Factors Affecting Textile Industry

The research reported in this thesis was on “Factors affecting the growth of the Textile Sector”. The purpose of research was to study the micro-environmental factors affecting the growth of the textile sector so that the effect of the macro-environmental factors that plague the textile sector can be countered. The secondary data was collected by consultation of literature in the libraries and the internet and also from the material printed by different organizations of Pakistan. The findings suggested that among other variables that affect the Growth of Textile Sector such as number of looms, Raw Cotton production and Raw Cotton consumption, the variables Yarn Production and Number of Spindles have a significant impact on the growth of the textile sector.

CHAPTER 1

INTRODUCTION

This thesis identifies the micro environmental factors that have a major impact on the Growth of the Textile Industry. These factors include all those elements in the immediate area of operations of the industry that affect its performance such as production, consumption and supply of raw materials. The textile sector or textile industry is defined as the industries involved in designing, manufacturing, distribution and use of clothing. The textile sector is technically considered to be growing or flourishing; if the textile mills are producing cloth at an increasing rate or the contribution of the textile sector to the GDP of the country is increasing (i.e. production of cotton cloth is increasing in the sector). Hence, the relationship linking the growth of the textile sector with the production levels of the cotton cloth in the industry. The GDP of a country is defined as “The Total Value of Goods and Services Produced in an Economy”, so if the quantity of cotton cloth production is increasing or decreasing in Pakistan that directly goes to show that that the share of economic contribution of the textile sector to the GDP of Pakistan is growing or declining respectively. There are varieties of variables both macro-environmental and micro-environmental that affect the performance or growth of the textile industry such as the political, social, legal, economic and environmental issues. The textile sector or any other sector for that matter can only flourish or grow if the policies of the government support the operations of the industry on both the micro-environmental level and the macro-environmental level. For instance if the government policies regarding the industry are detrimental to the cause such as putting a quota to the amount of cloth that can be exported to other countries or on a more fundamental level of the supply chain, restricting the type of cotton that can be used to produce cloth in the mills or if the costs of financing the expansion is higher such as the conditions prevalent in the economy that would also result in a negative impact on the growth of the textile sector or if the inflation rate is beyond the predicted levels that would also cause the Pakistani cloth to lose its competitiveness in the markets, both local and international. The macro-environmental factors affecting the textile industry are tremendously diverse such as the illiteracy rate that is prevalent in the country and the trouble it causes in the form of resistance by individuals working in the factories and mills to adopt newer methods of production and technologies, to the investment insecurity that is present in terms of a declining economy partly through poor government policies regarding businesses and partly through the prevalent global recession that discourages the international investors to invest in an economy that is one of the biggest producers of textile products, to the physical insecurity that is present due to the law and order situation.

This thesis however would be discussing the micro-environment variables that affect the growth of the textile sector. The Textile sector is a major contributor to the economy of Pakistan; hence, it is vital to study the factors affecting the growth of this major industry because it reflects the state of the economic health and macroeconomic policies that govern the state.

The textile sector growth is dependent on a number of variables. The raw cotton production and its level of consumption affect the final product in the form of cloth. The level of consumption if important because it specifies the quantity that stays in the economy or in other words, is not exported to other countries. The number of looms and spindles is another major factor affecting the production of cloth because the larger the number of looms and spindles producing the cloth and yarn respectively the higher the produce of the textile sector is going to be because the yarn production is ultimately in used in producing cloth. All these factors affect the production of cotton cloth.

CHAPTER 2

LITERATURE REVIEW

The changing profile and map of the EU textile and clothing industry, this article talks about the changing structure of the European Union textile and clothing industry. Some of the main reasons it mentions for the change include markets with often unstable and rapidly changing demand, limited product range and subject to rapid obsolescence and limited scope for economies of scale. EU still accounts for a large share of world exports and employment despite increasing competition worldwide. Some of the textile and clothing firms were focusing on simply the design and marketing and sub-contracting or out sourcing manufacturing, others focused on creativity, design and the making and selling through their own networks.

Due to the absence of economies of scale firms tend to remain small, while small firms in turn have limited access to finance. So all of this leads to why the textile industry remains a particular small size in the EU, failing to increase beyond it. (Dunford, 2002″The Changing Profile and Map of the EU Textile and Clothing Industry”).

Skills and competitiveness: Can Pakistan Break out of the low-level skills trap? This paper argues that Pakistan needs to dwell into the higher value added, skill intensive and technologically advanced sectors instead of the current low-level skills trap. Currently Pakistan is only focusing on growing cotton and increasing it yield but that is not enough if Pakistan has to compete with a technologically advanced world. The main challenge to do that is to change the mind set and develop institutions which recognize the value of investing in people. (Rashid Amjad, 2005 “Skills and competitiveness: Can Pakistan Break out of the low-level skills trap?”)

Demand for textile and clothing exports of Pakistan, this article states that textile and clothing remain an important element in economic development of countries and in Pakistan it is the largest industrial sector with respect to investment, employment and export. The paper highlights various agreements which enhanced the access of textile products of country to various markets around the world. It compares the performance of textile industry of Pakistan with other developing countries in terms of exports. The major buyer of Pakistan textile products is U.S.A. Though the share of Pakistan’s exports in world market has increased to 1.1%, other developing countries had a substantial increase of upto 5%. The paper states the features of Pakistan textile industry that major chunk of yarn produced in country is exported in its raw form where it can be utilized for production of quality products such as fabric. Despite having the advantage of cotton and yarn production of superior quality the industry faces challenges in form of lack of investment, capacity and qualified workforce. The paper builds a model on the textile industry of Pakistan and provides with the policy recommendations in form of massive restructuring in this liberalized and competitive trade environment.

This article focuses on the textile industry of Pakistan for it has played an important role in the economic development of this country, therefore it needs to be built upon and undergo massive restructuring to become capital intensive like it has been in the west for a while now. There is a need to focus on the quality of finished products instead of spinning activity. The finished products include production of the fine quality cloth in textile mills. Reliance on low technology power looms for the production of fabrics should be reduced and the number of shuttle less looms should be increased which have the capacity to produce wider width superior quality fabric for the international market.

The reason for focusing on the quality of finished products and the development of quality cloth which is at the end of the manufacturing process is because apparels/garments provides the highest value added product among the textile items, therefore maximum focus should be towards the units producing garments, however, the increase in cotton prices resulting in proportionate increase in yarn price coupled with the increase in the cost of other inputs such as financial changes, electricity, labor, etc. has crippled the financial viability of the shuttle less weaving sector in Pakistan. To switch to more capital intensive production in the textile industry, Pakistan needs to add sufficient well developed infrastructure in terms of communication, services, export procedures, appropriately trained manpower, material inputs and transport facilities. To increase the Pakistan’s share in the global market would otherwise be difficult.

The article gives the examples of Hong Kong, South Korea and Japan. Pakistan has nearly 15000 looms whereas countries like South Korea and Japan has more than 50,000 looms. But there is more to them than just numbers. Developed countries depend more than anything on the supply factors of international competitiveness. E.g. only low wages cannot guarantee a cost advantage in textile production but there are many other factors like low capital costs and low energy costs. (Afia Malik, 2005 “Demand For Textile And Clothing Exports of Pakistan”).

Aftab A. Khan and Mehreen Khan in the article “Pakistan Textile Industry Facing New Challenges” highlight the importance of textile industry of Pakistan as one of the most contributing industry to the country’s GDP. It identifies the major variables resulting in the decline of industry which includes global recession, internal security threats, high cost of production, higher financing cost, depreciation of rupee, and inflation rate. The paper provides with statistics on textile industry of Pakistan and suggests that 60-70% of machinery needs replacement in order for attaining better quality of production and cost efficiency. The downfall of industry contributed by the severe energy crisis in country, along with the financial crunch and devaluation of rupee lead to higher costs of products imported for production purposes. This all lead to unemployment in country and decline in textile exports. The paper provides with the hope that textile industry can b revived and rebuilt if government supports the industry and certain measures are taken for its betterment. It includes subsidies, awareness programs, energy alternatives, trainings and exploration of new potential markets. (Aftab A. Khan, Mehreen Khan, 2010 “Pakistan Textile Industry Facing New Challenges”).

Industrial Organization and Technological Change: The Decline of the British Cotton Industry, this article by William Lazonick again focuses on the fact that failure to adapt to and compete with the changes in the international competition. The British industrialists were divided amongst themselves and failed to identify the structure and economic conditions of international competition. This study of the British cotton industry suggests that a fundamental cause of Britain’s relative decline from the late nineteenth century was the inability of its capitalists, divided as they were by competition and markets, to adapt Britain’s nineteenth-century economic structure to the conditions of twentieth-century international competition. The structure of industrial organization which arose in the context of Britain’s unchallenged domination of world markets in the mid-nineteenth century left the subsequent generations of capitalists powerless, both individually and collectively, to supersede the market so as to develop the coordinated managerial structures and introduce the high throughput production processes that characterize the modern capitalist enterprise.

The article “Hike in POL prices to raise cost of production” from the “Pakistan Textile Journal”, Feburary-2010 issue highlights the adverse impacts of increase in petroleum prices on the textile industry of Pakistan. The article speaks on the problems faced by the textile industry of Pakistan throughout its existence. It states that with an impaired perception of being a terrorist state, the export based economy has suffered to a greater extent along with the global recession. Moreover with less buyers aiming Pakistani textile markets and economic turmoil has forced the textile exports to go down by 30 to 40% in a time span of 3 years in quantity terms, along with an additional negative growth in all sub sectors of textile industry. Rising inflation, lower investment rate in textile sector, rising mark ups with higher cost of production and power outage with higher energy costs, all rendered to a greater trade deficit for country and less international demand in last few years. The exports in 2008-2009 slumped to $ 9.95 billion where the target was of $ 12 billion. Lastly it states that along with all issues faced by textile industry of Pakistan, power shortage and higher petroleum prices would further increase problems for the industry as it will make products less competitive and increase the cost of production as prices of all commodities will shoot up.

http://www.ptj.com.pk/Web-2010/02-10/Islamabad-Outlook.htm

The article “Pakistan faces a severe textile crisis” is a statistical report from “emerging textiles.com” 6th December, 2006, ponders on the situation faced by Pakistan textile industry. It states that Pakistan textile industry has experienced a double digit growth which is now over and several factors have contributed in this decline of textile industry, though the government has provided with an initial research and development funding to support the industry but rising energy and financing costs could not prevent the industry from a severe crisis. It also highlights the increasing competition faced by other textile exporting countries like India, Bangladesh, China and Vietnam with their low cost products. Import tariffs on textile products and shifting from the policy of utilizing more yarn of country for value added products to export of raw yarn has again intensified the crisis situation for the industry. The article provides with complete statistics of Pakistan textile exports from July2005 to June 2006.

http://www.emergingtextiles.com/?q=art&s=060906Pmark&r=free&n=1

In another article of Report on Textile Industry of Pakistan it claims that the reasons for the decline of textile industry of Pakistan include rise in the rates of (EFS) export finance scheme from 8.5% to 9.5% which is a rise of a 100 basis points. The second major reason it mentions is the rise in energy tariffs adding to the low availability of the electricity. Adding to that was the fact that refineries could not provide furnace oil in the required quantity to the power generation companies which led to the low working hours of the textile mills directly or indirectly. Another major blow came from the rise in yarn prices, the raw material feeding the textile mills. The cotton prices increase from 2000 to 6600 per 40 kg due to the export of yarn, the yarn export will amount to 614 million kg (which represents 14% of textile exports in 2010 versus 11% in 2009).

Some of the other factors influencing the textile industry include increase in minimum wage, Double freight for Punjab & Khyber Pakhtunkhwa textile mills, Lack of transportation facilities and Tariffs & trade agreements. (Yasin Ahmed, 2010 “Textile Industry of Pakistan”)

In another article “Pakistan lags behind in Technical Textiles” it is argued that the technical and economical impact of technical textiles in the industrially developed countries and their future contribution to the development of economics of newly developing countries, such as China, South East Asia, and North Africa etc. Pakistan still lags behind in technical textile products as neither the government nor the textile industry has made any serious efforts towards synchronizing textile products with the emerging needs of the world market by developing higher value-added products. Although the textile sector is the backbone of Pakistan’s economy, the Government as well as the textile industry has kept their focus on conventional textiles, ignoring technical textiles and knowledge-based products. (Noor Ahmed Memon, Noor Zaman, 2007 “Pakistan lags behind in Technical Textiles”).

In this last article of “Development of Textile Industrial Clusters in Pakistan” it mentions the reasons for decline of the cotton industry as outdated technology, poor machinery, lack of skilled labor and reliance on the traditional Ustaad-Shagird mode of training and due to which there is a high defect rate. (Muhammad Shahzad Iqbal et al., 2010 “Development of Textile Industrial Clusters in Pakistan”)

CHAPTER 3

METHODOLOGY

Research Type

The research is quantitative in nature. Basically it takes into consideration the data which is numerical in nature and the relationship purely depends on the data figures of the variables such as Number of Looms, Number of Spindles, Yarn Production, Raw Cotton consumption and Raw Cotton production.

Data Type & Research Period

This research is solely dependent on secondary data analysis. Multiple Regressions would be run on the data of Number of Looms, Number of Spindles, Yarn Production, Raw Cotton consumption and Raw Cotton production.

Sources of Data

Data on Number of Looms, Number of Spindles, Yarn Production, Raw Cotton consumption and Raw Cotton production will be collected from World Development Indicators, Economic Survey of Pakistan and APTMA.

Dependent Variable:

Factors affecting the growth of the Textile Sector

Independent Variables:

• Number of Looms
• Number of Spindles
• Yarn Production
• Raw Cotton consumption
• Raw Cotton production

OPERATIONAL DEFINTIONS

Textile Sector

The textile sector or textile industry is defined as the industries involved in designing, manufacturing, distribution and use of clothing. Although there is no one known way of measuring this growth. Sometimes the quantity of export of cloth is taken to be a measure of the growth of the textile sector but technically that there is no one way because there is a huge amount of informal sector that goes unrecorded in the textile sector. The textile sector in this thesis is considered to be growing or flourishing; if the textile mills are producing cloth at an increasing rate or the contribution of the textile sector to the GDP of the country is increasing (i.e. production of cotton cloth is increasing in the sector).

Yarn Production

Yarn production basically refers to the quantity of thread that is being made using the cotton that is grown and harvested. It is the total quantity of the Yarn that is being produced in an economy. It is a direct measure of the Thread that is being made from the cotton that is collected and further down this process of the supply chain the cloth is being produced from this very Yarn. Yarn Production is measured in (000 Kgs). Generally it should have a positive impact because this independent variable is directly related to the dependent variable.

Cotton Production

Similarly the cotton production is simply the amount of cotton that is being produced in an economy. This should also have a direct effect on the growth of the textile sector since both are positively related as the cotton production would go up so would the growth of textile sector.

Cotton Consumption

This variable basically measures the quantity of cotton that is being produced and consumed in the local economy. Since Pakistan is a cotton producing country, this variable measure the quantity of cotton that is being consumed and processed by local ginneries and mills instead of being exported as Raw Cotton to other countries. Technically this should have a positive effect on the growth of textile sector as cotton consumption in the local economy goes up so would the growth of textile sector.

Number of Spindles

This variable basically refers to the quantity of Yarn producing spindles that are operating in the economy. This should also have a positive relationship between the growth of textile sector because as the number of yarn producing spindles goes up so does the ability of the mills to produce cloth and hence the growth of the textile sector.

Number of Looms

This is similar in nature to number of Spindles; the only difference is that it measures the quantity of cloth producing Looms that are being used in an economy. If the Number of Looms would increase so would the cloth production and the growth of textile sector

HYPOTHESIS

Yarn Production

H0: There is a significant relationship between Yarn Production and the growth of textile sector

H1: There is an insignificant relationship between Yarn Production and the growth of textile sector.

Cotton Production

H0: There is a significant relationship between Cotton Production and the growth of textile sector.

H1: There is an insignificant relationship between Cotton Production and the growth of textile sector.

Cotton Consumption

H0: There is a significant relationship between Cotton Consumption and the growth of textile sector.

H1: There is an insignificant relationship between Cotton Consumption and the growth of textile sector.

Number of Looms

H0: There is a significant relationship between Number of Looms and the growth of textile sector.

H1: There is an insignificant relationship between Number of Looms and the growth of textile sector.

Number of Spindles

H0: There is a significant relationship between Number of Spindles and the growth of textile sector.

H1: There is an insignificant relationship between Number of Spindles and the growth of textile sector.

TECHNIQUES

Simple statistical technique of Multiple Regression will be used for the analysis of this secondary data. Multiple regressions will explain the effect of independent variables on growth of textile sector.

DATA ANALYSIS

For analyzing the data statgraphics will be used. Alongside explaining the relationships between variables and the amount of variation that each variable is causing, it will also provide the graphical analysis in graphical forms.

DATA INTERPRETATION

Statistical software such as Statgraphics which will be used in this thesis to interpret data. The P-values indicate the validity of the model and of each independent variable and the R-squared will explain the degree of variation caused in the growth of the textile sector through the variables Number of Looms, Number of Spindles, Yarn Production, Raw Cotton consumption and Raw Cotton production.

CHAPTER 4

RESULTS AND ANALYSIS

The dependent variable is growth of textile industry and the independent variables that are micro-environmental include Yarn Production, Consumption of Raw Cotton, Cotton Production, the total number of spindles and the total number of looms in Pakistan. The Yarn production has been chosen as an independent variable because theoretically speaking the production quantity of yarn is directly proportional to the quantity of cloth that is produced. After that the consumption of Raw Cotton has been chosen as an independent variable because it is a significant representation of the quantity of cotton that stays in the economy and is consumed by the population of Pakistan and not exported to other countries. Although the consumption of cotton specifies both the mill and non-mill usage of cotton, the non-mill usage of cotton is insignificant because it mostly represents the uses of cotton without any value addition for instance usages of raw cotton for domestic uses such as cotton balls used in infirmaries for patients. So most of the cotton consumption technically shows the amount of cotton that is processed in mills to produce cloth or textile. The Cotton Production again is a vital independent variable because it is directly proportional to the growth of the textile sector. The cotton produced is first ginned to separate the fiber from the seed, the fiber goes on to be twined and twisted to produce yarn and the yarn is then used to produced cloth so higher the quantity of cotton produced in an economy, the more the textile industry is liable to produce cloth. Multiple Regression analysis has been used as the statistical tool to develop and judge the degree of significance of the relationship between the dependent variable and five independent variables.

The Regression equation is:

Growth of Textile = -20.4196 + 0.00338711*Consumption of Raw Material

+ 0.00128728*Number of Looms + 0.00227119*Number of Spindles +

0.0191763*Raw Cotton Production + 0.00932286*Yarn Production

The dependent variable (Y) over here in the above mentioned equation is the “Growth of Textile Industry” which is being predicted or explained. The independent variable represented by (X) explains the Variance in Y. Every independent variable has its own beta coefficient that explains the relative importance. The beta coefficient explains the relative change in the dependent variable if the independent variable is changed by 1%. All variables show a positive relationship which is correct because all other independent factors are positively related to the dependent variable that is Growth of Textile Industry. If we analyze the beta coefficients, a one percent change in the Number of Looms would cause a .0012 percent growth in the textile industry, if there is a one percent increase in the Number of Spindles it will cause a 0.022 percent growth in the textile industry. Equally if there is a one percent increase in the yarn production it would cause a 0.009 percent increase in the growth of the textile industry. A one percent increase in the consumption of raw cotton would increase the growth of the textile industry by 0.03 percent, which is a significant percentage. Lastly, the one percent change in cotton production would cause a 0.019 percent increase in the growth of the textile industry.

The R-Squared statistic indicates that the model as fitted explains 95.5788 percent of the variability in Growth of Textile. The adjusted R-squared statistic, which is more suitable for comparing models with different numbers of independent variables, is 91.1576%. The P-value of the model is 0.0021. Since the P-value is less than 0.01, there is a statistically significant relationship between the variables at the 99 percent confidence level. The individual p-values of the independent variables will determine the relationship between each independent variable and the dependent variable. If the value is above 0.1 then the relationship is insignificant and the alternate hypothesis will be rejected. According to the model, Number of Spindles and Yarn Production have p-values less than 0.1. The p-value of Number of Spindles is 0.0070 and the p -value of Yarn Production is 0.0022. Hence the null hypothesis (H0) for these two variables are rejected and the alternate hypothesis (H1) will be accepted. According to the results, the p-value of Consumption of Raw Materials, Number of Looms and Raw Cotton Production is more than 0.1 so the null hypothesis for these variables is accepted and the alternate hypothesis will be rejected.