Apparel manufacturers: Are companies really moving out of Sri Lanka?

December 19, 2023

Amidst electricity tariff hikes, increased taxes, and an impending Value Added Tax (VAT) hike in January 2024, reports state that apparel manufacturers are increasingly considering relocation or are already relocating to other countries with a viable business environment.

Speaking to The Sunday Morning, National Chamber of Exporters of Sri Lanka (NCE) Chairman Jayantha Karunaratne said that there was a shift of apparel industries from Sri Lanka.

“Most of the companies are opening up different branches or subsidiary companies overseas to keep costs down. This has been happening for some time now and it will reduce business to Sri Lanka. In small ways, they keep developing their business abroad. It’s a process and in the process, at some point, they could even move out 100%. For now, these companies are shifting in small volumes.”

Kenya, Tanzania, Egypt, and Middle Eastern countries like Oman and Jordan looked compelling for the companies to expand their operations, Karunaratne stated.

However, Joint Apparel Association Forum (JAAF) Secretary General Yohan Lawrence, speaking to The Sunday Morning, said it was incorrect to say that apparel companies were moving out of Sri Lanka.

“There has been a reduction in Sri Lanka’s export volumes (January to October) from $ 4,715 million in 2022 to $ 3,748 million this year. Part of the reason for this reduction is the global drop in demand for apparel – for example, the EU’s global apparel imports in the first eight months of this year were $ 61 billion, down by about 10% from the previous year. At a time when there is an oversupply of apparel, it is unlikely that there will be significant new investments.”

Sri Lanka loses edge
That said, the fact remains that Sri Lanka has lost its competitive edge in the global apparel market, which has led to a reduction in market share, particularly in the EU and the UK. Whilst the EU’s global imports of apparel are down by 10% as indicated above, Sri Lanka’s drop in exports to the EU is at around 18%.

Lawrence stated that during a time of demand reduction, Sri Lanka was losing out disproportionately: “Our competitor countries which include Bangladesh and Vietnam have also seen a reduction in volumes, but in those cases the reduction is much lower (single digit in Vietnam’s case). Both Bangladesh and Vietnam have better access to the EU and the UK markets as they benefit from Preferential Trade Agreements that are more attractive than those Sri Lanka has.”

According to the JAAF, Sri Lanka has GSP+ access to the EU (and DCTS to the UK), but in these schemes, there is a restriction on the utilisation of fabric that is not from a SAARC country and as such, only 50% of Sri Lankan exports to these countries qualify for duty-free access.

“Duties in the EU are around 11%. For Sri Lanka to compete with Bangladesh, for instance on apparel made using Far East fabric, we would need to be 11% cheaper. Given the scale of operations in Bangladesh, this is simply not possible,” Lawrence noted.

“At a time when supply exceeds demand, basic economics dictates that prices will fall. In the context of falling prices for apparel, if Sri Lanka is unable to compete, it will lose market share. Getting this market share back will be incredibly difficult,” he added.

Tariff troubles
Lawrence stated that, unfortunately, the recent increases in utility costs had resulted in Sri Lanka becoming uncompetitive. Sri Lanka now has one of the highest electricity rates in the region.

“Whilst we understand the requirement for a cost-reflective tariff, we must have proper control over costs and estimates of expenditure. As JAAF had argued at the public consultation on the last electricity hike, it has become more than clear that the forecasts were incorrect and in all likelihood, the tariffs will have to be reduced in April next year.

“After labour costs, electricity is one of the highest local costs and there must be a transparent mechanism for the setting of these prices. The water issue is similar. Despite the National Water Supply and Drainage Board (NWSDB) making profits, we are concerned with the statements in the media on further increases in the cost of water. The JAAF has long been lobbying for more fabric mills in Sri Lanka, but with the current rates for power and water, this proposition becomes unviable. Unless we get more mills into the country, we won’t be able to increase the utilisation under GSP/DCTS, which will further weaken our position in the market.”

Hiring on hold
Lawrence also addressed speculation about factory closures, particularly in the SME sector: “The JAAF has been in close contact with its SME members and it’s incorrect to say that there has been a large number of closures over the past few months. Since late last year, with the reduction in volumes, these companies have put a hold on recruitment and not replaced employees who may have left the business. This has led to a gradual reduction of employees in the sector. If companies have temporarily suspended their operations, these are all done in discussion with the Ministry of Labour to ensure the industry supports employees at this time.”

Meanwhile, Export Development Board (EDB) Chairman Dr. Kingsley Bernard told The Sunday Morning that it may be incorrect to say that the apparel manufacturing companies were moving out of Sri Lanka. “Stating that those companies are expanding operations might be correct,” he added.

Minister says no migrations
State Minister of Investment Promotion Dilum Amunugama, speaking to The Sunday Morning, denied that apparel manufacturing companies were moving out of the country.

“Nothing is under our control because of the Ukraine-Russia war, what’s happening in the rest of the world, and the economic conditions in Europe. There has been a drop in orders from the European market. Due to this the factories have slowed down operations, but they have not moved out.”

The Minister also stated that five factories had halted operations while their owning companies remained open. “One factory from MAS and one factory from Brandix can be added to the list. They have not got rid of any staff members. Some 8,000 workers are being paid their basic salary and the expectation is that the markets will improve and operations will restart.

“No company or organisation has shut down and gone out of the country. Of course, we have problems like 30% tax and power tariff and all the things that the International Monetary Fund (IMF) has imposed on us. It affects all industries, not only apparel, but no one has closed and gone out of the country,” Amunugama added.