Garment industry wants cost cutting measures in Budget 2007

The garment industry is asking for budget support to reduce its costs. The industry says its profit margins are coming down while operating costs are going up. To stay in business, garment factories are asking the government for exemptions from taxes and measures to reduce utility payments, through next year’s national budget.

“Our most important priority is how to reduce costs. So we have asked the government for some measures to reduce costs,” said T. G. Ariyarathne, Secretary General of the Joint Apparel Association Forum (JAAF), the representative body of the garment industry.

The biggest headache for garment factories is the increasing cost of electricity.

“This year electricity rates increased by about 38%. Electricity is about 3% of the cost of making a garment. So an electricity price increase of 38% will increase costs by almost 1%,” noted A Sukumaran, Chairman, Sri Lanka Apparel Exporters Association.

The electricity cost increase also pushes up overall costs by increasing the price of fabric. “Fabrics and trims are about 60% of the cost of a garment. Fabric manufacturers use large amounts of electricity. So when electricity prices increase, the cost of Sri Lankan fabric also increases. So if we buy fabric locally our costs will increase again,” said Sukumaran.

This means that any cost benefits of backward integrating the industry by attracting textile mills, are eroded, because higher electricity costs increases the cost of fabric anyway.

Costs of transport, food, clothing and lodging have also increased and are set to continue upwards with the escalation of war. To keep pace with the increased cost of living, workers are asking for bigger pay increases. A recent study by AlaRM, a coalition of NGOs and trade unions for instance, found that wages of garment workers are inadequate to live on. Research by ALaRM found that garment workers’ earnings should come to around Rs 10,000 to Rs 12,000 per month, to live on, instead of the current average of Rs 7,500.

But the cost of living in Sri Lanka is out-racing garment industry incomes. Factories say they already have around 30,000 vacancies and are willing to increase wages to retain workers and attract more. But factories say they cannot increase wages to the ‘cost-of living’ levels recommended by ALaRM.

The increasing production costs make it difficult for Sri Lankan garment factories to compete with low cost producers like China, India, Vietnam and Bangladesh. The hardest hit, are the small and medium manufacturers. Larger garment companies have invested in backward integration and technology, to increase specialisation and productivity and to contain costs. But most small and medium factories – that make up a majority of the sector - have not been able to do so due to cost constraints. Therefore a majority of garment factories are caught up in the increasing-costs-reducing-profits trap.

“I would say that it is a luxury if any of the garment factories are earning a 5% net profit now,” said Sukumaran. This compared to industry margins that were as high as 30% during the quota era.

To deal with the increasing costs that are making Sri Lankan garments uncompetitive, the garment industry is asking for relief measures on prices of utilities, through the budget. However, the JAAF did not comment on exactly how these relief measures were to be provided for the industry.

The JAAF is also requesting that the garment industry be released from the 0.5% Economic Service Charge.

“We understand that the government needs revenue. We have to accept taxes to pay for all the public services. What we are asking, is for the government to consider the industry situation and rationalise all these costs, to be able to sustain the industry,” said Ariyarathne.