Pakistan supply chain under strain

25
AUG
2010

Author: Jonathan Webb - Categories: Risk

A combination of devastating floods and increased action from militants is placing the Pakistan supply chain under severe pressure. Doubts surrounding the country as a place to do business may prove more damaging to its prospects to position itself as a major supplier destination.

The floods have displaced 20 million, made homeless six million and killed over 1,600. Credit rating agency Moody's has stated that the floods have effectively denied any possibility of an increase in Pakistan's rating, with the agency also believing that the disaster will slice its 2010 growth from 4.5% to 3%.

The floods have had a significant impact on Pakistan's nascent textile industry. Local business associations have estimated that the destruction has destroyed three million bales of cotton. As a consequence, the cost of clothes production within the country will rise by 20%. With apparel buyers seeking to stock inventories for the Christmas sales, companies are concerned over the viability of the Pakistan supply chain to deliver sufficient volume on time and on budget. Indeed, many orders have been re-directed to suppliers in Bangladesh and Sri Lanka. Already, export orders have declined by 7-10%, and this could fall by a further 30%.

The FT reports that clothing companies such as Levi Strauss and UK-based Next have warned of inflating clothing prices. Not only does this undermine the country's competitiveness, but the impact of the floods on the textile industry may have a more concerning impact on the economy. A PIU Operational Report on Pakistan states that 20% of the country's total export earnings come from the ready-made garment industry. The continued destabilisation of this vital earner of foreign capital may have broader implications for economic sustainability.

The floods may also discourage external involvement from those in other industries seeking to use Pakistan in their supply chains. Currently, 1,500 kilometres (930 miles) of roads are submerged and the extent of long-term damage is hard to gauge. However, our report shows that the majority of freighting is conveyed via road, and with the increase in traffic diverted to other networks, the lack of available infrastructure may serve to further deter future investment.

The power vacuum brought about by the floods has created concerns over opportunistic insurgency. International agencies are concerned that relief funds may inadvertently fund the Pakistani Taliban, which the Pentagon itself was found guilty of in the course of operations in Afghanistan.

The Taliban's operations to disrupt the US army supply chain within Pakistan have grown more adventurous. Logistics providers are complaining that it is becoming more difficult to recruit drivers willing to transport Afghanistan-bound goods, as convoys are becoming increasingly likely to come under insurgent attack. The disruption has caused the NATO supply chain to be re-routed through other Central Asian states.

Pakistan's supply chain is under grave stress. Its exposed weaknesses are potentially causing disinvestment within the economy, but also the severity of the negative publicity may be more damaging still to business confidence. The instability and uncertainty created by the current crisis may bring longer-term damage in commercial insecurity that may further stymie Pakistan's economic development.

Comments

Peter via LinkedIn

Wed 25 Aug 2010 18:13

Can i just ask that although this is a very relevant discussion that we remember that this disaster is of truly huge proportions and our immediate concern and thoughts should be about giving what we can to help the millions of unfortunate victims in immediate need. Oxfam and Aid international will accept donations now. Pakistan's prospects of being a major supplier destination is of little concern to people who have lost everything and do not have enough to eat or drink. Dont want to sound pompous but priorities first!

Jonathan via LinkedIn

Wed 25 Aug 2010 18:14

I agree with you that the crisis is undoubtedly calamitous for the communities that have suffered from this great tragedy. However, with business perception deteriorating over Pakistan's declined ability to provide the services it needs, the recovery period of this crisis will be prolonged and its effects will be deepened.
Although the immediate effects of the floods are severe, it will also imprint a long-lasting legacy which will damage the country's future development. The business investment that provides jobs and infrastructure also injects the capital that allows the population to overcome the natural disaster. Private sector investment also enhances the economy's capacity to better deal with these sorts of crises in the future.

Aasim Liaquat

Wed 25 Aug 2010 22:26

Thanks Jonathan for posting this article. I have just returned today from the affected areas in Sindh province after doing some relief work along with my friends. The situation is worse than any ones imagination and UNO has rightly called it even bigger catastrophe than Tsunami or Catrina. The floods have displaced millions of people, thousands have lost their homes, household goods and domestic animals (which is one of the main source of income in rural areas). I urge you all to help these people by donating whatever amount you can through international agencies.

Regarding the textile supply chain, since i am into textile business myself (run a small sourcing company) let me explain geographic location of Pakistani textile industry for your better understanding. There are four provinces in Pakistan i.e NWFP (north west frontier province), Balochistan, Punjab and Sindh. The flood started from NWFP and major destruction happened there and then flood moved down to Balochistan and Punjab and now it is hitting Sindh province. There is no textile industry in NWFP and Balochistan. Over 90% of Pakistani textile industry is situated in two cities of Punjab province (i.e Faisalabad and Lahore) and Karachi city of Sindh province. All of these three cities have not affected by flood so in my honest opinion production of textile goods would not be affected and production lead times would more or less remain same as before. Logistically, goods produced in Faisalabad and Lahore may take couple of days more time than regular time to reach to port city because of roads destructions. Since Karachi is the port city, it will not face any downtime because of logistics.

Cotton crop however has affected and as per initial estimations, over 3 million cotton bales have been damaged (more precise figures have yet to come in coming weeks) which will lead to price increase of product. Also government is planning to impose flood tax on exports and local sales which will be another element which will lead to price increase.

Jonathan Webb

Thu 26 Aug 2010 10:31

Many thanks for your comment, Aasim, it's very interesting to hear the insight from someone who has actually seen the extent of the disaster.

It's heartening to read that export lead-time times will not be affected because of the crisis, and perhaps this will help bring in a little more much-needed foreign capital. There are reports that Pakistan is seeking to use the crisis as leverage to secure easier access to EU and US markets, and perhaps, if Brussels and Washington is willing, this may alleviate some of the price increases that you cite.

The world does seem to be mobilised by the plight of so many millions, and let us hope that aid will quickly find its way to those people that need it most.

Tarique via LinkedIn

Tue 31 Aug 2010 10:11

I couldnt agree more to what Peter has put forth. This calamnity is of biblical proportions. Let the people first get help from the Aid agencies and the goverment task groups.
As such the past few years, its become difficult, I understand, for companies to do business in Pakistan with the security of its people the biggest concern.