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Tuesday, June 25, 2024

Pakistan Textiles value chain dilemma

Despite textiles being a major player in Pakistan’s economy, a significant number of firms still operate in a non-integrated structure. Nevertheless, the industry successfully exports a substantial percentage of its total output. In integrated sectors, each participant contributes to the value addition of textile goods.

The paradox of a long-standing economic powerhouse with predominantly non-integrated factories highlights both the resilience and challenges encountered by the Textile Value Chain (TVC) in Pakistan. Pakistan is a major producer, consumer, and exporter of cotton yarn globally. However, the average size of spinning mills in Pakistan is comparatively smaller than the global standard, making them less competitive, particularly with small spinning units using outdated technology and producing yarn counts below global market demands.

Integrated textile factories offer several advantages contributing to operational efficiency and product quality. However, they face challenges such as being capital-intensive, less responsive to technological advancements, and susceptible to disruptions that can impact the entire production process. In the context of a multistage turnover tax, non-integrated factories face increased gross taxes compared to their integrated counterparts. This discrepancy arises from the unique tax structure in non-integrated industries, imposing a turnover tax at each production stage. Consequently, as a product advances through multiple factories, cumulative taxation occurs, leading to an increased cost for the final product, making the non-integrated sector less competitive and diminishing profits.

The imposition of duties on raw materials exacerbates challenges for Small and Medium-sized Enterprises (SMEs), particularly as they struggle to avail duty-free benefits in the export duty structure. Large, well-integrated firms can take advantage of duty exemption schemes for exporters, while smaller enterprises face difficulties utilising these tools due to the complexity of application processes. Consequently, SMEs find it challenging to compete, as these duties significantly inflate production costs throughout the manufacturing process, creating a barrier to competitiveness.

Financial institutions naturally consider SMEs riskier due to their smaller size, limited track record, and insufficient collateral. Consequently, SMEs face difficulties obtaining loans or credits on favourable terms. Integrated factories, on the other hand, enjoy potentially easier access to credit due to their more comprehensive and stable business model.

Flexibility is a key aspect worth noting, particularly in integrated textile industries, where importing for re-export can enhance efficiency and ensure a steady supply of raw materials. It’s an important consideration, albeit one that may heighten dependence on foreign suppliers. In contrast, non-integrated industries might prioritise domestic sourcing for better control. However, when these non-integrated industries engage in importing for re-export, they could encounter coordination challenges.

Lastly, traceability in the Pakistani textile industry varies. Integrated factories benefit from easier traceability due to the centralised nature of their production process, while non-integrated factories may find traceability more challenging due to the involvement of multiple entities in different stages of production.

 On the other hand, non-integrated textile factories offer several advantages, most notably specialisation. By focusing on specific stages of the production process, these factories can achieve a high level of expertise and efficiency in their chosen areas. This focused approach allows for targeted resource allocation, contributing to a more sustainable and energy-efficient manufacturing model.

The discourse on integrated versus non-integrated textile units is also important in terms of sustainable practices. The impact of processes like picking, transportation, and ginning on cotton quality is particularly relevant here. Integrated units have the potential to implement more coordinated and sustainable practices across these stages. Addressing sustainability concerns in these processes becomes imperative for both integrated and non-integrated units in Pakistan, emphasising the industry’s need to adopt eco-friendly methods and ethical sourcing practices to ensure the production of high-quality and environmentally responsible textiles.

Non-integrated textile factories face severe challenges like a lack of communication between different entities involved in the production process. Pakistan’s standalone spinning units are increasingly becoming incompatible with competitors. Globally, textile industry enterprises are moving towards full or partial integration. To remain competitive and relevant in the evolving textile sector, Pakistan should align itself with this trend. This is imperative for standalone spinning units to integrate and diversify their offerings. Integration is not just a necessity but a crucial imperative for survival in the competitive landscape.

Integrating Pakistan’s textile industry, particularly SMEs, with track and trace systems is crucial for leveraging the GSP+ status and expanding into new markets. The establishment of the National Compliance Centre marks a significant step towards improved traceability and compliance standards, essential for enhancing the sector’s competitiveness and sustainable growth. However, more comprehensive measures and strategic policies are required to bridge this gap and foster sustained growth in the export sector.

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