‘Pakistan has to speed up work on SEZs’

An interview with Shahid Abdullah, Director Sapphire Group of Companies

A renowned industrialist, Shahid Abdullah is a Director at the Sapphire Group of Companies. He has played an active role in overseeing the Group’s diversification into various businesses such as electricity generation and dairy farming. He is also serving at the Boards of various companies within the Group.

BR Research recently had a sit-down with Shahid to discuss matters pertaining to the country’s textile industry, and Sapphire Group’s future plans. Below is an edited excerpt of the conversation.

BR Research: How have the business dynamics of the export-oriented textile industry changed ever since the new government came in?

Shahid Abdullah: On the positive side, the relief measures taken by this government offer greater opportunity for the market. Gas and electricity tariffs at $6.5 per MMBTU and 7.5 cents per unit, will provide much needed relief for growth in exports. Backdated refunds are also being cleared. The continuation of these policies is likely to have a positive impact.

The government’s shift in focus from non-productive investments to productive investments such as manufacturing is also commendable.

The agriculture sector demands renewed focus. I would encourage immediate attention to cotton crop. The annual production has come down to 10 million bales from 14 million bales in a period of four years. While the discussions relating to the R&D and best practices for revival of agriculture sector are important, effective implementation will be key to success.

BRR: What is your outlook on dollar?

SA: It is an extremely difficult question to answer, as I would really be speculating. So far one can see that Pakistan rupee is weak due to a dual deficit problem that we have today. The IMF program is likely to improve the crises, however, one does not know the terms of IMF; therefore, I cannot comment on this at this point in time. Post IMF program, we are likely have more clarity.

BRR: You mentioned that the reduction in energy tariffs has given a boost to the textile export industry. How long before the boost starts reflecting in export numbers as well?

SA: It will definitely take two to three years for exports to grow. There are several other steps that need be taken to allow the industry to get back on its feet and start export orders.

BRR: But your costs did go down overnight.

SA: The immediate benefit of reduced energy cost is that the previously idle capacity is now operational; this will impact job creation favourably. It is now time to increase capacity and gear for growth.

BRR: So you don’t see an immediate impact of these measures on overall exports?

SA: The industry is witnessing positive impacts as it has been able to capture new customers, who have committed new orders, closed garment factories are being revived, and new factories are being considered and setup as the cost of doing business is substantially reduced.

All of the above are necessary for growth. The results can be witnessed, provided we have consistency of policy and measures to give confidence to business community.

BRR: How will the expansion be financed in your opinion? Will it be more equity driven, as interest rates are at a multiyear high?

SA: Export based industry gets loan through LTF, where the interest rates are competitive and conducive for growth. We are pushing the government to increase the financing limit for textile industry.

Furthermore, the subsidized funding is only for imported machinery etc. For textile factories, the main cost these days is land and building. Land is now very expensive in textile clusters of manufacturing. Hence, the government needs to consider extending LTF facility or similar facility for land and buildings as well. This will definitely speed up the setting of new industry and current planned expansions.

BRR: What is Sapphire doing in terms of capacity expansion?

SA: We recently did expansion at our Denim plant to increase capacity from 12 to 16.8 million meters per annum.

BRR: Have there been or will there be any expansions by Sapphire as a result of the steps taken by the current government?

SA: The group’s growth suffered for a while. We are now in process of adding capacities after business- friendly policies have been announced by the government. About 70 percent of our turnover is export based; we are confident of further increasing the exports.

BRR: There is an argument that the textile industry of Pakistan is fragmented. Economies of scale and efficiency are both found wanting. Mian Mansha had once pointed out that Pakistan processes around 4800 bales per factory, whereas Australia processes 43000 bales per factory. Do you really think fragmentation is a problem?

SA: Fragmentation is a problem. Scale is an issue for sure. Sapphire as a group has tried to scale up in home textiles and garment production.

The real problem is the lack of focus and research on the agriculture output, especially cotton. If you add one million bales of cotton, it adds a billion dollar of exports. The cotton research institutes are totally redundant. Cotton seeds have become obsolete; there is virtually no R&D being put in cotton crop. We do not follow best practices and the recoveries have gone down.

Our strength is our cotton. Until and unless we improve the recovery and quality of seeds, adopt best practices, increase yields – we will continue to struggle. If we adopt best practices and invest more in R&D, we can increase our cotton produce to 20 million bales.

BRR: What kind of policy measures would you recommend to tackle fragmentation and encourage consolidation within the industry?

SA: Both the larger and smaller capacity textile companies have their inherent strengths, and can coexist. Smaller niche industries complement the requirement of larger industries.

BRR: Don’t you think there will be better patronage in case of smaller players coming under the wing of bigger players, in the context of access to finance and latest technology?

SA: It is already happening as exports are growing up. For example, fabric produced by sizeable units is used by smaller units to produce and export garments. This is what has happened across the world as well. It is very difficult for any textile industry to grow without a flourishing SME sector.

BRR: Manmade fiber was tipped to take over cotton based fiber almost a decade ago. Today, big textile importing markets have a larger chunk of fiber based textile. How the industry in Pakistan in general and Sapphire Group in particular is evolving to that reality. Will there be an end to the obsession with cotton?

SA: I have a different view on this, as I firmly believe that Pakistan’s inherent strength is its cotton. As far as manmade fibers go, the cost in countries, like China, etc. is substantially lower, and we will always be dependent on imports for such materials. Some units in Pakistan produce manmade fiber, but it will take some time for Pakistan to build capacity.

BRR: Bangladesh has no cotton either, but they have advanced in this segment by leaps and bounds. What stops Pakistan to take the same route even if it takes fiber to be imported?

SA: Garments in Bangladesh did backward integration at the first stage. Koreans came there and trained the workers. Then they had this whole era of Special Economic Zones (SEZs), where everything was done through a one-window operation (with the SEZ CEO reporting to the Prime Minister’s office.) SEZs across Pakistan are a prerequisite for development of industry. SEZs should work smoothly, where the industry does not have to worry about any operational glitches.

BRR: The unit price of our value added textile exports have tapered off in the past four to five months. Is it solely because of the rupee depreciation?

SA: The global market has become very competitive, and the unit prices keep on changing. And it varies from one segment to another. The way forward is to focus on value added segment.

BRR: Why the textile industry in Pakistan is so shy of spending on R&D? Is your company engaged in active R&D alone or in collaboration with other big players? There is hardly any presence of textile companies in the intellectual sphere, despite being the leading export earner and one of the leading employment generators.

SA: All big groups do engage in R&D activities, as value added sector cannot thrive without enough R&D investment. The orders that we end up securing from international brands are mostly due to R&D based product collection, presented to the brands.

BRR: Do you think it is time Pakistan’s textile exporters start looking for new markets, other than the traditional US and EU markets?

SA: The market is driven by the brands, where you get the pricing. The products may be going to other markets as well, through their distribution channel.

BRR: What is your take on the revised FTA with China? Do you think your concerns have by and large been addressed?

SA: Since FTA is already signed with China, it could give a huge boost to the value-added segment. You may actually see the foreign companies setting up plants here.

BRR: Why haven’t the Chinese come already? We have been hearing this story for quite some time now.

SA: For that to happen, the whole procedure has to be made easier and streamlined. The world has moved towards SEZs, and to attract Chinese textile manufacturers, Pakistan has to speed up work on SEZs to make them operational as soon as possible.

BRR: Do our export prices compete with those of China?

SA: If we produce efficiently, we will be more competitive than China because of the labour cost advantage. We are now competing with Bangladesh as well, which was not the case six months ago.

The business model around the world is rapidly changing. The big brands are now looking for one source. Hence, the focus area for Pakistan is the garment capacity, which is not sufficient at present. The global trade of garment is $785 billion with the Chinese share of 38 percent. Even if 1 to 2 percent of Chinese production is shifted to Pakistan, we will gain a lot, both in terms of export revenues and training of human resource.

And if they do not end up coming to Pakistan, they will become our competitors, because they eventually have to shift somewhere. China is already looking to shift its garment industry to its western part.

BRR: Are you actively seeking partnerships with big counterparts in China or elsewhere?

SA: We have sought, but we have not been very successful. This transition must happen so that our human resource benefits and we adopt best practices with much greater R&D focus.

BRR: An ADB study earlier conducted had noticed that the textile industry is not adequately represented. On the one hand there is the Ministry of Textile, TDAP, Commerce and others, while on the other, you have APTMA, PREGMA, hosiery associations and the list goes on. In other countries, there is a central unified body representing the entire industry. What is your view on industry’s representation for advocacy?

SA: As far as associations go, presenting the case to the government is one aspect. Associations are for the purpose of setting the roadmap for the industry. Smaller companies cannot afford to invest in research, which is where the role of associations becomes vital. The important thing is to have experts within associations to set roadmaps for key topics such as energy, taxation, agriculture, etc., and the government has to play a leading role in changing the pattern through policy measures

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BRR: Do you see a billion dollar Textile Company in Pakistan in the next four to five years?

SA: You will see a billion dollar textile Group in Pakistan very soon.

BRR: What changes do you suggest in the policy?

SA: The facilitation for creating capacities is the need of the hour.

BRR: What kind of facilitation are we talking about here? The costs have been slashed, refunds being taken care of, SEZs are underway. Don’t you think the ball is entirely in the textile industry’s court now?

SA: If the SEZ implementation is fast tracked, I totally agree with you that it is the industry’s job to work hard and show the results.

BRR: Are you specifically demanding or suggesting anything for the upcoming budget?

SA: Most issues have been taken care of. We would want the clearing of refunds of the exporters to be expedited.

BRR: Moving on, what are Sapphire’s ambitions as regards expanding the footprint in the energy chain?

SA: We are planning to put up an LNG Terminal in collaboration with other groups such as Lucky and Halmore. We have a strategic partnership with ExxonMobil in developing a buyers’ own LNG terminal.

In the broader scheme, Pakistan has to go for complete deregulation of the energy market, where the most important element is going to be encouraging competition in this sector. Our consortium aims to bring competition in the sector for the benefit of the manufacturing sector and the end consumers, who wish to cut the middlemen for competitive and reliable supplies.

BRR: Are you planning to diversify your business any further from the current set of textile, energy, and dairy?

SA: We will be launching our own brand in the dairy segment, to be started from Lahore. We will start very small, and build it slowly.