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
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
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
Setting up textile and apparel parks to bring together
textile mills, apparel producers, service providers, with
centralised infrastructure such as effluent treatment and
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
finance. More information about the services can be found