Musadaq Zulqarnain is among the co-founders of Interloop Limited, Pakistan’s largest listed textile company by market capitalization. A business leader par excellence, Musadaq is credited for turning Interloop Limited into a $400 million export company, and the country’s second-largest exporter.

Musadaq is a member Board of Directors of the Paksitan Textile Council, and has served on the Board of Faisalabad Industrial Estate Development & Management Company (FIEDMC), also serving as its CEO. He was also a Member of the Board of Port Qasim Authority. He is the President of Interloop Welfare Trust, engaged in numerous philanthropic activities in the country. He is also associated with The Citizens Foundation (TCF), the largest not-for-profit organization providing primary and secondary education in Pakistan.

Musadaq began his professional career in the gas transmission industry (SNGPL), going on to become a successful entrepreneur. Over the last three decades, Musadaq has turned Interloop into one of the largest hosiery manufacturing and export businesses out of Asia, becoming a trusted partner of global brands such as Nike, Puma, Adidas, Target, H&M, Tesco, Reebok, Hugo Boss, Levi’s, among others.

In his candid discussion with BR Research, Musadaq drops many truth bombs. While most textile seths are quick to point fingers towards Islamabad, he appears keen on introspection, using the Interloop’s success story as an example of what his competitors could do differently in an admittedly challenging economic environment.

He appeared particularly concerned about the global headwinds and future trends, especially those pertaining to the textile industry’s transition towards Net Zero emissions, and the lack of preparedness of domestic value chain in this respect. He also showed anxiousness regarding the weaning of global textile value chain away from China, and whether Pakistan’s industry is ready to capture the market share up for grabs.

The conversation carries many lessons for both the industry as well as policymakers. Below are the edited excerpts:

BR Research (BRR): You are a first-generation industrialist, unlike many other top textile houses in the country. How did a new entrant manage to become the top player in an industry otherwise dominated by legacy families?

Musadaq Zulqarnain (MZ): In Pakistan, scale in any business is synonymous with legacy names and sponsor relationships, rather than competitiveness or management quality. New entrants can only buck this trend by building a brand that is rooted in trust, reliability, and credibility.

Back when we first started, commercial banks refused to issue our import LCs even against a hundred percent cash margin. However, in a few years as our business scaled and the company became known for its transparent management practices, banks began to chase after us, offering lines of credit.

Similarly, when we decided to approach the equity markets, many bankers pleaded with us to keep the capital structure debt-financed, insisting that they shall cater to any future financing needs. We opted for public listing not because we had any unmet financing needs, but because we understood that our corporate governance will become even more efficient and stringent after going public due to increased scrutiny.

BRR: Textiles is generally considered a low ROE industry, with an over-indexed share in bank lending. Would you advise privately held firms who traditionally rely on bank financing – especially the established players – to follow your path in going public?

MZ: From a capital structure perspective, equity markets are best suited for companies in the growth phase. Sponsors can maximize their shareholding value by taking companies public, so long as they are able to gain investor confidence viz. management practices, transparency in corporate governance, and business outlook.

If I could do it all over again, I would choose to take the company public over accumulating debt from banks. If the sponsors’ intent is to fleece the investors, they would inevitably lose the market’s confidence in the long term – whether it is shareholders or banks.

BRR: In your view, why do legacy textile firms avoid going public?

MZ: Unfortunately, the practice of keeping two sets of books is rampant in the domestic industry. Revenue and profit suppression both take place to underreport tax liability. Because exports operate under a fixed tax regime, the practice is slightly less common in export-oriented units. Businesses that sell only domestically are particularly infected by this scrouge. This is partly due to the perception that the manufacturing sector is over-taxed, but also because many non-core liabilities, such as worker participation funds and similar contributions, are linked to accounting performance.

In my view, businesses that engage in this practice engage in self-harm. When reported accounts do not represent the true size and profitability of the business, firms struggle to secure financing because the accounts cast suspicion on the firm’s capacity to repay. Similarly, when balance sheet size or operating performance is underreported, firms may lose out to competitors in securing large orders, especially from foreign buyers.

BRR: From a purely wealth maximization perspective, are sponsors who amass personal wealth by keeping two sets of books in business better off?

MZ: If you examine the market value of Interloop, you will find that as a major shareholder, my personal wealth has multiplied faster by maintaining transparency in the accounts, than of competitors in similar lines of business who may have maintained two sets of books over time.

BRR: Do you believe Pakistan’s indigenization approach to the development of textiles became an impediment to the growth of value-added segments?

MZ: Globally, textiles and apparel are classified as separate industries. Historically, Pakistan had a comparative advantage in cotton-based fabrics, from the latest technology in weaving and spinning to the strong presence of an integrated value chain going all the way up to cotton farms. Before WTO, Pakistani textiles enjoyed preferential access to Western markets under the quota regime. As a result, to this day Pakistan has an abundance of skilled talent in spinning and weaving trained at various local textile institutes.

However, the readymade garments and apparel industry suffered from lack of focus, as both the industry and policymakers failed to adapt with the changing trends in the global markets. When the quota system was eliminated from the international textile and apparel trade in 2005, Least Developed Countries (LDCs) such as Bangladesh positioned themselves as the low-cost manufacturing hubs for the rest of the world.

The apparel industry in countries such as Bangladesh and Vietnam took full advantage of their low-cost labor. Initially, they fully focused their attention on labor-intensive segments such as readymade garments, while importing intermediate products such as yarn and fabric, which would have been more capital and energy-intensive to produce domestically.

Meanwhile, Pakistan struggled to leverage its well-placed upstream yarn and fabric value chain, failing to position itself in the higher-value add industries of garments and apparel. This was partly because, until 1995, Pakistan had an export tax on raw cotton, which meant that the spinning and weaving industries enjoyed an abundant supply of low-cost raw material, usually procured at a steep discount to international market prices. Because cotton milling is largely commoditized and low in complexity, it enabled players with financial muscle to multiply in size. Thus, penetration in the export market became largely a function of volume and price. This was in sharp contrast to garments and apparel, which demand entrepreneurial attention, especially in product development and marketing.

BRR: From an industrial policy perspective, what did Bangladesh get right over the last two decades?

MZ: Several factors became instrumental in the divergent paths followed by Bangladesh and Pakistan over the last two decades. First, Bangladesh fully exploited its LDC status, seeking preferential market access – from Canada and USA to Europe. Equally significant was the urgency with which Bangladesh sought Free Trade Agreements with many economies in emerging markets, especially China. It allowed duty free import of yarn and greige fabric, allowing its garment industry access to raw material and intermediate inputs, rather than attempting to indigenize the whole supply chain.

Third, Bangladesh exploited its low-cost labor potential to its fullest by actively encouraging female labor force participation, especially in the garments industry. Fourth, Bangladesh primed itself as the outsourcing hub for top global apparel brands by actively seeking business tourism.

This was around the same time when Pakistan became a tourism pariah due to rise in religious extremism and terrorist incidents and violence, which effectively put a stop to foreigners – especially from Western nations – travelling to Karachi or Lahore. Fifth, Bangladesh enjoys friendly trade relations with regional countries, especially India, allowing it access to world’s second-largest yarn manufacturer at its doorstep.

Lastly, it maintained a razor-sharp focus by specializing in garments and apparel segments only, which was rooted in its comparative advantage as a country: low-cost labor. Only now is the Bangladesh’s garments industry attempting to backward integrate because of a push to wean global value chains away from China.

BRR: If the apparel industry in Bangladesh was dependent upon imported raw materials, why did Pakistan concurrently fail to multiply its export volume of yarn and fabric?

MZ: Initially, when global retail rushed to factories in Bangladesh and Viet Nam attracted by their low wages, they also helped garment clusters in Bangladesh and Viet Nam source raw material – fiber and fabric – by nominating legacy suppliers in China India, and Pakistan. Later, when the industry in Bangladesh and Vietnam scaled up, they were very agile and quick to backward integrate – causing a decline in demand for yarn and fabric supplies from places such as Pakistan. Meanwhile, Pakistan’s industry was very slow to forward integrate, eventually losing out its share in low-value yarn and greige cloth trade as well.

BRR: Was the failure to develop textile clusters a contributing factor to export slowdown?

MZ: Firms in industrial clusters win collectively, but also lose together. Although Pakistan has industrial clusters just like any other textile manufacturing countries, the spirit of succeeding through cooperation is missing. When orders exceed our capacity or the lead time is short, it is very difficult to find trustworthy outsourcing partners. Often competitors go behind our backs to the buyer to price us out. Even when we find partners, ensuring quality control is cumbersome.

BRR: Is the cotton-centric approach a comparative advantage for Pakistan’s textile industry or the root cause of its premature stagnation?

MZ: Cotton was our strength, but that’s now history. Between 1970 and 2010, share of man-made fibers in global textiles rose from 40 percent to 72 percent. Pakistan, on the other hand, completely failed to develop its domestic synthetic fiber industry. The quality of polyester manufactured in Pakistan is hopeless, yet for a long time, the industry has faced curbs on import in the form of very high tariffs and duties at the import stage, which were imposed to protect two domestic polyester manufacturers.

BRR: Aren’t fabrics and garments made of synthetic fibers perceived to be of inferior quality by consumers?

MZ: Socks manufactured by Interloop use up to 40 percent man-made fibers, because the buyers are very receptive, especially to products made of blended material. There was a time when polyester fibers were considered inferior in quality and used to cause skin irritability. However, over the years, technology and innovation have changed the game dramatically. New varieties are considered to increase breathability and preferred by buyers.

BRR: “Made of hundred percent cotton” label once commanded a premium. Does this no longer hold true?

MZ: Globally, the demographic change since millennials have inverted trends and preferences in apparel. Formal clothing – even in corporate offices – is now being replaced by activewear, pullovers, and outdoor wear. Cotton has a significantly higher share in formal wear, whether in the form of woven fabric or readymade garments. But as formal wear goes out of fashion, so does demand for fabrics made predominantly of cotton.

BRR: Talking about trends, what is the single greatest challenge faced by Pakistan’s export industry?

MZ: The most significant development holding back Pakistani apparel manufacturers today is lead time. In the past, fashion trends used to change every six months on average, roughly in line with the change of season. Today, as Gen Z has come to dominate fast fashion, trends change every month. This means that retailers place orders in much smaller quantities for market testing, and demand agility in lead time for subsequent large orders. This has two consequences. First, if you cannot meet short lead times, the buyers are no longer interested. Second, the supply chain could no longer be geographically spread out as in the past. This resulted in tremendous backward integration in Bangladesh and Viet Nam, which as I explained before has led to a substantial decline in demand for Pakistani origin yarn and fabric.

BRR: In retrospect, do you believe the massive expansion in the low-value-adding spinning segment using SBP’s concessional finance – under the TERF scheme – was a good idea?

MZ: TERF was a success to the extent it helped catalyze the modernization of Pakistan’s outdated spinning manufacturing base. Installation of energy-efficient plants will obviously help the spinning industry make productivity gains. However, as I explained above, export demand for yarn is witnessing a secular decline due to forward integration in export destinations. Meanwhile, a small share of concessional finance flowed towards the expansion of the apparel manufacturing base. Unless the apparel industry grows, demand for fiber from the now-modernized spinning units will not grow.

BRR: Many economists believe that concessional financing has made Pakistan’s textile industry inefficient and rent-seeking over the years, becoming dependent on handouts. Do you agree?

MZ: Working capital loans breed inefficiency, especially when advanced on fixed rate. However, the same cannot be said of long-term loans.

When we talk about the missed opportunity in readymade garments, it is no longer true that the industry is labor-intensive or requires low investment. In the past, the value-added industry was able to achieve a fixed asset turnover of at least two times, which in recent years has dropped to one. Previously, land and building costs used to be insignificant as a percentage of capex. Over the years, speculative activity in the property market has made land cost alone a headache in setting up factories.

Even more significantly, capital intensity in manufacturing has also risen massively. Various stages of stitching and garments manufacturing now require specialized, hi-tech, and sensitive electronic machinery, which are also very expensive.

In addition, large-scale units that directly export to global retail brands also face prohibitive infrastructure costs. We are not only required to set up effluent treatment plants, develop sewerage, drainage infrastructure, but also pay for development of roads, gas and water transmission infrastructure, power generation, and backup power units on alternate fuels. In addition, global brands with ESG agenda also expect that their suppliers adopt net zero practices, which includes regular capex for energy efficiency improvements as well as solar-based generation. If we are to continue supplying global brands, these good-to-haves shall turn into must-haves very soon.

If Pakistan’s industry is to remain competitive, there is a need for continuous access to finance for BMR, lest our manufacturing practices become outdated. Capex cannot take place when the borrowing rate is above twenty percent.

BRR: The BMR and expansion in the textiles manufacturing base during Covid was marketed as a push to capture business moving out of China, especially in the context of the Xinjiang ban and trade war. Does Pakistan stand a chance against competitors such as Bangladesh?

MZ: Forget Bangladesh, India is massively investing in expansion of knitwear capacity to capture global retail business moving out of China. Unless Pakistan’s businesses and policymakers show agility, Pakistan could soon see significant loss of export market share to India. In coming years, the ‘lost export opportunity to Bangladesh of 2010s’ would be dwarfed in comparison to “lost export opportunity in knitwear’ to India.

BRR: Does this mean Pakistan’s textile industry is weary of resumption of trade with India?

MZ: The opposite. Just like Bangladesh, Pakistan should allow its value-added industry to fiber and fabric of Indian origin, so they can compete in the global market with the upcoming Indian capacity in knitwear and other high value-added segments.

BRR: Will this not put Pakistani players, including the composite units, at a significant disadvantage?

MZ: This is not only a question of price competitiveness. India is the world’s second-largest producer of yarn, with a vast and modern manufacturing base in synthetic, man-made fibers. Pakistan’s industry simply does not have access to a vast variety of modern MMF-based fibers and fabrics because of the protection afforded to the dinosaurs in the MMF segment. If Pakistan is to meet the complex demands of modern consumer in export markets, access to raw materials is equally crucial.