The Pandemiconomic Impact: Insights from ACCA finance professionals
Sri Lanka’s apparel industry expects a $1.5 billion loss in export earnings in the April-June quarter of 2020. The largest export earner at approximately $5 billion annually, the industry is bracing for a 50% decline in demand over the next year and a half and is forced to reinvent itself to survive, says ACCA Member Mahesh Semage.
ACCA, a global accounting body, is recommending a three-pronged approach called the ‘Three As’ of crisis planning, to deal with the economic fallout of this crisis: ‘Act’ to respond in a sustainable manner and focus on employees and stakeholders; ‘Analyse’ the different information sources to secure your organisation; and ‘Anticipate’ the business impact and future trends. Semage believes Sri Lanka’s apparel sector demonstrates how this method of crisis planning can be effective.
Sri Lanka’s apparel industry has no peer in the island’s economy with ready-made clothing accounting for nearly half of Sri Lanka’s total exports employing 15% of the workforce. Companies like Brandix, MAS Holdings and Hirdaramani are the country’s only large-scale multinationals with offices and clothing factories across Asia, Europe, and North America. Over several decades, Sri Lanka’s successful apparel firms have invested in R&D capabilities and built globally competitive expertise around the manufacture of innovative functional wear and high-end lingerie for brands such as Victoria’s Secret.
“The US & Canada accounts for 60%-65% of Sri Lankan clothing exports with the EU taking up 20 – 25%. These markets have now collapsed due to lockdowns and social distancing to contain the spread of COVID-19,” Semage, who works as the manager for strategy at MAS Capital Pvt Ltd, says.
The pandemic has caused many fashion stores to shutter in these markets while letting go of staff in their thousands. Fashion brands have requested clothing manufacturers in Sri Lanka for steep discounts for undelivered orders or asking them to differ, or worse, cancelled entirely. Semage says revenue has dried up. Even before COVID-19 hit Western economies, Sri Lankan clothing makers experienced an acute raw-materials shortage because major suppliers in China, Hong Kong and Taiwan had gone into lockdown.
The industry is committed to acting in a sustainable manner and focus on employees and stakeholders. “Already, the largest firms have proposed salary cuts between 5-60% with upper senior management and above taking bigger cuts or not taking any pay altogether,” Semage says.
The industry is constantly analysing market trends, but this can be difficult given the nature of the global spread of the pandemic and governments reacting to the crisis in different ways. Uncertainty is the only constant for many industries everywhere.
Anticipating the business impact and future trends as accurately as possible will tell the industry what it needs to at the present.
“We expect demand for clothing will fall 50% over the next one to one-and-half years because of the impact of COVID-19 could last as long as we don’t have mass-production of a vaccine”. And that is the best-case scenario, Semage says wryly. Smaller clothing makers, however, will struggle to make it after June. With revenue disappearing, larger firms will eventually face the challenge of staying above water with 70% of costs being salaries and wages. “We could see more severe measures in the months to come,” Semage says.
The industry has already pleaded for a bailout. It has rarely ever asked for handouts in the past, but this crisis is unprecedented.
Sri Lanka’s apparel industry is world-class with no other country coming close to its successes. It has survived shocks like the phasing out of the multi-fibre arrangement which had guaranteed orders, the withdrawal of the European Union’s GSP Plus trade concessions and the 2008 Global Financial Crisis. Through it all, the Sri Lankan apparel industry continued to grow and expand beyond Sri Lanka’s borders despite losing the competitive labour advantage. It achieved this by mastering concepts like lean manufacturing, building analytics capabilities to predict fickle fashion trends and focusing on high margin garments. The production of basic clothing was moved out to new their factories in Bangladesh, India, Kenya, Ethiopia, Indonesia & Vietnam while Sri Lanka became their innovations hub.
Recently, while Fast Fashion disrupted traditional clothing retail, Sri Lankan clothing makers were able to achieve fast turnaround times opening production facilities closer to markets in Europe and the US. A testament to their successes, companies like Brandix and MAS attract the country’s best talent like no other industry can.
To survive this crisis, Semage says the industry will need to change, fast.
The first challenge is regaining its labour competitiveness. Already, while Sri Lanka was in lockdown from March 17 to April 22, competitors in Bangladesh, China, Cambodia and Vietnam were operational taking what little global demand was left. Sri Lanka must not only play catch up but also find its cost advantage to survive. “Consumers are unlikely to chase fashion and make feel-good purchases. The functionality of clothing will be their main priority,” Semage says. “This is why it makes sense to suspend costly R&D exercises and high-margin innovative wear because the volume and returns will just not be enough,” he says.
Diversification will become critical.
The larger apparel firms have built up considerable reserves to survive economic shocks, but if there is one lesson from this pandemic it is the need to diversify risks, Semage says. “The industry in Sri Lanka was apparel centric, predominant revenue was only coming from apparel and I think they took a lesser degree of focus on diversifying into other industries, and one reason why the industry is also now impacted in a bad way”.
Companies are trying to move into medical gear and protective apparel/equipment. “If they can produce and develop that in this short period, I think they should be able to compensate some of that lost revenue in,” Semage says.
Supplying online retailers like Amazon which has experienced growth during the COVID-19 lockdowns word over is another option. Semage believes online clothing retail has the opportunity, but growth will be limited because often clothing is impulsive buying and consumers will have other prioritise for as long as the pandemic lasts. However, there is a challenge to consider. “Selling to online retailers comes at a cost compromise. You need to be very cost-competitive in that market,” Semage says.
The need to keep costs low and increase productivity will compel the industry to be cost-competitive. “I believe the staff at all levels will appreciate the need to work harder with, to some extent, fewer benefits that everyone survives. The large clothing manufacturers, the pride of corporate Sri Lanka, will also have to be much leaner,” Semage says.
As the industry grew in sophistication it may have put on some operational weight which must now be shed. “The industry’s ability to adapt and change is embedded in its DNA, you can be assured it will do what it takes to survive this crisis and contribute to the economy, that much is known amidst all the uncertainty,” Semage says.