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The Sialkot Cluster

Published in Nov-Dec 2022

Fatima S. Attarwala examines the dynamics and challenges of two intrinsically Pakistani industries

Sialkot is one of the wealthiest cities in Pakistan. According to industry estimates, in 2020, when Pakistan’s GDP per capita was $1,538, Sialkot boasted a GDP per capita of $2,400. With earnings of about two billion dollars from exports annually, the rise of the city’s wealth is driven partly by its export-oriented industries. Two of its main industries are sports goods and surgical instruments, which are almost entirely concentrated in Sialkot alone.

Sports Goods

In 1889, a British sergeant went to a local saddle-maker to have his football repaired. The leather had dried out, meaning it needed to be repaired. The local craftsman decided to make a new one based on the pattern of the original. The sergeant was delighted because he did not have to wait eight months for a new ball to arrive from England. Thus started the manufacturing of footballs in Sialkot.

The British had established a large military garrison in the city due to its strategic geographic location. During World War I, when English factories produced fewer balls, Sialkoti firms began exporting to other colonies. This allowed a football cluster to grow internationally, despite its negligible presence in the country.

According to the State Bank of Pakistan, Sialkoti businessmen have been the official makers of match balls since the 1982 FIFA World Cup, and for the last three consecutive FIFA World Cups, Pakistani firm Forward Sports has been manufacturing the match balls. As Pakistan’s footballs became part of supply chains of big brand names, Sialkot’s repute grew, leading to the rise of exports of other sports paraphernalia. Eventually, Sialkot became home to Pakistan’s sports goods industry.

The annual growth rate of exports since 2017 is five percent, but keep in mind that this period includes the pandemic when sports events were banned and exports plummeted. In 2021, exports grew by 30% over 2020 as the world started opening up. In 2021-22, Pakistan’s total exports were worth $365 million and were made by over 4,200 companies. While businesses in Sialkot produce a variety of sports goods, hand-stitched inflatable balls reign supreme. Sialkot caters to about 70% of the world’s demand for handstitched inflatable balls. Footballs make up half of Pakistan’s sports goods exports.

Benefitting from the zero-rated tariff offered under GSP Plus, most football exports find a market in Europe. While football is the most popular sport in the world, it is a particular favourite of Europeans. The US is also an important market. International brands such as Adidas, Nike and Puma source their sports equipment and related supplies from Pakistan.

Other than footballs, Sialkot manufactures a range of sports goods, including hockey sticks, rackets, protective gear, cricket kits and athleisure. Pakistan also has a strong international footprint in the world of hockey sticks. “Awan Sports makes about 90% of the hockey sticks used by pro athletes in the world,” says Jarrar Awan, Director, Awan Sports Industries. Unlike Forward Sports which bids for FIFA, Awan Sports prefers to focus on entry-level or mid-range footballs with higher volume. About half of their sales are from footballs and the remaining 50% stem from rackets, hockey sticks and protective gear, such as gloves. It is a truth universally acknowledged that a cricketobsessed nation with a strong sports goods industry must have renowned domestic brand names for kits. Any kid who has picked up a bat with dreams of playing with the boys in green would be familiar with CA Sports, the official kit sponsor of the national cricket team. MD Sports is another big brand name domestically. “Indian and English cricketers use kits by MD Sports and CA Sports. These companies have their showrooms abroad as well,” says Mohsin Masood, Secretary General, The Pakistan Sports Goods Manufacturers & Exporters Association.

However, cricket is the passion of relatively fewer nations. Street cricket is a beloved pastime in the subcontinent, which uses a tape ball – a tennis ball wrapped in electrical tape. Tape ball bats differ from regular cricket bats and are exported mostly to Bangladesh. The wood used in these bats is sourced locally. Overall, Pakistan’s share in the global market of cricket kits is small, with India taking the lead. The sportswear business developed as an offshoot of the sports goods sector. At the outset, international buyers used to buy inflatable balls from Sialkot and sportswear from South Korea, Taiwan, the US, and elsewhere. As the apparel industry diminished in some countries, buyers who were already satisfied with the quality of sports goods from Sialkot asked the local exporters to produce sportswear.

Within sports apparel, Talon Sports was one of the pioneers at a time when most sports goods businesses in Sialkot focused on gear rather than textiles. Over the last three decades, it has become the biggest sports textiles exporter in terms of volume. “Postpandemic, sales have risen with the use of athleisure. High-street use of hoodies and tracksuits has increased, driving a bump in sales,” says Qaisar Baryar, CEO, Talon Sports.

Sports textiles in Pakistan lean into the country’s strength of cotton. However, a lot of the apparel manufactured uses imports from China. Polyester and other synthetic textiles are imported, and then cut and sewed in Pakistan since labour costs are cheaper than in China. Within the athleisure category, Pakistan’s competitors are the main textile-exporting nations – Bangladesh, Cambodia, China and Vietnam. The competitiveness of Sialkot’s sportswear is based on lower prices.

The sports goods businesses in Sialkot are small and medium enterprises (SMEs); family businesses are handed down from generation to generation. While some specialise, most companies produce a range of products related to the sports industry. Each company brokers its own deal with big brand names that are its customers. A concentrated effort for marketing is missing from the industry, which is why its share in global sports goods exports is less than one percent, except for footballs, where the share is 11%. R&D and sufficient investment in technology are lacking. Awan explains the importance of R&D in international markets: “In the mid-eighties and nineties, sports goods were made conventionally with labour-intensive procedures. For example, tennis rackets were made from wood, although the market had evolved towards aluminium and carbon fibre.” Awan Sports, along with Forward Sports, is considered one of the leading companies in sports technology in the country. However, many companies persist in using outdated methodologies for production. Even in the case of footballs, the world had switched away from hand-stitched, which Pakistan specialises in, to machine-stitched balls, which are lower quality and typically manufactured in China.

Sialkot benefits from being a cluster. A lot of small makers are largely dependent on big local firms for orders. Besides this, specialised inputs and services, such as die-makers and technicians for machine repairs are a call away. Its strong leather industry provides the main raw material for footballs. However, for the myriad of other raw materials required for the range of other sports goods, Pakistan relies on imported raw materials, especially from China.

Pakistan’s international image and lack of government support hinder the growth of the sports goods sector. “When we go to international fairs, the stalls, tents and fabrications of other countries are far superior. India gives a 50% subsidy to its sports goods producers travelling abroad, whereas Pakistan’s government offers only 30%,” laments Masood. Given the relatively stronger Indian rupee, the difference in percentage hampers local efforts to compete successfully.

Running a factory and creating a brand are two very different things. The factory owners are content with competing with one another, rather than on a global stage which would require marketing worth millions of dollars. Although creating a brand to match the stature of Adidas and Nike is a long shot, the industry needs to start from somewhere as there are always markets and segments that are responsive to new entrants if the quality and design meet the latest trends.

Sialkot produces the same top brands, and there is no doubt that it can produce the same quality under its brand name. However, creating a brand requires heavy investments in design, packaging and marketing. Thanks to e-commerce, many streetwear brands are now entering the markets through online marketplaces like Amazon and eBay. However, the lack of vision for investment in branding has limited the sector’s potential and growth trajectory.

Surgical Instruments

Similar to sports goods, the surgical instruments industry started in the British era. However, in this case, the love of a husband spurred the sector. As the story goes, the British always set up a missionary hospital wherever they went. Sialkot was then known for its high-quality swords and daggers, exported all over India. One day, a woman’s appendix burst. Her husband, a Muslim swordmaker, took her to the missionary hospital. While the British doctor was willing to operate, he did not have the requisite tools, which would take three to four months to be imported from Germany. His wife could not delay the operation. The tools at hand were broken. The swordmaker took the broken tools home, worked out how they were formed and showed up four hours later with brand-new instruments forged at home. That is how residents of Sialkot began manufacturing surgical goods. During World War I, when Turkey and Germany sided against the British, the supply chain was disrupted, and Sialkot began manufacturing surgical equipment on a large scale.

Pakistan’s surgical industry, almost entirely located in Sialkot, is highly competitive at the lower end of the technology scale. Although the industry is worth billions globally, Pakistan’s exports amounted to $422 million in 2021-22. Because of its low manufacturing and labour costs, Sialkot is good at making simple items such as forceps, scissors, clamps and stethoscopes.

Despite its existence for a long time, the industry’s annual growth rate from 2016-2020 was 2.6%. There is intense competition in Sialkot. Most local producers cite each other as their major competitors. Although local rivals claim to compete based on product quality, the primary basis of competition appears to be price, according to research by the Pakistan Business Council (PBC). The products sold are cheap; depending on the type and category, the average price of a surgical instrument ranges between 50 cents and seven dollars.

Similar to the sports goods industry, SMEs characterise the surgical instruments sector. “Pakistan’s exports were done through over 1,700 companies, says Zeeshan Tariq, former chairman, Surgical Instruments Manufacturers Association of Pakistan (SIMAP), explaining how fragmented the industry is.

And therein lies the problem. Most of the firms subcontract the initial production of instruments to workers that work out of their own homes or small workshops. The finishing and quality-checking of the product are done in-house. Given the labour-intensive nature, especially polishing, Pakistan can produce instruments at a lower cost than China, but the emphasis on low-cost leaves little room for marketing or branding. Most of the steel used in the tools is sourced locally, although part of it is imported from Germany.

Local companies make products based on provided specifications and export these to overseas buyers, mainly in Germany, the UK and the US. The instruments are then branded and supplied to overseas distributors. Pakistan’s market share of surgical instruments has remained nearly static at 0.7% over the last 10 years. “We work as original equipment manufacturers. Our customers are big brand names, such as KLS Martin and Aesculap,” says Tariq, naming some of the world’s largest and most respected manufacturers of surgical instruments and medical devices. “Our products are sold at a multiple of the price we sell them at because we don’t have the budget to market them.”

In the Middle East market, buyers prefer to buy Pakistani instruments from European or US suppliers rather than directly from Pakistan, because they trust European and US brands even though Pakistani manufacturers are the original equipment manufacturers.

This limited success is at risk as well. Listing the threats and challenges to the industry, Tariq lamented the dollar volatility, because of which the price of raw materials has gone up. The effects of the war in Ukraine have also been felt since demand has slowed down. “We are wary of the recession we foresee in Europe. Business is still good but has slowed and we are not sure whether the decrease in demand is temporary or permanent.”

Another challenge is that the rebate, which used to be offered at 4.8%, is now at 1.5%. Export rebates entail the refund of taxes paid on exported goods during production and sales. A bigger threat is the Medical Device Regulations (MDR) that the EU will impose in May 2024. Currently, the Medical Device Directive is in effect, which has fewer regulatory measures and is less technical than MDR. Once implemented, any device not registered under the new regulations will be barred from European markets, which is one of the leading destinations of Sialkot’s surgical industry.

Meeting the requirements is not a challenge, asserts Tariq. MDR consultancy, testing and certifications cost about $70,000-100,000, according to TDAP. A company earning $200,000-250,000 cannot afford to spend half its revenue on accreditation.

While surgical goods are zerorated for tariffs under the EU’s GSP Plus programme, Pakistan will lose its pricing edge once MDR is implemented and Tariq fears that many of the sector’s units will be unable to survive without government support.

A crisis in the making, identified by the PBC report, is the recent development in 3D printing that is set to revolutionise many industries. Anything can be manufactured at a fraction of its current cost through 3D printing, which has already started playing a significant role in medical devices. The Pakistani surgical instruments’ competitive edge lies in their low labour cost. If international markets shift from the current prototype phase into commercial printing, the Sialkot cluster could lose major chunks of its market.

Within each category of sports goods, the dynamics of demand are different. For example, in terms of high-end hockey sticks and footballs, Pakistan competes globally based on quality. While companies like Awan Sports and Forward Sports are not international household names, they are known within the world of big sports brands for contractual manufacturing. On the other hand, businesses within the surgical instruments industry are more homogenous, with little investment in branding. As a result, their local and international competition is based on price, leaving them vulnerable to global changes.

To increase ease of business, Sialkot has set up its own dry port and airport and operates Air Sial. While the officer bearers of associations and chambers frequently bemoan the lack of government support, they are proud business owners who have managed to grow independently, albeit at a limited scale. A scale so limited that though being over a century old, neither industry has a significant share of the global market.

Fatima S. Attarwala heads Dawn’s Business & Finance desk.