Ever since the current administration placed all its proverbial ‘export’ eggs in the textile basket, the market is abuzz with excitement over the coming export bonanza. Of the incremental Rs 230 billion loans disbursed under TERF/LTFF since April 2020, Rs 126 billion have been absorbed by textile sector. Is the export target of $21 billion truly in sight?
As BR Research had previously pointed out, more than Rs 75 billion out of the concessionary LT debt extended to textile thus far has gone to low-value added segments within the industry. In contrast, only Rs20 billion has been disbursed to apparel manufacturers. If high value-added segment is not investing in capacity expansion and modernization, can the sales-mix truly shift towards high end exports?
Before an attempt is made to answer that question, some caveats are necessary. Reliable data related to segment-wise capacity and made-up textile output is hard to come by. Even within low-value adding segments, estimates of fabric production are unavailable, and any analysis must rely on total yarn production as proxy for fabric and made-up textiles output. In absence of output data, price trends can serve as a useful proxy, especially as the made-up textile industry caters to both local and foreign markets.
According to PBS, export volumes of cotton yarn and cotton cloth have fallen to nearly half compared to late-2000s. Meanwhile, made-up textiles export volume has witnessed much weaker growth, barely rising by one-third in 13 years. As greater share of local yarn and fabric output is retained at home – 90 percent of domestic yarn output is consumed locally for onwards value-addition - why has the same not reflected in volumetric growth of value-added exports?
A segment-wise analysis of made-up textile reveals interesting trends. For much of the last decade, export volume for three major value-added categories: towels, knitwear, and readymade garments – remained either rangebound or underperformed peak volumes witnessed in pre-FY11 period. Export volumes finally outperformed in FY21, rising by 4 percent for towels, 11 percent for bedwear, and by 43 percent for knitwear (over previous peak volumes). Readymade garments continue to underperform, staying put within the long-term range.
Excluding knitwear, none of the other three value-add segments has so far witnessed substantive quantitative growth in export to warrant capacity expansion. Unless of course the industry had already reached full capacity by FY11; or the capacity has reached full utilization thanks to exponential growth in local sales.
In absence of any data on local sales volume mix, price trends can give some sense of direction. For the purposes of consistency, BR Research built annual price indices of export unit price and compared the same with PBS’ Wholesale Price Indices (base period 2007-08). Unit prices are compared in Pak Rupee to ensure consistency between WPI and export price currency, while re-based exchange rate trendline has been added so readers may net-off exchange rate impact (on export price) visually.
Throughout the period under review, increase in export unit price of towels and bedwear is largely explained away by currency depreciation. Meanwhile, rate of price increase in local market (i.e. WPI index) outpaced rate of change in export prices. How come?
It is hard to fathom that towel and bedwear producers could have replaced forgone export (qty) growth by expanding the pie of local sales alone; especially when local prices increased at a faster rate than export prices, currency depreciation, and even raw material prices. May be local towel and bedwear consumers are a loyal bunch who exhibit price-inelastic behaviour. But is that sufficient to fill in for the forgone export market volume? Why then would bedwear and towel exporters need more capacity?
The story of readymade garments is even more peculiar. Over the last decade, export unit prices have grown at a much faster rate than currency depreciation. To some, this may indicate exporters’ ability to command better pricing. However, pricing power certainly did not translate into higher volumes for garments exports, which underperformed FY08 peak volumes in 11 out of 13 years, staying rangebound in the other two.
Meanwhile, the much slower rate of increase in readymade garment prices in the local market may indicate a more competitive domestic market landscape. Have readymade garment producers been fighting tooth and nail to gain share in the local market? That might appeal intuitively considering the mushroom growth of local apparel brands over the last decade but goes against the commonly held notion that ‘local and foreign garment buyers are very different beasts’ and consume vastly distinct product types. Anecdotal conversations also suggest that RMG export players tend to be ‘100 percent exporters’ and are concentrated in very different product categories than those demanded by local consumers.
What then explains the moribund readymade garment export volumes over the past decade? If readymade garment producers have been operating at full capacity, why then have they not benefited from TERF bonanza the same way as low-value added segments (such as spinning) have? Or, does high-value add segment simply doesn’t require fixed asset investment to deliver volume growth?
In absence of more data on segment-wise output or local sale volumes, export and local price trends leave a lot unanswered. On its part, GoP has ensured competitive energy tariffs, market-based exchange rate, and a bonanza of concessionary financing for the industry. Meanwhile, APTMA too has endorsed GoP’s export target of $21 billion, observing that it is very much achievable. Will the mothership explain how it plans to go about the same, if the value-add industry is not expanding at the same pace as spinners are?
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