of 57.43% in global exports, in 2017, owing to its high value-addition content. Apparel exports can be broadly categorized into Knitwear and Woven Garments. In 2017, Pakistan’s exported USD 2.47 billion worth of woven garments resulting in a global share of 1.08%. Whereas the share of woven garments in Pakistan’s textile exports stood at 18.96%.

Composition of Pakistan’s Textile Exports (2017)
Cotton: raw, waste, yarn, thread & cloth, etc. 27.71%
Knitted Apparel 19.35%
Woven apparel 18.96%
Bed ware 17.34%
Towels 6.34%
Textile made ups ( excl. Towels ) 5.16%
Arts silk synthetic textile 1.99%
All Other Items 3.15%

In 2017, global denim fabric exports were recorded at USD 2.76 billion. China retained its position as the leading fabric supplier with a market share of 18.72% whereas Pakistan ranked 2nd with a share of 17.46%. However, the global denim jeans market had much higher value than the fabric market and according to estimates by Euromonitor International it had a value of USD 95.4 billion in 2017.

Since the purpose of this report is to provide a policy framework for enhancing competitiveness of Pakistan’s denim industry, a total of 11 one-on-one interviews were conducted with leading exporters of denim apparel from Pakistan. The sample size is indicative of the small number of very large players in the denim sector. A few large firms which are vertically integrated – spinning to apparel, dominate denim fabric and denim apparel exports from Pakistan.

Following were suggested to enhance export competitiveness of Pakistan’s denim sector:

All rebates / refunds / incentives should be automatically credited into accounts of exporters: To help better manage cash-flow at the firm level, the government in collaboration with the State Bank needs to setup an automatic system linked to receipt of export proceeds.

Pakistan needs to promote the production of premium quality denim: Since major denim importing countries are opting for vertical integration, export markets are shrinking and margins are under pressure. Manufacturers can either improve their production practices to enhance productivity and hence reduce costs or increase value addition at the fabric stage by producing premium quality denim.

Government policies need to ensure availability, quality and stability in prices of cotton: Not only does the government need to introduce policies to incentivize cotton production but also ensure that better agricultural practices are followed in the country. The use of better-quality seeds, mechanization of agriculture and better farm management techniques can ensure a supply of good quality cotton.

Exporters need to have gas and electricity available at competitor country rates: Utility rates and tariffs, need to be at par with those of competitor countries to ensure a level playing field for Pakistani manufacturers.

Polices need to promote the setting up of industries for the manufacture of garment accessories and other ancillary materials: If the government is able to provide fiscal and tariff incentives to promote relocation of global suppliers to Pakistan for the production of garment accessories and other ancillary materials, this would be beneficial in two ways. Firstly, the domestic industry would be better off with local sourcing. Secondly, this import substitution would help reduce the BoT deficit.

Government taxes & levies need to be rationalized: Government collections from businesses need to be streamlined to ensure that the number of procedures and the amount collected are both reduced. Industry competitiveness suffers not only because of the high cost but also because of the time associated with handling the lengthy procedures mandated by the government.

Interactions with Government functionaries need to be reduced: Companies which are audited by accredited global suppliers should be exempt from frequent inspections by government departments.

Apparel should be government’s priority, not cotton: Bearing in mind the policies implemented by the major apparel hubs such as India, Bangladesh, China, Vietnam etc., the government should implement policy measures aimed at supporting the apparel industry. The policy should support the introduction of man-made-fibre and the import of yarn which is competitively priced.

Common R&D facilities need to be promoted in denim clusters: Companies which are investing heavily in R&D are the ones which have done well in the past few years. R&D is not only done at the fabric level but also in fabric processing and washes of jeans. However, since medium-sized companies cannot afford their own R&D departments, common R&D facilities need to be set up in denim clusters so that such facilities are available to medium-sized companies.

Firms need to be helped to comply with global EHS (Environment, Health & Safety): Firms reported that compliance with global EHS standards was partly responsible for Pakistani firms being able to maintain their global market shares. The government should provide common effluent treatment plants in denim clusters and help medium-sized companies meet global EHS standards.

Increasing Chinese production costs is an opportunity to promote JVs with Chinese companies: Currently, the government policies do not promote joint-ventures, the Board of Investment (BOI) should be mandated to develop policies which promote JVs.

Government needs to collaborate with the denim industry to promote brand Pakistan: The bigger players would like to have a joint industry-government body, professionally run, which will take a holistic and futuristic view of Pakistan’s denim industry. A more in-depth analysis is required of the policies followed by Vietnam, Cambodia and Bangladesh to better understand the policies followed by them to promote their apparel industry.

The PBC is a private sector not-for- profit advocacy platform set up in 2005 by 14 (now 79) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s’ regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk