Size matters. If it didn’t, State Bank Governor Dr Shamshad Akhtar wouldn’t push the textile industry into seeking consolidation of the entire chain through mergers and acquisitions in order to face effectively tough global trading environment.

“The industry should gear itself to deal with the increasingly tough competition in the international market,” she told the textile millers during her address at the All Pakistan Textile Mills Association (Aptma) head-office in Karachi earlier this month.

She was reported to have advised the textile barons “I request you people to seriously look into the consolidation of the sector as international and regional competitive pressures are going to further build up, and it would be larger companies that are more likely to survive,” Dr Shamshad said.

She was of the view that the textile sector should endeavour to achieve economies of scale. “With size comes everything,” she maintained. “Small-sized enterprises could also benefit by contributing to large-scale export units,” she said.

Why so much emphasis on consolidation of the textile chain? The global textile trade has surged very quickly since the quotas were scrapped in January 2005 under the liberalised World Trade Organisation (WTO) trade regime. The world trade in textiles and clothing spiked to $530 billion in 2006 from $483 billion in 2005.

With a strong textile industry supported by locally produced cotton, Pakistan was viewed across the world as one of the few countries that stood to gain maximum advantage from the phasing out of the textile and clothing quotas. But it did not happen. Pakistan’s share in the global textile and clothing trade remains below three per cent. That is in spite of over $5 billion invested in the basic and value-added sectors since 2002.

The industry blames the inconsistent government policy, poor country perception of Pakistan in the international market because of runaway blasts and suicide attacks (and what not), and the soaring cost of production on the back of rising utility, especially energy prices, credit cost for the failure of the industry to take as much advantage of the removal of the quotas as was expected of it.

On the other hand, the government blames that the textile industry had failed to increase its share in the world textile and clothing trade because of its inefficiencies and smaller size of units, particularly in the value-added sub-sectors. Hence, it has long been urging the industry to move towards consolidation in all sub-sectors in order to create volumes, curb inefficiencies and reduce cost of doing business to become competitive in the global markets.

To encourage mergers and acquisitions in the textile industry, the Shaukat Aziz-led government had decided in March last year on a recommendation of the Planning Commission of Pakistan to allow a 15 per tax credit to buyers of smaller, loss-making units. The commission had floated the idea that the profit-making companies acquiring loss-making units should get a 15 per cent tax incentive on its profits to encourage consolidation in the industry.

Further, it had suggested that the profit-making company should be allowed to indicate the losses of the acquired unit on its balance-sheet. Nothing has so far been done on these recommendations either, said the industry.

“We have done our bit. It is now for the industry to realise that it cannot and should not keep looking towards the government to protect it from competition in the new tough international environment,” a senior federal finance ministry official in Islamabad told me several weeks ago.

While most textile leaders agree with the government to the extent of consolidating the industry, they do not buy the idea that the industry itself is or was responsible for the current impasse. “Is it our failure that foreign buyers are not prepared to deal with us because of political instability and deteriorating law and order? Is it our fault that we do not get power or gas to run our plants because of energy shortages in the country? Is it our fault that our costs have spiralled over the last few years? Is it not the failure of our foreign policy that we have been denied market access in spite of Islamabad’s leading part in the war on terror?,” a leading yarn and clothing exporter asked.

“None of these factors are in the control of businessmen. This is the result of ad hoc industrial policies of the previous government, which continued to refuse to give us what we need to stay afloat and compete with our regional competitors like China, India, and Bangladesh. The fact that we are still working and haven’t closed down despite a hostile domestic and global business environment should be acknowledged,” he said.

The industry is full of those supporting and opposing consolidation. “We agree that consolidation is crucial to create volumes needed to secure good export orders,” said Aptma-Punjab chairman Akber Sheikh. “But the authorities should help us consolidate by giving an exit strategy. While the central bank should instruct the banks to stop invoking personal guarantees against the directors/sponsors of loss-making units to prepare such units for acquisitions and mergers, the government must give fiscal incentives as proposed by the Planning Commission of Pakistan to prepare the ground for mergers and acquisitions.”

He said the government must ensure that the fiscal incentives were strong enough for a bigger company to acquire a loss-incurring mill. “Unless it is done, the consolidation of the industry will not occur.”

He said, the “provision of fiscal incentives for consolidation would prevent closure of manufacturing capacities, create volumes, reduce intra-industry competition, boost efficiencies and improve marketing and product development. The smaller units cannot do all these things. Unless we achieve consolidation, we should forget competing effectively in the global markets.”

All Pakistan Textile Association (Apta) Aptma, chairman Adil Mahmood is opposed to idea of consolidation of the industry. “It is simply not possible in the given circumstances, especially in the spinning sector. The textile industry has become unviable. It is absurd to talk about consolidation at this moment,” he said.

He said most of the smaller units were making huge losses. “Even if a profit-making group acquires loss-making unit(s), it will not be feasible for the former to move the machinery to the same premises in order to reduce the costs because of the extremely high prices of land and construction. Unless you move the machinery to the same premises, how can you reduce the costs?,” he wondered.

“The best solution to the current impasse in the industry lies in allowing the millers a respectable exit from the business or in writing off their debts as was done under a scheme given by the central bank a few years back to clean up the balance-sheets of the banks,” he demanded.

Is what Adil says really a solution to the industry’s problems? That may be so, but only partially and for a limited period. The best policy would be to encourage efficient and profit-making mills buy out the loss-making and smaller units to create economies of scale. For that, the government and the central bank must work together to hand out an attractive incentive package to the industry.