November 24, 2007

THE ECONOMIC TIMES, 24 November 2007
Ashish Kumar Mishra & Irshad Daftari

On 15th November, an anxious group comprising 11 representatives of the textile & clothing industry of India and heads of four banks called on the finance minister, P Chidambaram. Every member painted a doomsday picture of the industry, outlining the fall in exports because of the appreciation of the rupee, infrastructure bottlenecks, cross-subsidy that the industry has to pay for power and delays in funding under the Technology Upgradation Fund Scheme (TUFS). That lasted for about 70 minutes, but it could have continued indefinitely, high as the group was on emotions.

A member in attendance says, “The minister gave us a very patient hearing.” That’s all the finance minister can do, unfortunately. As India’s economy becomes richer, its currency will continue to appreciate and put many industries “on the barge”. Jack Welch, former CEO of General Electric, once talked about ideally having “every plant you own on a barge”. His reasoning was that factories should float between countries to take advantage of lowest costs, be they due to under-valued exchange rates, low taxes, subsidies, or plentiful supply of cheap labour. Welch’s barge is a reality, thanks to globalisation. Whether anybody likes it or not, the textile industry is on the barge that can sail to Bangladesh, Vietnam or Sri Lanka at any time.

So is this end of the road for the textile industry? Yes—in the present form. But if textile companies can do what Bombay Rayon, Himatsingka Seide, Provogue, or Alok Industries did then it can crawl out of the hole it is in right now. Mind you, these companies haven’t got it all sorted out, but they indeed are the pick of the lot. They have followed a differentiated strategy and avoided the pain of the conventional textile manufacturers.

There are two things that can’t be denied. One, that the pain of the industry is real. Two, if the companies are willing to change their business model they can survive—not everyone will, but some will not only survive, but even thrive.

Consider the pain first. During April-May 2007, exports of cotton textiles declined by almost 20%. Exports to the US, which is the dominant market for Indian textile manufactures, witnessed a steep decline between January and September 2007, growing only 1.5%, compared to 12.5% last year. Industry associations are yet to study the total impact but predictions of huge collateral damage are rife. Says Prem Malik, chairman, The Cotton Textiles Export Promotion Council (TEXPROCIL), “Almost 45,000 jobs have been lost in Tirupur most of which are either badli or contract workers. We expect that during this year almost 5,00,000 jobs will be lost.” Several exporters say that they have already lost their shirt because of the rupee appreciation. After all, if the dollar appreciates 15% in value for a business that works on margins lower than 10%, it’s a recipe for disaster.

Stay away from the commoditised

But this is bound to happen if you are locked into a commodity segment with paper-thin margins. This means you are competing with really low-cost Chinese textile companies on one hand and negotiating with tough buyers like Wal-Mart on the other. But the companies that are willing to build a brand and compete in domestic market or select high-value export market segments can still make respectable margins.

Says Prashant Agarwal, managing director, Bombay Rayon Fashions, “The overall impact of the rupee appreciation is there but then a lot of it depends on the business model of the companies.” To their detriment, very few companies actually invested in improving productivity. The abolishment of quotas in 2005 and the subsequent spurt in exports lulled exporters into a false sense of security. Most firms focused on short-term gains. Says a manufacturer, “Though there was heavy capital expenditure in the last two years, a lot of it was in existing technology. Not many manufacturers have thought in terms of investing in completely new technology.”

A single-minded focus on exports and in a pure-play commodity environment, i.e. cotton textiles, meant that Indian manufacturers potentially neglected a domestic opportunity and one to add value.

Focus on the Indian market

Earlier this year, the IMAGES-Technopak Annual Apparel Report suggested that the entire clothing, textile and fashion accessories market stood at Rs 113,500 crore. If one were to work backwards and consider only clothing and textile, it alone stood at nearly Rs 101,000 crore and registered a growth of nearly 15% over the previous year. Add to this rising disposable incomes and declining share of spends of food. Adds Nikhil Chaturvedi, MD, Provogue, “Apparel retail in organised retailing has been growing over 30% annually.” The export market works out to Rs 72,000 crore ($18 billion in FY2007). Clearly, the domestic opportunity is much larger and growing really fast.

It would seem that many companies have hugely underestimated the opportunity in the domestic market by focusing entirely on exports. “Many companies felt there is more money to be made from exports when compared to the fragmented domestic market,” says a senior Trident Group official. Also, many exporters were simply not comfortable with the idea of selling small lots locally and dealing with many buyers. Says a consultant, “The local market is less transparent and requires a different mindset from exports, but not many exporters think they can actually make the transition to addressing the domestic market.”

Provogue was one of the early movers to recognise the potential of the domestic market, and got out of the export business many years ago. Today, after huge investments in brand-building, fashion and retail, it is one of the best known Indian apparel brands. The Classic Group from Tirupur, one of the biggest manufacturers of menswear, has launched a slew of brands under the brand-name Classic Polo for the domestic market. The Creative Group, another huge exporter from the South, has launched its brand Fahrenheit 109 in big retail stores. Sources also say that Gokaldas Exports, a company that has manufactured for everyone from Nike, Gap, Diesel and Old Navy, is in the process of finalising a foray into brands, after its retailing foray, The Wearhouse.

Premal Udani, chairman, Clothing Manufacturers Association of India, and managing director, Kaytee Corp, has also looked beyond exports after being one of the most vocal critics of the appreciating rupee. He says, “We are supplying some of our goods to Pantaloon and Shoppers Stop, and we are also thinking of setting up our own brand.” Mr Udani still believes that organised retail has a long way to go before it can really drive demand away from the export market.

Pick the high value export segments

However, there is no point in competing in commoditised export market, which is where nearly 70% of India’s exports fall. In this category, the Chinese and even the Pakistani and Bangladeshi exporters undercut Indian manufacturers. While labour costs would be at par across these countries, India lags on the scale and technical expertise.

In China, for instance, almost 1 million spindles operate under a single roof, compared to 600,000 spindles in an Indian manufacturing unit. Says Mr. Agarwal, of Bombay Rayon, “If the manufacturer is selling basic garments without any value-add, which are more like commodities, then he has absolutely no pricing power and that is a threatening proposition during unfavourable times.” In effect, Indian textile exporters have to look at growing the 30% value-added exports to a figure far higher.

Value-additions have had tremendous benefits. For Himatsingka Seide, a high-end silk textile manufacturer, it has meant a lot of buyers that would be willing to pay top dollar. Their products are often bought by luxury brands or high-end retailers. Explains Aditya Himatsingka, executive director, Himatsingka Seide, “With high-end, high value-addition in silk, a buyer has limited bandwidth. He can’t go to many buyers like he can with cotton textiles. We can work with margins as high as 30% compared to 10% margin that the commoditised textile manufacturer makes.” Of course, Himatsingka’s volumes would be comparatively lower, but the company makes up for both the rupee appreciation and low volumes through the margins.

Design, as Bombay Rayon has shown, can be a huge value-addition for a textile manufacturer. The company has design studios in London, Amsterdam and New York. As a result, says Mr Agarwal, “There is a huge amount of detailing and development that goes into our products. Our typical mark-up is almost 500-600% on the product. That is the pricing power that we command.”

Go green for greenbacks

Sometimes, it is just great value to do good for all your stakeholders. Two years ago, Alok Industries discovered that there was a latent demand from customers for organic cotton products. They jumped right in. Says Dilip Jiwrajka, managing director, Alok Industries, “We realised that the demand for organic cotton is huge. Now almost 20% of our products are made from organic cotton which has resulted in a real jump in our profits and topline.” In fact, Alok Industries has booked almost 1,80,000 bales of organic cotton for this year and there are more customers in waiting. Today, leading brands like Nike, Marks and Spencer, CO-OP, Patagonia, Timberland and Wal-Mart are already selling organic lines and the demand for organic cotton fibre is expected to grow to almost 100,000 metric tonne in 2008 from 40,000 metric tonne in 2006, more than double in just two years.

Yet, there is still further room for innovation and establishing further niches. Man-made fibres like nylon and polyester are slowly replacing natural fibres like cotton and linen globally. Yet, very little of the value-addition takes place beyond cotton textiles and silk. Says Devangshu Dutta, CEO, Third Eyesight, a consultancy that has worked with some of India’s leading textile companies, “Our competitive advantage over other countries isn’t in the manufacture of raw material. It is in design and product development, and if that means importing nylon and polyester to implement designs then companies shouldn’t shy away from the opportunity.”

Surviving the textile meltdown won’t be easy. Unlike the Indian IT industry, other countries in East Asia can offer a real alternative to India. Only if Indian firms can differentiate, invest in machinery that can help them raise productivity and improve speed to market (see box) can they compete. Otherwise, no amount of government policy changes will save them.