NAVIGATING THROUGH PANDEMIC: APPAREL SECTOR CONFIDENT OF BRAVING THE STORM

‘‘There is a need for some ‘out of the box’ thinking to come up, with some creative solutions in the short term, to help contain the impacts of COVID19 on employment. A rigid and inflexible approach will result in the worst set of outcomes

‘‘ As the world starts getting back to work, we can now start to focus on these conversations and hopefully start finding that silver lining that each dark cloud has. We should point out however that this is not something that can be solved overnight and it will take some time for these new arrangements to become commercial opportunities

‘‘ By all accounts, the global apparel industry will be smaller post COVID-19 than before. That is a reality we all need to accept and the challenges that this poses to the industry

The start of the coronavirus (COVID19) pandemic in China last December sent ripples across the global economy but it certainly took time to realise that even the strongest industries would receive a painful hit from the club. Sri Lanka’s longstanding apparel sector was one such that wasn’t spared. The industry that takes pride in steering through storm, with minimal intervention from the government, too had to reach out for help this time round, affirming the severity of the impact. Mirror Business recently engaged in an in-depth discussion with the Joint Apparel Association Forum (JAAF) leadership to capture the precise status of the industry that is a key contributor to the national economy and a major contributor to the employment space of the country. Speaking to Mirror Business in an exclusive interview, JAAF President Arumugampillai Sukumaran pointed out that a downfall in Sri Lanka’s export market would directly impact the industry at home and the people it supports. However, Sukumaran expressed confidence in the industry getting back on track, although it is unlikely the sector will be able to boast its US $ 5.6 billion status in the near future. Following are the excerpts from the interview.

The apparel sector was one of the first to be hit and even the larger companies were not spared. What is the status of the companies now?

With the easing of the lockdown restrictions, majority of companies have slowly been able to get back to work. The percentage of employees back to work varies, depending on a host of factors, including the availability of work, the requirements of the health protocols from transport, seating for meals, factory floor layouts, etc.

Some companies have gone up to 70 percent but on average, it is about 50 percent of the workforce that is now employed. In any case, coming back to 100 percent deployment is dependent on our ability to adjust the infrastructure and the manufacturing floor to new normal social distancing behaviour and the change of mind of the international buying community to procure from us, which scenario we believe will take more time.

Our priority remains the safe return to work, thus the companies are working closely with the local health authorities to ensure that we take the maximum possible precautions when we recommence operations. It is worth mentioning also that these measures do come at high cost, whether that is from transport, to sanitation and costs of reengineering workstations, etc.

No one is debating that these are unnecessary but the customers are not going to pay extra for these additional protocols that we are putting in, to secure the health of our employees. We can only hope that our competitor countries are putting in similar precautions, so that we are able to compete fairly in the international supply markets.

There is also the question of demand for our products, which again varies from company to company. As we all know, there have been large cancellations and pushbacks from buyers and the closure of international buying houses is also on the rise. Hence, the visibility of orders, even for the next three to six months, is also not there and we are continually watching the developments.

As an alternative in the interim, companies are making anything possible to be able to generate some revenue for the business. Hence, a number of companies are manufacturing masks, for both export and domestic markets. Resultantly, at this moment, the cash flow deficiency is a major problem, particularly faced by SMES.

One of the extremely important issues is that a large number of companies have not received the concessionary loan from banks, under the COVID-19 emergency refinance facility that has been offered for the payment of salaries and utilities, during the period April to June.

We believe these facilities were all agreed in principle but the refinancing facility offered by the Central Bank was not sufficient and is not being translated into loans being disbursed. Time is of the essence here and particularly for the SME companies, this loan offers a vital lifeline at this critical juncture.

We need some intervention here to get these moving urgently or it will be too late. We are happy that this issue has been sorted out with the intervention of the president, who had indicated that an additional Rs.100 billion would be offered.

The sector was trying hard to continue to pay its employees but with the impact turning for the worse, job slashes were witnessed. What is the situation around that?

Sadly, job losses are going to be a reality in the POST-COVID-19 world, whether in Sri Lanka or overseas. A survey done by the Labour Department has predicted 300,000 job losses in the formal private sector, with the possibility that this could increase.

As you mentioned earlier, the apparel industry is particularly badly affected by COVID-19 and we are predicting about 80,000 to 100,000 jobs being lost because of the possible shrinkage of the global apparel sourcing industry.

On the question of the payment of wages, as you can imagine, this has been an extremely difficult situation for our membership. An agreement was made with the Labour Department that allowed for companies to pay 50 percent of the basic salary for the days that the employees were not able to perform work.

There was a minimum of Rs.14,500 agreed by the other sectors but apparel had maintained that not all companies could pay this and it was agreed that the companies, which are not able to make this minimum, would write to the commissioner general of labour for redress.

We know that nearly 100 companies in our sector have written in accordingly but I must say that almost all companies, which are working today, have paid some salary even to those who did not come to work. A number of these are from the SME sector, which have been disproportionately affected and will need some bespoke relief to ensure that these companies continue to stay in business.

In fact, the Labour Department survey in its recommendations calls for the ability to deduct wages for the days not worked, shortterm layoff strategies and the pro-rating of payments. If we can get some finality on these areas, it will help to secure the employment of the majority and minimise the impact on the loss of employment.

There is a need for some ‘out of the box’ thinking to come up, with some creative solutions in the short term, to help contain the impacts of COVID-19 on employment. A rigid and inflexible approach will result in the worst set of outcomes. The JAAF itself is now seriously discussing the ways of minimising the negative impact.

There was a series of order cancellations, even those that were shipped. With countries slowly opening up, such as the UK, where its clothing stores reopened from June 15, what is the progress in that area? Is there a shift in demand observed?

Retailers are all carrying heavy stocks in the POST-COVID-19 era and they will of course look to clear as much of this stock as possible, before they start replenishing orders. Moreover, whilst shops are starting to open, what we don’t know is the level of demand that there will be. It’s early days; so, we will need to watch this carefully and see what signals we do get.

It is however worth mentioning that from the perspective of receiving orders, the indications are that in many areas, it will get worse before it gets better. The closure of retail shops of major brands in the western world that come to light every day is alarming. Perhaps digital or online marketing would be the element of the new normal. We must be ready for it.

What do you suppose the new area of focus should be for production?
Right now, there’s a lot of focus on the area of PPE, particularly masks and items such as gowns, scrubs and coveralls. Some companies have already started export of these. We should however be cautious in predicting this as the next big thing for Sri Lanka because of two reasons.

The first one is the demand. Obviously in the aftermath of COVID-19, the demand for this type of product is very high. One must look at whether these levels can be sustained in the longer term.

The second call out is in relation to the costs of certification for the manufacture of PPE. Currently, we are in a window, where due to the urgency for product, both the EU and USA have relaxed their standards to help get more products into their countries. This is the short-term opportunity that many companies are able to take up.

PPE however falls into two categories – medical and non-medical. On the nonmedical side, these tend to be more generic products and as other nations get back to work, we will see a potential oversupply in this area, which will drive prices down.

On the more specialist medical PPE, once the temporary easing of rules is withdrawn, companies will then need to have products and facilities certified for the product of medical devices. For the EU, this entails the CE mark and ISO 13485. For the USA, FDA approval is required.

Whether for the EU (and UK) or USA, the process time and costs for these certifications are exorbitant. Again, as global supply increases and demand potentially reduces, the long-term viability of these sectors is uncertain. Our hope is that we will be able to make some decent headway into this product area but it by no means a given.

Having said that, I must emphasise that our core business is the fashion industry and we need to continue to focus on it and Sri Lanka should now put in place a payment platform for us to engage in ecommerce, as a major change. It is absolute necessity when the brick and mortar retailers are losing their prime place in the world of apparel sourcing.

COVID-19 cannot disturb the world economy any further. We got to come out of the problem. Global supply chain will only change its origin, due to trade wars but will be revitalised with a more Asian focus, outside China. Hence, if a company can keep its head above today, without collapsing, then we will win the game. That is how the apparel industry is thinking and working.

Sri Lanka is dependent on imports to fuel its supply chain and the apparel sector felt that hit when China went into lockdown. The establishment of the fabric park in Eravur seems to have gathered pace. What is the actual progress of that? And what more focus is required to be self-reliant as much as possible?

I am not surprised that you are asking this question, as this is a perennial negative observation being made very frequently. I think it is necessary for me to give some insight into this issue.

The Sri Lankan apparel industry procures one-third of its fabric requirements from the domestic market; it is almost 90 percent of the export quality domestic production. Ninety percent of all accessories, packing material, etc. are also being procured locally.

At the same time, Sri Lanka does not produce any woven fabric of export quality. Essentially, it has to be imported. Despite the above, the domestic value addition in the industry today is around 50 percent, whereas even under FTAS, the requested value addition is around 35 percent for origin status.

The Eravur fabric park, which we are promoting, is a key component of the strategy of the JAFF to help the industry be less reliant on imported raw material. As said earlier, we currently procure locally about one-third of our total raw material requirement and we are looking to move this needle a further notch with the Eravur park.

Eravur has been on the agenda for some time now and we are confident that this will be fast-tracked by authorities to allow it to be operational very soon. It has in fact been recognised by the president as a key element of the apparel industry strategy and we are confident that the project will gain some real traction now.

The JAAF has committed to find three investors for this project and these are now lined up. No manufacturing industry in Sri Lanka is self-reliant and there will always be an element of import needed to support the industry. That said, we are continuously working on the options of sourcing locally.

Oftentimes these conversations need to have the buy in of the brand. There are number of cases where we have been able to make the transition from import to locally sourced, particularly after 2005, when we commenced our journey as being a total solutions provider, where supply chain management has slowly been taken over by the local manufacturer. This is how we have transitioned to an industry, which imports 50 percent of our raw materials.

L Brands, the parent company of Victoria’s Secrets, announced it would permanently close 250 stores in the US and Canada. It was also shared that the company would likely file for bankruptcy. How does this translate to Sri Lanka’s apparel sector, given that Victoria’s Secrets accounts for about 20 percent of our total exports?

As you know, apart from L Brands, a number of other retailers, who are large customers of Sri Lankan apparel, are in very difficult times. Clearly, when these retailers sneeze, the Sri Lankan apparel industry gets a cold. Our member companies are exploring all avenues of options to help overcome these difficult times.

As the world starts getting back to work, we can now start to focus on these conversations and hopefully start finding that silver lining that each dark cloud has. We should point out however that this is not something that can be solved overnight and it will take some time for these new arrangements to become commercial opportunities. We are going to have a few months of pain before we start coming out of the crisis.

A number of global initiatives are being offered to support the apparel sector. One such is to offer consumers the chance to purchase clothing from the cancelled apparel orders from Bangladesh. Any such support for Sri Lanka along those lines?

Not that we are aware of. Typically, though these are arrangements, where stock is taken off the manufacturer at very nominal values and then sold to customers overseas. I don’t think there is anyone operating in this space at present and moreover, we have strong brand protection responsibilities to our customers.

The apparel sector is one that has always looked at things positively, even when the conditions weren’t so good. So, what are the opportunities seen by the sector at this point?

You’re absolutely correct. The apparel industry has proven to be resilient in the face of many challenges and we have always found a way to get through each crisis. COVID-19 is however different, as this time, it has affected every single facet of the industry.

At this point, as the world is just getting back to some form of normality and I don’t think we have all the answers as yet. We need to keep close contact with our stakeholders and find a way though this crisis. This we will do.
As mentioned above, there is the PPE possibility and we feel that despite the challenges, there will be some inroads made here. There is also going to be more need for smart apparel with built-in health monitoring and protection.

Could you point out the challenges faced and in what areas?
The true impacts of COVID-19 have not fully presented and as mentioned, we still have a few more months of difficulty to navigate through. By all accounts, the global apparel industry will be smaller post COVID-19 than before. That is a reality we all need to accept and the challenges that this poses to the industry.

We will not be a US $ 5.6 billion industry in the immediate future. That said, with changes in technology, increasing value addition to product, changes to the way we work, etc. we will continue to be a vibrant and a relevant industry. I’m sure, within the next couple of years, the global fashion industry will revert back and we are sustaining the industry to go back to that level.

One of the biggest challenges we face is our labour laws and we do need reform here. This issue always raises a concern that companies want to adopt a ‘hire and fire’ attitude. This is not the case.

Our agony is that even in cases where the employer and employees are in agreement, the rules are not flexible. The case in point is the five-day week. Despite a public statement made by the employees in print media agreeing to this, we still have to go through an administrative process on a half yearly basis, which has no meaning.

Part-time work is another area that is just not allowed but is something that there is a need for both, by employers and employees. The fixed weekly holiday is another one, which needs addressing. Factories need to have flexibility in the way they can operate.

It is this lack of flexibility for both employer and employee that results in manpower agencies operating without any form of accountability or employee protection. We need to have these difficult conversations and overhaul our labour laws.

What are the key changes the sector envisages, once the COVID-19 dust settles?

We have understood the need to make Sri Lanka more competitive globally, particularly on price and fast turnaround. I anticipate more players looking to do this by gaining control of their supply chain. This is the key for success.

Will the apparel sector be able to completely recover from this crisis?

For sure we will recover. When you say completely recover, we have to accept that it is not going to be in the short term. That said, we believe we will continue to be the major contributor to the economy of the country, bringing in significant net foreign exchange, employing a large number of people across the island, uplifting communities and building better lives for our people. Our relevance in the total economic agenda cannot be underestimated.