The biggest problem with Pakistan is political instability. Because of the political conditions sometimes it's hard to make decisions that are too far into the future. The political instability affects tax rates and duties on exports. This in turn affects a company's profit margins. A recent example of a government policy affecting the textile industry is the imposition of sales tax on textile manufacturers. Before 16th March 2011, Textile industries were exempt from paying taxes. This rise in tax also affects apparels manufacturers as the cost of raw materials has gone up.
Textile industry is the most important industry of Pakistan. The government would definitely encourage investment which will create jobs for people as well as buy raw materials from the local producers. There will be export duties on the products GAP ships to other countries for sales, but these duties are not large enough to offset the cost advantage gained by low cost labor. Hence that makes Pakistan a suitable place for production. Differences in Marketing: Global standardization is the way to go.
National responsiveness is not necessary because the people of Pakistan are influenced by the Western culture. The products sold in the US will do very well in Pakistan too. Labor Force: In 2010 the textile industry accounted for 55% of Pakistan's exports. This shows that this is a major industry for Pakistan. There is high inflation and unemployment in the country. The labor force is mostly young. There has been a change in trend. Pakistan being a poor country has excess of low cost labor. Many foreign firms have exploited this particular benefit to gain advantage over competitors.
Working training programs will have to be conducted for smooth operation of the factory. Export Tariffs As we have suggested for GAP to go for large scale production of its clothes here in Pakistan and then export them to the foreign markets, for that reason the government export policies towards the textile sector had to be first of all taken in view. Recently Pakistan has announced its new Textile policy for 2009 – 2014 in which the government has offered about 87 billion rupee cash subsidy to the textile and clothing sector to boost exports.
It predicts plans to boost textile exports to $25 billion from the current $17. 8 billion by 2014. Taking this into view GAP could also greatly benefit from this new policy as there are no export tariffs or quotas upon the amount of textile that a company wants to export . GAP could greatly benefit from this new trade policy and add much greater value to its finished products as top quality raw cotton is readily available locally which would be needed for production.
The government on the other hand has put quota on the amount of raw cotton and yarn that can be exported out of Pakistan as huge amounts of raw cotton were being exported to foreign markets due to which the price of yarn locally took a sharp increase in prices locally and added little to the foreign exchange as export of raw cotton did not add any value to it. For GAP , entering into Pakistan with a production point of view under this new policy would be much easier as under it the import of textile machinery has just been allocated bare 1 to 3 percent duty for the period 2009 to 2012 .
The government will also provide necessary support for branding, grading, labelling and other activities that would add value to the textiles chain. An insurance scheme will be introduced to protect local exporters from unforeseen losses and help the industry in IT-related issues. Major Barriers and Opportunities to Enter As Gap is a multinational brand operating in most of the countries of the world in order to compete with the other multinational brands. In North America it has over 1100 stores and world wide it has more than 300 franchises.
As there is strong competition in apparel industry of Pakistan so initially it will create problems for Gap to carry on its operations. People of Pakistan are very brand conscious but on the other hand they also prefer to buy branded products relatively at a cheaper rate as compared to other branded products. The low prices of Gap products initially will give them an edge over competitors and it will result in enhancing their sales. The major barrier that Gap can encounter is with the cost of the apparels.
As the competitors like Levis, Calvin Klein and Tommy Hilfiger have been in the market for quiet long time so they can have a cost advantage. When GAP will launch its operations, already operating industries can lower their prices giving a tough time to it and it might hinder in expanding its operations to other cities of the country. Moreover other barriers might include the tariffs and taxation polices that will be applied by the government inorder to carry out the operations. As the economic progress is pretty slow during the last few years which have resulted in an increase in inflation.
In order to cope with the increased inflation government increased taxation and the rate it has increased has affected many other industries of Pakistan. The increased taxation in return has increased the costs of other elements like raw material, electricity, transportation and research and development. Apart from the barriers there lies great opportunity for Gap to carry out its operations in Pakistan. One opportunity is the extensive target market that Gap will cater with its products.
Being a multinational brand, people will prefer to buy branded products and as people of Pakistan spend on their clothing in order to remain up to date so it will be a great market for Gap products. Moreover all types of seasons are present in Pakistan, so whenever the climatic changes occur people move to stores to fulfill their needs for buying branded and fashionable products. A large market is the greatest opportunity for Gap to perform its operations. Moreover another opportunity is the textile sector of Pakistan. Textile sector contributes more than 60% to the country total exports that sums around $5.
2billion and also this sector contributes to 46% to the total output produced in the country. So carrying out the operations in Pakistan and opening outlets will give it a benefit and will save it from a number of taxes that are being imposed by the Government. The cheap labor as compared to other countries and the availability of raw material will help Gap to perform well in the market of Pakistan. Outsourcing production in Pakistan will result in cheap finished product and it will further enhance the competition in the market.
Attractive Foreign Markets The target market of Gap is upper class and upper middle class, so it is essential for GAP to launch its products in countries which follow a lavish style and having high per capita income. The most attractive markets will be those in which there lies a great diversity in the preferences of buyers. As far as the market of Pakistan is concerned, trend changes at a very greater pace and the people to remain upto date buy products from time to time, which givers this region a very high purchasing preference.
Moreover there are other factors which are to be kept in mind while making operations in foreign markets. One important perspective is the markets of developing countries. In developing countries as the people continuously strive to achieve progress and provide the customers with all the facilities that help them in attaining a strong portion of market. Moreover such economies are a constant source of foreign investment as foreigners see a potential market for their products, so the competition that arises in return benefits the customers and also helps in gaining a greater market share for the organizations.
In developing economies, the countries that understand the needs and demands of markets in a efficient way gather a large portion of market share which help them in making improvements in their products and satisfy the customers in a more appropriate way. Another important perspective is the increase in population of that country. If a country has increasing trend of population increase, there will be differences in preferences and ultimately this will result in an increase in purchasing trend of people. Moreover the changing pace of trends and customer preferences are also an important issue which cannot be neglected as well.
India and China are the most rapidly growing economies which makes them very attractive markets for GAP. Having a presence in Pakistan would be of great benefit as it is the central location. From Pakistan it very easy to ship products to other Asian markets. The low cost of labor would give GAP a cost advantage as well. Least Attractive Foreign Markets There are certain reasons that restrict an organization to continue its operations in other countries of the World. One important market where investment should not be made is where the income level of individuals is low and most of the population lives below the poverty line.
In those segments people lack from their basic needs which ultimately results in decrease in spending pattern of customers. Also the markets that have very high costs of production of products are least attractive for most of the investors. If the costs for running an operation are high than the benefits obtained from the sales, then in a short time it becomes very difficult for organizations to go on with their operations in those markets. Moreover the markets that are already much saturated by the products of same variety should not be invested in, as the change in market totally depends on the actions of market leader.
If the market leader reduces the prices of the products the initial operators also has to lower their prices in order to sustain in the market which results in a very low profit or in some cases it leads to negative cash flows. But as far as GAP is concerned, Pakistan is a suitable market for it as it has low costs of production. The factors involved in production are also cheap like raw material and labor. Also the market is not saturated that it will create hurdles in making it operations to work out. Attractive Sectors of the Industry
As far as Gap is concerned the garments sector is the most attractive sector to carry out its business. Pakistan's garment industry is very well established as there lies a great competition among the garment producers of Pakistan. Exports of garments play a very big role in making a healthy economy of Pakistan. Outsourcing the production will surely reduce the costs that might be incurred from importing the same products. Moreover producing goods here will also give leverage on taxes and tariffs that affect the product in the market.
Producing products here will decrease the final price of the product which is a good signal for the customer and in this way market share can be gained from this particular sector. The richest person of Pakistan is also involved in operations in the textile sector, so it can be observed that the textile sector is a prospering and flourishing sector of Pakistan. Alternative to FDI In case GAP doesn't want to go for Foreign Direct Investment, then the alternative way is to continue the production as it is. Currently local manufacturers have been given the production responsibilities by GAP.
GAP keeps a strict quality control check on these manufacturers. Franchising would then be the preferred mode of entry. These franchises would be able to acquire the products from the local manufacturers. This would give both cost advantage to the franchise owners as well as create profits for GAP itself. In case of franchises GAP would be able to spread its stores in all the major cities of Pakistan as many investors would be readily available to buy the franchise. Current production facilities would not be able to sustain the demand if GAP decides to use Pakistan as a base for production for Pakistan as well as for other Asian markets.
For this GAP would either have to sign more agreements with other local producers or start its own production in Pakistan as already mentioned earlier in the report. Signing up other local manufacturers might create the problem of uniform quality among the products. Tight quality control check will have to be implemented. Franchising reduces the huge capital costs and the risk attached with it. The risks are shared but the one risk that is not minimized is the potential damage to the brand's goodwill. If the franchise owners don't succeed in selling the products, the brand's image is damaged.
GAP can keep a check on proceedings in the franchises but the risk is still there because GAP wouldn't have complete control over the stores. Mismanagement in the stores is a risk. CONCLUSIONS AND RECOMMENDATIONS As we've seen that in recent years GAP has had a focus on international expansion, going ahead with this proposal would provide a good strategic position to expand into other Asian markets. This we feel is a huge potential benefit for GAP in the future. This is a long term project with a lot of potential. The biggest advantage is the Central location of Pakistan in Asia for shipping purposes.
The initial target is to capture the market of Pakistan. After that there is a big opportunity to use this as a base for their production for the Asian market. Pakistan being a developing economy provides the benefit of low cost labor. Low production costs will be helpful in sustaining premium prices and keeping the profit margins high. The prices can also be lowered, if need be, to compete with its competitors. GAP is already outsourcing some of its products from Pakistan. That is why knowledge of the industry as well as contacts is there.
It would be relatively easy for GAP to successfully establish its own production facilities in Pakistan. The stores would then be open to a strong potential market. The population of Pakistan is dominated by youth and they account for 62% of the population. Also the upper class people are very brand conscious; hence this is a very attractive market. The presence of brands such as Levi's in Pakistan shows that there is potential in the market. Presence of strong competitors is a sign that the market is good, and GAP definitely has the capability to compete with other brands.
Having a presence in Pakistan will provide valuable knowledge of an important market and industry. The capital costs are high. GAP will have to acquire land and machinery. GAP can also buy an existing plant but we would recommend establishing new facilities because if this is to be used as a production base for global expansion then GAP would have to ensure the quality of the products is good. The government will also be more supportive as new facilities will create jobs for the people. Good terms with the government will help this project to be carried out smoothly.
High capital costs mean there is a definitive risk attached to it. If things go wrong losses will be incurred. But on the other hand if this plan succeeds then GAP can not only gain a strong presence in the Pakistani market but also in other Asian markets. Greater risk means higher potential returns. The chances of failure are not very high according to our research. The energy crisis in Pakistan is a major hurdle to most industries these days. Electricity and gas shortage has been a real problem. But compared to other industries the textile sector is not being affected that much.
So we think that GAP will do fine in Pakistan. The political instability of Pakistan is a factor. Taxes and duties are fluctuating. Government policies also change due to instability which is a potential hurdle. But usually Governments tend to favor foreign investors who create a lot of jobs for the people. The proposed factory will create many jobs. All in all there are many positives and some negatives too, but potential returns are high. Asia is a very good market and producing in Pakistan will help GAP increase its global presence. The success of this proposal can even enable GAP to become the global leader in Apparels.
The stores in Pakistan are also going to be very profitable because there is brand recognition in the country, and the high proportion of youth and the brand-consciousness of the upper class will help earn huge profits. We recommend that GAP should go ahead with this proposal because it is a huge expansion internationally. International expansion has been a focus ever since sales went down in the US. Instead of waiting for sales to drop again, this time if GAP continues the expansion, it would prove to be a huge strategic advantage. The project is long term and commitment to the cause is required for this to be a success.