DELOCALIZATION: A Pragmatic Approach to Pak-Italy Bilateral Trade

JUNE 17-2005

DELOCALIZATION: A Pragmatic Approach to Pak-Italy Bilateral Trade

Majyd Aziz

Delocalization refers to a geographical movement or transfer of productive activities essentially to obtain a more favorable cost price. This global shift in production undertakings is either a result of a strategic program to integrate expertise available in different areas, the cluster scenario for example, or it is the result of market-oriented competitiveness. Delocalization is also the outcome of the policy to broad base the investment portfolio and to obtain advantageous returns on investment. Delocalization also brings into focus the hard-core decision of aggravating the unemployment situation in the area of origin since there is a break-off of business relationship with the domestic entities due to the decline in economic activities.

The escalating rise in costs has necessitated a dependence on highly sophisticated machinery and equipment. This has ensued into a situation where there is an adjustment within the labor market with employers looking for workers who are adaptable and have relational competencies. Semi-skilled and unskilled workers have a lower demand profile in many European countries. In Italy, the various employers’ associations have welcomed the introduction of extensive and more efficient training schemes for workers. The employers, as well as the trade unions, agree that to remain competitive in the international market, labor costs must be rationalized and quality further upgraded.

Pakistan’s textile and clothing industry has been catering primarily to the low price market in Europe and America. Sheltered by the quota regime, the manufacturers were able to develop substantial textile exports and thus able to survive in the global scenario. The elimination of quantitative restrictions from the first day of 2005 has put pressure on the Pakistany textile producers as recent events have substantiated this new development. The European and American markets have been inundated with textile products from China with some categories increasing by 1500%, 1300%, and 1100%, etc over last year. The outcome: re-imposition of quotas on China. Pakistany textile exports to EU have to face 12% import duty with bedwear still subject to an anti-dumping duty of 13.1%. GSP Plus facility to Pakistan is still just a dream.

In this scenario, it is imperative that Pakistany textile manufacturers embark upon the strategy to develop linkages and joint ventures with the Italian textile industry. The advent of a free economy has made it imperative for Pakistany companies to contemplate this approach. The prime objectives are to increase production and employment levels, to improve productivity and international competitiveness, to encourage import substitution and promote the exportation of products, and to upgrade manufacturing processes and products. Companies based in developed countries could assist and contribute thru international redeployment of manufacturing facilities and the transfer of industrial technology and know-how to SMEs in developing countries and economies in transition.

One of the most prestigious labels in the textile and clothing industry is the Made in Italy label. It is the leading sector in the Italian economy and primarily consists of small and medium sized companies. In fact, 95% of the companies have an annual turnover of less than EUR two million. The Italian fashion scenario employs nearly a million persons, including about 200,000 self-employed workers. However, this industry is in the throes of crisis. More than 250,000 workers have been laid idle due to international competition, rising costs, counterfeit products, and unfair competition due to illegal importations.

The share of textiles in Pakistan’s exports is 68%. There is a need to introduce processes and expertise to aim for value-addition of products and for establishing a reliable image for the quality of textile products. The time is opportune for Pakistany textile companies to interact with Italian companies desiring to relocate in Asia. The Italians are famous for their men suits, for example. Pakistany men suits manufacturers have not been very active in the global market. An Italian company, having a brand name, having market access to the North American and European markets, and having linkages with the Italian fabric manufacturers, can delocalize its operations at home base by shifting manufacturing facilities to Pakistan. This would be mutually beneficial to the Italian company as well as its partner in, say, Karachi. The Italian company would be able to rationalize costs while at the same time maintain technical, quality, and marketing controls. The domestic company receives cutting edge technology, enhances value of its exports, and is able to obtain market access.

It is in the interest of Pakistany manufacturers to take maximum advantage of the delocalization syndrome now actively being contemplated in most of the developed countries. Italian textile companies must be contacted and convinced that Pakistan is the right place to locate and that this arrangement would be beneficial, would be progressive, and would bond the textile community of Italy and Pakistan.