Prefisibility Report

Pre-Feasibility Study

COTTON TOWELS MANUFACTURING UNIT

Small and Medium Enterprise Development Authority

Government of Pakistan

www.smeda.org.pk

HEAD OFFICE6th Floor LDA Plaza Egerton Road, Lahore

Tel 111 111 456, Fax: 6304926-7 Website www.smeda.org.pk

REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE

PUNJAB SINDH NWFP BALOCHISTAN

8th Floor LDA Plaza Egerton

Road, LahoreTel 111 111 456, Fax:6304926-7 Websitewww.smeda.org.pk

[email protected]

5TH Floor, BahriaComplex II, M.T. Khan Road,

Karachi.Tel: (021) 111-111-456

Fax: (021) [email protected]

Ground FloorState Life Building

The Mall, Peshawar.Tel: (091) 9213046-47


Bungalow No. 15-AChaman Housing Scheme

Airport Road, Quetta.Tel: (081) 831623, 831702


January 2009

http://www.smeda.org.pk/

Pre-Feasibility Study Cotton Towels Manufacturing Unit

DISCLAIMER

The purpose and scope of this information memorandum is to introduce the subject matter

and provide a general idea and information on the said area. All the material included in

this document is based on data/information gathered from various sources and is based on

certain assumptions. Although, due care and diligence has been taken to compile this

document, the contained information may vary due to any change in any of the concerned

factors, and the actual results may differ substantially from the presented information.

SMEDA does not assume any liability for any financial or other loss resulting from this

memorandum in consequence of undertaking this activity. Therefore, the content of this

memorandum should not be relied upon for making any decision, investment or

otherwise. The prospective user of this memorandum is encouraged to carry out his/her

own due diligence and gather any information he/she considers necessary for making an

informed decision.

The content of the information memorandum does not bind SMEDA in any legal or other

form.

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1 INTRODUCTION TO SMEDA 4

2 PURPOSE OF THE DOCUMENT 4

3 PROJECT BRIEF 4

3..1 Opporrttuniitty Rattiionalle 5

3..2 Prroposed Capaciitty 5

3..3 Tottall Project Cost 5

3..4 Production Process Flow 6

4 CURRENT INDUSTRY STRUCTURE 7

5 MARKETING 8

5..1 Guidelines for Towels Export Business-- Key Success Factors 8

5..2 Tottall Market Size and Growth 9

5..3 Major Exporters 9

5..4 Major Importers 10

6 RAW MATERIALS 10

7 MACHINERY DETAILS 11

8 HUMAN RESOURCE REQUIREMENT 12

9 LAND & BUILDING 13

9..1 Tottall Land Requirement 13

9..2 Covered Area Requirement 13

9..3 Recommended Mode 14

9..4 Suitable Locations 14

9..5 Utilities Requirement 14

10 PROJECT COST 15

10..1 Initial Project Cost 15

10.2 Estimated Time for Project Completion 16

11 KEY SUCCESS FACTORS 16

12 THREATS FOR THE BUSINESS 17

13 REGULATIONS 17

14 KEY ASSUMPTIONS 17

15 FINANCIAL STATEMENTS 18

15..1 Projected Income Statement 18

15..2 Projected Cash fellow Statement 19

15..3 Projected Balance Sheet 20

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1 INTRODUCTION TO SMEDA

The Small and Medium Enterprise Development Authority (SMEDA) was established with the objective to provide fresh impetus to the economy through the launch of an aggressive SME support program. Since its inception in October 1998, SMEDA adopted a sect oral SME development approach where key sectors were selected on the criterion of SME presence. In depth research was conducted and comprehensive development plans were formulated after Identification of impediments and retardants. The all-encompassing sect oral development strategy involved overhauling of the regulatory environment by taking into consideration other important aspects including finance, marketing, technology and human resource development. SMEDA has so far successfully formulated strategies for key sectors including, Fruits & Vegetables, Marble & Granite, Gems & Jewelry, Marine Fisheries, Leather & Footwear, Textiles, Surgical Instruments, Transport and Dairy. Whereas the task of SME Development at a broader scale still requires more coverage and enhanced reach in terms of SMEDA’s areas of operation. Along with the sect oral focus a broad spectrum of Business Development Services is also being offered to the SMEs by SMEDA. These services include identification of viable business opportunities for potential SME investors. In order to facilitate these investors, SMEDA provides Help Desk Services as well as development of project specific documents. These documents consist of information required to make well researched investment decisions. Pre-feasibility Studies and Business Plan Development are some of the services provided to enhance the capacity of individual SMEs to capitalize on viable business opportunities.

2 PURPOSE OF THE DOCUMENT

Pre-feasibility studies are developed primarily to facilitate potential entrepreneurs in project identification for investment. Pre-feasibility Studies may form the basis on which an important investment decision maybe made. The document covers various aspects of the business venture from project concept development to, financing and business management

3 PROJECTS BRIEF

Towel is an important product used in every day life. Towels and its allied products constitute an important sector of textile industry. In made ups, towels sub-sector is the second largest after bed wear in terms of production and exports. Towels are manufactured in various sizes, shapes and qualities depending upon customers’ requirements. The proposed project is for setting up a Towels Manufacturing Unit. This will be a vertically integrated unit including the facility of weaving, dyeing, finishing and stitching. Most of its production will be for export purpose as this is an export-oriented order based industry, hence contributing towards the earnings of foreign exchange for the country. There is a vast range of towel products like towels, terry towels, warp pile fabric, dish cloth, wash cloth, floor cloth, bar mops, bathrobes, bath mats, dusters, kitchen towels

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etc. All the calculations and financial workings have been done while treating this as an export based project. The yarn used in the


production of towels is 10/s, 16/s and 20/s cotton, polyester/cotton yarn is also used to increase the strength of the product. Pakistan Towel Industry produces a complete range of towels which include hand towels, bath towels, face towels, kitchen towels, wash cloths, etc., available in rich assortment of patterns and designs in eye-catching colors. The towel manufacturers in Pakistan also produce a large range of allied products of towels including, terry bar mops, terry bathrobes, terry face towels, terry wash cloths, shop towels, terry gloves, terry pillow covers, terry coverlets and all other terry made-ups as desired by the buyers.

3.1 Opportunity Rationale

Exports of towel products from Pakistan constitute a major share of the world market. Pakistan has approximately 8% share in the world market of towel products1. The annualaverage growth rate in the value of exports from Pakistan in the recent five years has been 8% for towels2. The international demand for towels is increasing at a fast rate due to the reasons that European Union has recently withdrawn duties from Pakistan and also due to the population trends resulting into increase in consumption of related products. Pakistan’s largest market is USA, about two third of Pakistani exporters provide towels to USA3. More than 50% of world exports of towels come from Asia. The market share of Asia in world exports is increasing due to lower labor costs. Pakistan has a good share in exports from Asia. The availability of suitable raw material and development of certain skill levels are the favoring factors for further establishment of Towel industry in the country. Towels of Pakistan have won the appreciation of customers all over the world. Jacquard towels, woven with double yarn in floral patterns and rich colors, speak volumes for their excellent craftsmanship. Beautiful, absorbent, smooth, white and dyed Pakistani towels are exported to Europe, United States, and Canada and to all other countries earning substantial foreign exchange for the country.

3.2 Proposed Capacity

The proposed capacity of this unit is 20 looms producing 150 tons of towels per annum based on daily two shifts of 8 hours for 300 days. This unit has the capability for horizontal as well as vertical integration.

3.3 Total Project Cost

The total project cost of this Cotton Towel Manufacturing unit is Rs. 38.9 million.

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3.4 Production Process Flow

Most of the towel industry is classified as constituted of small and medium sized units having smaller productions, and mostly manufacturers do not have complete processing facilities. The woven towel is sent to independent processing units. This reduces the capital cost of the manufacturers, but at the same time, increases the quality cost. Quality control becomes very difficult when processing is sub-contracted. The decision to establish an in-house processing facility is supported by the fact that orders that a manufacturer gets from buyers are in line with the manufacturing capabilities, so there is a need to invest in modern processing facilities. Since this is an export-oriented industry, so quality is the most important tool that a manufacturer can use to achieve good price and market share of its product through the modern processing facilities. For a new entrant, it may be difficult to fetch orders without any proper production facility.

Another important processing step is drying. Since the weight per unit area is higher for a towel as compared to other woven fabrics, so drying time is relatively higher. Majority of the manufacturers uses atmospheric drying in the sunlight. Large manufacturers have their own hydro extractors that improve the quality of their final product. Due to the quality issues, a hydro extractor has been recommended for this project. Final operation is cutting and stitching. This is fairly a simple operation and does not require much expertise. There are no major technology issues in this operation of towel manufacturing.

A complete towels unit with looms and dyeing section has been recommended instead of outsourcing some of the processing functions. According to industry sources, it is difficult

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to get the production processed on regular basis from other units because the unit, which is giving good quality, usually remains busy. Outsourcing results into increased costs of production hence reducing profits. Most of the export-oriented units in the country have their own processing facilities.Pre-Feasibility Study Cotton Towels Manufacturing Unit

4 CURRENT INDUSTRY STRUCTURE

The Towel Industry of Pakistan comprises of approximately 300 manufacturers and exporters with a diverse range of towel products. The towel industry relies largely on locally manufactured machines to produce products that have a good demand in the international market. Pakistani exporters have been able to sell towel products on competitive prices and have made considerable progress in terms of value addition and quality issues over the last 10 years. The exports of towel and allied products have increased substantially despite the stagnation in country’s exports. Following is the geographical split of manufacturers and exporters in Pakistan:

Table 4-1: Geographical Split of Towels Manufacturers and Exporters in Pakistan4

Northern Region Number of units

Northern Region Number of unitsLahore 14Kasur 3Faisalabad 4Gujanwala 17Multan 1Others 6Total for Northern Region 45Southern Region Number of unitsKarachi 255Total for Southern Region 255

Table 4-2: Towels Manufacturers in Northern Region – Exporters and LocalSellers5

Northern Region Number of unitsLocal Sellers 29Local Sellers and Exporters 7Medium Exporters 6Large exporters 3Total 45

Table 4-3: Towels Manufacturers in Southern Region – Exporters and Local Sellers

Southern Region Number of unitsLocal Sellers 27Local Sellers and Exporters 22Medium Exporters 200Large exporters 6

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Southern Region Number of unitsTotal 255

It is obvious from the above table that major concentration of this industry is in the southern region of the country. This is due to the initial development of industry in Karachi and the fact that manufacturers can avoid transportation costs from manufacturing units to ports. In addition, many imported chemicals used in dyeing process are available at lower prices in Karachi. This industry is characterized by majority of the manufacturers and exporters located in few major cities.

The above manufacturers and exporters of towels products have diverse production facilities ranging from complete vertically integrated units, to stitching units, from weaving units to dyeing units, etc. A few are also working as commercial exporters without any production facility.

According to the estimates given by industry sources, approximately 90% of the revenues generated by this industry are from exports while 5% of the rejected exports are sold in the local market, and remaining 5% comes from local requirements.

5 MARKETING

In view of the fact that main raw material and skilled manpower is available in Pakistan, the scope for towel exports from Pakistan is unlimited. However, marketing is a very vital aspect of this industry as this is an export oriented order based industry. Export orders can be obtained through direct marketing in the international markets either by initiating contacts with potential customers through formal communications or visiting those countries especially USA, Europe and Gulf countries. The Towel Manufacturers Association of Pakistan (TMAP) is well organized and has an impeccable record in its conduct and administration of textile quota and trade fairs. It participates in “Heim Textile” Fair regularly and organizes space for its members. However, in the absence of export orders, other factories that have excess export orders can also provide subcontract work on CMT (cut, make and trim) basis. TMAP is also involved in getting latest trade inquiries raised from various countries; the members can also obtain this information to focus their marketing efforts on target countries.

5.1 Guidelines for Towels Export Business- Key Success Factors

To enter in the export business of towels, following basic guidelines can provide help to any new entrant in this business:

1. Ensure good quality at all costs. This is a basic key for a successful exporter. Therefore, quality issues should be the primary focus. In this respect, a quality certification can be very helpful in marketing the quality issues related to towels products. Although, the stress on quality in this industry is not as important as in any other textile based industry, like, polo shirts, bed sheets, curtains etc. However, a certification like ISO 9000 can be helpful in obtaining orders and building an impression in the eyes of buyers.

2. Commitments with buyers regarding quality, price and shipment are the basic essentials to enter and grow in the export business.3. Many towel-manufacturing companies are considering it worthwhile setting up their overseas offices and warehouses. Overseas office can not only assist in sales, but also keep the exporter continuously informed about the latest buyer's requirements and market

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demands. Warehouses of supplier(s) in the customer's countries make it convenient for the customer to make the purchase decisions effectively, as in this case customer gets the


required products on LDP (Landed Duty Paid) basis and without any hassle of being involved in shipment and import procedures.4. It is very important in successful marketing to be active and quickly responsive to the customer demands. Being flexible with buyers regarding their requests and requirements can help to develop mutual understandings with them.5. Participation in trade fairs is very helpful in knowing customers’ requirements and obtaining orders. International Trade Fairs provide an excellent opportunity to introduce a new entrant in the international markets.

5.2 Total Market Size and Growth

Total global trade value of Towel products is more than US$ 4.0 billion. Cotton Towels have a substantial share in the total exports of Towel and related products.6

Towels Products Percentage ShareTowels 56%Woven Cotton Pile 30%Cleaning Clothes 11%Terry Towel 3%Total 100%

5.3 Major Exporters

China is the major exporter of towel products and Pakistan holds second position in the global exports of towels, with 8 % market share. Total exports in 1997 were $305 million. In Europe, Portugal, Germany and Belgium are the major exporters. Following are the percentage shares of these countries:

Table 5-2: Percentage Share in World Exports8

Countries Percentage ShareChina 28%Pakistan 8%Portugal 7%Germany 7%Belgium 6%Others 44%Total 100%

5.4 Major Importers

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Regional distribution of towel imports is quite balanced. Of the six major importers, three countries belong to Europe, two to Asia and one to American Continent. USA is the top importer and also has the highest average import growth rate. It is interesting to note that the average growth rates of all the major importers of towel products have been positive. Following are the percentage shares of the major countries importing towel products:Pre-Feasibility Study Cotton Towels Manufacturing Unit

Table 5-3: Percentage Share in World Imports9

Countries Percentage ShareUSA 19%Hong Kong 11%Japan 10%Germany 8%UK 8%France 7%Others 36%Total 100%

6 RAW MATERIALS

Following is the list of raw materials, which are used in the manufacturing of towels:

1. Towels fabric is made from 10/s, 14/s, 16/s and 20/s yarn or a mix of cotton-polyester

depending upon requirements of customers.

2. Dyeing chemicals (reactive colors, caustic soda, soda ash, hydrogen per oxide,

common salt, detergent and wetting).

3. Stitching threads.

4. Poly Bags (packing material).

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7 MACHINERY DETAILS

Following combination of machines is required for manufacturing of approximately150,000 Kgs of towel per annum based on daily two shifts of 8 hours for 300 days in aYear

Table 7-1 Machinery Details

Machines Unit Cost per machine (Rs)

Total Cost (Rs.)

Looms 20 226,000 4,520,000Hanks to Cone and Cone to Hanks Winder 1 57,000 57,000Weft Pirn Winder 1 35,000 35,000Kier 1 400,000 400,000Winch 2 300,000 600,000Hydro-extractor 1 250,000 250,000Sizing 9 drum with double dip system 1 4,950,000 4,950,000Warping 1 200,000 200,000Tumble 1 375,000 375,000Stenter 1 375,000 375,000Inspection Rolling Machine 2 375,000 750,000Boiler 1 900,000 900,000Stitching machines 5 40,000 200,000Cutter 1 100,000 100,000Other Equipments-Furnace Oil Tank, Frames, Trollies and Water Pump

499,125

Sales tax 2,554,065Installation costs for machines Including Transformer, Cable and Control Panel Total Cost of installed machinery 16,765,190

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8 HUMAN RESOURCE REQUIREMENTSFor a unit of 20 looms, following manpower is required:

Table 8-1: Permanent Employees

Employee No. ofSalary per

Employee perMonth

Salary perMonth

SalaryPer

AnnumChief Executive 1 70,000 70,000 840000Export & Marketing Manager 1 50,000 50,000 600000

Accountant 1 25,000 25,000 300000Accounts Clerk 1 12,000 12,000 144000Store Clerk 1 10,000 10,000 120000Technician/Electrician 1 10,000 10,000 120000Security Guard 4 8000 32,000 384000Peons 2 7000 14,000 168000TOTAL 12 192,000 223,000 2,676,000PRODUCTION FIXED COSTS

Production Supervisor 1 26,000 26,000 312000Weaving Manager 1 38,000 38,000 456000Dying Master 1 25,000 25,000 300000Boiler Engineer 1 28,000 28,000 336000Asstt. Dying Master 1 20,000 20,000 240000Asstt. Weaving Manager 1 20,000 20,000 240000Total Production Fixed Costs 6 157,000 157,000 1,884,000

TOTAL FIXED PAYROLL 18 349,000 380,000 4,560,000

Table 8-2 Contractual employees 10

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Employee No. of Salary perEmployee per

Month

Salary perMonth

SalaryPer

Annum

Warping Labor 3 5000 15,000 180000Sizing labor 3 5000 15,000 180000weavers 4 6500 26,000 312000Fabric handlers - Drying Department 20 5000 100,000 1200000Cutting Master 1 9000 9000 108000Cutting Helper 3 5000 15,000 180000Stitching machines operators 5 7000 35,000 420000Packing staff 5 5000 25,000 300000TOTAL 44 47,500 240,000 2,880,000

9 LAND & BUILDING

9.1 Total Land Requirement

For above mentioned recommended size of towels manufacturing unit, approximatelyOne-acre (8-kanal) area of land is required.

9.2 Covered Area Requirement

Following is the covered area requirement split into various departments and sections:

Table 9-1: Covered Area Requirement

Sections/DepartmentsArea (sq. ft.) per

section Total Area

Yarn & Dyeing Material Store 800Sizing Section 1,000Warping Section 1,000Weaving Section 125 per machineDyeing & Finishing Hall 6,000Cutting, Stitching & Packing section: Cutting Room 150 per table 750Stitching Section 100 per machine 1,000Packing Section 150 per employee 750Towels Store 700.00Total Factory Area 17,000Office Building 1500Total Area 18,500

Table 9-2: Construction Cost Cost Required Area(S. ft) Cost per Sq. Ft.(Rs)

Land 18,500 200Factory Building 17,000 600

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9.3 Recommended Mode

It is recommended that this project should be started in an owned building because this set-up will involve installation of heavy machinery, underground cabling and other fixtures with considerable cash outlay.

9.4 Suitable Locations

The clusters of towels industry exist predominantly in Karachi, Gujranwala, Faisalabad and Lahore. As most of the manufactures are based in these major cities, it is recommended that such unit should be located in any of these areas. However, the basic criteria for the selection of location within these clusters should be the accessibility of raw material and skilled manpower. Also, basic utilities like electricity, gas, waters and public transport is must for the establishment of such sort of unit.

9.5 Utilities Requirement

Electricity Gas Furnace Oil Telephone Fax Internet

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10.2 Estimated Time for Project Completion

1 months for completion of initial formalities i.e. formation, registration of the company etc.10 months for purchase of land and construction of building.3 months for sanction of loan (In case, if financing has to be arranged through bank).4 month for purchase of machinery, its installation and trial run.1 month for furnishing and staff / labor appointments.The projects can take-off within one year, as some of the activities will be in progress simultaneously. In case if the project is self financed, if the building is rented and if machinery is also locally procured then this set-up will not take more then 6 months.

11 KEY SUCCESS FACTORS

The total commercial viability of this proposed towels unit depends on the regular supply of export orders. This requires aggressive marketing efforts at the entrepreneur's end and the concerned management team. A detailed discussion on the marketing aspect has already been done in the marketing section of this study. Comparing Pakistan’s major importers with the world’s major importers, Pakistan is completely out of sync with the world market mix. The countries of Middle East are not included in list of major importers. USA is the largest importer but only 1-2 % of Pakistan’s total exports are going to USA. Pakistan does not have any major exports to markets like Japan, Hong Kong, Germany and France. There is an opportunity for the Pakistani towels products’ manufacturers and exporters that they should target these markets and get Pakistan its due share.Following are other key points that can be taken as key success factors for any export based towels unit. Outlets in Gulf countries Assurance of consistent good quality Surety of on time delivery Competitive rates Cost efficiency Better services to the customer i.e. claim settlement etc. Better communication development with customers

12 THREATS FOR THE BUSINESS

Close competition among local exporters causes reduction in prices of the orders in

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process. The labor force at the lowest level i.e. skilled / semi-skilled manpower, machine operators are quite unorganized. Their job behaviors and seriousness about the completion of any assigned job are always unpredictable; however, a motivated Production Supervisor can overcome this. Non-availability of technical personnel especially for dyeing, processing and finishing. In case of CMT based unit, the requirement of credit and/or delay of payments from customers might cause disturbance in the cash cycles.

13 REGULATIONS

As such no special regulation is applicable on this industry except the normal industrial rules and regulations. It does not require any prior sanction/approval from the government to establish a Towels industry as a whole except for installation of boiler.Being the export-based unit, government offers incentives in terms of treating exports as zero-rated for sales tax, tax rebates at the rate of 3% and re-finances facilities. Towels Manufacturers Association of Pakistan (TMAP) is the administrative body in Pakistan with the primary objective to safeguard the interests of exporters and manufacturers in Pakistan. Moreover, every export shipment is verified by TMAP in order to enable the exporter to claim tax rebate from the Government.

The advantages of being registered with TMAP are:

1. The first hand knowledge of international trade inquiries,2. Prompt awareness of any changes in Government policies, and3. A platform for manufacturers and exporters to share knowledge and experience.4. A platform for manufacturers and exporters to discuss any unwanted change inthe Government policies and to solve individual problem of any manufacturers.

14 KEY ASSUMPTIONS

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Prefisibility Report

Documents

information memorandum

lahore tel

information heshe

presented information

contained information

tottall project cost

head office

project completion