pakistan furniture narrative - draft

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Pakistan Furniture Narrative - Draft

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    SECOND DRAFT

    Pakistan Furniture Sector Strategy Narrative

    Report Written by the Strategic Working Group (SWOG) November, 2007

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    I. Executive Summary Pakistans furniture sector is at a crossroads. It could choose a path to capture over one billion U.S. dollars in additional revenues in 2015 at a present cost of USD 39.6 million, or it could choose to stay in the path of diminishing and unsustainable growth at no immediate cost. Mostly viewed as a cottage industry, the Pakistans furniture sector has been largely unable to capture the benefits of a growing domestic market and international demand. Asian imports have seized this vacuum, occupying 12.5% of a USD 160 million domestic market in 2005. Import market share is projected to double every 2.5 years, from essentially 0% in 2003. Meanwhile, exports have been sluggish. The USD 14 million in revenues (2005), or 10% of domestic production, is well below Pakistans production capacity and its potential to meet a growing global demand. If the basic production capacity investments proposed in this document are carried out (USD 39.6 million in 3 years), SWOG estimates a sector production value at ex-factory prices of USD 305 million by 2010, and $1.85 billion by 2015, with 62% coming from exports (USD1.15 billion). The potential returns in an investment of less than 40 million U.S. dollars are impressive. In a single year of 2011, the gains from this investment compared to status quo growth projections are estimated at USD 151.2 million, a 378% return on investment. This includes USD 84 million gained by curbing imports through superior local products, and USD 67.2 million in additional export revenues. In 2015 alone, gains over status quo projections are estimated to surpass one billion U.S. dollars. In order for Pakistan to seize this extraordinary opportunity, it must address three key challenges: (a) raw material instability, (b) inadequate productive capacity across the value-chain, and (c) weak sector coordination mechanisms. SWOG is proposing key strategic investments to address these challenges, including the installation of 250 solar-kilns, a sustainable forestry system, the establishment of manufacturing and training centers (CFTMCs), and a Sector Development Company. The initiatives outlined here are necessary capacity requirements to upgrade Pakistans industry to compete effectively with both domestic imports and in export markets. Looking ahead, the sector must choose where it wants to compete in the long-run. This may continue to be in volume-based market positions, or in specific value-added segments, or a combination of both (if the value-chain can be configured accordingly and trade-offs in the use of its scarce resources have been considered). A market learning component has been included in the proposal to inform the sector on a long-term competitive strategy while building the capability to adapt to potential changes in the global environment.

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    INDEX

    1. Executive Summary 2. Overview of Pakistans Furniture Industry

    2.1 Industry Structure and Growth of Imports 2.2 Raw Material Sources 2.3 Furniture Global Trade and Pakistans Exports

    3. Key Opportunities and Challenges Facing Pakistans Furniture Sector

    3.1 Opportunities

    3.1.1 Potential Four-fold Return on Sector Investment by 2011 3.1.2 Unique Tradition of Craftsmanship and Proximity to One of the

    Worlds Fastest Growing Markets 3.1.3 Growing Domestic Demand

    3.2 Challenges

    3.2.1 Shortage of Sheesham and Other Wood Resources 3.2.2 Capacity Across the Value-chain 3.2.3 Weak Coordination Mechanisms

    4. Addressing Sector Challenges: SWOG Work to Date

    4.1 A Shared Vision for the Public and Private Sectors 4.2 SWOG initiatives

    5. Moving Forward

    5.1 Long-term Considerations 5.2 Considering Alternative Long-term Scenarios

    6. Action Plan

    6.1 Activity Prioritization 6.2 Work Plan Table for Proposed Initiatives for the Pakistans Furniture

    Sector

    APPENDIX A: SWOG Initiatives Cost Detail

    APPENDIX B: Furniture Sector Projections (IFCA) APPENDIX C: Detailed Description of All Initiatives APPENDIX D: List of Acronyms APPENDIX E: Map of Key Furniture Producing Clusters

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    II. Overview of Pakistans Furniture Industry

    2.1 Industry structure and aggressive flow of imports. While Pakistans furniture industry has a proud historical tradition for craftsmanship, managerial and technological capabilities have not followed. It is mainly perceived as a cottage industry with inconsistent quality, without the production capacity to meet a growing domestic and international demand in recent years. Most of its current production volume ($126 million in 2005 at ex-factory prices) is geared towards the domestic market ($160 million), competing directly with low-priced imports (often not very well) which has been aggressively capturing Pakistans domestic market share. Chinese and Southeast Asian firms have been fulfilling large office furniture contracts orders traditionally occupied by local firms, displacing, for example, traditional orders from firms in Chiniot and Gujrat. In 2005, foreign imports captured 12.5% of total domestic market share (from nearly 0% before 2004), and their total sales volume is projected to double every 2.5 years (figure 4, section 3). The concentration of MSMEs1 is high, with about 6,000 firms or productive units in Pakistan (80,000 workers), a decrease from 8,000 in 2004, a fact which reflects sector volatility in the past years. 2.2 Raw material sources. Pakistan has 2.3 million of hectares of wood forest, supplying the highly coveted Sheeham wood which is used by 82% of all furniture in Pakistan. The wood comes mostly from state forests in NWFP, northern areas and Azad Jammu Kashmir (AJK), whereas most of the hardwood comes from Punjab and Sindh, while manufacturing is done across Pakistan (e.g. Gujrat, Lahore, and Karachi). During 1995-2000, Pakistan imported 3% of all wood inputs for local furniture manufacturing,2 in addition to other inputs materials. This included wood and inputs from the United States (all types), Malaysia (Roundwood, Veneer and Plywood), and China (Veneer and Plywood, as well as Packaging materials).

    2.3 Furniture Global Trade and Pakistans Exports. Furniture trade is big global business and still a largely untapped export opportunity for Pakistan. Between 1995 and 2000, trade in furniture grew by 36%, faster than general merchandise trade (26.5%), apparel (32%), and footwear (1%).3 Pakistans participation in international markets has been fluctuating in recent years, with $14 million in export revenues in 2005. Overall, the country is a very minor player in the furniture market of $300 billion (0.0036% of total global share).4 The global industry in the past years has been characterized by an intense competition from other Asian competitors such as China, Vietnam, and Malaysia. ITC data indicates the price in all categories of furniture, except bedroom furniture, has been falling due to intense global competition (see figure 7 in section 5). In Pakistan, about $14 million of its production is geared towards exports. Accent or occasional furniture such as typical furnishing items including side or corner tables, magazine tables, standing small shelves (etageres), chests, nesting and pedestal tables, and small chairs - is the largest export category in Pakistan (nearly

    1 Micro, Small, and Medium Enterprises 2 SWOG data, analysis (2007), based on 1996-2000 production data (36 million cubit meters of wood produced locally and 1.1 million cubit meters imported) 3 Kaplinsy and others, The Global Wood Value-Chain: What Prospects for Upgrading by Developing Countries, UNIDO, Vienna, 2003, p. 1 4 Strategy Narrative Document, no citation, 2007, p. 10

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    80% of all exports), followed by bedroom furniture (10%). The main export destinations are Afghanistan (16%), UAE (15%), USA & UK (12% each), and Saudi Arabia (8%). If the right capacity and other investments are made to the sector, SWOG estimates that Pakistan could transform its current $14 million export revenues into $1 billion by 2015 (figure 2, section 3).

    Figure 1: Furniture Sector Volume World and Pakistan

    99.996%0.004%

    WorldPakistan

    Pakistans exports occupy a small fraction of the global wooden furniture trade ($14 million out of $30 billion in 2004), with growing

    imports outpacing exports in the domestic market

    Source: JE Austin/USAID SWOG report (2006), SWOG analysis (2007)

    78%

    9%

    13% Dom ProdExportImport

    Domestic market total: $160 million(2005)

    Global total: $30 billion(2004)

    This sector strategy has been prepared within such a changing global and domestic context. This is a result of the Pakistan Initiative for Strategic Development and Competitiveness Project, launched by the United States Agency for International Development. This report is based on the recent work to date by the Strategic Working Group (SWOG) summarizing the opportunities and challenges for Pakistans furniture sector (section 3), formulating a vision and objectives (section 4.1), and proposing key initiatives to transform a cottage industry into a $1 billion export sector (section 4.2). Thoughts on a way forward are included in section 5, and an action plan in section 6.

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    III. Key Opportunities and Challenges Facing Pakistans Furniture

    Sector 3.1 Opportunities 3.1.2 Potential Four-fold Return on Sector Investment by 2011 (USD 151 Million). If an investment of $39.6 million is made by 2010 on basic capacity improvements in the furniture sector (see cost detail

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