Promoting SME clusters key to compete with Chinese products

Promotion of export-oriented SME clusters is the only way for Pakistani SMEs to compete with Chinese products, which have strong advantages in both cost and volume. This has been proposed in the final report (November 2006) on "Toward a vision 2030:direction of industrial development in Pakistan."
The study was conducted both in Japan and Pakistan by the Japan International Co-operation Agency (JICA) and International Development Centre of Japan.
Even if the level of required technology is low, the answer lies in producing highly sophisticated products to beat the Chinese products. The most efficient way to upgrade SMEs in Pakistan is to promote SME clusters, the study said.
With globalisation, the manufacturing industry in the world is going to be reorganised. If Pakistan takes easy way to rely on the principle of the free trade and does nothing to promote the local industry, the country might miss the bus and become an orphan in the middle of global competition. The country might face the following two alternatives in enhancing industrial development:
- To construct the framework of incentives for all groups of industry, and rely on the principle of free market economy or free trade in allocating economic resources of the country.
- To prioritise the importance of the industrial sectors for the country and concentrate on economic resources to promote these sectors in order to effectively utilise the limited resources of the country.
Referring to integral manufacturing, the study said that many segments of Pakistani market are already full of competitive and attractive Chinese products. When the trade with China expands in the process of globalisation, it is unavoidable that Pakistani products should face severe competition with Chinese ones in the domestic market. The Pakistani consumers are attracted to Chinese products due to their low prices. Even though the quality of these Chinese products is not fully satisfactory, it is expected that the demand for these cheap Chinese products might gradually expand in the future.
If the Pakistani manufacturers also produce cheap and low quality products to compete with the Chinese ones, these Pakistani products might not be able to survive in the market.
In fact, some Pakistani producers have already started making cheap and low quality goods by imitating the Chinese strategy or even by getting components from China.
The study did not consider this as an appropriate strategy for the Pakistani manufacturers. It is needed to avoid direct competition with Chinese products. If cheap, low quality and counterfeit products are easily available in the market, it is very difficult to promote high valued, high tech, and internationally competitive manufacturing in the domestic industry.
Pakistani should better introduce the strategy to focus on manufacturing highly valued, high quality products, and making its own brand recognised in the market.
The study has identified that the industrial infrastructure of the country is far less developed than that of the East Asian competitors. Poor infrastructure is the severe bottleneck for the promotion of automobile industry. The supply of electricity in Karachi is particularly unstable. Even inside the industrial estate the manufacturers suffer from frequent blackout.
It is extremely necessary to improve the condition of power supply at the industrial estates immediately. Moreover, in order to attract foreign investors in the automobile industry, the development of fully serviced industrial estates should be taken into consideration.
It identified Sialkot, Karachi, Gujrat, Wazirabad, Faisalabad, and Chiniot where major clusters exist. SMEs with less than 100 employees account for 99 percent of the 3.2 million companies operating in Pakistan. They dominate in major industries in terms of both the numbers of companies and employees. Micro enterprises with less than 10 employees have the biggest shares.
In Sialkot there are 2,500 surgical units employing 60,000 people. The number of sports goods units is around 300,000. In Karachi 170 leather units employ 5,000 people and 8,000 gem and jewellery units employ 250,000. In Gujrat 400 electric fan units employ 50,000 people and in Wazirabad 300 cutlery units employ 25,000 people. The 7,700 textile units in Faisalabad employ 100,000 people and in Chiniot 3000-4000 wooden furniture units employ 25,000 people.
Only 20 percent of Pakistani companies outsource production of parts. The main reason for outsourcing is to save labour costs. It is totally different from the case in advanced countries where the company outsources because of the specialisation and high level of technology of vendor companies, which enhance the competitiveness of products.
One reason behind this low level of vertical linkage is weak contract enforcement. Contracts are regularly breached. There are prevalent delays of delivery and payment. These kinds of practices significantly erode trust among companies.
To reduce the risk of default, companies in Pakistan are inclined to enter into long-term transactions with only selected customers or maintain excessive in-house production. Nevertheless, the study said: assisting clusters can contribute to the enhancement of the competitiveness of SMEs in clusters, as well as clusters as a whole, since clusters in Pakistan do have advantages of agglomeration such as easy availability of raw marterials and labour, and technology/information spill over.
On strengthening SME support channels, the study said that though various institutions exist, both public and private, for offering SME assistance, such as Smeda, EPB (now TDAP), SME bank and provincial small industries corporations, utilisation of their services has not been satisfactory.