The Indian Textile and Apparel Industry

(Based on a presentation made at Interstoff-Asia Spring 2003) Part 1: Opportunities to Partner

By Devangshu Dutta

The Indian textile industry is very large and diverse - an hour-long presentation is hardly adequate to cover all its aspects, but I will attempt to piece some of the pieces of this puzzle together for this gathering. 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% to industrial production in the country, is estimated to directly employ approximately 35 million people apart from the indirect employment in allied sectors, accounts for a about 27% to 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. Like the "six blind men exploring the elephant" most people's experiences and actions have included only part of the industry, rather than its completeness. 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. Part 2: Vertical Chain and Variety of Products To begin with, the Indian industry is amongst the very few in the world that is truly vertically integrated from raw material to finished products. It contains within itself, fibreproduction, spinning, knitting and weaving, as well as apparel manufacture. Among fibres, although cotton has the largest share (around 58% of mill consumption), Indian industry has over the years steadily diversified its raw material base to include manmade fibres such as polyester, viscose, acrylic, polypropylene etc. (accounting for around 39% of raw material consumed), as well as other natural fibres (including silk, wool, linen etc.). 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 upgradation, 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 womenswear and bleeding madras shirts in menswear that so typified India's image in the past, India 1

produces active sportswear, weatherproof outerwear, foundation garments, suits, socks, infantwear 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.

Part 3: Competitive Capabilities Certainly, an abundant low cost base of labour 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 garmentmaking 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 base of needlecraft 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 been qualitative improvement in management assets as well. 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 had begun to be created in the 1950s, the 1990s have seen growth of "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 that were placed upon the size and composition of manufacturing capacity that they could invest in, from the 1960s until the early-1990s, a number of companies grew their business solely on the basis of "merchant exports" i.e. 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. 2

Part 4: Geographic Spread and Concentrations The size and diversity becomes immediately clear as one tries to list 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 thirty-odd 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 1990s 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. Part 5: 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.
Product exported (billions $ USD) Yarn, Fabric, and Made-Ups Apparel Total Sources: Ministry of 20002001 6.53 2005 Target 10.70 C AGR 13%

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. 3

5.57 10.00 16% 12.10 20.70 14% Textiles and Various Export Councils

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.

Part 6: Challenges Faced In India Before we start listing out the opportunities that India presents for various types of companies, it would be wise to acknowledge the deficiencies and problems as well. I would broadly classify these 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 industry structure with a dominance of small scale. Even though the government policies that created this distortion have gradually been removed, their impact will be felt for some more time. One of the greatest implications is that since most of the companies are small, there are very few clear examples of industry leadership and reference points that can be aspirational or inspirational for the rest of the industry. The ones that do - 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, this is changing, even as apparel exporters such as Ambattur Clothing, Shahi Exports, Gokaldas etc. 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 as low as 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. The fragmentation of supply base also creates barriers in 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 4

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 into which to invest. 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 framework of VAT is beginning to be 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 unionisation of labour, 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 one hopes 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 costefficient. 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 the potential.

Part 7: India Presents Opportunities, Too! Despite the disadvantages, India does present 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 5

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. A large base of European and American customers are already served from India, with almost 70% of apparel exports headed to the US and EU. Even as these companies are growing their sourcing from India, other customers are also starting to build up their presence, directly or through indirect relationships. Even while the sun sets on the quota regime Indian exporters are also targeting non-quota market, including Australia, Japan, West Asia, South Africa and Latin America. Opportunities for Consumer Brands India has one of the largest and one of the fastest growing economies in the world. It has averaged an annual growth rate of GDP over 6% over the last several years, and this is improving the overall prosperity of the population. The consumer market was already relatively well-developed which is improving further with favourable factors such as rationalisation of taxes, reduced import tariffs, and a growing young segment that is willing to spend more. International brands already present in the market include Benetton, Lacoste, Levi Strauss, Crocodile, Dockers, Lee, Wrangler, Nike, Reebok, Adidas, Zegna, Marks & Spencer etc. There is also a boom in retail development: organised retailing projected to grow from a 0.8% share to 5% by 2005, of a $170 billion market (in absolute terms) [a $935 billion market, in PPP terms]. This is being enabled by development of retail infrastructure e.g. mall space. However, as many companies have discovered in the last ten years, this opportunity needs to be qualified. Before you get any starry-eyed visions of a billion consumers for your brand, do a sanity-check - depending on the product and its price, your market may be half-amillion people in 6 cities, or 20 million in 25 towns. Very few companies, such as Unilever, can actually aim to reach out to 500 million Indian consumers or more. For example, when the Indian car industry was de-regulated in 1993 it had only three major car models, whereas now it includes Suzuki, Honda, Toyota, General Motors (Opel-Vauxhall, Chevrolet / Subaru), Ford, Daimler-Chrysler (Mercedes), Hyundai, Volkswagen (Škoda), Mitsubishi etc. and new Indian manufacturers as well. However, though the Indian car market sells around 580,000 units a year and cars in the C-segment or higher are growing, only 10,000 Mercedes-Benz have reportedly been sold in the last 8 years. The lesson is that, while the consumer market is sizeable and certainly growing, it is important that each company carries out a structured assessment of the potential for their products, before beginning to build any expectations. Part 8: More Opportunities in India Opportunities for Industrial Suppliers and Tertiary Suppliers As the industry grows, opportunities for suppliers to the industry are also growing. This includes raw material manufacturers (fibre, yarn, fabric, trims) and machinery manufacturers. India appears to be a competitive and sustainable hub of production globally, and therefore manufacture-suppliers are investing in India as a growing market. Import duties have been brought down for industrial supplies, and are likely to come down even further. For example, while a few years ago the import duty on manufacturing equipment was 25%, this has been reduced to 5%. India is also an emerging market for used and refurbished machinery. In fabrics, while duties are still high for sale in the domestic market, the duty-levels are as low as a fifth of what they were a few years ago. The government is committed to bringing 6

tariffs down further in compliance with the WTO framework. Also, fabrics can be imported free of duty if they are made up into garments and re-exported. The government is trying to balance between the interests of domestic fabric manufacturers who wish to keep competition out and apparel manufacturers who want to have access to a wide variety of fabrics from the most economical sources. However, over time significant reduction is likely in import duties on fabrics and other raw materials as the apparel industry grows and domestic raw material manufacturers also improve their capabilities. Specific opportunities for industrial suppliers include wool, fabrics made of man-made fibres (especially functional fabrics, such as protective fabrics), industrial textiles, geo-textiles, products for medical applications, accessories and trims. Indian yarn and fabric companies are also importing raw material to achieve product variety. For example, India does not produce significant quantities of apparel-grade wool and is now the third largest customer for Australia, with companies such as Raymond, VXL and Reid & Taylor producing worldclass worsted suiting fabrics. Similarly, many companies have imported speciality yarns from Europe and the Far East to achieve greater variety in their knitwear ranges. Opportunities also exist for tertiary suppliers for support products such as labels, software, hardware (e.g. bar code scanning equipment, testing and inspection equipment etc.), with the growing need for improving standardisation and quality levels. This is also an area where customers (retailers and brands) are a driving force, as they are asking their factories to upgrade their capabilities. Services are another area for growth. The immediate opportunities for service providers (logistics, technical, consulting, legal and finance) are arising out of the growing need for improvement of standards, productivity, compliance etc. and an increasing willingness among Indian factories to invest in services. Opportunities for Investment Foreign Direct Investment (FDI) is on the up-trend, and has been for several years. Policies related to foreign investment have been fairly transparent policies, though the process is not always easy. India has a structured, multi-tiered administrative, political and legal system that would be familiar in nature to European and American investors. FDI in the apparel and textile industry has been recently opened up, as liberalisation has gathered steam. Manufacturing is a thrust area for the Indian government, as Indian industry and the government see foreign companies more as partners in building domestic manufacturing capabilities rather than a threat to Indian businesses. Following this through, the central government as well as various states are executing various schemes such as integrated textile and apparel parks. Although direct investment in retail remains closed to FDI as of now, companies have found alternative structures through which they can approach the Indian consumers (examples include Levi Strauss, Marks & Spencer, Royal Sporting House, adidas, Nike, Reebok etc. in fashion products). There is certainly a broader opportunity to "grow the market from inside" as companies can freely set up fully-owned sourcing (liaison) offices, as well as marketing operations. Other than sourcing liaison offices, a number of companies are already present in India through joint ventures, strategic alliances and other forms of relationship. Part 9: Strategy and Execution As with any new market or supply base, companies need to study the environment carefully, but even more so in the case of India due to its diversity and size. A number of problems that companies have faced when entering India have arisen out of inaccurate interpretation of the information collected during earlier stages, rather than anything else. Typical mistakes include wrong estimation of market volume as mentioned earlier, pricing and distribution structure. 7

Pricing is a critical factor - while there are consumer segments or industrial customer segments that can pay prices comparable to the more developed western markets, by and large India remains a price-sensitive market, with real income levels far below USA or Europe. While companies may not want to substantially discount products in India that they would sell elsewhere for higher prices, they do need to develop products to fit the needs of the Indian market in terms of pricing and features. Similarly, in the area of distribution, while India was a relatively closed economy between the 1970s and early 1990s, it has had its own well-developed framework for marketing and distribution of consumer and industrial products. Rather than expecting to recreate their European or American experiences, companies need to look at the needs and capabilities of the distribution framework in India. Be open to exploring different forms of ownership and control rather than remaining wedded to a single way of doing business. And, finally, after you have selected an appropriate market segment, set up the appropriate structures with realistic expectations from the market, the last word of advice would be: "sustain your efforts - patience pays". India is a long-term, sustainable market and supply base, rather than a bubble that you need to capture quickly!