Why are Pakistani businesses unable to compete in the global markets? What is it that inhibits them from breaking through overseas? As our exports continue to decline, the commonly heard responses to these questions from the private sector are lack of government support, expensive inputs, energy shortages and a slowdown in global markets amongst many others. On the other hand, the government blames past policies including currency overvaluation, limited product range and underinvestment by the industry.
While none of these are entirely incorrect, I would like to dig deeper and understand why our industry could not find answers to these issues. None of these are problems which could not be effectively countered by sound thinking and good management. After all, the same sort of issues have been successfully dealt with in the domestic market. I therefore hypothesise that management skills are an important missing ingredient and a major contributor to our failure in the world markets.
We do not like talking about poor management as it is always easier to blame others for our faults. But the truth is, that as an economy, we have been lacking in management skills required to compete in the global markets. I would like to shed some light on where we went wrong and what can be learnt going forward.
We have seen some announcements recently from companies in Pakistan wishing to venture into export markets. We will look at how they stand to perform in view of this analysis.
To begin with, post the initial few decades, our entrepreneurs never felt the need to compete globally. They preferred to operate in industries which served the domestic market where they could leverage their networks. If you look at Pakistan’s largest conglomerates you will see bulk of their investments in industries like fertiliser, energy, cement, sugar, automotive, FMCG and services – all meant for the local population.
While these were necessary investments required for the domestic market, they were relatively more attractive given their unusually low risk and high returns and it is this equation which caused the problem. When capital is scarce it will naturally chase lower risk options. It became too strong an incentive for industrialists to resist the low hanging fruit and hence the largest business houses focused their financial and human capital on the domestic market. Their attention was diverted from the potential export-based investments which required longer-term investment horizons.
It is interesting to note that most local industrial groups started in the textile sector and many of them still have textiles amongst their portfolios, albeit a much smaller proportion of their overall business than what it was when they got going.
While textiles were the only export industry in which local entrepreneurs found sizable success, there were two problems with the strategy they followed. First, their investments were primarily in the commodity end of textiles value chain which provided small margins. They either produced yarn and grey fabric and later developed home textiles and basic garments business.
International yarn and fabric middlemen played the key role in purchasing these products from Pakistan while sales to large wholesale and retail brands were made via buying houses and visits to trade fairs. Revenues in all cases were dependent on big buyers who exerted their power in terms of the minimal margins provided to Pakistani suppliers.
Even so, survival was possible until the quota regime lasted since Pakistani companies did not have to worry about many expenses such as marketing, business development and research on new products. But as soon as the quota allowances under the General Agreement on Tariffs and Trade (GATT) – the predecessor to the World Trade Organisation (WTO) – regime ended, Pakistan suffered badly as manufacturers could not remain competitive in many segments when compared to Bangladesh, India, Turkey and many other developing economies.
Second, and more importantly, our managers did not see the change coming and never realised that they had little competitive advantage. Lack of appropriate business knowhow coupled with limited information about international markets meant that Pakistani producers did not understand the competition, did not see the shift in trends in products and markets, the changing industry cost structures and the new global supply chains. Consequently, they failed to enter the value-added segments at the right time, giving up market share to new entrants who were far better organised to address the changed market needs. Incidentally, the few companies which did invest in value added sectors and modernised their businesses have reaped considerable rewards for their persistence and continue to do so.
In many other sectors, Pakistan has developed manufacturing skills and can make good products. We have traditionally been exporting surgical and sports goods from places like Sialkot, our basmati rice is known for its superior taste and aroma and our artisans can take pride in their arts and crafts. But unfortunately, in almost every sector, we have failed to brand and package our products to appeal to the developed world.
Our aesthetic sense remains old school instead of fresh, inspiring and wholesome. We rely on basic production capabilities while the world invests in superior marketing and sophisticated aesthetics. We also live in relative isolation from the world markets. As a society, our exposure to diverse cultures is limited and we find it difficult to understand people from different backgrounds. We like to cling to our ways and are apprehensive of breaking cultural boundaries, which is another reason why our managers fear challenging the status quo and have problems understanding other markets.
It is no secret that all our South Asian neighbours are much better amalgamated in the global economy. In fact, we will find it difficult to compare ourselves with any other Asian economy in this respect, apart from North Korea perhaps.
We have therefore followed flawed strategies, developed and executed by poor managers who had no understanding of global markets and preferred to remain isolated. Since we have never invested in world scale capability, we end up relying on management teams which are good enough to run operations in industries protected in one way or the other by the state. But this skill set has no idea how to operate globally. It is not qualified to operate in international markets neither can this capability be developed overnight.
This brings me to the interesting announcements recently from a few major companies to invest in export-oriented businesses. While the thinking is appreciated and it is in line with the spirit of the times, I wonder if any attention has been paid to the various points I have raised here. They should consider moving up the value-added chain instead of investing in commodities which add little value and create few jobs. Instead, they should follow a country like Vietnam which is now producing smartphones and computer chips having begun with textiles!
Even if we were to give these organisations the benefit of the doubt around their export strategy, history tells us that our chances of success will be low if we do not develop an internationally oriented managerial workforce.
This is where the state, the private sector and academia must join hands and develop educational programs in international marketing, export sales, project management, overseas customer support & service, product design & development and foreign languages & cultural awareness.
In addition to classroom training, companies will have to expose their people to global markets through secondments, international conferences and wider travel at various levels in the organisation. Over the medium to long term, Pakistan could develop management skills which are suited for global markets. For those who dare to venture forth without these, we will just have to wait and see.