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News Clips 28 June, 2013

[ No more crutches for textile sector ]
[ U.S. suspends Bangladesh trade privileges ]
[ Japan: Clothing makers counter 'fast fashion' ]

No more crutches for textile sector   [ top ]

BUSINESS RECORDER, BR Research, June 28, 2013
With the introduction of two percent value added tax on supplies for the textile value chain, the FBR has replaced the zero-rating regime for the textile industry, effectively bringing an era to a close.

Moreover, according to the SRO 98(1)/2013, all companies as defined in Income Tax Ordinance 2001 as registered for sales tax, have already been subjected to withholding tax at one-fifth of the applicable rate of sales tax on all purchases. Furthermore, the persons registered as exporters are also now to be subjected to withholding tax of one-fifth of the applicable rate of sales tax on all purchases from registered persons.

Under the scheme, refunds shall be available against exports, however, refunds to unregistered entities will not be allowed. These alterations are on the whole expected to encourage companies to register.

Coming at the heels of SRO 154, the leaders of various textile organisations have vehemently opposed this decision, claiming that the current situation in the country with high cost of utilities and poor law and order situation has already reduced their profit margin.

Talking to BR Research, an official from Pakistan Textile Exporters Association (PTEA) contended that the textile industry is operating at average profit margins of just three four percent profit which effectively leaves no room for blocking their funds with the government to be refunded later.

However while some of the industry concerns about additional taxation may be grounded in fact, it is certainly about time that the sector stands on its own feet. The textile sector has long enjoyed support from government, often receiving undue patronage regime after regime.

The recent figures for instance speak volumes about the sectors ability to find breathing room despite the immense pressure that has been exerted on the countrys economy at the hands of the severe energy crises.

During the last 10 months the sectors fundamentals have witnessed an upward trajectory at the hands of stable cotton prices, a growth spurt in regional demand, a surge in cheaper financing and the continuous Rupee depreciation against the greenback.

As per data released by PBS, textile exports at the close of 10MFY13 have shown 15.5 percent improvement year-on-year, jumping to $10.7 billion. The sectors profitability on the whole has also been steadily strengthening.

For a sample comprising 67 of the leading textile companies in the country, profits during 3QFY13 appreciated to Rs 8.9 billion, depicting a growth of 180 percent quarter-on-quarter. Meanwhile, the cumulative profits during 9MFY13 reached staggering heights, scaling Rs 22.8 billion in comparison to Rs 4.4 billion for the same period last year, according to a research brief compiled by Topline Securities.

These concrete fundamentals also make the sector an untapped haven for investors. A recent research report compiled by AKD Securities highlighted that the price-earnings multiple of a select group of 11 textile companies listed on the KSE remained 4.3 in the first half of fiscal 2013.

In comparison, the three-year average of their multiple had been only 2.2. Similarly, in terms of price performance, the year-on-year increase in the first half of fiscal 2013 has been a staggering 216 percent, the report continues.

In the medium-term, the improving sector dynamics are very likely to outweigh some of the liquidity concerns plaguing some of the industry players. Chinese yarn buying is set to resume to the previous sky-high levels and the expected GSP Plus status for Pakistan by the European Union will further push Pakistans textile to European countries.

All of this certainly disproves the notion that Pakistans textile sector will sink without the preferential spoon feeding by the government. What it does prove however, is that in all likelihood, the countrys textile sector is strong enough to grow without the crutches it has traditionally leaned on.

U.S. suspends Bangladesh trade privileges   [ top ]

USA TODAY, Matthew Pennington, Jun. 27, 2013
WASHINGTON (AP) - President Barack Obama announced Thursday the suspension of U.S. trade privileges for Bangladesh because of concerns over labor rights and worker safety that intensified after hundreds died there in the global garment industry's worst accident.

In a proclamation, Obama said Bangladesh was not taking steps to afford internationally recognized worker rights to employees in the South Asian country.

U.S. Trade Representative Mike Froman said the U.S. will, however, start new discussions with Bangladesh on improving workers' conditions so the duty-free benefits that cover some 5,000 products can be restored. He didn't say when that might be, noting that it would depend on Bangladesh's actions.

Bangladesh's Foreign Ministry called the suspension "harsh," saying his country had taken concrete actions to improve factory safety.

Thursday's announcement was the culmination of a year-long review of labor conditions in the impoverished country. Democratic lawmakers have been pushing for the step since the April 24 collapse of Rana Plaza in Dhaka that killed 1,129 people. In November, a fire at a garment factory killed more than 100 people.

"The recent tragedies that needlessly took the lives of over 1,200 Bangladeshi garment factory workers have served to highlight some of the serious shortcomings in worker rights and workplace safety standards in Bangladesh," Froman said. The Generalized System of Preferences, which is designed to boost the economies of developing nations, covers less than 1% of Bangladesh's nearly $5 billion in exports to the U.S., its largest market. The benefits don't cover the lucrative garment sector but Bangladesh's government was anxious to keep them.

The action may not exact a major and immediate economic toll, but it carries a reputational cost and might deter American companies from investing in the country, one of the world's poorest.

The U.S. action, which takes effect in 60 days, also may sway a decision by the European Union, which is considering withdrawing GSP privileges. EU action could have a much bigger economic impact, as its duty-free privileges cover garments, which account for 60% of Bangladesh's exports in that sector.

The U.S. Trade Representative review of labor conditions in Bangladesh follows a petition filed in 2007 by the AFL-CIO seeking withdrawal of the GSP benefits. The review was expedited late last year amid concern from U.S. lawmakers over deadly industrial accidents, deteriorating labor rights and the April 2012 killing of prominent labor activist Aminul Islam - a case that has not been solved.

Froman said despite close engagement with Bangladesh to encourage labor reforms, the U.S. hadn't seen sufficient progress. But he said the U.S. was "committed to working with the government of Bangladesh to take the actions necessary to rejoin the program." Steps it wants to see include passage of an amended labor law and other steps to enhance workers' rights and worker safety, Froman said.

Defending its record, Bangladesh said it was amending the labor law and a ministerial committee has been formed to ensure compliance by garment factories.

"Bangladesh hopes that the U.S. administration would soon bring back Bangladesh's GSP status, a benefit a least-developed country is supposed to receive in developed countries as per the provisions of the World Trade Organization," the Foreign Ministry statement said.

House and Senate Democrats who had been calling for the U.S. benefits to be curtailed quickly welcomed Thursday's decision. Rep. Joe Crowley, D-N.Y., who is co-chairman of the congressional caucus on Bangladesh, said that in light of recent tragedies in the country, the suspension was "inevitable."

"I hope this action will propel Bangladeshi officials to develop a clear path forward that protects all workers in Bangladesh," he said.

Sen. Robert Menendez, D-N.J., chairman of the Senate Foreign Relations Committee, said it was long overdue for Bangladesh to change its labor practices and ensure workers' rights.

"Bangladesh is an important trading partner, but we cannot and will not look the other way while workers are subjected to unsafe conditions and environments endangering their wellbeing," Menendez said in a statement.

He also called for American companies operating in Bangladesh to improve conditions for factory workers and work with European companies on a global standard for safety.

Lawmakers have criticized U.S. retailers that source garments from Bangladesh for not joining the more than 40 mostly European companies that have adopted a five-year, legally binding contract that requires them to help pay for fire safety and building improvements. The Bangladeshi garment manufacturers' association says it stepping up inspections and has closed 20 factories. The garment industry employs some 4 million people in Bangladesh, 80% of them women.

Japan: Clothing makers counter 'fast fashion'   [ top ]

JAPAN NEWS, Hironari Akiyama / Yomiuri Shimbun, June 24, 2013
With the domestic apparel market shrinking, the industry has seen a series of restructuring moves in an effort to compete with large “fast fashion” firms such as Uniqlo Co. that offer cheap clothing manufactured in-house.

Point Inc., which owns the women’s clothing brand Lowrys Farm, plans to form a business integration in September with Tokyo-based clothing retailer Trinity Arts Inc. and Natural Nine Holdings, a Tokyo-based apparel maker that owns factories overseas. Previously, most of Point’s products were made in emerging countries and acquired via trading companies. However, three years ago, the firm began making its own clothing overseas, and now produces about 20 percent of its products. The business integration is aimed at bolstering this manufacturing structure and cutting costs.

Cross Company Inc., a second-tier clothing retailer based in Okayama that owns the earth music & ecology brand, in December acquired a midranking firm, Tokyo-based CAN Co., in a bid to become a major player in the industry with sales exceeding 100 billion yen.

Cross Company began in-house production in 1999. “Buying CAN, which has a product line that resembles ours, will increase production efficiency,” said a Cross Company representative.

According to Recof Corp., a firm that advises companies on mergers and acquisitions, there were 31 apparel-related mergers and acquisitions in 2012, worth a combined 126.3 billion yen, the highest figure in the past five years.

This accelerated restructuring of the clothing industry is in response to a market that is rapidly shrinking due to the aging society, low birthrate and prolonged deflation. Yano Research Institute said the retail apparel market was worth 9.05 trillion yen in 2011, 12 percent less than it was five years earlier.

The retail business model, inwhich firms stock and sell finished products designed by clothing makers, appears to be approaching its limit. Companies are increasingly unable to compete in terms of design or cost with large fast fashion firms, which have internal design and production departments, and can compile information on products that sell well and mass produce them in emerging countries.

Recently, a number of foreign fast fashion firms have entered the Japanese market, including Inditex of Spain, which operates the Zara chain, and Hennes & Mauritz AB, or H&M, of Sweden. Retailers are being pushed to increase in-house production to compete with these firms.

However, the business integration involving Point will only bring sales up to about 150 billion yen, which is still short of the 200 billion yen to 300 billion yen that is standard among midranked overseas fast fashion companies, indicating further restructuring of the industry may be coming.