Malaysian Textile Industry Future

First I would like to thank the MKMA for giving me an opportunity to write my views on the textile industry for the October’s issue of the MKMA Newsletter.

 The Malaysian textile industry is currently going through a “very rough” patch in its industrial life cycle. Is it nearing its end of its life cycle or are there more years left in it? Will it go the way like what has happened in Taiwan, Hong Kong and Korea or will it have its own distinctive existence in Malaysia? Whatever the lifeform it will take will greatly depends on what will happen in the next 2 to 3 years.

The following events that will take place between now and 2006 will probably set the direction of the global textile industry for at least  the next decade:

1.                  Phasing out of quotas on 1st Jan 2005 as per the WTO agreement.

2.                  China’s role in the present and post 2005 period.

3.                  Terrorism , war and unpredictable events like SARS emerging.

1.      Phasing out of quotas on 1st Jan 2005 as per the WTO agreement.

We all know that the WTO agreement will kick in on 1st Jan 2005 and quotas will be abolished for all textile imports from MFN countries to the US and EC. This will bring immediately to our minds that only the fittest will survive meaning able to produce products at the lowest price possible. To the buyer this means landed cost so factors like logistics and duties come into play. Total cost will mean CnF plus duties. So competitiveness will be measured based on these points.

Ensuring the lowest cost of production and logistics costs will not ensure the winner unless you can bridge the import tariff barrier. That’s where survival trick lay for the next decade. We can overcome this tariff barrier either by working very efficiently or just simply ask for its removal (through Free Trade Agreements). This is where the industry and the government of every country producer should base its incentives and strategy on.

2.      China’s role in the present and post 2005 period

Countries like China have other advantages due to measures like currency control and export subsidies at their disposal. Cost of manufacturing is measured in the currency of the country of production and later translated to the country currency of the buyer. Hence an element of currency exchange takes place when the transaction is done. The exchange rate can be either determined by market forces or be artificially fixed by the country having a currency control regime. Countries like China and Malaysia practices “fixed rate” or “pegged” rate to eliminate short term variations in order to provide some kind of predictability to businessmen. However it can also be “fixed” to give an artificially low rate to the exporter in order to gain an unfair advantage over others. China and Malaysia to a lesser extent have been accused of using such practices.

If China which is under tremendous pressure from the US is forced to revalue its currency (RMB) to a much higher rate say 20% or more it will greatly change the entire scenario of the trading environment of not only textiles but of all manufactured products from China to the world. This will also impact greatly all those who have invested there recently thinking the current situation will carry on.

Another unfair method of increasing export competitiveness is “export subsidy”. China has been accused of subsidizing exports in the order of 17%. This had been carried out since the earlier communist years when the need for foreign hard currencies were sought to increase national reserves and to give support and legitimacy to the RMB. However recent years of economic successes and investments from overseas that had brought in so much foreign currencies, China would gradually see the need of slowly removing such subsidies. Such export subsidies are actually effectively lowering the exchange rate of the RMB further and can be seen as currency rate manipulation. The exporters are actually getting more RMB for the goods they export much higher than the official rate. Export subsidies are not allowed under WTO rules. China will be expected to abolish them eventually if she wants to be on a level playing field. Think what will happen to China’s competitiveness when this happens.

3.      Terrorism , war and unpredictable events like SARS emerging.

We have seen what incidents like 9-11 , Bali explosions and SARS can bring to a country’s economy. Acts of terrorism will force buyers to avoid sensitive and unsafe regions. After all businessmen want to make money in order to be able to enjoy it and not to risk their lives and lose everything. Investments in unsafe countries or places perceived to be so are very risky. From current reports countries like Thailand, Vietnam, Cambodia, China and even Malaysia are considered safe from terrorism problems.

Another problem is SARS which had affected China and Vietnam to a larger extent than other countries. SARS can bring on even more unpredictable results than terrorism. With travel bans imposed, movement restricted, fear of goods being contaminated by germs can completely wipe out the industry if prolonged. We have seen it and it is even more fearful than terrorism. This will cause buyers to second source their goods from other countries in order for their flow of goods not to be disrupted. Good management warrants you to second source your goods in case your primary source may be destroyed by strikes, riots, war, fire and now diseases (SARS). The morale here is that secondary source countries will have a role to play if you are still competitive enough to warrant the buyers’ attention.

I hope that with the short analysis I have given, our textile industry players will be more the wiser to put in their investments in the right places. I have always pondered over how true this saying is:

                             “There is no sunset industry, just sunset products”

  Back to Index of October 2003