From Apparel To… Motherboards?

At a ceremony to mark the 150th anniversary of St. Mary’s College, Kegalle, on March 5, Prime Minister Ranil Wickremesinghe stated in a speech that Sri Lanka cannot depend on its apparel exports anymore, and that it was time to shift to electronics instead. The Daily Mirror quoted him as saying that the Government had, “…asked the University of Harvard to carry out a study on Sri Lanka’s economy. The university in turn informed us that Sri Lanka should not rely on exporting apparels any more. This is a correct assessment as Sri Lanka cannot compete with countries such as Bangladesh, where the wages are lower. Therefore we need to concentrate on new export items such as electronics. We can even start manufacturing parts for mobile phones or robotic machines.”

The apparel industry is Sri Lanka’s primary foreign exchange earner, accounting for 40% of total exports. But the present Government’s distaste for undergarments is well documented, and while this might not be the reason for the curtains being drawn on the apparel sector (we hope), it appears we should not be depending too much on one kind of export to boost our economy. But are electronics the answer? We confess that imagining Sri Lanka as an electronics hub makes us a little giddy with excitement. It certainly has a lot of appeal to it. The demand for electronic parts is tremendously high. Looking at the US market alone, the Consumer Technology Association sees the confidence towards tech spending increase year over year. The CTA Index of Consumer Technology Expectations (ICTE), which measures consumer expectations, has increased by 7.8 points this February, compared to the previous year, according to their report. What this means is that people are expected to purchase a lot of electronic devices, which is very good news to those who manufacture electronic devices.

But just because the outlook for the global electronics industry is looking good, can Sri Lanka really make the shift to become a large-scale manufacturer of electronics and corner a part of the market?

The slightly obvious flaw in the plan is that if Bangladesh is undercutting (pun not intended) Sri Lanka’s garment industry with lower wages, it most certainly can do the same in electronics. Bangladesh has been working on setting itself up to be a manufacturing hub in the region for a while now. A BMI research report last year identified the country as being one of the ten “emerging markets of the future.” Their export-oriented industrial sector already accounts for a quarter of their GDP, and is likely to increase in the future. One of the factors behind their rapid growth is their large workforce, which can drive manufacturing at a level that is hard for Sri Lanka to match. The country also already has a head start on manufacturing electronics, with a light engineering and electronics industry that continues to grow every year, and a preference for locally-manufactured electronics brands.

This does not mean that Sri Lanka lacks the capability for electronics manufacture. In fact, we do have our own manufacturing plant that produces electronics for local brands as well as for export. But Sri Lanka may have trouble competing directly with the likes of Bangladesh, Indonesia, Philippines, and Vietnam in terms of pure volume and cost, let alone dealing with giants like India and China.

Sri Lanka might not be able to compete with its neighbours on manufacturing volume alone. But does it even need to, to build a stable export economy?

Location, Location, Location

Sanjeewa Wickramanayake, chairman of E-wis, a computer and electronics manufacturer in Sri Lanka, believes that if Sri Lanka makes it easier for electronics manufacturers to start up, it would draw in international brands who may turn to Sri Lanka for their supply needs.

What does make Sri Lanka special is that its geographical location makes a good point to reach and serve all countries in the region. Leveraging this is one way Sri Lanka can boost its economy. Through the Government’s Balagathu Sri Lankawak (Empowered Sri Lanka) economic plan, they hope to open up Sri Lanka to investment and to use Sri Lanka’s location to gain access to bigger markets. Part of this will be done through free trade agreements, but a big part will be the logistics. The plan states that new expressways and the modernisation of the Colombo Port and the Katunayake International airport will make it easier for goods to be transported across the island.

The plan also proposes making it easier for companies to do business in Sri Lanka, by facilitating access to permits, making it easier to register property and to get loans from banks. Improved connectivity and digital payment services are also on the list, which would make it much more convenient for businesses to stay connected and carry out transactions online.

All this, of course, if the Government actually follows its own plan for once.

Diversification

The Prime Minister did not make an exact reference to the study that they had supposedly asked Harvard to do on the Sri Lankan economy, but earlier in January, Professor Ricardo Hausmann of the Harvard Kennedy School of Government delivered a lecture at the BMICH, on Sri Lanka’s economic growth. The professor said that Sri Lanka’s poor export performance was due to its lack of diversity in exports. He stated that between the years 2000 and 2015, China had added 76 new products to its export portfolio, while Thailand had added 70 new products for a gain of USD 326 per capita. In comparison, Sri Lanka had only added five products for a USD 7 gain per capita.

He stated that countries with diverse export baskets have a lot more options and a lot more economic complexity to play around with. Vietnam is one such example, whose economy overtook Sri Lanka because of their expansion into electronics.

Mixing Things Up

Sri Lanka cannot compete with the likes of Bangladesh and Vietnam in terms of electronics manufacture. Nor can it become one of the primary suppliers of electronics components to China and Japan ‒ at least not in any reasonable time frame. But we don’t really need to. What we need to do is to play to our strengths, and that lies in diversity. It is not necessary to replace our apparel sector with electronics manufacturing, but what we do need to do is ADD electronics manufacturing to our existing export portfolio, along with apparels and a whole lot of other products. While Sri Lanka cannot dominate any one industry, a diverse portfolio can make Sri Lanka a regional ‘one stop shop’ for all sorts of manufacturing needs. Add to that a good logistics network and great geographical placement, and Sri Lanka really can be a manufacturing hub for the region. We can also finally prove to the world that lingerie and motherboards can coexist.

Featured image courtesy electronicproducts.com