Getting into the Driver’s seat: Apparel (and other) SMEs can show the way to a brighter future

By Yohan Lawrence

In planning for the future, the past is just prologue. For modern Sri Lankan Small and Medium Enterprises (SMEs), the prologue is dominated by massive twin global headwinds of a post-pandemic future and a war brewing in Europe. Their combined impact can potentially up-end a global economic order that has been consolidated over generations.

It may seem like bad timing, or just plain bad luck, but this is now our inescapable reality. The question is what are we going to do about it? For SMEs to plan out their futures, we have to consider their present and how they got there. 

In Sri Lanka, Micro, Small and Medium Enterprises (MSMEs), defined as businesses that employ a maximum of 300 individuals and bring in a revenue of Rs 750 million, account for over 90% of all businesses and 75% of the labour force. The pandemic devastated them. A survey by the Department of Census and Statistics compared revenue and employment between January and May for 2019 and 2020 to assess the impact of Covid-19. Here’s what they found.

In the 17,469 MSMEs surveyed, revenue declined by 40.9% from March 2019 to March 2020, 74.2% in April and 55.2% in May. Employment fell by 38.5% in March, 80% in April and 66.7% in May.

This came after Sri Lanka suffered 4 years of economic decline; GDP growth fell from 5 per cent in 2015 to 2.2 per cent in 2019, thanks to droughts in 2016-17, followed a constitutional crisis in 2018-19[1].

Now, a war in Europe threatens international trade, perhaps the global economy itself. The apparel industry is a very big part of Sri Lanka’ trade, accounting for over 40% of all exports, and over half of the country’s merchandise exports. SMEs are an integral part of the value chain and that puts Sri Lanka at an important location in the global value chain.

In 2020, the Asian Development Bank Institute published a working paper[2] on the impact of the pandemic on SME performance in the Uva and Central Provinces. The study found that SMEs that had linkages with global value chains were able to weather the pandemic better than those that didn’t (of the 329 SMEs, 55 were in the apparel business which is globally linked).

They were more profitable, and average monthly revenue was third highest, after hotels and homestays that topped the list, and food and beverage businesses. Those that used R&D could expand easily because of access to broader networks (again, apparel is a good example), and made significantly higher profits. 

These studies and other experiences underline how SMEs are key drivers of the Sri Lankan economy. Revitalising their operations and their growth will be crucial in building a resilient economic recovery, and a stable, sustainable industry. As Sri Lanka considers approaches to the post-pandemic future, three for apparel SMEs – perhaps all SMEs – come to mind.

Invest: Long-term development has to be an essential part of any plan for the future. That means creating an enabling environment, access to finance and markets, skill development, business clusters and higher levels of technology. The National Policy Framework for Small and Medium Enterprise Development was set out in 2015; the Ministry of Industry created a National Enterprise Development Authority to build that enabling environment. Sri Lanka Vision 2025 cited MSME development as part of the growth framework.

The government and the central bank have concessional loans for MSMEs in underserved and unserved sectors; despite all that, bank lending to MSMEs is less than 5% of GDP. Half of that is for manufacturing, of which apparel is probably a small part. Most apparel SMEs rely on their own resources, which leaves them particularly vulnerable in hard times.

The Colombo Stock Exchange has three Boards for listing companies: the Main Board, the Diri Savi Board for start-ups and mid-size companies and the Empower Board for MSMEs that was set up in 2018. Until April 2021, not one company is listed on the Empower Board. Equity investment capital is hard to come by for MSMEs. 

There is clearly a case for greater institutional support to SMEs in Sri Lanka, and by extension, to the apparel industry that plays such a big role in Sri Lanka’s external finances and trade balance. In preparing for the post-pandemic revival, a fresh review of how investments in SMEs can be made more effective and productive should be included.

Innovate: Traditionally, technology levels in SMEs are low. Certain businesses – like e-commerce have developed as rapidly as internet connectivity has, and the use of smartphones. In manufacturing however, technology upgradation is less evident, and not quite up to what may be required.

Governments everywhere are encouraging businesses to undertake greater technology adoption; product quality improves as skill levels (which come with technology) also get better. In Sri Lanka, the Industrial Technology Institute supports SMES through advice and training on technology upgrading and adoption.

Apparel SMEs are already innovating; a recent example was using 3D printing technology to provide buyers with samples, when the pandemic disrupted transport and logistics. Samples are key elements in helping buyers assess and audit product quality, an all too important need in the apparel global value chains.

Some innovation is a function of necessity. But innovation that is driven by meeting new product standards – especially for sustainability and ethical manufacturing, for instance – will also require building R&D capabilities; some SMEs have done so, like improving thread quality that ensures longevity and durability – but greater institutionalisation can help. This is where public private partnerships (PPP) come in, and the government can lead the discussion.

Integrate: Several studies over the past decade by the OECD, the World Bank and other institutions have demonstrated how SMEs can thrive when they are part of global value chains. The findings of a specific study on Sri Lanka – referenced above – were broadly consistent with those of other bigger and wider studies.

A comparison with the SME industries in other neighbouring countries – Bangladesh, Pakistan and India – all highlight the absence of a critical ingredient in Sri Lanka’s system: data and data infrastructure. Data is available on agricultural and non-agricultural enterprises, but a sector-by-sector classification is unavailable.

There is no data on the SME contribution to exports, not much on the scale of different segments and the lack of data collected over a long period of time from which trends and issues, challenges and opportunities can be identified. Integrating SMEs with global value chains – though it has occurred to some degree in apparel – cannot be achieved unless there is a data-based system on which to make policy and provide incentives.

Global value chains have network effects, exposing SMEs to better technologies, and the chance to make higher value generating products. They also open up access for SMEs to bigger markets. True, MSMEs in most countries are domestically focused, but global value chain analysis and experience shows that doesn’t have to be true.

Despite being in different business areas, SMEs are also an ecosystem; in apparel, they are part of a larger domestic value chain that is part of a larger global value chain. The great opportunity for SMEs is to make that link stronger and more direct.

Invest, innovate and integrate should be our SME mantra. On the road to the post-pandemic future with all its twists and turns, and with Vision 2030 as the map that serves as a guide, apparel (and other) SMEs can drive the economic growth train at least through some stretches.                                   

[1] https://www.adb.org/sites/default/files/publication/616771/adbi-wp1153.pdf

[2] https://www.adb.org/sites/default/files/publication/616771/adbi-wp1153.pdf