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With just eight months to go before MFA quotas are phased out, the industry in India is buzzing with activity. However, amidst this development, challenges and fears also remain.
With textile and apparel exports of about US$14 billion, India is one of the larger players in the US$360 billion global trade. Not surprisingly, the phase out of quota is being watched, analysed and debated with a mixture of concern and enthusiasm.
Government Support to the Industry
The restrictive industrial policy followed by successive governments over the decades has created an industry that is largely fragmented and dominated by small-scale enterprises. However, in the last 12-15 years, governments of all political affiliations have realised the importance of allowing the Indian industry a free-play, and these restrictions have been steadily removed.
Over the last few years, among the significant industry-friendly policies put in place by the Indian government are the following:
Removal of industrial licences that artificially choked manufacturing capacity, and later opening the textile and apparel sector to larger-scale investments.
Removal of taxation and duty imbalances which favoured small, unstructured companies. A unified Centralised Value-Added-Tax (CENVAT) mechanism in the textile supply chain has been established, though different rates of duty remain of various products.
Steady reduction of import duties on machinery and capital goods by the textile and apparel industry to allow factory modernisation. Simultaneous reduction in import duties on fabrics and other raw materials.
Providing soft loans under the Textile Upgradation Fund Scheme (TUFS).
Setting up textile and apparel parks to bring together textile mills, apparel producers, service providers, with centralised infrastructure such as effluent treatment and power.
Use of e-commerce by setting up B2G (business-to-government) initiatives such as the one by customs authorities to facilitate quicker processing of export and import shipments.
Increasing the convertibility of the Indian rupee against
major international currencies, and simplifying foreign
currency purchases, thus allowing the industry freer access
to raw material, trims, services and technical inputs.
Industry Gearing Up
In sectors such as spinning, where control was dismantled first, Indian companies have become amongst the most competitive in the world. India now holds a 25 per cent market share in world exports of cotton yarn.
Others sectors are now beginning to follow. A recent report by investment research firm SSKI highlights the opportunity Indian industry has to dominate the global trade in home textiles. Companies such as Welspun and Trident (Abhishek Industries) are already among the largest suppliers to the world’s largest retailers, while others are also ramping up capacities.
Previously neglected areas that are also seeing significant investments include weaving, where shuttleless looms may treble in the next three years. The fabric dyeing and processing sector has an estimated current capacity of 4 billion metres (not including traditional dyeing methods), and is seeing expansion of existing plants as well as new start-ups.
After the de-reservation of apparel from the small-scale sector, large mills are drawing up aggressive plans to integrate vertically into apparel manufacture. What initiative they had lost to the unorganised powerloom fabric sector, they are now aiming to regain through apparel.
A case in point is Raymond, India’s largest worsted suiting manufacturer and one of the largest denim producers. While expanding its denim capacity (slated to go up from 20 million metres to 35 million by mid-2005), it is also looking at setting up a denim apparel plant of 10,000 units a day with the potential for further expansion. It is also planning a tailored apparel plant in Bangalore. The total investments planned are in the region of US$46 million. In addition to this, Raymond is also said to be planning an apparel factory in Thailand, and evaluating opportunities in China.
Similarly, Arvind Mills, one of the largest denim producers in the world, has set up a denim garment factory in Mauritius with an annual capacity of 1 million pieces (planned to treble subsequently). It has also doubled the annual capacity of its shirt manufacturing plant in Bangalore to 4.8 million units.
Even yarn spinners have been investing in forward integration into fabrics, dyeing-processing and apparel, with the aim of providing a one-stop solution for customers.
Many of the larger companies have used recessionary trends in recent years to cut organisational flab, improve plant productivity and also reduce interest and other costs. This will now stand them in good stead as they look to compete more effectively in the global market.
The Role of Retail
Industry experts concur that the growth of organised retailing within India could be a huge enabler for improving product variety, quality and productivity amongst the supply base.
Though the largest Indian retailers are minnows compared to their global cousins, many of them have been steadily adopting management processes that compare well to global best practices including category management and B2B e-commerce. This has filtered through to the textile and apparel supply base as well, whether it is the adoption of data-interchange driven merchandise planning, or quality-improvement on the factory-floor.
Observers, including Indian retailers themselves, agree that foreign retailers would do much to hasten this process of development.
The government remains unmoved, although the Indian Finance Minister recently confirmed in an interview to the press that the government is “committed to the principle of allowing up to 26 per cent investment in retail by foreign companies,” provided the domestic retailers have achieved a scale where they can compete more effectively.
Opening of FDI certainly strikes a welcome note for financial investors and venture capitalists, who could later sell their stake to foreign retailers once the market opens up further. But the statement has left international retailers largely unmoved since many of them want a larger, if not complete, ownership of their operations in India.
More and more, India is seen by the world’s largest retailers as an important future market in which they must have direct access through their own subsidiaries, rather than through franchise or licence agreements, or minority stakes.
As a sign of their commitment to the country, many of them have been making politically-correct noises about increasing their sourcing volumes and supporting the local supply base.
JC Penney is looking at sourcing over US$700 million of merchandise in the coming years, while Gap is said to be already sourcing about US$600 million from the region. Others also see India as a growing source, and a potential market. The visit of Debenhams’ international director, Francis McAuley, was widely reported by the local press earlier this year.
Wal-Mart is also stepping beyond its generic sourcing of about US$1 billion to test market Indian brands in the USA. It has begun a pilot project in Houston (TX) with the producers of the Amul brand in India, to sell their sweets and ghee to the Indian population settled in the USA. If the response is encouraging, Wal-Mart plans to expand the presence to California, New York and New Jersey, the three largest states where the population of Indian-origin is sizeable.
UK’s Woolworths states in its CSR 2003 document that: “India is a growing source of inspiration…and it is essential that we develop our understanding of the potential to manufacture chosen products there.”
However, the world’s second largest retailer, Carrefour, deferred its plans to set up a retail operation in India, and recalled its representative Jean Chritophe Goarin in March this year. Carrefour initially explored the option of entering through a franchisee, before stating its preference for a direct presence, which is not allowed under current rules.
For most international retailers the domestic retailing angle will not be explored until a clear policy emerges from New Delhi. This must wait until the elections are over in May and the new government is firmly in place.
A Wildcard: Free-Trade with China?
An interesting recent development in March this year was the beginning of discussions to explore bilateral free-trade between China and India.
The two sides are scheduled to work out a clear timetable and study the areas of co-operation in trade, investment and other issues. Also, they will try to work out a specific five-year programme for economic partnership. Discussions are bound to be slow and tortuous given a 40-year old border dispute and traditional economic rivalry.
Bilateral trade between the two countries jumped 54 per cent in 2003 to over US$7 billion. Indian companies have also been actively exploring direct investments in China (currently estimated at only US$40 million).
Chinese companies have not been as enthusiastic to return the favour, seeing India as a large market for their entry-priced products rather than a new production base. Currently Indian infrastructure costs, such as power, remain higher than Chinese costs, as is the cost of borrowed capital. Industry sources also point to the lack of transparency in Chinese costing, which could indicate additional government subsidies, making it more attractive for Chinese companies to manufacture in China.
However, India’s rising resistance to inexpensive Chinese goods is an obstacle to setting up a free trade agreement between the two. In 2001 and 2002, 36 anti-dumping investigations were launched by Indian authorities against Chinese imports.
Sceptics also point out that the launch of a free trade agreement between India and Sri Lanka has not yet had any significant impact on trade between the two countries, and they do not expect quick wins from the Sino-Indian dialogue.
Re-Establishing a Business Model
However, Indian firms remain undeterred as they are looking to use a mix of Chinese, Indian and other production facilities, driven by Indian design and merchandising capabilities, to service their brand and retail customers. Among the companies said to be exploring this option are Raymond and Aditya Birla group.
Indian companies such as Shahi Exports, the House of Pearl etc, have already been following this model over the last decade, and have grown sizeable businesses through a mix of manufacturing and trading. Others are following suit.
Indians have been global textile merchants for thousands of years, selling goods produced in their home country as well as those produced elsewhere. 2005 may see the re-emergence of the “Indian trading house” with a business model that is driven more by design and product development with production taking place in multiple countries one of which might be India.
The author, Devangshu Dutta, has been involved with
the fashion, retail and consumer products sectors as an entrepreneur,
a manager and a consultant , working with companies globally.
His currently works with companies in the area of strategy,
outsourcing and incubation of business operations, and corporate
(Published in www.just-style.com, dated 12 May 2004)
(Copyright) Devangshu Dutta, April 2004