sialkot's enterpreneurial spirit

CMER Working Paper Series

Working Paper No. 96-10

SIALKOT'S ENTERPRENEURIAL SPIRIT By Dr. Jawaid A. Ghani

SEPTEMBER, 1996

CENTRE FOR MANAGEMENT AND ECONOMIC RESEARCH Lahore University of Management Sciences Opp. Sector ‘U’, DHA, Lahore Cantt. 54792, Lahore, Pakistan Tel.: 92-42-5722670-79, x4222, 4201 Fax: 92-42-5722591 Website: www.lums.edu.pk/cmer

SIALKOT'S ENTREPRENEURIAL SPIRIT

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TABLE OF CONTENTS ABSTRACT ............................................................................................................................................ 2 1. INTRODUCTI 0 N.............................................................................................................................. 3 2. THE SPIRIT 0F SIALKOT ................................................................................................................4 3. THE SUR GI CAL GOODS IND US TRY ......................................................................................... 8 4. THE SPORTS GOODS INDUSTRY .................................................................... ............... 10 5. RESPONDING TO CHALLENGES ................................................................................................ 11 6. CONCLUSI0NS............. ................................................. ................................................................................. 14

LIST OF TABLES AND BOXED INSERTS TABLE 1: SIALKOT PER CAPITA MANUFACTURING AND EXPORTS............................................................................................. 4 TABLE 2: EMPLOYMENT BY SIZE OF FIRM............................................................................................................................................ 5 TABLE 3: SIALKOT EXPORTS (IN Rs. MILLIONS) .................................................................................................................................. 7

Box 1: SUDDLE GROUP OF COMPANIES, ....................................................................................................... 6 Box 2: ONE-STOP SHOP FOR RIDING ENTHUSIASTS .......................................................................................10 Box 3: PROFESSIONAL MANAGEMENT AT LEATHER FIELD.......................................................................... 12


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ABSTRACT

Sialkot represents a class of craftsmen-turned-entrepreneurs who emerged after partition. With the highest per capita exports in the country, the city thrives on a dense network of subcontracting relationships and a fierce entrepreneurial spirit. With over fifty years of success behind it, the city is now bracing to take on the threats of non-tariff barriers to trade by establishing joint ventures and professionalizing its operations. Having survived despite, rather than due to government policy, it now holds many lessons for the rest of the economy.


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1. INTRODUCTION

Sialkot, Pakistan's export capital represents an economy and a breed of entrepreneurs quite different from that nurtured by the state apparatus over the years. Though Sialkot's roads and other infrastructure are primitive and choked, yet the culture of enterprise sported by this city and its contribution to the national economy is unmatched by another city in the country.

Located 130 km northwest of the provincial capital, Lahore, and with a population of about 600 thousand, Sialkot is in many ways a unique city in Pakistan. A strong export and entrepreneurial culture combined with widespread availability of subcontracting arrangements has resulted in low barriers to entry and a proliferation of small and medium scale enterprises. These enterprises are financed mostly through family 1

savings . They compete by remaining lean, with low and shared overheads. They thrive through a network of subcontracting relations which allows each company to specialize in only part of the overall value chain. These are enterprises deeply embedded in the socio-economic context in which they exist. The "trickle down" effects in terms of infom1ation, skil1s, and wealth are many; in sharp contrast to the relatively insular circuits of power and wealth promoted by the vertically-integrated organizations which have developed elsewhere in the country.

The craftsmen entrepreneurs of Sialkot with their middle-class backgrounds represent an industrial 2

bourgeoisie which emerged to fill the vacuum created by the departure of the primarily non-Muslim trading 3

and industrial class to India . These craftsmen entrepreneurs are quite distinct from another small but powerful industrial elite class which also emerged at this time. This latter class consisting mostly of tradersturned-industrialists who received strong support from government policies and mostly invested in capitalintensive and highly protected large-scale manufacturing industries. A considerable concentration of wealth soon accumulated with sixty industrial groups, the robber barons as Papanek (1967) called them, controlling 4

two thirds of all industrial assets and eighty percent of bank assets by 1959 . The seventies saw the nationalization of the financial sector and much large scale industry. The combination of robber barons and bloated public sector organizations resulted in large pockets of inefficiency in much of the economy.

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Sialkot epitomizes the industrial bourgeoisie of Pakistan, a class which has created "pockets of efficiency" in the economy. This chapter seeks to elaborate on the nature of industrial activity which characterizes this city, the challenges it faces, and its future. In the process we hope to draw lessons which others in Pakistan and elsewhere can learn from the experiences of this city.

2. THE SPIRIT OF SIALKOT Sialkot contrasts sharply with the rest of Pakistan in terms of manufacturing and export activity. The number of individuals involved in manufacturing (proportionate to population size) is over four times higher, number of manufacturing establishments is six times higher, and exports eighteen times higher compared to the rest of the country. Equally contrasting is the profile of manufacturing establishments. The proportion of manufacturing workers employed in large firms nationwide is 27 percent, compared to less than one percent in Sialkot. The proportion working in small enterprises is over 90 percent in Sialkot versus about 60 percent in the rest of the country. Tables I and 2 provide further details on these figures. Table 1: Sialkot per capita manufacturing and exports Pakistan Population (1995) No. ofl71fg establishments (1988) No. of employees ill m(g est. (1988) 6

Exports (1995-96) ill Rs. Mfg establishments per 1000 population Mfg employment per 1000 population Per capita exports in Rs.

135 m 290,073 1,622,687 294,741 m 2.2 12.0 2,183

Pakistan (urban) 39m 176,749 1,049,406 177,000 m 4.5 26.9 4,540

Sialkot city 0.606 m 8,415 34,115 24,445 m 13.9 56.3 40,338

Source: Census of Establishments (1988) data files; Sialkot Dry Port Customs; Economic Survey (GOP)


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Table 2: Employment by size of firm

Firm Size (# of employees) 1-10 11-50 51-250 Over 250

% of total manufacturing employment Pakistan Sialkot city 42.1 18.4 12.3 27.1 100%

65.2 26.3 7.6 0.9 100%

Source: Calculated from Census of Establishments (1988) data files Note that figures for Sialkot district were quite similar to that for Sialkot city.

The vast majority of firms in this city are family owned and managed. There are few professionals; firms are staffed by craftsmen who learned their trade by serving as apprentices to other craftsmen. Sialkot has a high degree of exposure to the international economy with entrepreneurs participating in numerous trade fairs abroad and hosting visits of foreign buyers. Even the smallest of exporters is likely to boast of a fax

machine and a mobile phone to maintain contact with the outside world. This exposure to the international environment is gradually leading to the realization that firms will have to become more professional in order to compete favourably in the years to come. Issues like ISO 9000 certification have led to a realization that local industry has to spend greater effort on worker training and quality assurance than what has been done historically.

Firms typically prefer to subcontract rather than to make the investments in equipment and manpower, which would be necessary for manufacturing in-house. Even among the workers working within the firm, many are piece-rate craftsmen rather than salaried employees. Firms subcontract anywhere from 20% to 80% of their manufacturing to vendors. For instance, soccer ball exporters often subcontract up to 90% of their value-added to cottage industries with only material cutting, final testing and packaging being perfoD11ed in-house.

The preference for subcontracting and piece-rate workers rather than on vertical integration and the development of a loyal workforce is a natural outcome of the fierce entrepreneurial spirit which is characteristic of the citizens of this city. When asked about his ambitions, a young craftsman stated that

he "would like to own his own workshop and become an exporter or would like to get exported, i.e., he would like to migrate". This entrepreneurial spirit results in low


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company loyalty; not many want to remain as employees in someone else's organization. As soon as a person has saved enough to buy the most rudimentary equipment he wants to get started in exports.

Widespread subcontracting, strong socio-economic networks of support, and the entrepreneurial spirit in the city result every year in the birth of hundred of companies such as the Suddle Group described in the boxed insert.

Box 1: Suddle Group of Companies

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Sialkot's industries are in many ways typical of industrial clusters in other parts of the world . Clusters are defined as geographical concentrations of related industries. Growth results from agglomeration effects as specialized skills and services are developed within and attracted from without the cluster. The presence of numerous final firms and of multiple sources for ancillary services and inputs results in fierce

competition and local rivalries. It also results in a pool of specialized manpower, in rapid diffusion of infom1ation, and in low barriers to entry due to easy access to the resources within the cluster. As Marshall put it "The mysteries of the trade become no mystery; but are as it were in the air….if one man starts a new idea, it is taken up by others


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and combined with suggestions of their own; and thus it becomes the source of further new ideas" .

Sialkot is very much a city at work, energetic and chaotic. Weiss (1991, p. 48) describes her impressions as:

"The sights and smells of Sialkot arc of a different order than Lahore's. Horse drawn tongas are in plentiful supply as they ease down thin alleyways purportedly referred to as streets. Sialkot prides itself as the birthplace of Allama Iqhal. The city's pragmatism becomes evident when viewing its industrial area: workshop upon workshop of boys and men, labouring together, making halls, gloves, bats, all sorts of sporting goods. This is a city at work, which moves about briskly in the morning, and closes up early in the evening. "

Three industries dominate Sialkot. Of the Rs 24.4 billion exported from the city in 1996-97, 36 percent came from leather goods, 30 percent from sports goods, and 18 percent from surgical instruments (see Table 3).

While clusters of leather good manufacturers and exporters exist in several other parts of the country as we1l9, the surgical and sports goods clusters are uniquely located in Sialkot. In 1988 about 93 percent of the 2565 surgical goods manufacturers in the country were located in the city of Sialkot. Similarly over 98 percent of the 3559 sports goods manufacturers in the country are located in 10

Sialkot and its neighbouring localities . In the next sections we elaborate on the dynamics of the surgical and sports goods clusters and the challenges faced by each. . Table 3: Sialkot exports (in Rs. millions) YEAR 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97

SPORTS GOODS 2,276 2,475 4,329 4,718 5,860 7,261

SURGICAL GOODS 1,826 2,263 2,382 2,860 4,194 4,498

LEATHER TOTAL GOODS EXPORTS 1,851 8,695 3,920 10,205 4,144 12,837 5,769 16,984 7,243 20,428 8,745 24,455

Source: Sialkot Dry Port Trust


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3. THE SURGICAL GOODS INDUSTRY Sialkot's surgical goods industry is responsible for 75 percent of Pakistan's engineering exports. It produces over 2000 different instruments, mostly made from imported stainless steel. With a 20 percent share of total world exports, surgical instruments made in Sialkot are used by surgeons, dentists, and veterinarians throughout the world, and are considered second in quality only to Germany the global leader in this field-.

As is typical of Sialkot, the industry is characterized by a high degree of specialization. Of the roughly 3000 firms in this industry in 1994, only about 200 firms both manufactured and exported surgical goods. Another 600 firms were involved in trading, i.e., these firms exported surgical instruments but did not own any manufacturing facilities; instead they relied entirely on the vendor industry. Of these 600 only half could be categorized as serious exporters of surgical instruments while the remaining 300 dealt in multiple product items including surgical goods. The third industry segment comprised about 2000 small vendors. Nadvi (1996) describes the host of "stage firms" who supply specialized vendor services for both the manufacturer and trader segments. These include individual firms specializing in filing and grinding, in forging and diemaking, in milling and box fitting, in polishing, in electroplating, and in heat treatment. Providers of ancillary services and inputs include suppliers of steel and machinery; travel agents, communication couriers, cargo handlers, legal and accounting services, and repair workshops, and

institutional support in the form of financial institutions, trade associations, and various government funded training and research centers.

As with industrial clusters elsewhere in the developed and developing world, the birth of the Sialkot 11

surgical industry can partly be explained by what Krugman calls an "historic accident" . The Punjab historically had to bear a greater share of the brunt of invasions from Central and West Asia, and as a result developed an expertise in manufacturing metal-based weapons. The koftgars (blacksmiths) of Sialkot developed a reputation by producing swords and daggers for the Mughal emperors. In the late nineteenth century some koftgars repaired surgical instruments for the American Mission Hospital. Encouraged by the hospital staff, they gradually started manufacturing replicas of the originals, and a new industry was born. By 1920 Sialkot was exporting to all parts of the subcontinent and as far away as Afghanistan and Egypt, and was later selected for supplying surgical instruments for allied forces in World War II.


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Excerpts from the 1920 Gazetteer of the Sia1kot District provide interesting insights regarding the early years of the industry: "Kotli Loharan consists of two large villages of Lohars (ironsmiths) lying about .live miles {() the north-west of Sialkot. All kinds of articles for use and ornament are made, such as shields and arms, betel-nut cutters, knives, boxes, plates, inkstands, and so on. The material used is iron, and gold and silver are used in inlaying. . . . . The Lohars of these villages are now very well off (unlike what was reported by Mr. Kipling in the last Gazetteer), having earned large sums as armourers and shoe-smiths during the War. There are some twenty concerns which turn out manufactured articles of iron and steel, including swords, spearheads, gurkha knives, razors, and stirrups. The workmanship is excellent in most cases. At Sialkot, there are excellent surgical instruments, knives, scissors, etc., turned out by the two factories of Messrs. SS Uberoi & Sons and A.F. Ahmad & Co. A new industry has also sprung up recently of making steel and iron trunks, office trays and cash boxes: this noisy trade has invaded the central part of the town, near the Fort. There are about 500 ironworkers at Sialkot. " (Government of Punjab 1920. pp. 125)

The industry has come a long way during the last seventy years. The Metal Industries Development Centre (MIDC), initially established in 1942 to act as a supply and inspection agency for allied forces and later upgraded in 1947 and during the eighties to provide workshop facilities and advisory services to local industry, pioneered in introducing several new technologies including drop forging hammers, vacuum heattreatment, and numerically controlled (CNC) die-making machines. During the nineties several international joint ventures with European firms were set up.

Together with its many successes the industry has also faced difficult times. Due to local rivalries, price wars, lack of a professional workforce, and a subsequent short term orientation among businessmen, quality standards were not maintained during the late eighties by many exporters. As a result, due to the export of substandard surgical instruments to the United States, in April 1994 the U.S food and Drugs Administration (FDA) imposed a ban on the import of surgical goods from Pakistan. Only firms conforming to Good Manufacturing Practices (GMP) issued by the World Health Organization would be allowed exports to the United States. With over half of Pakistan's surgical goods exports going to the United States, exports did fall for a while but have been able to rebound since then.


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Will the industry continue to thrive, or will it die a natural death just as numerous craft industries were eventually replaced by mass production techniques in the automobile and other industries at the turn of the century in Europe and the United States? Before attempting to answer that question we now turn to a discussion of another industry in this unique city.

4. THE SPORTS GOODS INDUSTRY 1994 is remembered in Sialkot as the year the city was selected for supplying the official ball to the Football World Cup in the United States. It culminated a year of frenetic activity as Sialkot's industry turned out over 20 million footballs to cater to the excitement created by the publicity surrounding the event. Exports of footballs doubled from Rs. 1.6 billion in 1992-93 to Rs. 3.2 billion in 1993-94. In addition to top brands such as Adidas and Puma, major sports clubs around the world sourced footballs from Sialkot. The burger chain McDonald's reportedly took a plane load of footballs to be distributed as souvenirs during the tournament. The excitement remains four years later, since once again the city has been selected to supply footballs for the next World Cup in 1998.

The 1994 world cup was only one more in a long list of achievements. Recorded history of the industry goes back to 1895 when the city started becoming famous for its tennis racquets. By1903 cricket bats were being crafted from imported English willow and gradually exported to different parts of the subcontinent and beyond. In 1922 one Sayed Sahib was awarded the British Empire Export A ward for supplying footballs to the British army. Over the years the industry grew to include a variety of wood and leather based sporting equipment, and diversified into related industries such as sports apparel and riding equipment.

SJALKOT'S EN7'N/_PRENEURIAL SPIRIT

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Box 2: One-stop shop for riding enthusiasts

The industry earned over Rs. 7 billion in exports during 1996-97, over half of which came from the sale of footballs. The industry is primarily cottage-based, employing some 15 to 20 thousand individuals

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Even a

giant firm such as Saga Sports with half a billion rupees in exports and a thousand employees subcontracts out much of the stitching work to hundred of small firms. The work is skill and labour-intensive with a typical football requiring about 1400 individual stitches, and an expert worker turning out about four such balls in a day.

Will Sialkot still remain competitive as other countries with even lower wages, enter the market? Will Sialkot be able to overcome increasing non-tariff barriers to trade such as requirements for quality and environmental certification? Ultimately the continued success of the city will be detem1ined by its ability to respond to new challenges and opportunities, and it is to this topic that we now turn.

5. RESPONDING TO CHALLENGES Over the years Sialkot's industries have faced many challenges. These have been met with varying degrees of success. The advent of new light-weight material for tennis racquets and other sporting equipment quickly eroded the international competitiveness of Sialkot's wood-based products. However Sialkot's firms responded by developing new niches in footballs and leather and textile based sporting apparel. The seventies saw a period of labour unrest and strikes spurred by the then popular socialist slogan of "factories to the workers". Trust and harmonious relationships so essential to the network of subcontracting arrangements started breaking down. The city soon recovered and the dream of most young men today is to start their own workshop or trading company, to spend their energies creating rather than

redistributing wealth.


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The ban imposed by the U.S. Federal Drug Administration in 1994 on the import of surgical goods resulted in a flurry of activity to obtain the necessary quality certification. Joint ventures were formed and efforts

made to tap into alternative markets in Central Asia and the Far East. It also resulted in exporters switching to other growth industries such leather goods (particularly gloves for sporting events), where exports have increased five times in the last five years.

A much greater threat looming around the comer is the requirement of ISO quality certification by European importers before the turn of the century. This will affect all products, not just surgical goods. The 13

certification requirements are also far more stringent . Reportedly less than half a dozen firms have so far received certification. The road to quality certification will indeed require a major change in the way industry in Sialkot works. The flow of each production batch through the various stages of production will need to be recorded, tests will need to be performed on materials and components, health and safety standards and general working conditions will need to be improved upon. Having uniformed workers working at benches while periodically taking notes on quality levels. is a far cry from the current cottagebased subcontracting system with craftsmen sitting on the floor with piles of material around.

One response has been vertical integration. The larger football manufacturers have started establishing stitching centers in nearby villages. Instead of villagers working at home or traveling an hour each way to the factory in inner Sialkot, they work at these centers, where standards can be more easily enforced and quality monitored. Medical Devices which specializes in quality surgical instruments, recently obtained ISO 9002 certification after setting up its own fully integrated manufacturing unit with no subcontracting. Only l4

young educated workers are hired and trained entirely in the firm . Another response, as described in the boxed insert on Leather Field is to compete by innovating and professionalizing one's operations.


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Box 3: Professional Management at Leather Field "

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Another challenge facing the city is its relative inability to collectively solve some of its own problems . Infrastructure facilities arc woefully inadequate. This includes poor air, road and rail transport, and telecommunications. The drainage is in shambles, there are few recreation facilities, few colleges, and no universities. Somehow the city's strong entrepreneurial spirit and the dispersed heterogeneous vendor base 16

seem to get in the way of collaborative business activities . Ironically these are also the very sources of its strength. The fierce individualism leads to localized rivalries and price wars, and the lack of collective long term vision among the

SIALKOT'S ENTRFJJRENEURIAL SPIRIT

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various industry segments. In addition Sialkot does not belong to either of the two most powerful lobbies in the country, i.e.. that of feudal agriculturists and that of big business, notably textiles. The lack of strong secretariats within business associations has also contributed to their lack of effectiveness

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. Thus there is

little representation from Sialkot on key national committees, resulting in the general feeling among Sialkot business that the city and its industry fail to receive fair treatment at the hands of the central government.

6. CONCLUSIONS The export-oriented Industrial clusters which emerged in cities such as Sialkot thrived, despite rather than due to government policies in place for much of the last fifty years. Will these industrial clusters continue to thrive as non-tariff barriers to trade and regional trading blocs make it increasingly difficult for the small exporter to compete. Collective efforts, alliances, and public-private partnerships are the new strategic weapons being forged to fight the trade battles in the twenty-first century: these are missing in the alleys of Sialkot.

An equally compelling concern is the future of the industrial elite elsewhere in the country. Much of large scale manufacturing thrived on government largesse, a result of subsidies on credit and other inputs. and behind high walls of tariff protection. The current wave of deregulation, privatization. and trade liberalization are ending this comfortable state. The industrial elite may wither away, much as a terminal patient after life-support systems are removed.

I believe a revamped industrial elite and industrial middle-class can both not only survive but also thrive. In a world where globalization and regionalism of industrial activity simultaneously exist, the large and the small complement each other. The large firms provide the deep pockets, the credibility, access to markets and technology, and bargaining power necessary to compete internationally, while small firms are more innovative and "lighter on their feet". Regional clusters provide local concentrations of knowledge, of specialized skills, institutions, and infrastructures, and of spillovers among organizations. Companies such as Saga Sports and Leather Field in Sialkot, Millat Tractors in Lahore, GFC Fans in Gujrat, and Pak-Suzuki in Karachi have over the years created regional clusters of hub-spoke relationships wherein the lead


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organization provides access to technology and markets for a complex of suppliers surrounding the central 18 hub. ;

World class regional clusters do not just haphazardly emerge. The extant literature in this area suggests that such clusters are crafted with the support of local government, through the development of trust which encourages investments in relationship-specific assets and which mitigates against threats of opportunism. 19

Current policies strongly discourage cottage industries from growing to small-scale . They thus often remain at the periphery in the undocumented economy, surviving by scraping costs and selling counterfeits. A "radius of trust" which is limited to the extended family. prevents medium-sized companies from growing further. No firm in Sialkot has yet gone public and few hire professional managers, thus considerably diminishing the chances or growing into truly world-class companies. There is much which industry and government can learn from thriving clusters elsewhere, from the metal-based industries in neighbouring Ludhiana, from the new high tech industries in Singapore's Technology Corridor and Califomia's Silicon VaHey, from the military-industrial complex in Changwon in South Korea and from Japan's ShinanogowaNagasoka technopolis programme for the development of new materials and technologies. In all of these local government and institutions, as well as partnerships between large and small firms played a key role in 20

the development of the industrial district .

Fifty years ago when industry was at a standstill, two distinct classes emerged in the country. Both thrived, one with and one without the support of government. Today they both stand at another cross-road. One lacks capital, the other entrepreneurship; both lack professional management. The future of Pakistan's economy depends on whether the two can work together in partnership with government, in order to survive 21

together .

Acknowledgments This study was possible because of the many entrepreneurs of Sialkot who shared their stories, their time, and their Friendship so generously with me. 1 owe thanks to Dr Tahir Andrabe and Was!{ Khan who u!/Ilinue 10 be a source of new ideas, to Dr. Noor M. Lard( who provided access to Federal Bureau of Slalistics data tapes, and to an earlier grant Fain the Asia Foundation on which part of work is based.


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I According to Abbasi (1994) over 80 percent of small enterprise financing comes from own or extended family savings. Only II percent comes from banks or money-lenders. 2 The term industrial bourgeoisie was first used for this class by Weiss (1991). See Altaf' (1983) for a discussion or this entrepreneurial class as it impacts the nature of industrialization in term of choice of scale and capital intensity. ownership (public vs. private), product (industrial vs. consumer), and policy (import substitution vs. export driven). 3 British rule in the Punjab was dominated by three political themes: political entrenchment, revenue extraction, and military requirements. The resulting elite zamindar class had little interest in the development of modern agriculture. The little commerce and industry that existed was dominated by Hindu banias, Sikhs and Parsis; while Muslims were primarily peasants, artisans, and soldiers. See Ali (1988) and also Papanek (1968) and Altaf (1983). Indeed there W