Investing in employment intensive SMEs more lucrative for exports

LAHORE: Large scale manufacturing sector is crucial for the economy but the main providers of jobs in Pakistan are the small and medium enterprises (SMEs) that need a boost to move from being local suppliers to global suppliers.

The share of the manufacturing sector in the job market is only 14 percent that is very low because 80 percent of the manufacturing investments in large scale industries provide less than 20 percent of the manufacturing jobs.

The rest over 80 percent jobs are provided by the SMEs. The size of workforce in Pakistan is 63 million out of which only 9.13 million jobs are provided by the manufacturing sector.

The workforce in around 300 operating spinning and weaving mills is around 180,000 at an average of 600 workers per mill. The SMEs of textile sector employ a workforce of over 3.3 million.

These include textile subsectors like garments, knitwear and towels. The investment in these value-added sectors is 20 times less than the spinning and weaving sectors. Realising this, even the All Pakistan Textile Mills Association has advised the government to facilitate around a thousand new garment and knitwear units in the country.

Most of the bank credit in textiles is availed by the spinning and weaving sectors while the SMEs of this sector have nominal exposure to credit. The default rate of textile SMEs is nominal compared with the defaults of basic textile units.

The garment and knitwear units have to accept foreign orders in accordance with their capacities, the rest they refuse because they do not have the finances to enhance capacities as it is extremely difficult for them to get bank credit.

These SMEs grow at 7-10 percent per annum on their own investment and are regularly increasing exports. A look at the car manufacturing sector would reveal that the three main car manufacturers hardly employ 5,000 workers. The investment in the manufacturing plant is heavy and they cumulatively produce around 300,000 cars per year.

The SMEs that supply auto-components to these manufacturers operate with a workforce of over 150,000. These auto part makers manufacture precision auto parts of global standards. Each component they produce is approved by the Japan-based principle offices of these car manufacturers.

The quality of these parts is so good that whenever the principle offices face part shortages in Japan they ask the Pakistani auto parts producers for supplies.

But the Pakistani suppliers lack capacities to execute these orders. They need investment to scale up but banks are mostly not interested to hold their hands. Indian auto part makers have enhanced capacities and their exports are almost equivalent to our total exports.

The investment in 23 cement units of the country is probably the same as that of the entire textile sector. The number of workers in these units is hardly 23,000. Similarly, sugar mills also fall under large scale manufacturing. These mills cumulatively employ hardly 63,000 workers.

The investment is very high. As a matter of fact automation has been very high in large scale manufacturing industries while the role of workers is still protected in most SMEs. The large scale industries provide mostly the basic materials needed for growth. This is the reason that large scale manufacturing industries are still flourishing in most developed economies where the wages are very high.

Barring basic textile, most of the LSM sectors like automobiles, cement, pharmaceuticals, chemicals and paints are operating successfully in developed economies. However these economies have outsourced the labour intensive industries.

This is the reason that the garments, knitwear and auto parts are manufactured in developing economies for the developed economies. To ensure a sustainable export-led growth, the government has to shift its focus from LSM to SMEs. These SMEs should be the suppliers of every low and high value product for the global economies.

The light engineering industry could fetch more foreign exchange through thousand suppliers from Pakistan than our entire exports. Even the export of low value-added steel pipes has substantial scope of exports from SMEs. The auto parts and value-added textiles have 100 times more potential than our current exports from these sectors.