Where have all the garments gone?

Where have all the garments gone?
Republica, 23-Feb-2010
Mallika Shakya

Ms. Shakya is Postdoctoral Research Fellow at Oxford Department of International Development/Contemporary South Asia Studies

Many tourists and Non-Resident Nepalis (NRNs) returned this winter to yearn for bygone tranquility and a rustic rural charm. An industry ethnographer, I came to see what happened of an industry that once employed over 150,000 Nepali men and women, and made a third of our total exports.

Alas! The hustle and bustle of garment cutting, sewing, washing, packing and trucking seems now to have halted forever. Apparently, not a single piece of garment got exported from Nepal to the United States in the past few months. No more clusters of sari-clad women will now squat in winter sun to ‘finish’ sewn clothes while sharing gossips about gods and demons and in-laws; there will be no hurried setting-up of assembly lines; no more shop floor gaffs on whether Nepali gods are more powerful than Indian in protecting their wailing industry from being annihilated.

The industry is simply gone with the wind. Nepalis are known for their enduring abilities to let go and move on, and I am doubtful if there will be any digging of its garment past. A stubborn researcher, I say we need a post-mortem.

The policy myths about how it was a losing battle even before it started raises more questions than answers: The first myth about the Nepali garment industry is that it is an ‘Indian’ industry and hence Nepali policymakers need not worry about its misfortunes.

Yes, many Indian capitalists and workers crossed the border in the 1970s as the US passed a bill under Multi-Fiber Arrangement (MFA) that allowed it to buy less from bigger countries China and India so smaller countries like Nepal could have a market share. In the following three decades, however, Nepalis have learned and mastered the skill of garment-making such that Indians owned less than 10 percent of the garment factories in 2001.

Bemoaning India has been a popular Nepali basibiyalo but where is the acknowledgement when a massive Nepalisation does take place right under our nose?

The second myth is that, post-MFA, it is a lot more expensive to manufacture garments in Nepal than, say, in Bangladesh, let alone in China. And it takes longer to import inputs and export outputs from Kathmandu – a daylong drive from the nearest port. Why should Nepal subsidize an industry that has no comparative advantage?

True, but let us not equate costs and time with competitiveness which is a lot more complex phenomenon. Take the example of Thailand vs China – it costs almost twice as much to produce in Thailand than in China yet a major garment buyer Nike continues to source from the Thai factories.

Why? China is all about large scales and fast assembly lines but Thailand availed itself to a new production method ‘lean manufacturing system’ (following Toyota production model) that allows Nike earn more brownie points on labor and product standards, and hence the profit mark-ups. What Nike seeks from the Thai government is some help with the public goods needed for lean manufacturing, e.g., workers’ training and regulations for maintaining the certification of standards.

The third and fourth myths have to do with this ever elusive notion of ‘market’. Few garment factories closed down in Nepal for shortage of purchase orders or rejection from buyers. Several closed because their production could not make it to the port – thanks to never-ending bandas in Kathmandu and Tarai.

Many more closed because the new labor unions would not let them run production. The so called MFA was only a tip of the iceberg—the industry wasted away to the State indifference, donor cynicism and a complex apparatus of political aggression at all levels.

The fifth myth is that there is very little value added in garment-making. Really? Employing 150,000 workers for the whole decade should surely count more than the alternatives now pursued by the businessmen made redundant from the garment industry, i.e. to indulge in real estate speculation or retailing of luxury goods to sponge on remittance money.
Bygones. Let us not whine over spilled milk.

It is understandable that subsidizing is not a solution. Economists in Nepali and donor ministries seem too busy beautifying macroeconomic theories of how the ‘market’ knows best even if that means turning a blind eye on glaring evidence. Not much has been said about the whole saga of market failures that have to do with the micro foundations of competitiveness – public goods like skills, information, technology, innovation, physical infrastructure, and the overall business environment.

The garment businessmen have now moved on to new areas – the young and the bright who had embraced a garment career in the 1980s are now seasoned businessmen harnessing their entrepreneurship elsewhere. Some have been recruited into garment management positions in India, East Asia, Middle East, and the US.

Many have gone on to contribute to buzzing garment industries elsewhere. Women workers who could not follow their peer have either transformed themselves into seamstresses and tailors, or moved on to other jobs, or just simply sat home. It sounds like one of those familiar stories where the people are winning but the country has lost.

My only plea is: We have lost this industry; let us not lose the lessons. Let us at least have the moral courage and intellectual honesty to acknowledge that this industry was one of the few momentous entrepreneurial movements that Nepal had witnessed amid the ongoing political and economic chaos.

Demise of garment industry

Demise of garment industry
Republica, 19-Jan-10
By Chandan Sapkota
schandan@gmail.com

Few people realized that 2010 began with unfavorable news for the Nepali economy. The garment industry, once the highest foreign exchange earner for Nepal, has almost disappeared. In fact, only one firm still exports readymade garments to the US, once the biggest market for this industry. The growing Indian market has been the focus of attention of the few remaining firms that are struggling to survive. The demise of the garment industry demonstrates the failure of our trade promotion and industrial policy. To avoid recurrence of similar event, it is vital that we assess the causes of the downfall of garment industry and learn lessons from our mistakes.

An article in Republica accurately reflects the importance of the garment industry: “Through the first 16 years of journey, the industry with over 1,200 active production units in 2000 occupied about 7.2 percent share of the total manufacturing sector, earned one-third of the total export income, witnessed investment climb to Rs 6 billion and directly employed 90,000 people, supporting livelihood of 450,000 persons.”

Alas, this glory is now lost. Exports to the US, which previously accounted for more than 80 percent of total garment exports, have been insignificant this year. Less than 10 firms remain in operation. Hundreds of thousands of employees have been laid off. The country has lost a reliable source of revenue. Worse, the failure of this industry has led to the collapse of the whole exports sector.

Where and how did it go horribly wrong? The answer lies in an inability to foresee the changes brought about by globalization. Policymakers and garment investors failed to notice the quite obvious signs of change in the international market. They failed to design corrective policies to restructure the outdated domestic garment industry. Instead of addressing the constraints that were making the garment industry uncompetitive, they basked on the already secured preferential agreements and wasted valuable time and resources in securing more of them.

In 1990, the WTO’s member countries signed the Agreement on Textiles and Clothing (also known as the Multi-Fiber Agreement), which eliminated quotas on the trade of textiles and clothing. This was to be implemented in four phases; commencing with 16 percent reduction in quota of 1990’s imports. Thus, it was known two decades ago that all quotas in this sector would be abolished. There was ample time to invest and restructure the Nepali garment industry. However, both investors and policymakers turned a blind eye to the necessity for the reorganization of this industry.

Traditionally, the Nepali garment industry grew not because its products were competitive and superior, but because it got preferential access to the markets in the US and the EU. The guaranteed market access for Nepali garments and the imposition of quota on exports from countries that had advanced capital and competitive production mechanism meant that even if our products were not competitive in terms of price and quality, they were still exported without any restriction on quantity.

Prior to the first phase of quota elimination in 1995, Nepal had five years to upgrade its production structure so that firms could expand their size and tap synergies to exploit economies of scale, i.e. as you produce more of the same good, the average cost would decline. This would, in principle, improve price competitiveness of Nepali garments. Unfortunately, it never happened. Meanwhile, garment investors in countries such as China, India, Vietnam, Cambodia, and Sri Lanka, with the help of their governments, were already working to ensure the competitiveness of their products and the consolidation of their production. They were already preparing for the competitive international garment market after 2005.

The first phase of quota elimination in 1995 was followed by further quota eliminations of 17 percent in 1998, 18 percent in 2002, and finally 49 percent at the end 2004. The second phase of quota elimination hit the Nepali garment industry and the overall exports very hard, leading to a collapse of total exports, which have not recovered to the level reached in 1997. Though this was a catastrophic blow to the whole export-based sector, it was not appropriately heeded by investors and government. During the 10-year transition phase of MFA, the production structure in Nepali garment industry hardly changed. Most of the firms had small-scale production units with little cost advantage in production. Some of the intermediate goods that were used to produce final output were simply imported from third countries whose garments’ exports were subjected to quota restrictions, marginally redesigned, and stamped with ‘Made in Nepal’ tag for export. This meant that producers were merely acting as distributors to earn quick profits, often by gimmickry. There was very little creativity used in enhancing productivity, efficiency, marketing and distribution. Meanwhile, the investors paid little attention to product diversification and eroding competitiveness of their products.

While other governments actively engaged in upgrading their garment industry by establishing Garment Processing Zones, Export Promotion Zones, increasing consultancy for better management, and extending capital and credit to their garment investors, the Nepali government ignored the aggressive steps taken by other countries and did pretty much nothing. It simply requested more preferential agreements. It also failed to encourage and help investors find niche markets abroad. In addition, the government was unable to ensure the security of investors and the smooth flow of goods across the Nepali border. Frequent strikes along the main highways led to an increase in transportation cost. This also increased the risk of delivery problems, leading to an escalation in the final price of garments. It further eroded the price competitiveness of Nepali garments. To make matters worse, trade unions and militant youth wings made a mockery of property rights by occupying and confiscating private property, and forced an increase in wages and allowances, irrespective of labor productivity. The lack of a regular power supply also aggravated the situation.

The downfall of the Nepali garment industry illustrates some important lessons, which could be used to avoid a similar fate befalling other export-based industries. The Nepali government should not be hankering after preferential export terms; it should be investing and ensuring that domestic firms are competitive in terms of price and quality and are constantly innovating to keep up with cut-throat competition in the international market. Meanwhile, it is imperative that the government keep investors and supply chains away from the clutches of the militant youth wings and the unions. An industrial policy and trade promotion policy designed to address these issues is a need of the hour to keep our industrial base intact.

US apparel firm bankruptcy hits Nepal

US apparel firm bankruptcy hits Nepal
ArthaExpress, 11-Jul-08

The bankruptcy of American apparel buyer giant Stephen Berry has put four major Nepali garment exporters at risk of losing US$ 4 million and possible closedown.

Omi Apparel, Amardeep Garment, Binita Fashion and Destination Apparels plunged deep into trouble after Stephen Berry sought protection under US Chapter 11 bankruptcy law, that gives troubled firms more time to reorganize debt obligations.

"Though the door to receipt of payments due has not been completely closed, there will certainly be delay in payment and that will land the industry in trouble," Prashanta Pokharel, owner of Omi Apparel, told the Post. However, he refused to elaborate.

Knowledgeable people in the industry said it´s not only a question of delay. Since the buyer has declared bankruptcy exporters will lose at least a chunk of the payments due.

Stephen Berry, known for dealing in cheap university labels in the US, has been importing a substantial volume of garments from Nepal over the last half decade.

In the latest deal, it placed orders worth US$ 5.25 million with the four Nepali manufacturers in January. Of that, the exporters said they have received payment of only US$ 400,000. While they are yet to dispatch last consignments worth US$ 850,000, they

are also supposed to have received payment of $ 4 million for consignments already dispatched.

According to exporters, the Stephen Berry bankruptcy is bad news for the four exporters and for the Nepali garment industry as a whole. As chances of the US economy going into recession are heightening, exporters warned that more such cases can surface in the days to come.

Delay in payment, which they said is the best case scenario in the Stephen Berry deal, would still affect timely release of bank guarantees, freeze assets, subject them to fines and affect future operations, unless the banks came to the rescue.

"If the court refuses Stephen Berry´s appeal, the company will have to go into liquidation, which will be a disaster for Nepali manufacturers," said an official at the Garment Association of Nepal, requesting not to be named.

Nepal´s garment industry, which had investment of Rs 9 billion and had over 200 players in 2001, currently comprises just a dozen companies because of eroding competitiveness and internal problems.

Nepal’s garment industry close to losing its shirt

Nepal’s garment industry close to losing its shirt
ekantipur, 10-Jul-08

Nepal's garment exports to the US dropped by nearly half during the last six months as a result of buyers' waning interest in the leading foreign currency earning industry due to eroding competitiveness and internal labor problems.
Nepal sold US$ 8.96 million worth of readymade clothes to the US in the first six months of 2008. According to the Garment Association of Nepal (GAN), the figure was a 43 percent decline from the same period last year.

GAN's monthly trading data shows that the fall in garment exports to the world's largest apparel market was the steepest in June. Exports plummeted 71 percent to US$ 929,366 from US$ 3.21 million during the same month last year.

Entrepreneurs, who have long been demanding support from political leaders to bring discipline in the labor force, said business has been in free fall for 24 months straight.

“The government still has not shown any seriousness to develop a garment processing zone (GPZ), a program which was announced two years ago to help us cut production costs by a quarter,” said a GAN official. Nepal's garment industry, which is largely dependent on the US market, has been going downhill from 2002 when the US pledged duty-free market access to its major competitors in Sub-Saharan and Caribbean countries.

The end of the quota regime in international apparel trading in 2005 came as another blow, while internal instability, labor stirs and deteriorated industrial security forced well over 90 percent of the manufacturing units to close up shop over the past three years.

The industry, which in 2001 had some 200 operators with investments amounting to Rs 6 billion and employed over 60,000 persons, is down to a mere dozen manufacturers.

Nepali exporters have been pressing the government for the past five years to mobilize its diplomatic channels to secure duty-free facility in the US market. They even tied up with other Asian garment producing LDCs to directly lobby for special preference. “Sadly, all our pleas fell on deaf ears,” said the official. Even the bill recommending special preference for Asian LDCs that a US congressmen had tabled a couple of years ago got nowhere.

Despite the gloom running deep in the industry, garment entrepreneurs said that the industry could still regain its former glory if the GPZ was developed urgently, foreign investment was brought in and the government announced minimal fiscal and procedural support.

Garment Industry Sees New Hope 300k more jobs expected

Garment Industry Sees New Hope 300k more jobs expected
(New Business Age, March 2008)

Nepali readymade garment industry is expecting a speedy revival from present slump if the plans of India’s Reliance Group and America’s Shah Safari (SS) Inc. really get materialised. According to the sources, once the plans of these two buyers get materialised, Nepali garment industry will create nearly 300 thousand new jobs.

Enthusiasm among Nepali garment entrepreneurs soared up following a promise from Reliance Company, India to help rehabilitate the Nepali garment industry and buy the garments produced here. Likewise SS, based in Seattle, USA, too has a plan to set up a manufacturing facility in Nepal, say the industry sources.

Two representatives of Reliance visited Nepal recently and apprised themselves of the situation by meeting the industry leaders and the government officials, according to the same source. ‘They praised the quality of the Nepali garments and showed eagerness to place long-term orders which would engage 150,000 machines,’ said Prashant Pokhrel, the newly elected President of Garment Association Nepal (GAN), who had a meeting with the Reliance representatives Bipin Tyagi (Vice President) and Manas Sen (Quality In-Charge).

“If we get work only for 50,000 machines, that will be enough for us to be in the situation before the ongoing slump in the Nepali garment industry started,” Pokharel added. According to him, as one machine needs two persons to operate, the Reliance order, if materialised, will generate 300,000 jobs.

Pokharel also informed that while Reliance has already placed orders for samples, SS has appointed a local agent to negotiate with the garment manufacturers.

Similarly, other Indian companies such as Vishal, Megamart, Century and Pantaloon too are learned to be interested to source garments from Nepal

At present the Indian companies are sourcing readymade garments from Bangladesh, under a quota restriction of 8 million pieces, exceeding which attracts 15 percent duty. But as there is no such quota restriction in importing garments from Nepal to India, Nepal has become an attractive source for the Indians, say the industry sources.

Garment exports plunge

Garment exports plunge
eKantipur.com, 6-Oct-07

Hit by political instability, the tarai unrest, labor stirs and eroding competitiveness, the country's garment exports to the US in the first nine months of 2007 dropped to nearly half of what it was during the same period last year.

According to the Garment Association Nepal (GAN), the cumulative export of Nepali garments to the world's largest apparel market during the period was valued at US $21.91 million, whereas it totaled US $40.98 million during the same period last year.

A breakdown of the monthly export data shows that the export of Nepali readymade garments recorded a decline throughout 2007. In September alone, exports plummeted by one-third of the volume recorded during the same month last year. In September this year, Nepal exported US $2.17 million worth of readymade garments. The figure was US $3.29 million during the same month last year. The biggest declines were recorded in January, February and May when exports fell by more than half of that recorded during the corresponding months last year.

GAN officials attributed the drop to the loss of orders mainly due to internal problems particularly labor stir, frequent strikes and bandas along the highways.

Entrepreneurs said most of their manufacturing units remained closed during the period due to labor unrest, and even those who managed to overcome the problems were operating with a meager volume of orders.

“As vehicles transporting the raw materials and delivering the finished products have not been able to move, timely delivery has been hampered affecting receipts of new orders,” said a GAN official. According to the official, the industry has received fewer orders for the new seasons as well, even for Christmas when demands generally soar.

Over the period, the industry has dropped to second position from being the largest foreign currency earning export industry. Employment in the industry has also dropped to 5,000 persons from over 50,000 in the past.

Entrepreneurs charged that the government had been largely ignoring their demands for providing support to the industry, like developing a garment processing zone and lobbying for preferential market access in the major markets. Experts, meanwhile, attributed the lack of modernization in the industry and market diversification initiatives on the part of entrepreneurs as being critical factors behind the current gloom in the industry.

‘Garment industry can regain past glory’ - PK Pokhrel, MD, Ami Apparels

‘Garment industry can regain past glory’
eKantpur.com, 23-Sep-2007

Prashant K Pokhrel is managing director of Sunsari-based Ami Apparels, which is one of the leading exporters of readymade garment products. Pokhrel holds Master's degree in Economics and is the first Vice-President of Garment Association - Nepal (GAN). He talked to the Post about problems and prospects of the largest foreign currency spinning industry of Nepal. Excerpts

Tell us about the performances of Ami Apparels?

It is one of the few garment factories that are operating at this most adverse situation in decades. Despite the situation, our exports has maintained a moderate growth and hovered around US$4.4 million a year in the last few years. India, which is an emerging market for Nepal, consumes the major share of our exports. We have focused on product diversification in Europe and other countries, including India, where Nepal enjoys a duty free access. We contribute around Rs 3 million to the national coffer as income tax each year. We boast of being in a list of top five garment factories in the country, which are performing well amid hard time. Ami employs nearly 1000 workers at present and almost all of them are Nepalis. We commenced our business with the investment of Rs 10 million, which now has reached to around Rs 60 million.

What about the overall scenario of garment industry in Nepal?

Nepali readymade garment industry is facing a tough time at the moment due to impact of decade long conflict, labor problems and phase out of quota system in global apparel trading from 2005. Over the past five years, number of garment factories have dropped to about fifty from over 1200, dragging down the employment in the industry to meager 5,000 from around 100,000. Total export of garment slid down to US $47.7 million in 2006, from $105.9 million in 2002. It is expected to nosedive to around $30 million in 2007. In the past we were entirely dependent on the US market, but now we have diversified markets to Canada, Australia and India. As a result, share of exports to USA has dropped significantly compared to the past. Once the sector used to account for some 45 percent of total exports, but now, it is hardly contributing 15 percent. Out of the total investment of Rs 6 billion, only one billion is currently operational.

Do you see any possibility of Nepali garment industry regaining that past glow?

Despite all obstacles, I see a tremendous potentiality in the sector. India this week decided to lift 4 percent extra duty on Nepali garment exports. We can capitalize on it and tap the vast market of India, as Bangladesh is aspiring to recently. Geographical proximity with India will add advantage to Nepal. We will also get an opportunity to retrieve the lost US market, as USA is expected to provide duty free access to garment products of least developed countries like Nepal. We are also enjoying comparatively lower production cost compared to our competitor countries.

How will duty-free import agreement India signed with Bangladesh impact Nepali readymade garment exports to India?

I don't think it will pose any serious threat to the Nepali exports. India is a huge market. Besides, Bangladesh has received duty free export facility for just 8 million pieces, whereas we enjoy the facility for unlimited quantity. But still, there is no room for complacency in the business. We must build deeper business ties with diverse set of importers. Most importantly, we must settle all internal constraints to enjoy the benefits in the Indian as well as other markets.

How are you coping with the increasing global competition?

Well, adoption of new technology has helped us stand out better than other countries. We are using latest technology in the business. Situation of skilled manpower crunch does not exist now because as we have sufficient Nepali manpower specialized in different lines of production.

What sort of problem is the industry facing from labor?

The problem of labor exploded after Maoist launched labor union expansion drive in a bid to strengthen the party's position in open politics. To attain that, it placed various high-sounding but unreasonable demands. The workplace harmony vanished as already existing trade unions opposed the Maoist's drive. Ultimately, that caused dozens of factories to close down productions. Despite the situation, I believe labor problem can be solved soon. Of late, trade unions have begun to understand the problems of the industry. If employers are allowed to adopt hire and fire policy with a condition of employees' social security, labor problem will be solved. So, a policy of flexicurity- a combination of flexibility and social security - should be embraced to end labor unrest.