Micro, small and medium enterprises (MSMEs) are the backbone of any economy, and that is certainly true for Sri Lanka. MSMEs make up more than 90% of all non-agricultural business establishments in the country and generate 52% of GDP. They also account for 47% of all employment in a workforce of about 8.18 million.
The importance of MSMEs to Sri Lanka’s economy carries over to the economically essential apparel sector. In total, Sri Lanka’s apparel sector is the source of almost 48% of national exports and precious foreign exchange, in addition to contributing 7% of Sri Lanka’s entire GDP of US$ 84 billion. Moreover, the sector accounts for roughly 15% of all employment in the industrial sector. These 350,000 jobs – of which 20,000 are employed in the SME apparel sector. The context is important to illustrate the point that Sri Lanka’s apparel sector, and its SME sector in particular punches above its weight, given that these 350,000 jobs account for almost half of all of Sri Lanka’s export earnings.
Disruption at the grassroots
“Many large companies in this country and in our industry began as SMEs,” says Hemantha Perera, Chairman/MD of Sarasavi Exports, a leading apparel manufacturer. Despite many obstacles, SMEs have been essential to the continued development of Sri Lanka’s apparel sector. And they managed to keep playing such a pivotal role, without requiring much in terms of support.”
However, with the onset of the COVID pandemic, the daily work of many apparel SMEs has been severely disrupted. The sector is now banding together in its call for structured assistance to resuscitate their businesses. One of their biggest obstacles is the structure of the SME segment itself.
Approximately 80% of SMEs get their business by working in partnership with larger export firms. When Sri Lankan apparel was operating smoothly, this resulted in a trickle-down in orders, allowing the sector to flexibly provide surge production capacity to larger players as and when needed.
“Traditionally, a continuous flow of orders has not been a feature of this industry. This is of course common in all apparel supply chains which is tied to seasonal fluctuations in consumer demand,” says Rantha Tissera, Managing Director of Estilo Apparel, a mid-size firm that is among Sri Lanka’s most dynamic apparel SMEs.
“Typically, we tend to expect a drop off in orders for about 3 months every year, and in that time, SME production lines are usually idle. Given our current position in global supply chains, it will be difficult to break out of those cycles if we continue to stick with the status quo. And that was all prior to COVID.”
Funding fit for a resurgence
With the onset of the pandemic, order cancellations hit apparel producers across the globe. Given their already narrow margins, apparel SMEs everywhere were seeing their businesses erode daily. In addition to seeking safe ways of returning to work, apparel SMEs are concerned about gathering the financial capital needed to restart operations.
“Even when there is work, access to working capital will be a challenge that we will require some assistance to resolve. It is essential that we accurately identify who among us needs urgent working capital to restart work. Beyond that, we need assurances that we can safely continue to operate without disruption,” says Rushan Perera, Director of Sun Queen Garments Private Limited.
“Dependence on the larger players means that we rely on their orders to be able to pay our workers. Given that they are still facing shortfalls, we cannot expect the SME sector to survive based on what they are getting now. Some of us have the resources to be able to manage, but not all. Those who have been able to show greater resilience are the SMEs that managed to find and cater to stable niche markets.”
While working capital is the burning need of the hour, access to investment capital to buy new machines or upgrade their existing facilities will be essential to carving out a more stable and sustainable trajectory for Sri Lanka’s apparel SMEs.
“Many SMEs have growth ambitions but are unable to realise them because of a lack of access to capital,” says Denver Jayasundara, Chief Operating Officer at Rainbow Apparel. “Many SMEs want to continuously grow and market directly by investing in branding and technology. As an industry and a nation, we need to put together a strategy to facilitate such a strategy. ”
Vaccinations essential to safely stepping up SME capacity
Most SMEs expect these conditions to continue for another few months. All of them are looking at the serious possibility of a third wave of COVID cases with apprehension. SME factory owners and workers alike are concerned about how they could operate safely. While there are logistical given its size and wider geographic distribution, the consensus is that mass vaccination of the SME workforce is the only way forward.
“Our memberships employs over 20,000 people, and over 90 per cent of them have been vaccinated,” noted Rohan De Silva, Secretary, Sri Lanka Chamber of Garment Exporters. “However, there are many apparel SMEs outside of our association whose workers will also require vaccinations and engagement to bring back their confidence to get back to work.”
With orders now flowing in again to the large manufacturers, Sri Lankan apparel is beginning to ramp up production. When foreign currency is desperately needed in the national economy, ensuring that every available unit of production in Sri Lanka’s supply chain is brought back online is critical for Sri Lanka.
The way forward: grassroots collaboration and innovation
In support of this, the Sri Lankan Joint Apparel Association Forum (JAAF) is actively engaging with its members to share best practices on safety protocols, while stepping up coordination with public health officials and the Government in order to fast-track vaccinations to the SME sector as well.
So how is the industry adapting? Many firms support each other by sharing order flow and redistributing work according to available capacity. By larger companies working in partnership and sharing certain amount if its orders, has helped SMEs get over their worries about meeting delivery deadlines and getting workers back to their factories.
“We’ll have to start thinking of vaccinating families next,” says Jayasundara. “You don’t want workers getting sick because someone at home gets infected, and then having to stay away or create more panic. It’ll be hard to get back on your feet again if we have to face another prolonged crisis.” JAAF and the larger players are also working with national and regional Ministry of Health authorities in order to accelerate the vaccination of communities that are connected to the apparel sector. This is understood to be crucial to reviving these essential grassroots economies.
“This is also a good time to be thinking of some long-term permanent solutions,” says De Silva. “JAAF used to have a technology upgrade program for SMEs to meet sustainability and other compliance needs. Once the worst of this crisis is behind us, we need to urgently look at reviving these programmes, and add training and talent development schemes for SME workers.”
Many SMEs are also seeking to specialise; for example, Ruwangi Fernando, Chief Operating Officer of Adeem Uniform , operates an SME that produces school , work and hospital wear uniforms for exclusive buyers in the UAE, in addition to maintaining its own retail presence. Looking ahead, she is also exploring ways of expanding her production to other specialised uniforms in the Middle East whilst also developing on a diversified product mix.
In addition to working in partnership with larger companies, Rantha Tissera’s Estilo Apparel produces highly specialised fire-proof protection equipment in an exclusive partnership with a single overseas buyer. Such work has helped tide through the pandemic when sub-contracts dried up.
The continuation of GSP+ is another factor that many Sri Lankan SMEs are hoping for. That would open up access to markets for them directly to meet EU requirements on sustainability, ethical manufacturing, and quality. The EU’s continuation of GSP+ will be like the seal of good housekeeping for other markets like the US and the UK with similar GSP programmes.
Apparel SMEs in Sri Lanka are resilient, but they also need a little help from their friends at home and hopefully with new partners in niche markets overseas.