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Insight into India – part II

Despite its disadvantages ( outlined in Insight into India: part I ), India presents several opportunities as well.

Opportunities for sourcing companies
As India’s basket of production increases, retailers, brands and importers can explore specific opportunities suited to their business. A single-point of advice to them would be to “go beyond the obvious.” Whether you have sourced from India previously or not, do not be limited to your past image of what the Indian supply base can produce.

Prompt your suppliers to show you something new in terms of product type, fabric developments etc during each meeting. The structure of the Indian supply base will certainly offer you the possibility of flexible and small production runs, and the possibility of experimenting with new products

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Insight into India – part I

The Indian textile sector has its roots going back several thousand years. After the industrial revolution in Europe, this sector in India also saw growth of an industrial complex. However, over the last 50 years the textile industry in India has shown a chequered performance.

Today the industry contributes around 14 per cent to industrial production in the country, is estimated to directly employ approximately 35 million people (in addition to the indirect employment in allied sectors), accounts for about 27 per cent of the country’s exports, and is, in sum, an important economic engine for the nation.

In part, the very diversity, scale and spread of the industry which has been its strength, has also been its weakness. Most people’s experiences and actions have included only part of the industry, rather than its whole. Thus, even government regulations and financial policies have never been able to adequately fulfil the widely varied needs of the different segments of the industry.

However, during the last 10 years, the industry’s actions, government policies as well as market events have begun to converge, providing several growth opportunities for the sector domestically as well as in the global market. As the MFA quota-regime draws to a close, India presents many opportunities for buyers, suppliers and investors to partner with its textile industry, and to profit from the partnership.

Vertical chain and variety of products
To begin with, the Indian industry is one of the few in the world that is truly vertically integrated from raw material to finished products. It covers fibre-production, spinning, knitting and weaving, as well as apparel manufacture.

Among fibres, although cotton has the largest share (around 58 per cent of mill consumption), Indian industry has over the years steadily diversified its raw material base to include manmade fibres such as polyester, viscose, acrylic and polypropylene (accounting for around 39 per cent of raw material consumed), as well as other natural fibres (including silk, wool, linen). In fact, Indian companies have built global scale even in non-traditional areas (such as Reliance Industries in polyester, and the Aditya Birla group, which is the world’s largest producer of viscose fibre).

While accurate statistics for a comparable period don’t seem to be available to compare between Indian and China, India certainly has among the two second largest spinning capacities in the world. Also, this is continuing to grow and modernise – the current strength is at around 38 million spindles and 400,000 rotors. Through a steady stream of upgrading, this has emerged as a globally competitive supply base for yarn of various counts and qualities.

Fabrics have been a traditional area of strength, not just through millennia-old traditions of weaving, but through a series of industrialisation moves beginning in the late 1800s. The Indian weaving and knitting base today includes products as diverse as fine dress fabrics, shirting, worsted suiting, denim, fleece, jersey, flat/woollen knits, technical fabrics etc. Much of this diversification of fabric product base has occurred in the last 10-20 years as domestic consumption patterns have changed as well.

In apparel, far beyond the embroidered, beaded or sequinned dresses in women’s wear and bleeding madras shirts in men’s wear that so typified India’s image in the past, the country produces active sportswear, weatherproof outerwear, foundation garments, suits, socks, infant wear and a whole host of other products for all ages. Production of made-ups includes a wide variety of bed, bath and table linen, kitchen accessories, etc.

Competitive capabilities
Certainly, an abundant low cost labour base has been one of Indian industry’s advantages. Various studies by consulting firms such as Kurt Salmon Associates, Werner, Gherzi Textile Organisation as well as other bodies have highlighted India’s cost advantage, as well as the long-term sustainability of this advantage.

What is more important is that, among this abundant workforce, the fabric or garment-making skill is very high as entire communities have participated in the trade and sustained and refined workmanship. In fact, workers in the Indian industry are often referred to as “kaarigar” (artisan or craftsman), even though recent trends of increasingly automated equipment have emphasised deskilling of the worker into an “operator”.

It is this existing needlecraft base that has enabled the Indian industry to retain its position as one of the key suppliers of apparel and textiles, and also add new products to its portfolio by rapidly learning the techniques.

In addition to this, Indian industry has consistently remained flexible in terms of production quantity and lead time. While typical production runs are governed by fabric colour minimums, India presents the possibility of producing quantities as low as to a few hundred pieces. This capability is especially critical in an unpredictable market where retailers and brands are looking to source ever-smaller quantities of product, increasingly closer to the season.

During recent years there has also been qualitative improvement in management assets. This is especially critical: as retailers and brands consolidate their businesses, they expect their suppliers to become more sophisticated and take on more roles that were previously done by the customer. Therefore, suppliers need to become more sophisticated in their management practices, processes and technology, which can only be built if the senior and middle management are well-educated and technically qualified.

So, building on top of the textile engineering base which began in the 50s, the 90s saw growth in “fashion management” studies, including marketing and merchandising, garment manufacturing technology, design management, fashion communications management etc.

Simultaneous growth of the organised branded market within India, as well as the entry of larger companies sourcing from India, has given these fashion management graduates the playing field on which to further hone their skills, and provide a pool of management talent to Indian as well as global companies like Gap, Nike, Reebok, Tesco, Next, Asda, Wal-Mart, Limited etc.

The policy environment that was unfavourable to large-scale manufacturing in the past has also created an unintended strength – a base of design, product development and merchandising capability.

Due to restrictions placed upon the size and composition of manufacturing capacity that could be invested in, from the 60s until the early-90s a number of companies grew their business solely on the basis of “merchant exports,” ie, trading. This business model needed strong marketing and merchandising capabilities, as well as an eye for design and skills in product development. Over time this has built up into a sustainable strength and competitive advantage of the Indian industry. Buyers also recognise this skill as a key element of sourcing from the Indian industry, as visible from the frenetic rate of new sampling that goes on every season in factories around India.

Geographic spread and concentrations
The size and diversity of the Indian industry becomes immediately clear from listing the various geographical locations where the industry exists and their skills-sets.

Yarn, fabric and apparel manufacturing takes place practically across the country. There are over 1,500 organised spinning units of significant scale, and over 280 composite mills that are vertically integrated from spinning to finished fabric. In addition, there are over a thousand smaller spinning units, around 200 exclusive weaving units and an estimated 375,000 “powerloom mills” which operate in the small-scale sector.

However, there are certain concentrations of skills and product type that have developed over the last 30 or so years.

Western India, including the states Gujarat and Maharashtra, have a number of spinning units as well as composite mills. Also in the west, the Surat belt is known for polyester fabrics, gaining from the proximity of large polyester yarn suppliers. Surat’s industry has been a fast-growing supply base for the domestic market and, starting with the Middle East, it has steadily grown its exports also.

The south, including the Salem-Erode belt, is a hub for cotton fabric. While it dramatically grew in the 1980s and 1990s as a belt of small-sized “unorganised” mills, many companies here have recently become more sophisticated in their technology and product development.

In the apparel sector, Ludhiana, Tirupur, Delhi, Bangalore, Mumbai and Chennai are all remarkably unique and dynamic centres of production. For example, Tirupur in south India, formerly a small town, is today a stronghold of cotton knitwear with annual exports of a billion dollars. Ludhiana, in the prosperous northern state of Punjab, originally built its strengths in woollen knitwear through exports into the former Soviet Union. After a brief hiatus in the early 90s it regained its dynamism, and is now a supply hub for sweater knits to some of the largest fashion brands in the US and in Europe.

Delhi, the leading export centre for apparel in volume and value, leads also in design and merchandising skills, with smaller and flexible production quantities. Chennai (Madras), on the other hand, is more geared towards large and well-established factories producing large quantities of basic products, while Bangalore is growing in more engineered products including tailored clothing and foundation garments.

Obviously, this gross generalisation is only indicative of the relative strengths of the various locations, as individual companies with comparable or greater strengths do also exist outside these concentrations.

India as a regional sourcing hub
India is being seen by more and more customers as a hub, rather than a stand-alone sourcing opportunity. Standing alone, India exports about US$13 billion of textile and apparel products, and this figure is slated to grow to over US$20 billion by 2005-06.

   
Sources: Ministry of Textiles and Various Export Councils    

However, even more interesting is India’s position as a regional hub, including sourcing from Bangladesh, Sri Lanka and Nepal. In apparel alone, India, Bangladesh and Sri Lanka already export around US$12 billion to global markets, and are growing further.

Already companies such as H&M and Karstadt-Quelle manage their sourcing from these three countries together, with the regional headquarters based in New Delhi. Gap has taken it further, including its Middle East sourcing within this umbrella. Many others are following suit. The reasons for this are many and varied, including the fact that many companies in Sri Lanka, Bangladesh and the Middle East (and even as far as South East Asia – including Indonesia and Thailand) actually employ Indian professionals in various management positions. Other than that, business and cultural linkages have existed in the past and provide a platform for regional business cooperation.

Certainly, India’s size as a potential market is an important factor in its role as a hub, and many of these companies are looking to grow their sourcing base in and around India as a precursor to selling within the Indian market.

Challenges faced in India
Before listing the opportunities that India presents for various types of companies, it is wise to acknowledge the deficiencies and problems as well. These can be broadly classified into three heads: gaps in the industry, regulatory disadvantages and disadvantages India faces as a country.

A major gap in Indian industry is its fragmented structure with a dominance of small scale. Even though the government policies that created this distortion have gradually been removed, their impact will still be felt for some time.

One of the greatest implications is that since most of the companies are small, there are very few clear examples of leadership and reference points that can be aspirational or inspirational for the rest of the industry. The ones that are – Arvind Mills, Reliance or Raymond – far exceed the scale of most of the industry players, and do not provide a clear “roadmap to growth” for the rest of the industry. Having said that, apparel exporters such as Ambattur Clothing, Shahi Exports and Gokaldas have grown in an entrepreneurial manner, and can be role models.

Small scale also brings with it the problem of productivity. Various authors and researchers have placed the current productivity of Indian factories at half to one-third of levels that might otherwise be achievable. Smaller companies often do not have the resources to invest in appropriate technology or retraining, or in the re-engineering of processes. While skilled Indian labour is inexpensive in absolute terms, due to lower productivity levels, much of this advantage is lost by small firms.

Fragmentation of the supply base also creates barriers to achieving true integration between the various links in the supply chain. This creates issues of lack of control and lack of consistent or reliable performance. The huge geographical spread further complicates this issue.

    Among regulatory disadvantages, one of the most insidious is the historical reservation of manufacturing for very small companies. While the original political intention might have been to spread self-reliant industry across a large population base, this reservation has created the fragmentation that shackled the competitiveness of Indian industry. Most of the sectors have now been de-reserved, and entrepreneurs and corporates are investing significant sums of money in setting up new, large factories, or expanding their existing manufacturing plants.

Secondly, the government has, in the past, also kept foreign investment out of textile and apparel manufacturing. It has gradually removed these restrictions, and has also brought down import duties on capital equipment, creating grounds for foreign investors to set up manufacturing plants competitively in India. In recent years, when India has started becoming a global manufacturing base for products such as cars (Ford, Hyundai), power backup systems (APC), chemicals (Clariant) and fast-moving consumer goods (Unilever), it can certainly provide a competitive base for textiles and apparel companies to invest in.

   

Some other problems remain, such as excise and other tax imbalances. The political diversity of India’s 35 states and Union Territories, and a coalition of ruling parties has led to slow progress in rationalising these imbalances due to debate and discussion. However, a VAT framework is being put in place, though in fits and starts, which will clear these imbalances once it is implemented fully, and create a truly unified economic space.

Labour laws are still seen to be relatively unfriendly to business, with companies having less than ideal flexibility to follow a “hire and fire” policy. To avoid any potential trouble with labour unionisation, companies have often broken their business down into small units, which have, in turn, lost the efficiencies of scale. In recent years, there has been movement towards labour reform, and it is hoped that this will make the business environment even more conducive.

Finally, there are certain macro-level disadvantages that India faces as a country. For one, it has a global logistics disadvantage due to its geographic location. Unlike its competitors Mexico (for the US), Turkey (for the EU), and China (for Japan and the US West Coast), India is distant from all the major markets. Therefore, the cost of shipping is high and shipping time adds to the disadvantage. Cost of shipping is also affected by the fact that inbound freight traffic has been low – therefore, container movement is not at its most cost-efficient. This is changing as India imports more products and inbound freight traffic increases.

India also lacks any serious trade pact memberships, and therefore does not receive preferential access to the major markets. This leads to quota and duty disadvantages, which depress the sourcing volumes from India far below their potential.

The second part of this article outlines the opportunities for sourcing companies, consumer brands, suppliers and investors to form profitable partnerships with the industry ( click here to read it ). .

    This article is based on a presentation made at Interstoff-Asia Spring 2003. The author, Devangshu Dutta is a retail and fashion industry professional. He has had the chance to work with companies globally and across the entire supply chain from consumer back to raw material.
   
Copyright © 2003 Devangshu Duttta