SECOND DRAFT

Pakistan Furniture Sector Strategy Narrative

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

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 exfactory 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.

INDEX 1. 2. Executive Summary 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

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 2

Micro, Small, and Medium Enterprises 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

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
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

99.996% 0.004%
World Pakistan

9% 13%
Dom Prod Export Import

78%

Global total: $30 billion (2004)

Domestic market total: $160 million (2005)

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

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.

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 details in Appendix A), the return to the furniture sector as a whole is nearly four times (378%) its investment in 2011 alone, compared to a scenario where no such investment would have been made, or USD 151.2 million in additional revenues for domestic firms (resulting in additional tax revenues). This includes USD 84 million gained by curbing domestic import-market share (figure 4), and USD 67.2 million in additional export revenues over status quo projections (figure 2). The returns of this investment to the sector are estimated to grow exponentially, reaching over one billion dollars by 2015 in exports alone. Many aspects of such investment are relatively basic interventions by international standards, such as kiln drying facilities, but it will require effective action by firms and inter-industry coordinating entities to substantially improve quality across the value-chain (see challenges below), which is by no means trivial.
Figure 2: Comparison of Export Projections (2001-2015) Status Quo Versus Proposed SWOG Investments
In millions of USD

1400 1200 1000 800 600 400 200 0

Additional revenues over status quo USD 1 billion. Cost: USD 51 m

With investment

USD 84 million. Cost: USD 39 million

No investment (status quo)

A modest investment of USD 39.4 million by 2011 will allow the sector to fully capture an additional export revenues of USD 84 million (100% ROI). By 2015, the sector is estimated to capture additional export revenues of $1 billion.
Source: IFCA data (2006), ITC Report (2007), SWOG analysis (2007) No investment projection is based on average growth from 2001-2005, or 26.82%, corroborated with industry expert projections

Moreover, the industry has a potential to increase per worker value of $2,000 to $20,000 by 2012, resulting in USD 700 million domestic production value.5 This same plan forecasts exports to grow to USD 70 million in 2010 and USD 250 million in 2012, to occupy 53% of Pakistans production compared to 9% today (see Appendix B for additional IFCA projections on Pakistans furniture sector).
5

IFCA estimates (December, 2006), using ex-factory prices. See projection table in Appendix B. Under the status quo scenario, if no investment is made to the sector, expected growth is to merely double by 2011 towards a $320 million production value. Interview with Peter Rayner, 10/27/07.

20 01 20 04 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15

3.1.2 Unique Tradition of Craftsmanship and Proximity to One of the Worlds Fastest Growing Markets. Two distinct advantages have potential to give Pakistan a competitive edge in export markets: (a) proximity to attractive markets in the Gulf vis--vis other countries such as China and Vietnam, and (b) a tradition of craftsmanship and unique design. (a) In recent years, furniture demand in Gulf States has been nearly doubling, driven by rapid economic development and construction in the region (see Figure 3).
Figure 3: Major Furniture Imports by Middle East Countries (2001-2005)
Total Value in US$ (2005) = $1,477,336,000 In thousands of US$
$900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Value (2005)
Mattress Support Office Kitchen Bedroom Other Parts

In % Growth (2001-2005) = 19.2% average

30 25 20 15 10 5 0 Annual Growth (2001-2005)

Mattress Support Office Kitchen Bedroom Other Parts

Mattress support, kitchen, and living room furniture have been the fastest growing segments, particularly in UAE and Saudi Arabia
Source: ITC Report (2007), SWOG analysis (2007)

(b) In the past years, Pakistan exports have been driven by volume and price, mirroring its Asian neighbors such as Malaysia, China, and Vietnam. This may be the right strategy to Pakistan, but further examination of its competitive position is needed, including exploring other niche, value-added segments that would provide higher margins and wages, while exerting less stress in its natural resources. This is particularly important given Pakistans unique tradition in ancient and oriental design styles, which needs to be leveraged by identifying attractive buyers willing to pay a premium price for a product experience that only Pakistan could deliver. In order to realize this potential in export markets, further research on how the country could seize this opportunity needs to take place, starting by identifying and understanding the needs of attractive distribution channels. See section 5 (Moving Forward) for additional comments on this topic. 3.1.3 Growing Domestic Demand. Mirroring Pakistans GDP growth in the past years, the domestic furniture market has been growing by 25% a year, reaching $160 million in 2005 (ex-factory prices).6 Home demand is expected to reach $1 billion in 2015. Meanwhile, foreign imports has been increasing at an exponential pace, reaching 12.5% ($20 million) of domestic market in the course of 14 months (figure
6

IFCA estimates (Dec. 2006), SWOG anaysis (2007)

4). There is anecdotal evidence that consumer buying patterns, including important segments such as newly married couples, are shifting towards imports while local furniture are perceived as village products. 7 This is both a threat and an opportunity for Pakistan. The influx of Chinese and Southeast Asian furniture has strengthened cooperation in the sector, such as a proposal to setup a single sector coordinating organization for the development and promotion of furniture manufacturers (i.e. Sector Development Company, Furniture Pakistan, see Section 4 under 4.2 SWOG Initiatives). If Pakistan implements this other proposed SWOG initiatives, such as setting kiln drying facilities and other production improvements (ref. Appendix C for details of each initiative), Pakistans firms will capture a significant share of the growing domestic market by curbing the current growth rate of imports. By reducing projected import market share in Pakistan from 50% to 36% (a 14% gain) by 2010, this will translate into an overall gain of $67.2 million in that year lone (figure 4). By 2015, a conservative projection of curbing imports from 50% of market share to 30% would translate an overall gain of $200 million in a single year over a status quo scenario of no additional investment in the sectors productive capacity.
Figure 4: Growth of Imports in Pakistans Domestic Furniture Market Impact of SWOG Investments in 2010
Domestic Market Share % Estimated Projections

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2002 2005 2008 2010
Domestic Imports

29% 12.5%

USD 67.2 million* gained in 2010 if basic capacity investments proposed by SWOG reduce import share in domestic markets form 50% to 36%. By 2015, gains could reach $200 million for local firms

The share of imports have grown from zero to 12.5% in 2005, with projections to double every 2.5 years if status quo is maintained * 2010 projected home market size ($480m) x projected
Source: IFCA data, SWOG analysis (2007)
import market share under status quo (50%) minus 2010 market size ($480m) x import market share scenario with SWOGs capacity improvement initiatives (36%)

3.2 Challenges To seize the above opportunities, Pakistans furniture industry must be equipped to compete in domestic and international markets. The following critical challenges remain: 3.2.1 Shortage of Sheesham and Other Wood Resources. Although Pakistan possess has some of the best quality wood varieties (e.g. Sheesham (Rosewood), Deodar, and Walnut), the 2,301,280 hectares of wood is not managed well. There are claims
7

Peter Rayner (international furniture expert), interview on 10/26/07

of widespread exports of unprocessed logs and sawn timber to the Gulf countries. The waste happens from sawing to poor storing practice of final products, which can reach 50% on average according to Hard Wood Furniture Association. Nearly all wood used for furniture (82%) is Sheesham, which has a high international demand due to its high grain quality. Initial estimates indicate 1.23 to 24 million cubic feet (35,040 43,800 m3) of Sheesham wood is cut annually (80% of all timber in Pakistan). Six million cubic feet of additional Sheesham wood is expected to be cut between 2007 and 2008. Such accelerated pace of deforestation is unlikely to be sustained. The problem occurs in both supply/replenishment as well as handling of cut wood. This starts with location selection, choice of wood, and sawing, which is mostly unplanned by individual furniture makers at a rate of 5.9m per 1,000 people. Poorly equipped factories (inadequately lit, lack of proper machinery, messy) also results in waste in sawn wood. Shortage of Sheesham and other wood resources is a major threat to Pakistans wooden furniture industry.
Figure 5: Key Challenges in Pakistans Furniture Value-Chain
Domestic International Market
Hypermarket Mail order Dept DIY Stores housee Stores Bedroom Kitchen Other furniture Franchise Chain Retail Stores Stores Stores

Consumer Consumer Channel Channel

Non-Specialized Distribution Specialized Distribution

Large retailers

Buying Groups

Bedroom Kitchen Other furniture

Non-Specialized Distribution Importers/ Wholesalers

Distributor (National & International) Transport

Domestic manufacturers

Selling agents

3.2.2 Capacity Across the Value-Chain. Besides raw material replenishment gaps, wood is wasted due to lack of proper handling and processing techniques. Most urgently, there is waste while quality is compromised due to improper wood drying techniques. According to one estimate, wood waste can reach up to 50% across the value-chain.8 Critical quality and waste problems are a result of the widespread use of informal wood drying practices (e.g. sun drying). Currently, less than 1% of Pakistans wood production is kiln-dried, resulting not only in waste, but quality problems that are basic requirements for the export markets. Kiln drying eliminates moisture (to about
8

Hard Wood Furniture Association

Weak managerial capacity at firm and cluster level

Inadequate handling of wood / lack of skilled labor

Buying agents Poor market knowledge

Flooring, Joinery, Furniture and parts - firms

Manufacturing
Intermediate & final Products Reconstituted panel plants key inputs are imported

Inputs Timber/board Wood Supply, Roundwood PRoduction

Local and imports: Woodworking items, seating/upholstery items, glass, marble, metal, plastic (structural design), finishers, measuring, jig fixture Sawmills, veneer, plywood (4.2 million sheets (8x4) particleboard / year) Log bidding and auction (Kiln Drying is Missing) Sheesham (82%) Other, i.e. deodar, poplar, mulberry (18%) Domestic International market Domestic & international Key sector challenges Imported sawn wood (USA, Europe, Malaysia)

Raw material instability

Sources: Peter Rayner (2006), ITC report (2007), SWOG analysis (2007)

8-10%), bugs, and other impurities. Currently, there is no quality assurance compliance with international standards for consumer acceptance. Moreover, moving upstream in the value-chain, the lack of proper cutting, drying, and handling of wood, combined with lack of inputs or specialized suppliers (e.g. glue and dyes), affects the final product in both cost and quality (figure 5). Basic professional woodcraft techniques, such as cabinet making skills rather than using nails, are widely lacking. Moreover, adequate quality and finishing procedures are lacking, and modern packaging is virtually non-existent in most factories. Such technical upgrades and technologies are essential to modernize Pakistans firms across the value-chain to make it export (and import) competitive, regardless of the long-term scenario it chooses to adopt, whether the current volume and price strategy, or some form of niche value-added strategy. 3.2.3 Weak organization and management capacity at the firm and sector level. With imports positioned to double its home market share every 2.5 years, there has been an increasing recognition that a single and efficient coordinating mechanism should exist in Pakistans furniture sector. The sector is dominated by small, family-owned firms with weak production, storage, handling, and distribution systems. These smaller firms lack mechanisms to take advantage of scale economies (like purchase of inputs and common processing facilities), and sector strategy coordination with other firms and the public sector. In many factories, costing procedures are minimal, often with a single cost center for the predominantly manufacturer-to-retailer facility (75%). 30% of Pakistans furniture is sold as wholesale, either to traders or other firms. Additionally, storage and in-transit handling of furniture is poor, further exacerbating damages and waste. No single industry association today is able to technically coordinate production and marketing of furniture to transform Pakistans industry in a $1 billion industry by the next seven years. An effective mechanism is urgently needed to coordinate actions to improve exports and combat growth of imports, including addressing production capacity needs, formulating and implementing market-driven long-term strategies, and other inter-firm activities that neither the government nor the private sector is addressing today. Moreover, a focal entity to coordinate public-private sector activities is needed. One example of the adversarial relationship and lack of coordination between these two sectors is the use of Sheesham wood in public buildings. The government has been encouraging the widespread use of Sheeshambased furniture in public buildings, including schools, while the private sector has been resentful of this government-first policy towards the allocation of scarce Rosewood.

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IV.

Addressing Sector Challenges: SWOG Work to Date

4.1 A Shared Vision for the Public and Private Sectors. To help unleash the $1 billion potential constrained by the challenges outlined above, a group of committed industrial stakeholders came together to form a Strategic Working Group (SWOG) in Spring of 2006 to address how the industry could reposition itself. The SWOG is increasingly becoming a recognized private sector-led platform on which most players in the value-chain, including the public sector, have come together. The SWOG has developed a vision and formed functional working groups to develop critical activities and initiatives shared and agreed by the private sector and the Government of Pakistan: (1) In the short-term, it is focused on ensuring 100% usage of kiln dried solid wood for manufacturing. This is a critical basic processing requirement both to gain domestic market share from imports, as well as an international standard to export.9 Another complementary goal is to ensure credible supply of sustainable timber immediately and throughout the next 10 years. (2) In the long-term, the industrys vision is to become a globally competitive and sustainable furniture industry with improved productivity throughout the value-chain and increased export levels. 4.2 Key SWOG Initiatives. A summary of initiatives to accomplish the above directions, while addressing the key sector challenges, is outlined below (figure 6). The detail cost breakdown of US$39.6 million for these activities can be found in Appendix A, and a detailed description of each initiatives is found in Appendix C.
Figure 6: Pakistans Furniture Sector Challenges and Proposed Initiatives
Challenge Proposed Initiative Benefits
Replenishment of wood Sheesham and other wood resources Stable prices and reliability of wood inputs Greater supply available for valueadded products Improved supply by curbing illegal timber trade, increased export competitiveness Ensure availability of quality raw materials, including for exports World-class technical capabilities, including CAD, design, and manufacturing techniques Furniture accreditation for greater export competitiveness Informed industry and market choices for timely strategic actions

Cost in USD (millions)

Shortage Shortageof of Sheesham Sheeshamand and Other OtherWood Wood

Sustainable Forestry System Wood and Component Bank Reconsider use of sheesham in public buildings Chain of custody reforestation

6.5 m

Value-Chain Value Value-Chain Productivity Productivity

Establish 250 solar-based kilns across Pakistan Common Facility Training and Manufacturing Centers (4 model factories, curriculum) Furniture Testing Labs Marketing (exhibitions, showrooms) and industry/ market information capture

26 m

Weak WeakCoordination Coordination Mechanisms Mechanisms

Establish a Sector Development Company (Furniture Pakistan)

Critical capacity requirement to coordinate initiatives proposed here by SWOG

7.1 m

Total Cost US$ 39.6 m

Peter Rayner (international furniture expert), interview on 10/27/07

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V.

Moving Forward

5.1 Long-term Considerations: Potential Problems with Volume and Price Driven Exports. Currently, Pakistan has been adopting a market strategy that is mainly driven by volume and price. Its exports mainly easily imitable products such as hardwood (70%), home, and occasional furniture - have been fluctuating in the past years. Shadowing its Asian neighbors, Pakistans furniture exports have been mainly concerned about delivering large quantities of furniture at a reasonable quality, lower cost, and taking advantage of economies of scale. Because there is still unmet demand in this market, high-volume products seems to makes sense as a (perhaps assumed as the only) primary export option for Pakistans furniture sector. However, adopting this market position as the default and only scenario for Pakistan could put its furniture sector in a vulnerable position in the coming years. Volume and price strategies are relatively easy to imitate by other countries, while the threat of substitutes and change of market preferences could make this strategy obsolete. This is already happening as a trend: even though demand for furniture has been increasing globally, there has been a downward pressure on the average price (figure 7), indicating signs of net over-supply of volume-based common furniture categories. Pakistans furniture could be displaced by other countries through an over-saturation for the type of furniture which Pakistan is currently competing in after enjoying a few years of growth. Moreover, volume and price strategies have costly social consequences. First, they put enormous pressure on already strained natural resources (either in Pakistan or elsewhere), while increasing dependency on imported inputs from actual or potential competitors, or both. Second, it leads to downward pressure on wages, as market over-saturation puts pressure on costs, and wages are usually the easiest cost item to manipulate.
Figure 7: World Furniture Price and Export Volume Trends
(the industry) is in the throes of an intense global competitionmoving towards a common and falling global prices rising exports will not necessarily result in profitable production - UNIDO report (2003) 10 Year Furniture Price Trend Line*, in World Furniture Price Export Volume (1989-2005), in billions of USD**

$100

Actual volume trend line

$50

Estimated trend line

$0 1989 1995 2000 2005

Actual price trend (1989-97)

Expected price trend (1997- )

Although world furniture trade grew by 36% in 1995-2000, and by 67% in 20012005, world prices have been falling
** Furniture price trends here uses intra-EU imports as a proxy to world markets, as one of the largest markets and availability of information (Kaplinsky, 2003) **Including non-wooden items (all 821 ITC product group). Wooden furniture categories 821.16, 51, 53, 55, 59. show similar trends, with total $20 billion 2000 and $30 billion in 2004. Source: ITC data, Kaplinsky and others (UNIDO report on Global Wood Furniture Value-Chain, 2003), SWOG analysis (2007)

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5.2 Considering Alternative Long-Term Scenarios. Pakistans strategic objective in the long-term should take into account additional industry trends, identification and understanding of attractive buyer segments, and configuring the sectors capacity to meet the needs of these buyers (including the best result in value of its scarce wood resources). Volume and price strategy may be the right path, as other options could not be realistic for Pakistan. However, a further examination of Pakistans alternative competitive position needs to take place, including an in-depth understanding of potential distribution channels. This exercise is incorporated in SWOGs initiatives (section 4) and work plan (section 5) under Industry and Market Information Capture. The criteria for choosing the best strategic option for Pakistan should include at least the following: A competitive position which is difficult to imitate. Countries and sectors achieve sustainable competitive advantage by choosing to compete in market positions with complex competitive advantages, such as patents, a unique story, branded design or product of origin, ability to meet standards or certification, specific logistical requirements, and packaging, according to preferences of sophisticated buyer channels and most importantly, better than other relative choices of targeted buyers such as products from competitors or substitutes. Volume and price strategy is currently best led by China, who holds an absolute competitive advantage on volume relative to other countries. However, countries like Vietnam have even lower wages, serving as a potential threat to China on costs (see figure 8). The point here is that volume and price strategy is very vulnerable competitive position, where high export volumes usually leads into a temporary illusion of wealth creation, while putting pressure to lower wages, and eventually being displaced by cheaper competitors. Just like the poor will always be with us, there seems to be always someone cheaper emerging in world markets.

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Figure 8: Cross-Country Wage Comparisons

Workforce Hourly Cost Ranges in US$

$4.0

$2.0

Wage Average

$-

Pakistan does not have competitive advantage on costs, being stuck in the middle between China and Vietnam
Source: JE Austin/USAID draft report (2007), SWOG analysis (2007)

Rising wages and standards of living. An attractive future for Pakistans furniture sector should not jeopardize its workers. On the contrary, it should be built on rising wages and higher standards of living. Value-added niche segment exports, often best adopted by SME-concentrated sectors such as Pakistans furniture sector, illustrates how sector strategies can be chosen towards upgrading wages and wealth creation engines. By identifying and understanding the needs of sophisticated consumers and distribution channels, Pakistans firms could be best positioned for the future if it configured itself to meet the needs and a particular purchasing experience of attractive buyer segments. Current wooden furniture being exported in Pakistan (office, bedroom, living room, and other furniture), that are mostly volume and price-based, may not be the best vehicles to put an upward pressure on workers skills and wages as opposed to, for example, specialty design, branding (unique story), supply reliability, ability to meet specific logistical requirements and certification, as well as delivering a differentiated purchasing experience to certain buyers. Best captures value of scarce wood resources. A future where wealth is created but where its natural resources are depleted is not an attractive one. Ultimately, the depletion of its precious wood resources will kill the goose which lays the golden eggs, leading to neither wealth, nor environmental sustainability. Policies towards facilitating imports of wood from other countries may help ease this constrain, but it could put Pakistan in a vulnerable position in the long-run due to input dependency from actual or potential competitors. Thus, a long-term strategic option should take into account what best captures the best value of its scarce wood resources, measured by USD per kg of wood.

na Pa ki st an Vi et na m

al ay si a

C hi

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Distributes wealth across the value-chain. An attractive long-term scenario for Pakistan should not concentrate most of the gains at a particular point in the value-chain (e.g. exporters), but should be the best scenario that captures wealth across the value-chain. A value-chain gains analysis of different competitive scenarios, including comparing with status quo projections (volume and price), should take place to help Pakistans furniture sector to make an informed choice about its future. It is realistic. No decision about competitive position, however attractive its numbers may be, is worth pursuing if it the sector is not ready to adopt it. Potential bottlenecks includes lack of leaders (champions) emerging to embrace the opportunity, lack of institutional or financial capability for implementation, insufficient mobilization within the sector, and lack of technical know-how. Compelling data about different future scenarios may help, but it does not guarantee a movement towards a better future if there is insufficient receptivity and capability. Volume and price strategy could make the most sense if other alternatives are not, in this sense, realistic, or effectively adopted as a shared strategy by firms and by the public sector.

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VI.

Action Plan

5.1. Activity Prioritization. Initiatives are to be prioritized according to short, medium, and long-term, as well as independent (in blue) or path-dependent activities, as illustrated below: Short Term Sector Management Company Solar Kilns Medium Term CFTMCs Furniture Test Labs Wood Bank A full GANTT work plan is included in the next page. The following activity prioritization has been advised by Mr. Jehangir Khan Tareen (Minister of Industries, Production, and Special Initiatives) in March, 2007: 1. Setting up of Sector Management Company 2. Establishing 2 CFTMCs in Chiniot and Peshawar 3. Installation of 75 Solar Kilns 4. Marketing learning exercises, including market research and international exhibitions Long Term Sustainable Forestry Industry Branded Show Rooms

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5.2 Work Plan Table for Proposed Initiatives for the Pakistans Furniture Sector

Pakistan Furniture SWOG Strategy Work Plan - 2008-2010

Initiative Furniture Pakistan Actions Release of funds Building and renovation Recruitment of staff Procurement Operations Correspondence for foreign collaboration Proposal negotiation Infrastructure development Recruitment of staff Machinery: import & installation Soft launch Training/Common Manufacturing Tender and selection of vendors Construction & installation of kilns Market learning 1: buyer survey Market learning 2: buyer field research Long-term strategy formulation Market learning / strategy implementation (including international exhibitions) Year 1 Q1 Q2 Q3 Q4 Year 2 Q1 Q2 Q3 Q4 Year 3 Q1 Q2 Q3 Q4

CFMTCs

Solar Kilns

Market / Industry info Capture

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Appendix A: Program Cost Detail A.1 Total Program Costs (Capital and Operational Costs): Initiative Sector development company Furniture Pakistan (FP) Kilning facilities nationwide (200 kilns) Raw material bank Furniture Test Labs Design Facility & Training Academia CFTMC (5 centers) International exhibitions (3 years) National exhibitions (3 years) Market and industry information capturing mechanisms Forestry, planning, cloning/seeds Branded showroom/warehouses (showrooms) Total Cost In PKR (millions) 421 160 200 100 150 850 100 80 12 200 120 2,381 In USD (millions) 7.1 2.6 3.3 1.6 2.5 14.2 1.6 1.3 0.2 3.2 2.0 39.6

A.2 Priority Initiatives Detailed Cost (in PKR millions) Furniture Pakistan Capital Cost Operating Cost Total Cost Year 1 25.3 105.1 130.4 Year 2 0.5 118.9 119.4 Year 3 1.4 119.7 121.1 Total 27 344 371

CFTMC (x2) Capital Cost Operating Cost Sub-total 10% Contingency Total Cost

Year 1 182 43 225 22 247

Year 2 0 45 45 5 50

Year 3 0 49 49 5 54

Total 182 137 319 32 351

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Appendix B: Pakistan Furniture Sector Projections (IFCA) December, 2006 The following table summarizes IFCAs estimates on the potential growth for the local furniture industry vis--vis imports if significant production improvements are put in place to meet the growing demand of furniture in domestic and international markets:

Home Market / prices Home Market \Growth 72% Imports 20 80 Imports % of Home market 12.5% 29% Exports 15 30 Export Growth 114% Exports % of Production 11% 15% Production 140 195 Production Growth 39% Pak/Home Production 126 165 Pak/Home Prod Growth 31% Source: Market Values/Industry/IFCA estimates Dec. 2006

Pakistan Furniture Business Prospects (US$ millions) 2005 2008 2010 2012 ex-factory 160 275 480 700 75% 175 36% 70 133% 23% 305 103% 235 42% 46% 225 32% 250 257% 53% 475 56% 225 (4%)

2015 1000 43% 300 30% 1150 360% 62% 1850 289% 700 211%

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Appendix C: Detailed Descriptions of All initiatives The tables below include detailed initiatives, categorized in 3 main areas: A. Initiatives to increase productivity and competitiveness (raw material security) B. Initiatives to raise value-chain productivity C. Initiatives to improve industry market information D. Initiatives to improve workforce improvement E. Initiatives to strengthen productivity and sustainability policies A. Initiatives to increase productivity and competitiveness (raw material security) Activity A.1 Reduction of import duties on solid wood, wood boards, and lamination Description Objective and duration. Reduction of duty in on import of solid wood, wood boards and lamination: 2% reduction on solid wood (against 5% today) and 5% reduction on boards/laminations (against 20% today). This is to remain in effect until there is noticeable improvement in forest and wood land. Problem it is trying to solve. Alleviate raw material pressure and accelerated deforestation, hampering the availability of wood to the furniture sector. Forest and wooded land in Pakistan has decreased by 11% during 1990-2005, according to data from FAO. Expected impact: Increase in import of wood from 12.5% today to 30% by 2015;10 Decrease in pressure on indigenous supply sources of wood; Provision of cheap sustainable wood to Pakistani furniture sector leading to an increase in production; Increase in exports using cheap sustainable wood and cheap labor; Growth of forests which will give protection against aridity of environment and silting in of water reservoirs. Objective. Mandatory moisture test of hardwood during customs inspections before container is sealed. Certificates to be issued to complying parties.

A. Strengthen Policies for Increased Productivity and Competitiveness

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A.2 Mandatory Kiln Drying of Wood for Exports and Local Retail

Source: IFCA estimates, December 2006

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Problem it is trying to solve. The wide local practice of sun-drying of wood has resulted in discrediting the Pakistani furniture industry in export markets. At present, less than 1% of locally sourced wood meet basic international criteria (8-12% moisture content). Expected impact. (a) improvement in positive image of all furniture exported from Pakistan, and (b) increase in quality and durability of furniture A.3 Eradication of use of Sheesham for production of government school and office furniture Objective. Replace Sheesham wood with Acacia, mango wood, steel, and sheesham veneers for government schools and office furniture. Problem it is trying to solve. While Sheesham continues to be depleted at an accelerated pace (reflected on four-fold price increase in the past years), all public building furniture is currently made of Sheesham wood. The sector is not capturing appropriate value from this transaction. The government is currently taking the first cut of the best sheesham wood available, while the leftover is sold to firms at a higher price. This results in loss from other buyers willing to pay a higher price than the government, as well as animosity between the government and the private sector. Expected impact: Greater supply available for high end value added furniture for private manufacturers; More cost effective prices for the production of government furniture; Shifting focus of woodworking centers towards training rather than production

A.4 Reforestation and Chain of Custody

Objective. Concentrated planting efforts with mandatory chain of custody records to track the passage of timber from the forests to the end product. Problem it is trying to solve. Illegitimate timber acquisition activities, such as thievery by the local mafia, is adding to the lack of control of an already depleting Sheesham sources.

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Expected impact. Conservation of raw material to guarantee sustained supply of wood to the industry beyond the next sixty years; Increase in foreign exchange earnings and competitiveness in the international markets resulting from this improved standard / certification of quality.

A.5 Sustainable forestry system (USD 3.2 million, in 5/10/20 year cycle)

Objective. To supply a vast resource of cloned tree species suitable for the continuous enhancement of the wood supply across Pakistan. This includes farmer and landowner participation. Cloning is a proven route to success, already practiced in Peshawar. This includes not only Sheesham, but also Walnut, Neemwood, and Ash. The cost would cover annual preparation and supply of cloning saplings, background work on sustainability of delivery approval, infrastructure investments, and research in multi-cropping / Agroforestry. Problem it is trying to solve. Rapid depletion of wood resources, particularly Sheesham, which is the raw material for 90% of all wooden furniture in Pakistan. Trees need to replaced in an orderly manner. Expected impact. Benefit the industry with an estimated savings from sawn/kilned value of $320 million (20% of annual furniture demand). Effective replenishment of Pakistans forests Potential Institutional Partners. SMEDA TEVTA Provincial Small Industries Corporations Regional bodies Departments of Forestry and Agriculture Off-shore facilitation with Gulf States investment Other info

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B. Initiatives to raise value-chain productivity Initiatives B.1 Install Kilning Facilities (USD 4.1 million) Description Objective. Establish solar-based kilns across Pakistan to ensure availability of quality raw materials in the furniture industry. This initiative envisions the installation of 250 solar-based kilns in all major furniture clusters: 100 in Chiniot, 50 in Gujrat, 50 in Peshawar, 50 in Laohore and Karachi. Problem it is trying to solve. Increase quality of wood in Pakistan to meet international standards. Currently, less than 1% of wood current meets such standards. Expected impact. Dried wood will raise the quality of furniture. Given its low cost and easy replicability, a majority of the industry can incorporate the technology into their production. Potential Institutional Partners. Commercial banks through program schemes Competitive Support Fund (CSF) Business Support Fund (BSF) lending

Other info. The more commonly known wood drying system of using gas powered and vacuum kilns is an expense technology as the capital cost as well as recurring cost is very high. Solar drying technology is an effective and cheap method of drying wood at cycles of 2-3 weeks. B. Raise Value-Chain Productivity B.2 Establish wood/furniture testing labs (USD 3.3 million) Objective and cost. Ensure the export of quality furniture from Pakistan under international quality standards, by establishing internationally accredited testing labs. This includes mechanical tests on materials, semi-finished products and fittings plus mechanical tests on finishing products and chemical analysis. Quality assurance certification, flammability tests, and surface tests for the upholstery cluster to be setup as a separate site in Peshawar. Problem it is trying to solve. In order to penetrate in the international export markets, the consistent supply of quality products is a pre-requisite. Currently, there is no concept available for Wood/Furniture testing labs in Pakistan.

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Expected impact. N/A Potential Institutional Partners. B.3 Establish wood / raw material bank (USD 1.6 million) Provincial Industries Department(s); Pakistan Institute of Quality Standards Board of Investment (For facilitation to establish international linkage) Off-shore Labs

Objective. To provide a controlled and consistent source of quality wood to meet industry raw material requirements. This include a warehousing facility, facilitate importing of wood, financing facilities specifically for the wood bank (commercial banks), wood supply by government agencies. Problem it is trying to solve. To address shortage of wood / raw material for the furniture industry. This is reflected in sharp increases in the price of sheesham wood in the past years. Expected impact. Stabilization of prices of Sheesham in Pakistan and reliability of finished furniture to domestic and export markets Potential Institutional Partners Provincial Small Industries Corporations/Department of Industries Commercial Banks Provincial Forest Departments Private Sector Stakeholders

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C. Initiatives to improve industry market information

Activity C.1 Develop a Comprehensive Industry and Market Information Capture Mechanisms (USD 60,000 for market research x 2 (in 2008 and 2011)+ cost of database)

Description Objective. Develop an industry information mechanisms of foreign markets and trends, in the form of database and market access/learning exercises This includes a market learning exercise and a database (online and on demand) of critical business information. This is: a comprehensive marketing, materials, management, cost, design, workforce skill database on furniture styles, types, sizes and specifications, hardware, materials, tests, standards, certification, book translations of working manuals, working procedures, health & safety and environmental needs to sustain credibility for this industry Problem it is trying to solve. Furniture related business lack awareness of the foreign market and trends in design and materials, as well as production best-practices. The provision of such information to the industry can provide better target and well informed decisions about what to produce and where to market. This initiative is critical, as it is likely to affect the configuration of the value-chain depending on where it decides to compete (e.g. volume & price based competition versus niche value-added type of sector positioning)

C. Improve Industry and Market Information

Expected impact. Formulation of an industry positioning in international markets, including its relative position to is key competitors. C.2 Industry promotion and branding, such as the Establishment of Industry Branded Showroom (USD 2 million over 1.5 years, with USD 500,000 annually to sustain the web site) Objective. A major resource and back-up for the building of the Exhibition Program by providing necessary exposure to a wide range of products from different regions. This will be part of a comprehensive sector competitive strategy in international markets (see market learning in C.1 above). Problem it is trying to solve. Promote and position furniture products according to findings in market learning exercise. This has the potential to increase international visibility of a wide arrange of Pakistans

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furniture products from different regions. Currently, different firms showcase their products sporadically at exhibitions. Expected impact. Increased international reputation of Pakistans products. Potential Institutional Partners. Trade Development Authority of Pakistan Relevant Chambers Trade Associations Private Sector Stakeholders (Individual Industry Players) SMEDA Advertising and Media Agencies in Pakistan and USA.

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D. Initiatives to improve workforce improvement Activity D.1 Establish Common Facility Training and Manufacturing Centers or CFTMCs (USD 14.2 million) Description Objective, cost, and duration. To bring world-class capabilities into the industry, including ComputerAided-Design (CAD), manufacturing facilities, design and furniture infrastructure experts from Gulf States. Problem it is trying to solve. Gujrat and Peshawar are among the major furniture manufacturing clusters of country but relatively less developed in terms of technology and automation. All major processes of furniture manufacturing are performed based on traditional pattern or hand carving and basic manufacturing methods. Because of traditional means, there is a lot of raw material wastage and no innovation in the designing and manufacturing techniques.

Expected impact. These facilities will help avoid waste while improving quality including pattern making, cutting and manufacturing techniques to the local furniture manufactures. Potential Institutional Partners. SMEDA TEVTA Provincial Small Industries Corporations Off-shore facilitation with Gulf States investment

D. Invest in Workforce Development

Other info. This initiative will include the following activities: Establish four mechanized model finished furniture factories for key regions to rehabilitate the local population; Deliver on-site practical training in modern furniture practices and technology through model proven on-going furniture training programs; Develop world-class valuation (manufacturing and planning) expertise in Pakistan to support future investment in the sector.

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E. Initiatives to strengthen productivity and sustainability policies Activity E.1 Establish Pakistan Furniture Sector Development Company (USD 7.1 million) Description Objective. Establish a professional management firm for the furniture industry, with the purpose of coordinating implementation of SWOG strategic initiatives proposed here. Problem it is trying to solve. Currently, there is a lack of a single coordinating body with world-class management necessary to transform Pakistans furniture sector into a $1 billion industry. Expected impact. Effective coordination of initiatives described in this document. Potential Institutional Partners. Other info Regarding to the organization and governance, the Sector Company would have on its Board key industry cluster and industry supply individuals able to identify, interact, prioritise, solve and execute important issues as they become apparent. Many would be from the Working Groups of this PISDAC Initiative, as they see the potential of an integrated but competitive alliance.

E. Strengthen Industrial Organization and Supporting Institutions

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Appendix D: List of Acronyms ACIMALL - Italian Furniture Machinery Manufacturers Association AEDB - Alternative Energy Development Board BNU - Beacon house National University BMR - Balancing Modernization & Restructuring CFTMC - Common Facility for Training and Manufacturing Center CATAS - Italian Furniture Testing Laboratory CSF - Competitiveness Support Fund FRIM - Furniture Research Institute of Malaysia IVS - Indus Valley School ITC International Trade Center LGA - German Furniture Quality Test Center MTCC - Malaysian Timber Certification Council MTC - Malaysia Timber Council MTIB - Malaysia Timber Industry Board NCA - National College of Arts PFI - Peshawar Forestry Institute PSFD - Pakistan School of Fashion Design SATRA - UK Furniture Testing Center SWOG - Strategic Working Group TDAP - Trade Development Authority of Pakistan USAID United States Agency for International Development VDMA - German Furniture Machinery Manufacturers Association WISDEC - Wood Industry Skills Development Center Malaysia

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Appendix E: Key Furniture Producing Clusters

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