Speech by Mr. Mohan Pandithage, Chairman & Chief Executive , Hayleys Group & the Chief Guest at AGM of the Exporters' Association of Sri Lanka
Chairman of the Sri Lanka Exporters' Association, outgoing Chairperson, Committee members, ladies and gentlemen,
It is indeed an honour to have been invited by your esteemed organization to deliver the key note address at your 16th AGM. I had no hesitation in accepting the invitation, particularly given the paramount importance of exports for Sri Lanka's increasingly globalised economy. Today, more than ever, exports have a crucial role to play in Sri Lanka's economic development and this places your association in a pivotal role as a driver of this agenda. I would like to take this opportunity to share with you some of our experiences at Hayleys how we evolved from an exporter of raw coconut fibre into one of Sri Lanka's largest exporters of industrial goods, agricultural products and services.
A figure that has recently received a fair amount of press attention is the fact that Sri Lanka's exports as a percentage of GDP has dropped from 33% in the year 2000 to 16.4% in 2012. In recent months as well Sri Lanka's exports have been on a declining trend, whilst several competing exporters have continued to grow . Given the fact that Sri Lanka is an island economy of GDP US$ 60 billion, relying on the domestic economy alone will not be sufficient to generate the government's target of sustained GDP growth over 8%. Exports cover around half of Sri Lanka's US$ 20 billion import bill, and along with FDI and remittances, are crucial non-debt creating inflows, necessary to support Sri Lanka's external balances. In this context what can Sri Lanka do to re-ignite the pace of export growth, catch up with its competitors and over-take them in the future?
As Sri Lanka's per capita GDP continues to rise, the country will lose whatever remains of its labour cost arbitrage as wages increase. Sri Lanka will not be able to compete in exporting labour intensive, low value products, since exporters with lower wage costs such as Bangladesh and Viet Nam will be far more competitive. Therefore, it becomes necessary to compete in products that are more difficult to produce, requiring greater degrees of mechanization and technology. At present, high tech exports accounts for less than 2% of Sri Lanka's total manufactured exports.To improve this ratio necessarily entails investment in machinery, technology and higher skilled labour.
At Hayleys value addition has been a mantra. From our inception we have been a company that adds value to the natural resources of this country. The company commenced operations in 1878 in the coconut fibre trade and other commodity based trading businesses. Over time the necessity to move up the value chain pushed us into higher end products within this business. Hayleys started off simply exporting raw industrial fibre and with time moved into brushes, mats and specialized industrial fibre. Today our fibre is used in upholstery of seats in the top motor vehicle brands around the world. We have also constantly looked to identify global trends and cater to these. Coconut fibre products are seen to be an environmentally friendly alternative to many plastic products, and this is a strong comparative advantage these products have.
Activated carbon is another business where Hayleys has made strides in value addition. We pioneered this business in Sri Lanka, using what others discarded as waste, the coconut shell, to produce fine carbon particles that can absorb impurities from a range of substances. It was initially a struggle to start up Haycarb in 1970 given the complex technological process it entailed. Eventually by 1974 we had our first exports. Over the years we continuously invested in technology to find new uses of activated carbon. Today, the activated carbon we manufacture goes into air purification, water purification, gold extraction and we have worked with international partners to develop activated carbon as an energy storage technology.Haycarb is a business whose core competency is turning waste into value through innovation. The waste gases from the production process are fed into boilers which help power the manufacturing process saving energy costs to give the product further competitive advantage. This is an example of how innovation is not just important for developing new products, but also for doing what we have always done in a more efficient and cost effective manner than our competitors.
In rubber gloves as well we have continuously invested in R&D to move up the value chain. Recently we developed an electrician's glove that has insulation properties to add to a range of specialized gloves that we have developed catering to various industrial and domestic purposes. It is important to have close interactions with buyers to keep pace with the demand trends and requirements of end users and develop products to cater to these. Another strategy has been vertical and horizontal integration acquiring rubber plantations and marketing companies overseas in order to have better control over the entire value chain through branding and marketing. Dipped Products has also made concerted efforts to diversify its export markets targeting Latin America, Asia and Africa, with some success thus far.
In agriculture as well Sri Lanka has tremendous potential as an exporter. Our plantations have always been an important source of revenue, particularly tea. Today, however, value addition in tea needs to extend beyond bagging, packaging and blending. We need to move from being manufacturers of agricultural products to exporters of bio-technology products.In tea, there is tremendous value in extracting flavours, aromas, essential oils and other products from the tea leaf. This goes into a variety of industries from pharmaceuticals to cosmetics and food additives. The same applies to a range of spices native to Sri Lanka. However, this shift also needs investment in machinery and technology. One way to access this is through partnerships with those who have access to the requisite technology and networks with the existing markets for the end products. This necessity for investment also highlights the importance of a strong overarching investment climate and macroeconomic stability in support export development.
Having touched on export of goods, let me say a few words about the export of services. Sri Lanka's oldest comparative advantage is its strategic location at a central point between East and West. With the shift of the global economy's centre of gravity towards Asia, this strategic position will take on even greater significance. Sri Lanka has the opportunity to become a major exporter of transport and logistics services, acting as a hub for these services in the region. However, even in this business, location is a necessary but not a sufficient condition for success. To be a major player in this field it will be necessary to attract investment that provides world class service standards to compete with ports such as Singapore and Jebel Ali in Dubai.Hambantota should be made a free port which would have the potential to attract investment into ship services provision, entrepτt trade, assembly and other value added industries, catering to the region and taking advantage of Sri Lanka's free trade agreements in South Asia.The steps taken to expand the Colombo port are certainly in the right direction it is now necessary to develop multi-modal transport around the Colombo port as well. Even in other services Sri Lanka needs to specialize in niche markets where we have competitive advantages in tourism Sri Lanka can become an eco-tourism destination akin to Costa Rica and in BPO Sri Lanka can succeed in F&A services if the IT related infrastructure is enhanced in the country.
From a policy perspective, it is important that stable macroeconomic conditions are maintained to support export development. Predictable, low inflation helps us maintain costs within tolerance levels of buyers, and a flexible exchange rate will help exporters adjust to any cost differentials between competitors and Sri Lanka. Fiscal adjustment needs to continue so as to avoid putting pressure on interest rates, which in turn act as a deterrent to investment which is needed to support value added exports. Sri Lanka's foreign missions need to play a more pro-active role, acting like business development teams supporting Sri Lanka's commercial interests in foreign lands. Most importantly, Sri Lanka needs to invest more in its human resources. Finding skilled labour remains a key challenge for many businesses, and in the context of shifting to higher value, technologically intensive production, skilled labour becomes all the more important. Therefore further investment in high quality education becomes crucial.
The strategies that I have discussed have helped Hayleys exports revenue grow by 19% in 2012/13 to US$ 360 million, enabling the Group to account for 3.1% of Sri Lanka's total export earnings. We believe there is still a long way to go in our journey as we remain hungry for new business and are always on the lookout for any emerging opportunities. As the global economy continues to undergo rapid transformation, there will be a number of emerging opportunities for Sri Lankan exporters. We need to look at products to cater to global mega-trends such as ageing populations in Asia, global resource depletion (regeneration, recycling, purification), energy storage, food technology, e-commerce and so on. However, we also need to be able to manufacture these products in a manner that is competitive in the long term, leveraging comparative advantages based on Sri Lanka's geographic location, maritime links, proximity to major markets, natural resources and a literate population. The ball is in our court and it is our time to embrace the challenge and grab these opportunities as they arise.
Ladies and gentlemen, let me end by thanking the Exporters Association of Sri Lanka for their invitation, and thanking you for your patient hearing.