The Make in Pakistan thesis has been sold well. And following the currency depreciation along with changes in import tariffs favouring domestic production, companies have already started looking for options to source locally. During this transition from import in Pakistan to Make in Pakistan, a fundamental question remains unanswered: should Pakistani businesses invest for yesterday or invest for tomorrow.
In a recent feature in FDI Intelligence, a specialist-wing of the Financial Times group, Alex Irwin-Hunt and Sebastian Shehadi argue that as the fourth industrial revolution gains roots, manufacturing is “moving away from a low-cost labour model towards destinations that can accommodate the requirements of smart factories, including automation, artificial intelligence (AI), skilled labour and customer proximity, to name a few.”
They point out that Europe is fast becoming a powerhouse in Industry 4.0 – which entails inter alia AI and machine learning-based automated production techniques. As a result, Europe has received nearly a third of the world’s greenfield investment manufacturing projects since 2009, equalling what Asia-Pacific region received during this period, according to fDi Markets, a data service from the Financial Times.
“As online shopping and e-commerce continue to flourish, mass customisation and high-speed delivery are becoming the norm. For example, in 2017 Adidas set up its ‘speed factories’ in Germany and Atlanta – not Asia – to provide ‘next hour’ delivery for customised products,” the FT authors say, highlighting the reversal of the earlier trend of moving manufacturing to low labour cost locations.
And while Germany is leading the world in smart manufacturing technology, the FT’s report informs that China “is eager to close the knowledge gap and is urging domestic companies to gain access to the latest industry 4.0 technologies”. According to the World Economic Forum’s recent list of the world’s top nine smart factories, China already has three of those whereas five are based in Europe. South Korea, Japan and India may follow suit.
And let there be no doubt, FT’s is not a one-off prophecy about the future of manufacturing, and ensuing death of off-shore production within or outside the global value that Make in Pakistan thesis hopes to capitalise on. In October 2018, a study by McKinsey & Company, said that “mass-market apparel brands and retailers cannot win in the next decade without speeding up and transforming to a demand-focused model.”
“Two decades ago, US and European mass-market apparel brands and retailers were rushing to move as much production to Asia as possible in order to gain a cost advantage, the study titled ‘Is apparel manufacturing coming home?’ said.
Today, as “speed beats marginal cost advantage and basic compliance is upgraded to an integrated sustainability strategy”, traditional supply chain setup is “being challenged and as labor costs converge, mass-market brands and retailers are starting to more broadly rethink their sourcing and production models,” says McKinsey. About a quarter of apparel-sourcing executives told McKinsey said that more than half of the clothes they will source in 2025 will come from ‘nearshoring’.
For Pakistani businesses and the state, this means it is time to wake up and smell the coffee. No more can the country bet on textile alone. If certain types of manufacturing demand from the world will not swarm to Pakistan because of lack of smart manufacturing, other types of manufacturing demand such as apparel, which Pakistanis seems to be quite hopeful about, will not come in huge numbers because of ‘nearshoring’.
Pricing signals such as exchange rate, wage rate, tax cuts, etc to boost growth and productivity can only do so much in the absence of skills and productivity. Given the nature and pace of change, Pakistan will have to think long and act fast to boost the skills of its population, young and old. With skills and education devolved to provinces, the task requires coordination efforts of Himalayan efforts that is missing from the governments, current or former.
One possible quick way out is to use the CPEC card to fast track skill development and smart manufacturing, because cheap labour alone cannot be Pakistan’s strongest suit in a world that increasingly wants skilled and productive labour, and top technology. But that CPEC card too cannot be played without effective coordination between national and sub-national governments. Either way, be warned: the pace of change is faster than most people imagine; unless Pakistanis want their country to be the museum of the world, the time to act is now.
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