Executive Summary
With the phasing out of the Multi Fiber Agreement[i] in 2005, China & India have bombarded the market with low cost mass produced apparel. Exports from India and China have grown over 100% with the expiration of the MFA whilst other countries such Sri Lanka and Pakistan have seen a loss of market share in terms of volume traded. (Christoph, Alfons Hernandez, & Daan, 2005).
MAS Holdings Ltd (MAS) one of the largest apparel manufacturers is faced with this intense global competition and a constellation of other issues. The macro-economic environment in which MAS holdings operates is highly volatile. The country in spite of its high literacy rates and relatively high growth records is caught up in a 25 year old civil war which has destabilized the economy and the political environment. The government also has also issues with the global community on human rights which has resulted in bars on trade concessions.
These has affected MAS Holdings negatively, which focuses on foreign joint ventures and partnerships for growth. Other challenges comes by way of cost & time to market due to higher wages, lack of country infrastructure, reliance on external raw material suppliers and utility costs. These factors have MAS falling behind on market competition. However, to MAS’s credit it has been focusing heavily on green and ethical manufacturing practices which have earned much credit in the global arena. It has also built a name for itself in the niche markets of lingerie.
After conducting a complete analysis on MAS’s micro and macro environments, its recommended that MAS holdings pursue a differentiation strategy on its products, make backward integrations on its value chain to source its own raw materials and build a global brand image using its strengths on ethical and green manufacturing. MAS should also focus on lobbying the government on the aspect of human rights to win back trade concessions. These recommendations would help put MAS in a competitive & sustainable position in the global apparel market.
Introduction to MAS Holdings Ltd
MAS Holdings Ltd (MAS) is a private venture founded by three brothers, Mahesh, Sharad and Ajay Amalean, in 1986. MAS holdings humble beginning was marked by a single factory, named Unichela has grown out to the global operation it is today with 28 world-class manufacturing facilities spanning 5 countries in the African and Asian Continent employing an international workforce of 45,000. MAS’s factories in Sri Lanka are situated in the suburbs of Colombo (economic capital), Sri Lanka.
With an annual turnover of over USD $700 million MAS Holdings is in the business of producing Ready-made garments for export and is headquartered in Colombo, Sri Lanka. MAS holds the number one position in intimate apparel production in the South Asian market and is the regions’ most rapidly growing producer of competitive sportswear. MAS’s modus operandi involves a multitude of joint ventures with its buyers and suppliers. It is involved in a number of integrations along the value chain of apparel manufacturing in a big way, true to its philosophy of ‘seamless concept-to-delivery’.
Country Analysis
Sri Lanka is an island nation of 65,610 sq km, south of the Indian subcontinent. It is a member of the South Asian Association for Regional Corporation (SAARC) along with 8 other countries in the region. The capital of Sri Lanka is Sri Jayawardhanapura, Kotte. However, Colombo is the city that is more popularly known being the economic capital of the country. With its excellent geographic location, moderate weather and ample natural resources Sri Lanka is an excellent location for business investment if it wasn’t for a civil war which has kept business investors at bay.
A macro analysis of Sri Lanka reveals the following major factors. 1 Political Landscape Sri Lanka is a democratic republic with a parliamentary system. Sri Lanka adopted a parliamentary form of government upon achieving independence from the UK in 1948. According to the constitution, the executive president leads the government. At present the United People’s Freedom Alliance (UPFA) a coalition of eight political parties holds the majority in parliament. The incumbent president is a member of the Sri Lanka Freedom Party (SLFP), the largest membership of the coalition.
The brutal civil war that erupted in 1983 between the Sinhala majority and the Tamil minority continues till this day in Sri Lanka. The cease fire agreement that was brokered by Norway in 2002 between the government and the Liberation Tiger of Tamil Elam (LTTE) separatists proved to be short lived when violence broke out in 2003. In 2006, the conflict between LTTE and Sri Lankan military forces intensified. The economic capital of Sri Lanka, Colombo has been under the threat of terrorist attacks and has already seen a fair share of terrorist attacks including bombing of the Central Bank and the Bandaranaike International Airport.
Over the last 2 decades Sri Lanka’s political structure has been highly volatile, with weak majority and coalition governments. In spite of their differences, all governments have favored foreign direct investment (FDI) & have provided a variety of incentives starting from 10 year tax holidays and tax exemptions, encouraging foreign investments. A highly supported venture over the years has been the apparel industry. The government set up of free-trade-zones (FTZ) for apparel manufacturing in the early 1990’s. Unto today, most of these free-trade-zones are operational.
The apparel industry receives tax exemption on raw material imports, and receives tax credits for infrastructure set up. The government’s liberal views on international trade makes Sri Lanka a lucrative place to invest.
Sri Lanka has experienced healthy growth rates since the early 90s in spite of unabated ethnic violence. Robust private consumption demand and greater industrial production propelled by the labor-intensive textile and garment industries and growth of the domestic tea industry have been the driving force behind this economic growth.
Fiscal deficits are a major concern of the government; but have been showing improvement in recent years. The services sector is largely driven by the tourism industry which contributes the largest proportion to GDP and employs the largest proportion of the workforce. The industrial sector is dominated by the textile and garment industries, which is the highest export revenue earner (Datamonitor, Sri Lanka Country Profile, 2008). As of 2007, textile and garment exports constitute 56% of the total export revenue generated.
Sri Lanka has signed bilateral investment agreements with 24 countries and Free trade agreements with India and Pakistan are now in force. Sri Lanka is also a signatory to the South Asia Free Trade Agreement. As for exports 31. % of all exports go to the United States, Sri Lanka’s largest trading partner. United Kingdom and India follow accounting to 12. 8% & 8. 9% of all exports. On the imports side, India accounts for 20. 7% of total imports. Singapore, Hong Kong and China are the other major sources contributing 8. 3%, 7. 3% and 7. 1% of the imports respectively. Sri Lanka’s economic prospects largely depend on the greater political stability and progress of peace negotiations between the government and the LTTE. The FDI friendly policies and reduced bureaucratic regulations have helped boost growth rates.
However, continued violence and bloodshed may deter investors from entering the Sri Lankan market. (Datamonitor, 2008) The exchange rate is Rs. 115. 79245 per US dollar, at present. The Sri Lankan rupee is expected to depreciate continuing its trend over the last decade owing to the balance-of-payments deficits. In addition, the turmoil in the global financial markets and contracting world demand would be further contributing to this. Consumer price index inflation is expected to average 9% in 2009 and 8% in 2010 (Central Bank of Sri Lanka, 2009).
Social Landscape Sri Lanka has a population of 22 million (as at 2008) and is expected to grow at . 904 % per annum. The median age is 30. 9 years and 63% of the population is between 15-64 years of age and the male:female ratio of this segment is 0. 96 male(s)/female (CIA, 2009). Sri Lanka’s population distribution is such that around 1/6th of the entire population is clustered around the economic capital Colombo (Western Province) and suburbs. The official & national language is Sinhalese spoken by 74% and Tamil, the other national language is spoken by 18%.
English is commonly used in government publications, and is spoken competently by about 10% of the population. The literacy rate is 90. 7% and the unemployment rate is 5. 2%. Sri Lanka also sees a net migration of -1. 09 migrant(s)/1,000 (CIA, 2009). This is mainly attributed to the educated/skilled worker population moving out of the country to western nations for better prospects or to regions in Africa for economic prosperity and experience. It’s expected that over the next 5-10 years this brain drain would affect the country’s economic progress negatively.
Traditionally the female representation in the work force has been very low and they have been pushed to take on a more domestic role. However in present times this trend seems to be changing and more and more female workers are entering the workforce although their representation is still low at around 33% (Government Statistics Department, 2008). The apparel sector is predominantly female worker oriented and well over 75% of the workers in the sector are female (Central Bank of Sri Lanka, 2009)
The Sri Lankan legal system is a highly complex mixture of English common law, Roman-Dutch, Kandyan, and Jaffna Tamil law (CIA, 2009). The tax reform has implemented a Value Added Tax (VAT) instead of the Goods and Services Tax (GST) imposed previously, thus increasing the incidence of indirect taxation. Except for motor vehicles there are a very few trading regulations imposed by the government. The government also focuses its efforts to facilitate the development of the private sector giving lesser reliance to control and regulation.
Foreign investment is regulated by the Board of Investments of Sri Lanka (BOI), which serves as a one-stop shop for setting up in business ventures. However, the government plays a minimalist role on corporate governance practices. With the tax holidays and tax exemptions awarded to the textile and apparel industry, it is a lucrative area for investment & growth.
Sri Lanka’s strategic location at the crossroads of Asian trading routes has contributed to its growth as a regional trading hub. However, Sri Lanka’s infrastructure landscape is weak outside of the economic capital Colombo and this deters the spread of economic activities and development in regions other than the Colombo Metropolitan Area (The World Bank, 2009). Although mobile telephone penetration is relatively high (around 70%), there are still many regions around Colombo and the rurals’ that require attention to roads (the backbone of transportation), pipe-bourn water facilities and electricity.
ADB and the World Bank identify the lack of infrastructure and connectivity as two major obstacles to private sector development, alongside the lack of macroeconomic stability and peace (Asian Develpment Bank, 2008). Sri Lanka has several large ports of which Colombo, the country’s premier commercial port, is one of the best performing ports in Asia. It handles both conventional cargo and containers, and has been acknowledged as one of the most economical ports in the region. Sri Lanka has one International Airport that works as a regional hub between Singapore and Dubai.
The strategic location of Sri Lanka is a great incentive for investment and economic activity. MAS holdings with all of its manufacturing facilities on the outskirts of Sri Lanka faces issues with the weak infrastructure and energy facilities, which effects it’s time to market and costs.
The Global Apparel Industry
The global apparel industry is a combination of several functions such as design, production, buying and distribution. The current span shot of the global apparel market reveals the largest apparel consumer market position is held by Europe (33%) followed by the United States (25%).
As for manufacturers, China’s the largest apparel manufacturer/supplier in the world. The value chain of the global apparel industry in present times spans across the globe. (Refer Appendix 4: The Apparel Value Chain). There are several subsectors within the industry, such as menswear, womens’ outer wear, womens’ innerwear and kids wear. The global apparel industry has seen many production migrations since the 1950’s. The first migration occurred when North America and Western Europe apparel production was displaced by a sharp rise in Japanese imports.
The next shift came about from Japan to Hong Kong, Taiwan and Korea which dominated apparel exports in the 70’s and 80’s. The 3rd shift started towards the late 80’s and moved to other developing economies such as China, Indonesia, Thailand, Malaysia and the Philippines and Sri Lanka. By 1990s, new suppliers from Latin America joined the predominantly east and south Asian supplier (Gereffi & Memedovic, 2003). Most of these shifts have been based on cost advantages, mainly driven by labor costs. That trend has now changed and in present times, consumers are not primarily driven by cost & quality factors only.
The key success factors for successful production in the industry now are design, service, production flexibility, ethics and social responsibility initiatives of producers. As for the value of the global apparel industry the revenue totaled a $1,972. 2 billion in 2008, representing a compound annual growth rate (CAGR) of 2. 9% for the period spanning 2004-2008. The market according to analysts is forecast to grow, with an anticipated CAGR of 9% for the five-year period 2008-2013, which is expected to drive the industry to a value of $2,751. 2 billion by the end of 2013.
Apparel Industry
In Sri Lanka Sri Lanka’s apparel industry experienced phenomenal growth after its modest beginning in the 1970’s and it continues to be the strongest manufacturing subsector in Sri Lanka. 95% of the textiles manufactured in Sri Lanka are done so for the export market. Textile and Apparel exports are the most significant contributor to the Sri Lankan economy and accounts for around 54% of the total exports in 2007 and 67% of total industrial exports.
The textile and apparel industry is crucial for Sri Lanka who’s industrialization strategy is based on exports and foreign exchange. 90% of the manufacturers cater to apparels (Peththawadu, 2006). Sri Lanka’s growth in the apparel industry is largely attributed to the MFA quota scheme which prevented larger manufacturers bombarding the market. At present the industry contributes to 8% of the GDP, employs 33% of the manufacturing sector. The sector directly employs 270,000 and indirectly over 1 million. 85% of the textile industry workforce is female and approximately 350,000 women work in factories.
Sri Lankan women traditionally do not work outside of the home, but high unemployment in rural areas and displacement due to the civil unrest make many young women the primary or sole breadwinner in their family (Watson, 2007). The apparel industry is also the leading contributor to women’s empowerment and rural poverty alleviation. MAS Holdings and Brandix Lanka are the two biggest players in the apparel manufacturing market, based on export figures, both together accounting for around 50% of the total apparel exports Sri Lanka’s largest export markets are the United States and United Kingdom accounting for around 75% of the exports.
Joint Apparel Association Forum (JAAF)
In 2002, JAAF was formed as the apex body of all textile and apparel associations in Sri Lanka. The JAAF was formed to achieve the targets set out in the “Five Year Strategic Plan” of making Sri Lanka the number one destination for quality apparel production (JAAF Sri Lanka, 2009).
According to the JAAF ‘A look at Sri Lanka’s industry structure, human capital, enterprising nature of the private sector and government support suggests that Sri Lankan garments exports are moving along a path of sustained growth. From USD 3. 2 Billion in 2007, the industry’s growth is projected to be in the region of USD 5 Billion by 2010. ’ JAAF is in the forefront of creating a brand image for Sri Lankan apparel and has embarked on the journey of a brand strategy based on ethics & social responsibility. The brand image ‘Garments without guilt’ is in the making for the benefit of all apparel exporters of the country.
Under the Garments without guilt campaign Sri Lankan apparel exporters have to follow stringent labor and environment regulations. This would be the new face of Sri Lankan apparel going forward.
Sri Lankan is the recipient of several trade concessions for textile and apparel products which are listed below. These are in addition to trade relief provided by the SAARC agreement. GSP: The EU’s ‘Generalised System of Preferences’ is the system of preferential trading arrangements through which the European Union extends preferential access to its markets to developing countries (EU, 2005).
Sri Lankan exports go duty free to the EU and EU being one of Sri Lanka’s largest Apparel Export destinations would be greatly benefitted from it. Indo-Sri Lanka Free Trade Agreement : Million Pieces of Garments at zero duty to India without any restrictions including ports or sourcing of fabrics. Sri Lanka-Pakistan Free Trade Agreement : Small tariff rate quota’s allowed for export to Pakistan.
With the new key success factors of the apparel manufacturing industry and the country’s position in mind, this section looks at the key strengths, weaknesses, opportunities and strengths MAS holdings has. Strengths MAS Holdings has an established infrastructure and has moved into forward and backward integration of the apparel value chain. It has started its own lace & elastic manufacturing plants to support its apparel production and has access to a skilled pool of labor.
Additionally it as forged many a joint ventures and strategic partnerships with large, well know apparel retailers such as GAP, Victoria’s Secret and Nike. MAS is also known for its commitment towards green manufacturing and reducing its’ corporate carbon footprint. MAS is also known for its dedication towards quality and is appreciated for it. MAS Holdings has created a brand image for itself as a key player in the manufacture of lingerie These key strengths would serve MAS well in battling the post MFA apparel era.
Incentives provided by the government and other trade organizations are a major opportunity for MAS. Additionally, the new key drivers of the industry such as design, service, production flexibility, ethics and social responsibility initiatives of producers, which go beyond price is an opportunity for MAS to leverage its strengths. 10 Weaknesses Lack of access to raw material locally, which increases the lead time is one of the key weaknesses MAS has. Additionally higher labor and utility costs in Sri Lanka as opposed to other competing apparel manufacturing countries make cost of production very much higher locally.
Low cost mass manufacturers (from China and India) taking over market share is the largest threat MAS faces at this point. This threat is coupled with greater lead times that MAS incurs because of sourcing raw materials from out of the country. Additionally, Sri Lanka’s issues with human rights issues has threatened not only MAS Holdings but the entire apparel industry ith the EU striking Sri Lanka out of the GSP scheme until human right records are straightened out.
Additionally, the incumbent war & terrorist activities in the country has kept foreign investors and JV partners at bay due to the high risk of doing business in the country. Another issue that’s threatening the apparel industry and in turn MAS is the brain drain faced in Sri Lanka. There’s a dearth in middle managers and successors to carry the company forward. The relatively weak road and highway infrastructure in Sri Lanka has also hindered operational efficiencies of MAS.
The largest suppliers of MAS holdings are the raw material suppliers. Due to the commoditized nature of raw material for production (cotton, wool, synthetic fibers etc), the power of suppliers are relatively less intense. Although some form of pressure exist due to volumes purchased by some apparel producing nations.
Due to the nature of the product and the fashion industry the threat of a suitable substitute for apparel products is low. 16 Bargaining Power of Buyer (high) The large number of established players/suppliers available globally and the intense competition between suppliers puts a high amount of bargaining power in the hands of the buyers. Demands on price, quality, lead times and designs are extremely high in this industry.
Recommendation
for MAS Holdings Given the highly competitive global environment MAS holdings operates in, it is important that MAS places itself in a strategic and competitive position for long term survival. As Michael Porter pointed out in his cost-leadership and differentiation strategy, companies generally fail if they chose a path which gets them stuck in the middle.
It is apparent from factors beyond MAS’s control that being a cost competitor would be difficult for the company. The infrastructure in the country MAS operates in is not yet agile enough to provide it with the required support to operate at the optimum level its global competitors are operating. The relatively higher wage and utility cost pushes the country away from being a ‘low cost’ destination. Additionally, being a small country with access to a relatively smaller work force as opposed to its’ competition, MAS holdings is not in position to produce on a large scale.
However, with its’ already established name in the niche markets of lingerie and sportswear it would be in MAS’s best interest to follow a differentiation strategy and bank on its social responsibility initiatives and harness Sri Lanka’s brand strategy of Garments without guilt to position itself. The proposition is for MAS to compete on the ground of differentiation and value-added rather than on cost and volume.
MAS even at present follows a strategy of creating JV’s and strategic partnerships in order to integrate the apparel manufacturing value chain. Although MAS has successfully backward integrated up to the point of manufacturing lace and elastic, it still heavily relies on raw material and textile imports from external suppliers which add to the cost of production as well as increasing the lead time in manufacturing. With the changing critical success factors discussed in this report it’s crucial that MAS is in a position to be more flexible and reduce its lead time which is around 90 days compared to that of 60 days from its regional competitors (Trimmings, 2003), to be more competitive. Hence it should explore the possibility of adding to its fleet a few raw materials plants.
Given the present situation in Sri Lanka, it would be difficult for MAS to get JV support or foreign investments to set up operations in Sri Lanka, however with global operations in place, MAS could look into setting up raw material plants with JV support in one of the 5 countries it operates. The African continent would be a good option (for example Cotton production), as MAS already has production facilities operational in Madagascar and other African countries. However, a thorough analysis has to be conducted on picking a location prior to moving forward. Setting up of raw material production plants overseas would also be an incentive for management level employees who seek to move overseas for economic prosperity and experience. MAS would be able to attract and retain talented Sri Lankan employees in its workforce.
MAS being one of the largest export revenue earners for Sri Lanka, should take a lead role in lobbying the government and stress the JAAF to do so, in order to get Sri Lanka’s human rights related records straightened out. The apparel industry has suffered with the EU striking Sri Lanka off the GSP scheme due to this reason.
Not taking action would further escalate this issue leading to other countries imposing sanction against relief or concessions provided on trade to the country. With MAS’s already strong presence in the apparel manufacturing industry, its strong financial performance over the last few years (Refer Appendix 8 : MAS Holdings Revenue USD Millions (2002-2006)), its global presence and focus on ethics and green manufacturing, coupled with the recommendations discussed above would provide MAS Holdings with the necessary ammunition to survive and grow in the post MFA apparel industry successfully.
References
- Asian Develpment Bank. (2008, March). Asian Development Bank and Sri Lanka – Fact Sheet. Retrieved April 17, 2009, from Asian Development Bank: http://www. adb. org/Documents/Fact_Sheets/SRI. pdf
- Central Bank of Sri Lanka. (2009). Central Bank of Sri Lanka Statistics. Retrieved April 15, 2009, from http://www. cbsl. gov. lk/info/08_statistics/s_2. htm
- Central Bank of Sri Lanka. (2007). ECONOMIC, PRICE AND FINANCIAL SYSTEM STABILITY, OUTLOOK AND POLICIES. Retrieved April 15, 2009, from Central Bank of Sri Lanka: http://www. cbsl. gov. k/pics_n_docs/10_publication/_docs/efr/annual_report/Ar2007/Ar_Data2007_E/5_Chap_1_e. pdf
- Christoph, E. , Alfons Hernandez, F. , & Daan, Z. (2005). The end of the Multi-Fibre Arrangement and its implication for trade and employment.
