Sri Lanka Plays to Strengths Amid Covid Downturn

Sri Lanka’s manufacturing industry presents a conundrum. Despite a low minimum wage of $67 per month, global retailers do not look to the country for mass production. Instead, it has become a niche player, and has leaned on that strength throughout the pandemic.

The island nation saw apparel exports of $5.3 billion in 2019, solidifying its reputation for compliance, high labor standards, ethical integrity and speed of delivery.

Tuli Cooray, founder and secretary general of the Joint Apparel Association Forum (JAAF) for the last 17 years, talked with Sourcing Journal about some of the blind corners that the industry rounded as a result of Covid-19, as well as the effects of the dramatic directions the industry has taken in the past 10 years.

Apparel accounts for more than 40 percent of total exports, with the European Union and U.S the major markets. It also makes up 7 percent of the country’s gross domestic product (GDP), giving employment to more than 15 percent of the country’s workforce of 400,000.

Sourcing Journal: How much has Sri Lanka recovered from the impact of Covid-19?

Tuli Cooray: We all know that this has been a global crisis, something we haven’t experienced on this scale in decades, disrupting people’s lives and the global economy. The ill effects could not be mitigated.

It has been a difficult year, but given the situation, our total performance in 2020 is less by a little over a billion dollars. By the end of the year, we actually lost approximately 21 percent—to be at $4.15 billion for apparel exports against $5.3 billion in 2019.

SJ: For many Asian countries, the supply chain was affected by issues related to migrant labor and raw materials. Being an island country, were these harder to overcome in Sri Lanka?

T.C.: When we started, the first implication we faced was our inability to have an active supply chain. We are not a country that is strongly vertically integrated—with an extremely limited supply of raw material or fabric. We import $1.5 billion worth of fabric—of which 80 percent is from China. There are also limited imports from other countries, including India, Pakistan, Europe, etc. The raw materials were a primary concern as China was closed, and we had to suspend our production. Then from March to May Sri Lanka was shut down.

The industry is also largely dependent on a migrant labor force—a lot of the labor is from other regions, and they had to be brought back, and the boarding houses had to work, as a result, we did not perform well during that period.

SJ: How did the manufacturers manage the costs, including those for safety protocols and for keeping labor employed?

T.C.: We started slowly opening the factories on the basis of the new health protocols in May. In addition to masking, social distancing, etc., it was mandatory to have Covid testing—which had to be at 5 percent a week, or 1 percent a day. This was not a prevalent requirement in other countries where the pandemic was spreading—for example in Bangladesh, Cambodia, India. If you consider the tests to be done for 1 percent of the workforce in apparel, that was roughly 24 million rupees ($123,800) a day. So, at this point we have spent more than 1.5 billion rupees ($7.7 million) on Covid testing alone.

At that point, the government insisted—and we agreed—that we should not at any point terminate the services of our employees. The government gave us support. They permitted us to pay 50 percent of the salary, or 14,500 rupees ($75), whichever is higher to the people who are not working and are at home. In addition, the government gave support in working capital at 4 percent interest for the companies to utilize for the payment of salaries.

SJ: You were not allowed to fire any labor, but did factories close down?

T.C: Only for health purposes, but not as a business, not even 10 percent.

SJ: When the second wave came, and more than 1,000 workers at a Brandix factory were found infected, did it spread to many other factories?

T.C: It is not a question of Brandix. Rather that it originated in an apparel company, and that apparel company was Brandix—although it was being talked about as if Brandix had created it—but in fact it could have happened anywhere. Thereafter there were a number of other clusters—the fish market, other places, but when it came to the apparel industry, starting from Brandix, people thought they were the culprits, they will have to be held accountable. Thank God, subsequent situations were such that those misgivings are no longer prevailing at the level that they prevailed, and we are continuing to operate.

SJ: Over the past years, the manufacturing industry in Sri Lanka has grown more niche. What keeps you from increasing the production?

T.C: We have the best of trimming and value added industry in this part of the world, we are the best dyeing people, the best embroidery people, you name it. The support services are well developed in the country as a result of the strategy developed in 2005.

But most importantly, the entire world of retail trade in apparel is dependent on two factors—one is the tariff payable, and second is the country of origin. Where there is a preferential treatment for those two factors, the retailers dictate manufacturers in the Asian world to shift their operations there—that is how Cambodia came in, that is how Ethiopia came in. Some countries have preferential treatment on a regional basis, like ASEAN.

We lose out on most of these factors. We have GSP plus from the EU, but it is only applicable on 47 percent of our exports because we cannot meet the Country of Origin criteria. Compare this with other fast-growing Asian countries that have zero percent duty, and our costs go higher.

SJ: So how does the industry survive?

T.C: We are surviving on our performance. Compliance is a strong pillar of our industry. We have a very strong labor law. We are very proud to say we do not have child labor. We do not have forced labor. It has also become about more niche areas than mass, with mostly casualwear, intimate wear, sportswear and children’s wear. Though we can do various other things, we know this is our strength, and these are our product lines.

Over the years we have moved from contract manufacturing to become a total solutions provider, involved in the total value supply chain and that is our strength and that is how we are surviving the market. And we continue to improve on this.