How Economic Crisis Affects Sri Lankan Apparel Industry Economics Essay

At present, the whole world has been negatively affected by the global financial crisis (2007-2010). Not only the most powerful counties in world such as US and Europe, but also developing countries such as Sri Lanka been touched by the crisis more negatively.

The ultimate purpose of this is to evaluate the impact of global economic crisis on Sri Lankan apparel industry. The entire Sri Lankan apparel industry has been negatively touched by the global economic crisis and eventually it has been led to increase uncertainties within the industry.

The main intention of this article is to evaluate how the Global economic crisis has been affected on Sri Lankan apparel industry. The impact of Macro environmental factors & MESO factors due to global economic crisis will be discussed.

Key words: Global economic crisis, Sri Lankan apparel industry, Macro environment, MESO environment

Task 01

1.1 Introduction

The purpose of this article is to evaluate and measure how the economic crisis affects to the Sri Lankan apparel industry. Thus, I have taken economic downturn as the Macro theme and the decreasing demand due to the economic downturn as the Meso theme in my article and also discussed how it impacts to the marketing as a whole.

To publish my article, I have already selected few important magazines which are expected to expand my thoughts to the relevant target audience.

Macro theme: The economic downturn

Economic downturn of the world affect directly to the most of the countries negatively. It affects Sri Lanka as well, especially for the apparel industry in Sri Lanka. Most of the garment factories were closed down and downsized their activities, so it has been affected negatively to the Sri Lankan apparel industry and employment as well. Under Macro theme, we have discussed about the Economic downturn and its affection to the selected industry.

Meso theme: Decreasing demand

Decreasing demand drastically of the apparel industry in Sri Lanka is seen as the result of the negative changes of the economic crisis which directly affect suppliers, distributors, competitors and the customers. Due to the fluctuation of the exchange rates and the decreasing of per capita income, the all above factors have been affected negatively. Further I have discussed how the Meso factors respond to the selected Meso theme and the actions they have already taken and the relationship between them.

1.2 Most suitable potential publications

1.2.1 Business week (Bloomberg Business Week)

This is a global business magazine which inspires leaders to turn new ideas into action. This article of the magazine can create global conversation among the business professionals. This magazine has more than 4.7 million readers each week in 140 countries. This magazine founded in 1929 and the current publisher is Stephen J.Adler and its publishing weekly basis. This magazine mainly focuses on business professionals, high-income and highly educated people as its target audience to reach its ideas.

Due to more than 4.7 million readers, distribution among 140 countries and the considering about its target market, this magazine would help me to distribute my findings among more than 4.7 million people in the world. Its’ weekly frequency would help to remind my thoughts as well.

(www.businessweek.com)

1.2.2 TIME

This is an American news magazine; it covers most of the countries in the world. TIME EUROPE covers the Middle East, Africa and since 2003 it covers Latin America also. TIME introduced to Asia as TIME ASIA is based in Hong Kong. TIMEs south pacific edition covering more developed countries such as Australia, America, New Zeland and the pacific islands based in Sydney. The publisher of this magazine is the TIME Inc. and also as the target market, TIME focusing on business audience which publishing every week.

Most of the investors of Sri Lankan apparel industry are from countries such as America, Europe and Australia etc. So, this article helps them to get a clear picture about the current situation of the Sri Lankan apparel industry. To get the investment decisions, I believe this article really helps them to achieve more success.

1.2.3 LMD Magazine (Lanka Monthly Digest Magazine)

This magazine is not restricted in one area. It covers the gamut of business, political, management, current affairs etc. which really helps to corporate leaders, managers, directors & executive to express their views & generate new ideas. Not only Sri Lankan content, but it also covers both Sri Lankan & international corporate, finance, economic, political etc. This magazine mainly targets business and opinion leaders, senior managers and professionals, the academic & diplomatic communities and civil society organizations. It publishes every month under the publisher of Media service (Pvt) ltd.

To cover most of the segments in Sri Lanka and the international, this magazine can help to pass my message of the article to its target market. Not only the professionals, but it also covers the civil society. Thus, I think this magazine would help to me to expand my thoughts to each & every segment of the business world. Subsequently, I can expect a good respond, suggestions and novel ideas of readers through this magazine.

(www.lmd.lk)

1.2.4 The Marketer

The Marketer is an official magazine of chartered institute of marketing which is publishing by the Redactive Publishing Ltd as a monthly magazine. This magazine is sent to all members of chartered institute of marketing in UK and it’s available for non-members as well. The aim of this magazine is to offer in-depth analysis and practical guides to help marketers to stay at the cutting edge of the profession, combining the Institute’s academic expertise with marketers’ real life experience to promote marketing as a core business function. This magazine mainly focuses on marketers, professionals as its target market. This is very popular magazine among all marketers around the world.

(www.themarketer.co.uk)

Thus, I can express the current situation of the Sri Lankan apparel industry to the marketers through this magazine. And also it’s easy for marketers and professionals to get a better idea to form their marketing decisions & activities in Sri Lanka.

1.3 The Selected magazine

Out of the above four magazines, I have selected LMD magazine to publish my article because both its target market and my article’s target market seems similar. Not only the local readers, but LMD has also reached global readers as its general customer base.

Sri Lankan apparel industry is one of the leading industries before the economic crisis hit Sri Lankan economy. Since world economy is been recovering from the crisis again, Sri Lankan apparel industry has a good opportunity to grow up once again. Since LMD highly focuses on business and opinion leaders, diplomatic communities as its target market, I can expect a good respond from them through my article.

To take marketing decisions and implement new marketing activities, marketing professionals should be aware about the current changes of the industries like apparel. Thus this article would help them to get a better idea about the current situation & future trends of the Sri Lankan apparel industry.

Due to the above factors, I have selected LMD magazine in order to publish my article and it would help me express my views to my target readers.

Task 02

2.1 Introduction

The current global financial crisis (2007-2010) occurred with the failure of several large US financial firms in September 2008. Even though many business journals and economic specialists warned to US and European mortgage banks, investment banks and financial firms about a financial crisis, no one was ready to face such a situation. As a result of loose monitory policies, excessive capital flows and high borrowings, the US and European economies led to an economic crisis that caused to credit problems and major losses. By the first week of September 2008, the global credit market, investment banks and financial institutions were highly affected and threatened by the crisis and started to play a critical role in economies in all over the world

Causes for the global financial crisis (2007-2010)

According to Acharya V, Philippon T, Richardson M and Roubini N (2009), there are two fundamental causes for this crisis.

Credit boom

Credit boom could be explained as the inability for consumers and companies to get loans. According to Dell’Ariccia D, Igan D and Laeven L,(2008), while the probability of a banking crisis increases significantly (by between 50% and 75%) during booms, historically only about 20% of boom episodes have ended in a crisis.

Housing bubble

housing sector was the biggest growth, this because the financial institutions gave large sums of money to purchase homes, and brought with it that people began to buy homes, causing an increase in demand for these, this led to Homes are trading at high prices in many instances came to the speculation. People borrow to buy your home, then expect the price for the same rise and sold, which obtained the money to pay the debt owed to the bank and demanded a new loan to buy another home, this phenomenon called “housing bubble”. This lasted a short time and interest rates began to climb to try to lower the high levels of inflation, obtaining credit was no longer so easy, and housing demand fell and prices of these.

According to Akrasane N (2009), the following causes have been directly affected to create the world economic crisis in to this stage.

1. Global macroeconomic imbalance

– The industrialized West consumed too much.

– The rest of the world, particularly Asia produced too much

(Refer Appendix 1)

2. Free flow of capital in the global financial market helped facilitating and accumulating the imbalances

(Refer Appendix 2)

Consequences of the crisis

(Source: 23rd Asia-Pacific Roundtable)

Even though many people emphasized that Sri Lanka has got no effect by the economic crisis, there is no chance of survival for a small economy like Sri Lanka while the whole world getting affected by the economic recession. Sri Lanka too now has started to feel the effects of the crisis since a large number of private sector establishments have been shut down and our main exports such as garments, tea, rubber, coconut, cinnamon, gem and some other main exports have been losing the demand and the market and their prices are falling down as well. Thousands of employees have been losing their jobs as a result of that.

One of the main fields that affected by the crisis is Sri Lankan apparel field. Sri Lankan apparel sector is highly affected by this crisis and the sector is facing massive problems such as closure of garment manufacturing plants, loss of foreign exchange and uncertainty of employment. Based on a detailed survey conducted, around 75 garment manufacturing plants have shut down and thousand of garment employees have been losing their jobs they never ever thought could be realities.

The purpose of this article is to evaluate the impact of global economic crisis on Sri Lankan apparel industry. Mainly the crucial problems that Sri Lankan apparel industry has been faced due to the global economic crisis, how they affect Sri Lankan economy and their impact of MESO level changes like suppliers, competitors, distributors and customers.

2.2Macro Environment

Under macro environment, Economical changes upon Sri Lankan apparel industry due to Global economic crisis will be discussed.

The world economic crisis (2007-2010) has been playing a major role not only in the economies of US and Europe, but also in the economies of the other developing countries in the world. The main investing banks, financial institutions and world credit market has been highly touched and collapsed by the crisis and led to various economical and social issues.

Not only the most powerful economies in the world such as US and Europe, the developing economies such as Sri Lanka too has been touched by the crisis now as main sectors such as apparel, tourism, tea, coconut, gem etc have been losing their markets and some of the manufacturing plants have shut down as well.

Sri Lankan apparel sector also has highly affected by the crisis since it’s facing some crucial problems due to the uncertainty of the international market. Ultimately this has been leading to arise many unexpected problems in Sri Lankan apparel industry as discussed below. The issues that have been raised due to the economic crisis could be illustrated as below.

(http://www.worldfederation.org/Relief+and+Economic+Development/Articles/Economic_Bulletin_No2_Global_Economic_Crisis.htm)

Loose demand in the international market thus experiencing sharp falls in prices as well as demand.

Since apparel industry is Sri Lanka’s biggest industrial export, it plays a major role in Sri Lankan economy. Our main export markets such as US and Europe have not recovered from the crisis yet; it has been led to decrease the demand for Sri Lankan garments. Thus not only the apparel industry but also the entire economy would suffer because of lose of demand and reduction of the market share. According to the latest reports, garment exports fell by 20 percent in February 2010 and by a similar percentage in January.

Conversely with competition increasing from the other key competitors such as Bangladesh, Vietnam, China and India, the apparel sector of Sri Lanka is continuously under pressure to remain cost competitive during these recession time.

Job loses

The economic crisis has been led to arise many labor issues in Sri Lankan labor market today. Hardest hit are young worker and women, who represent 90 per cent of the garment workforce.

According to T.M.R. Raseedeen, general-secretary of the National Association for Trade Union Research and Education (NATURE), more than 50,000 workers lost their jobs in the 2008-09 periods as some 50 mostly garment factories closed due to loss of orders.

(http://ipsnews.net/news.asp?idnews=51268)

For example, Cinotex, a garment manufacturer that has been in Katunayake for the past 25 years, let 3,000 of its workers go, but asked them to resign voluntarily to avoid having to pay compensation. The same happened last August to Jakalanka which shed 2,000 jobs. West Apparel cut about 1,000 jobs. MS Apparels, with plants in Liyanagemulla and Katunayake, told 1,300 of its people that they were out of a job.

(http://ipsnews.net/news.asp?idnews=51268)

Closing garment factories

Most of the biggest garment firms have not highly touched by the recession but mostly small and medium size factories have been badly affected.

It is mostly small and medium-scale factories that have suffered the brunt of the economic crisis. Last year the number of garment factories fell to 250 from 300 in 2008.

Future opportunities and trends

Since the threat of the global financial crisis is been reducing and world economy is been recovering, there are some chances and opportunities to overcome from the downward in Sri Lankan apparel industry and increase the demand for the garments.

Enter in to new markets and captures new customer locations.

Since our key markets such as US and Europe has been knocked badly from the recession, Sri Lanka can find out some other alternative markets in order to increase the sales and demand for our garments. Sri Lanka can concern about other markets such as Middle-East, African countries, Russia and other well developed nations.

Introduce innovative & creative products to the market.

In order to gain new markets & keep the existing markets, manufactures can consider about producing more creative and innovative garments. Subsequently it would be easier to attract the customers and increase the demand for our garments. Manufactures should concern about the preferences of the international clients and new trends and emerges of the market as well.

Quality improvements

Many international customers are quality conscious than price conscious. Thus it would be an advantage if manufactures can more increase the quality of the existing products. High quality products can gain high demand from the customers and develop the image of the productions as well.

Focus on high return activities.

Exporters can invest on high return activities rather than go for less return activities which means ultimately increase the profits and make our apparel industry stable as well. Moreover Sri Lanka can go for long term or short term agreements with the other countries or can concern about getting more tax benefits and profits as well.

MESO Environment

Customers

When there’s an ongoing economic crisis in the country, customer’s purchase power automatically goes down and the demand for goods and services falls. People might not have enough money to even fulfill their basic requirements. Thus the demand for garments from customers goes down as well which forces garment factories to lower the amount they can invest in their business and decrease the production.

Suppliers

Mainly the suppliers of the apparel industry could be listed as follow,

Fabric manufactures

Thread manufactures

Machinery & other tools suppliers (Machinery & tools that use for garment manufacturing)

Chemical producers that produce chemicals which use for garment manufacturing.

The above mentioned parties have been highly affected by the crisis since they are directly linked with the apparel industry and they have been lost demand for their products.

As mentioned earlier, 250-300 garment factories have been closed and the suppliers of those factories would negatively affect since they make losses due to less demand.

Distributors

Local and international garment retail shops can be taken as the distributors of the apparel industry. When there is a less demand for garments from the market, sales of distributors fall down as well.

Competitors

When there is a less demand in the market, the competition among the suppliers also goes down. A good competition leads to supply high quality n better goods and services to the market. When there is a less competition in the market, it leads decrease the arrival of new, innovative and creative ideas to the market as well.