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Cablegate: Textiles and Apparel Sector: Updated Statistics And

VZCZCXRO2887
RR RUEHLMC
DE RUEHLM #1594/01 2711038
ZNR UUUUU ZZH
R 281038Z SEP 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4358
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9988
RUEHKA/AMEMBASSY DHAKA 9448
RUEHIL/AMEMBASSY ISLAMABAD 6348
RUEHKT/AMEMBASSY KATHMANDU 4393
RUEHCG/AMCONSUL CHENNAI 6905
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 001594

SIPDIS

STATE FOR EB/TPP/ABT THOMAS LERSTEN AND SCA/INS

COMMERCE FOR ITA/OTEXA MARIA D'ANDREA

USTR FOR ABIOLA HEYLIGER

MCC FOR D NASSIRY AND E BURKE

SIPDIS

E.O 12958: N/A
TAGS: ECON ETRD KTEX ELAB CE
SUBJECT: TEXTILES AND APPAREL SECTOR: UPDATED STATISTICS AND
PROJECTIONS OF FUTURE COMPETITIVENSS - SRI LANKA

Ref: (A) State 138090 (B) Colombo 537 (C) Colombo 533

(D) 05 Colombo 1644

1. Summary: Textile and apparel export growth has slowed following
the expiration of the Multifiber Agreement (MFA). The decelerating
growth suggests that the apparel industry will no longer be the main
driver of Sri Lanka's economic development. Large scale operators
who have invested in new technology and backward integration
continue to perform well. Contrary to earlier expectations of
massive job losses due to the expiry of the MFA, the industry is
reporting a serious shortage of labor. End Summary.

2. The following are the statistics requested in Ref A regarding
Sri Lanka's textiles and apparel sector. Source is the Central Bank
of Sri Lanka except as noted:

2005 2006
Jan-June
Total industrial production:
(Millions of USD) 7,784 NA
Total textile/apparel/leather production:
(Millions of USD) 3,071 NA

Textile/apparel exports:
(Millions of USD) 2,895 1380
Textile/apparel share of total exports:
(Percent) 45.6 43.6

Textile and apparel share of total imports:
(Percent) 17.2 14.7

Textile and apparel exports to the US:(a)
(Millions of USD) 1,679 845

Total manufacturing employment:
(Thousands) 1,385 NA

Total textile and apparel employment NA NA

(a) based on USITC data

3. Recent growth: Textile and apparel export growth has slowed
following the expiry of the MFA. Textile and apparel exports
increased by about 3 percent in CY 2005 and 4 percent in the first
half of 2006, compared to 9 percent growth in 2004 and 6 percent in
2003. While Sri Lanka's Treasury Secretary recently told a meeting
of Sri Lanka Garment Buying Offices Association that the "apparel
industry is the future of Sri Lanka," the decelerating growth
suggests that the apparel industry will not be in a position to
provide the main impetus for Sri Lanka's future economic
development. While there is no detailed information on the
financial stability of the sector, news of cash flow problems faced
by small and medium sized operators is emerging in private
discussions. Large scale operators who have invested in new
technology and backward integration continue to perform well.

3. Prices: The key problem faced by apparel manufacturers is the
acute pressure on prices, which have fallen sharply. However, some
export categories, such as lingerie, have received higher prices and
continue to enjoy substantial margins.

4. Impact of the US and EU restrictions on China: Sri Lanka has
benefited from US restrictions on China. Sri Lanka's exports to US
of the restricted categories have risen sharply while exports of
unrestricted categories have recorded substantial declines. The
industry fears that the period beyond 2007 will pose several risks
to the industry due to the entry of Vietnam to the WTO and the
expiry of China trade restrictions in 2008.

5. Imports from China: All textile fabric imports are free of
import duty to support the apparel industry. There is a 15 percent
import duty and an additional 15 percent tax on apparel. There are
no specific restrictions on imports from China.

6. Impact on labor: An estimated 10,000 to 30,000 employees have
lost jobs due to closure or contraction of operations of some
factories. However most of these workers are believed to have been

COLOMBO 00001594 002 OF 002


absorbed back into the industry. In fact, there are about 30,000
vacancies in the industry as of September 2006. According to
industry sources, many large factories are working below capacity
due to labor shortages. The shortage is attributed to lack of
accommodation and transport facilities, poor perception of factory
workers in rural areas, migration of Sri Lankan workers to jobs
abroad, the demanding nature of factory jobs, and the rising cost of
living without a commensurate increase in salaries.

7. In 2005, the apparel industry requested a six-month deferment of
a Government mandated wage increase to private sector employees.
The government acceded to the request delaying the application of
the wage increase by six months from August 1, 2005 to January 1,
2006 for apparel workers. The apparel industry has protested
against a recent move by some trade unions to request a minimum wage
of Rs 10,000 (USD 100) for private sector employees. Garment
producers contend that wage demands should be tempered by the
realities facing the industry.

Action to improve competitiveness
---------------------------------

8. A new apparel industry strategy - Sri Lanka's apparel industry
has begun to review its 5 year apparel industry strategy 2003-2007
due to the slowdown in export growth from an anticipated 12 percent
to about 3.5 percent in 2005-2006. The industry has not established
new targets for export growth but has decided on a set of "strategic
initiatives" for the next 3-year period. The initiatives include
image branding, improving design and development capability,
increasing productivity, human resource development and worker
welfare, and supply chain management to improve lead times. The
industry also plans to request that the government provide fiscal
incentives (tax exemptions), assistance to build worker housing, and
a moratorium on electricity rate hikes applicable to the industry.

9. Backward integration - The garment manufacturers are taking
steps to improve backward integration. Numerous production
facilities for accessories, textile mills, dying, washing and
finishing plants have been or are being set up. Recently, a large
apparel company began building a dedicated apparel and textile
complex with the aim of inviting fabric and accessory manufacturers
from around the world. There are various efforts to improve skills
and training, including a tie up with North Carolina State
University. As part of the US government's tsunami reconstruction
program, USAID will construct and equip two model vocational
training centers to provide training for the apparel industry.

10. Image building - The industry has launched an international
image building campaign based on a new Sri Lankan brand "Sri Lanka
Apparel: Garments without Guilt". The campaign strives to
differentiate Sri Lanka as an ethical sourcing destination based on
good working conditions in factories and broad compliance with
International Labor Organization standards, including the absence of
child labor in the apparel industry.

11. Preference schemes - Sri Lanka qualified for EU GSP+ benefits
from July 1, 2005, allowing Sri Lankan textile and apparel duty-free
entry to the EU. However, Sri Lanka is not able to reap full
benefits of the program due to the requirement of local value
addition in excess of 50 percent. Sri Lanka is negotiating to
reduce the required value addition to 35 percent, although certain
segments of the apparel industry, especially those that have
recently invested in backward integration, oppose the change.

12. Prospects: Sri Lanka's apparel industry is at a cross roads.
The industry (especially the large players) has reached a high level
of sophistication in the production process. However, the industry
needs to become a full service destination, providing services from
the design stage to production. In this environment, large players
that have upgraded production and technology, invested in backward
integration, formed ties with foreign buyers and secured access to
finance will continue to perform well. Smaller players face
difficulties due to lack of financing, lagging technology, high
electricity costs, serious labor shortages, and competition from low
cost countries.

BLAKE

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