Threads of Resilience

Yohan Lawrence

Sri Lanka’s apparel sector has long been celebrated for its resilience, consistently overcoming challenges to emerge as a pivotal revenue driver for the nation. 
Yet, the sector now finds itself navigating uncharted waters amidst the global pandemic and economic downturn, grappling with unforeseen obstacles compounded by governmental missteps and a turbulent global economy.
In an exclusive interview with Mirror Business, Yohan Lawrence, Secretary General of the Joint Apparel Association Forum (JAAF), offered a comprehensive analysis of the sector’s current landscape, highlighting areas of concern, and outlining key expectations for the future.
Following are the excerpts of the interview:

Can you provide an overview of the current state of the apparel industry in Sri Lanka?

 We ended 2023 with an overall value of US$ 4.5 billion which is down about 20 percent from the previous year. In 2022 it was US$ 5.6 billion. This is reflective of the reduction in global demand for apparel and has affected not only Sri Lanka but our competitor countries as well, albeit with different levels of reduction in demand. The USA, our largest export market also shrank by a similar amount. 
In 2023, US apparel import volume experienced its most significant decline since the pandemic, reflecting the impact of the macro economy. Specifically, compared to 2022, US apparel imports decreased by 22 percent in both quantity and value. None of the top ten suppliers saw positive growth during this period.
The last couple of months have seen some increase in the volume of business going through our plants but with the pressure on pricing, this is unlikely to relate to an increase in value terms. Our exports in January were a disappointing US$ 350 million which was down from the previous December which was US$ 415 million. Overall though we are looking at a value of US$ 4.5 million for 2024 as well. 

In a rapidly changing global market, what trends do you see shaping the apparel sector, and how is Sri Lanka positioned to capitalise on these trends?

As brands reassess their purchasing strategies and look for safe and secure homes to place their orders, we are seeing a resurgence of interest in Sri Lanka right now. We’ve had several high-profile visits from brands as buyers are returning to the country to meet with suppliers and to work on long-range plans with their suppliers. This augurs well for the island as Sri Lanka remains a strong player in the international arena with a great track record of delivering prime quality products, on time, and made in ethically and environmentally sound facilities. 
As the world demands greater transparency and visibility of not just where their garments were made but also where the fabric and the yarns come from, Sri Lanka being a small location with great supply chain visibility stands to benefit from this trend.
We are also seeing some cutting-edge work being done on the digitalisation of the Sri Lanka Apparel Supply Chain, particularly around the sampling process which we have some very sophisticated offerings for digital sampling. Whilst this won’t take out completely the need for physical sampling, the move to digital ensures that we allow for faster and better decision-making, whilst also reducing the number of samples being made. As the world moves in this direction, we see this as something that Sri Lanka can deliver against, giving us another differentiator. 

 What are the major challenges that the Sri Lankan apparel industry is facing today, and where do you see the most promising growth opportunities?

I think the major challenges are going to be around pricing, as with a situation where there’s a global excess of supply over demand there is constant pricing pressure. We welcome the recent announcement of a reduction in the electricity tariff.
JAAF argued in October last year that there was no justification for a price increase, but these arguments fell on deaf ears, and we’ve had 5 months of unnecessarily high power tariffs that have made us uncompetitive. There’s a degree of skepticism now that the reduction will be reversed in a few months citing the lack of rain. It is vital that Sri Lanka has a clearly laid out and transparent process for the setting of power tariffs whilst pushing hard on the addition of renewable energy to the grid to ensure that we have a stable and competitive rate for power. 

Right now,

we see the LKR strengthening which unfortunately makes exports less competitive. This issue is further complicated by the mandatory conversion requirement

placed on exporters which gives us no flexibility to manage this exchange loss. This is unfortunate as we need to ensure Sri Lankan apparel is cost-competitive in an environment where price pressures are taking precedence. As mentioned right now there is an excess of supply over demand, and this simply pushes the purchase price down. 
We have always argued for stable prices and exchange rates that reflect reality, as this allows manufacturers to cost more accurately and stand a better chance at being able to execute orders at prices that are agreed maybe 6 to 9 months before delivery. The exchange rate variation has been a point of great pain for the industry as many in the industry budgeted the LKR to hover at about Rs. 330 on the US Dollar. 

Sustainability has become a critical focus in many industries. How is the apparel sector in Sri Lanka incorporating sustainable practices, and what initiatives are being taken to address environmental and social concerns?

Sustainable manufacturing practices, including efforts to reduce Greenhouse Gas Emissions, water and waste have been built into the supply of apparel out of Sri Lanka for quite a while now. For instance, this comes at a time when there’s a complex map of legislation headed our way which is going to create a greater need for compliance in this area. 
As this legislation starts to bite, we believe Sri Lanka will be in a really strong place to ensure better compliance giving us an edge over other countries. 
Let me put some numbers behind our sustainability leadership. At present, we estimate that the apparel export industry has installed over 70 MW of Rooftop Solar Power Capacity which we expect to have increased greatly since these numbers were collected in early 2023. From a social compliance point of view Sri Lanka has 74 Global Organic Textile Standard (GOTS) Certified Facilities, 
Twenty seven factories or 2.3 million sq. feet of LEED Certified Factories and 112 facilities of which 55 are platinum certified Worldwide Responsible Accredited Production (WRAP) facilities. Sri Lanka Apparel already has a number of accolades in this arena and we see this trend continuing as businesses continue to push the boundaries here. 
Our efforts have not been limited to just the factory flow, the industries’ commitment to being a conscientious social actor can be seen through the multitude of projects that have been carried out, the collaborations to clean polluted waterways and more.

The local apparel sector was exposed to vulnerabilities in global supply chains. What is the industry doing to build resilience and ensure a robust supply chain in the face of future challenges?

From the time of Covid, we have seen this move by customers to source more locally. Local sourcing can take weeks out of lead times and can be a key factor in the competitiveness of the country. Local sourcing also reduces the overall carbon footprint of the final product which then aligns with the environmental sustainability goals of our customers as well. 
Sri Lanka has over the years built a significant supply base locally for raw materials like fabrics, elastics, laces, bra cups and wires, zips and other components. Additionally, items like labels, packaging, poly bags etc. are all locally sourced which increases the local value addition of the industry which is a direct enabler of more and better jobs. Data from the BOI support the position taken by the industry that our value addition is over 55 percent. (Value addition being defined as (Export FOB – Import CIF)/Export FOB)).
The expansion of this local raw material base is a key part of the JAAF strategy. That said, we do continue to have challenges in this regard. Sri Lanka is in the process of setting up a dedicated textile park in Eravur but there are delays in the implementation of this project. If we are to grow the supply base in Sri Lanka, we need to become the destination of choice for investors. Key factors in this are market access, the tax landscape, and things like trade facilitation and digitalization of our processes. 
If we take our minds back to the growth of the industry in the 1990s, this enabling environment was a key factor in attracting investments into the country. Application of para tariffs and a negative list for import of certain items needed for the construction of factories do nothing to help encourage investment into the sector. 
To further strengthen the viability of sourcing out of Sri Lanka as a preemptive offered to our customers at an industry level we have commenced a pilot project, which is a collaboration between JAAF-ADB-GS1 on using digital supply chains to enable transparency in the apparel supply chain which has the capacity to be the unique selling proposition (USP) for Sri Lanka as a sourcing destination. Presented at COP 28 this initiative has attracted the focus of several external stakeholders and we are now looking at how we take this forward to the next stage. These kinds of industry-led initiatives are some of the things we are doing differently to help prepare the industry and our people for the inevitable change the future will bring. 

 Skills and talent retention has become a critical issue for Sri Lanka. Is the apparel sector also impacted due to this? What efforts are being taken to address the skill gaps and foster talent development within the workforce?

Whilst there is an increase in the amount of migration at executive and above levels, this is something that the industry has always had to cope with. Sri Lanka apparel professionals have always been sought after and now we have large number of Sri Lankans who now work in apparel manufacturing facilities all over the globe. Not only this many have gone on to work for the apparel brands themselves. At the same time, we also have several qualified persons coming out of the local colleges and Universities ready to take on the challenge of filling these ever-expanding shoes. As an industry we have strived to work closely with these organisations to ensure that we have a stream of industry-ready graduates who we can then take on into the industry. 
Our efforts have resulted in numerous collaborations to sustain and grow the Department of Textile and Apparel Engineering at the University of Moratuwa as also the Sri Lanka Institute of Textile and Apparel which are two of the country’s premier centers of excellence in the areas of Textiles, Clothing, Fashion Design, and related disciplines. A number of other institutions continue to help educate and train a large cohort of industry ready individuals, be it for jobs locally or overseas. 

How is the industry exploring and expanding into new markets? What are the regions or countries that the Sri Lankan apparel sector is targeting for growth?

Our apparel exports have traditionally been to the markets of the USA, the EU and the UK. These three destinations account for some 85 percent of our exports. A large part of what’s dispatched to other countries includes orders placed by brands in our traditional markets for their retail stores in these new markets. Sri Lanka has the capacity to service other markets in addition to our traditional markets. Countries that we see market potential include India, China, Australia, Korea and Japan. Unlike other countries, Sri Lanka does not offer any incentive to exporters to seek out new markets. At the same time, our competitor nations have much better trading terms than Sri Lanka does in a lot of these markets, and this makes entry into those markets difficult. 
Take India for example. Sri Lanka is restricted under the ISFTA to supply 8 million pieces of apparel free of duty. Sri Lanka’s exports of apparel to India last year was US$ 59.25 million. Against this, Bangladesh has complete duty-free access to the Indian market, and last year shipped out US$ 800 million of apparel to India. Similarly, Bangladesh has preferential market access, lower import duties, due to its LDC status into countries like Japan and Australia which makes it difficult for exports from Sri Lanka to compete. 
We are hopeful that the recommenced negotiations with India on the ETCA will help Sri Lanka gain access to that market. With regard to Japan and Australia. Sri Lanka’s potential entry into RCEP offered some hope for access to these new markets, but this appears to have hit a roadblock and its realization is unlikely in the near future. 

How satisfied is the industry with the government about the negotiations of FTAs? Also are there any developments in SL getting an extension on the GSP Plus?

We’ve talked about FTAs, our key ask is that we expedite FTAs with countries that have the potential for growth of apparel. India would be a case in point. With relation to GSP+, the current scheme will now roll over until 31 December 2027 so the question of an extension doesn’t really apply at the present time. 
What is key is that once the rules for the new scheme are announced, we will then need to assess what may need to be done in order to qualify for the new scheme and the country would then need to make an application within the timelines. 
Furthermore, the government needs to increase the capacities of the International Trade Office, to be able to execute more than one FTA at a time. Given the criticality of FTA to overcome the duty and tariff restrictions that Sri Lankan Apparel exporters face. It’s encouraging to see the establishment of the International Trade Office, and we look forward to this office being fully staffed and able to deal with multiple FTAs at the same time. 

What kind of support and policies would you like to see from the government to further boost the competitiveness and sustainability of the apparel industry in Sri Lanka?

As a starting point, predictability and consistency of policy is something we have always advocated for.  From the unpredictable electricity price hikes to the failure to digitize the state’s bureaucratic arms that engage with the private sector which makes space for corruption and cronyism. There are numerous interventions that are badly needed to make government work better so that businesses may prosper and people be enabled to make a stable living. 

Looking ahead, and given that the business dynamics have changed significantly, what are the expectations for the apparel secor for 2024? 

2024 looks like to be a lean year as the year before with price pressures continuing to squeeze the entire supply chain. Cost Leadership and reducing inefficiencies will likely be the main tools used by the sector to continue doing business. We also expect Sri Lanka exporters to increase their presence in international trade and roadshows within this context the Export Development Board’s role will increasingly come to the spotlight and scrutiny.