labels: industry - general, textiles, economy - general
Indian garments in a brave new worldnews
29 December 2004

Waking up to the challenges of the quota-free regime, Indian garment manufacturers seem all set for the party, but the government needs to dress up as well. Report by Shubha Madhukar.

Barely 100 hours from now, at the stroke of midnight on 31 December 2004, as if to coincide with the New Year celebrations, the $500-billion global textile and apparel industry will shake off the restrictions of the multi-fibre agreement (MFA) designed to protect textile producers in the industrial West from being swamped by low cost suppliers of the developing countries.

From 1 January 2005, the fourth and final phase of liberalisation of the world's textile trade will end the quota regime, in force since 1974, and the last of the 84 per cent quota restrictions will be lifted in keeping with the World Trade Organisation agreements.

In theory, the end of trade restrictions should generate unprecedented business for developing countries - including, Bangladesh, China, Hong Kong, India, Indonesia, Korea, Pakistan, Philippines, Sri Lanka and Thailand. In practice, China is likely to run away with the gold and silver prizes, leaving the other countries to fight over the bronze.

The key will be volume-driven efficiencies combined with design capabilities and flexibility in manufacturing. These are the factors that have catapulted China into the biggest clothier of the world.

Not only did the quota regime protect high-wage Western companies, the way in which it was administered in India, it also cocooned many low-wage Indian producers who were assured of business without being really competitive. It worked like this: a country, say, China, could not export more than a certain number of pieces to the US in a year - even if Americans preferred to buy Chinese stuff for cost or quality reasons. That gave the opportunity for less competitive players from other counties to sell their wares in the US.

"Quotas afforded the comfort of assured business to manufacturers and to those who held a quota, and this imparted a sense of stability," says Rahul Mehta, managing director of Creative Outerwear Ltd, part of the $55-million-turnover Creative group of companies, among the biggest Indian garment exporters.

He adds: "Even inefficient manufacturers got quotas, which assured them business, and flab crept in," he adds. Often quotas were obtained merely for the premium, and someone else did the manufacturing.

The Indian textile industry clearly has many advantages. India is one of the biggest cotton producers in the world, it has a huge market, which creates the opportunity to exploit economies of scale, it has cheap skilled labour, and it has plenty of design skills. Still, the country's garment industry suffers from many structural weaknesses, unlike China's.

Till recently Indian law decreed that garment manufacturing should remain a small-scale activity. The result: even today 80 per cent of the country's garment makers operate from tiny outfits with less than 20 machines per unit. A 2003 survey by the Confederation of Indian Industry, Introspecting Competitiveness of the Textile Sector, reveals that only 20 per cent of the manufacturers in the Rs28,000 crore garment sector (with seven million workers) constitute the organised sector. Currently, 75 per cent of the readymade garment exports, according to CMAI, are to the quota countries.


Source - Clothing Manufacturers Association of India (CMAI)

In the post-quota regime, competition from China, Hong Kong, and other low-cost countries with huge capacities, will force Indian manufacturers to compete on productivity, quality and cost, which require not just skill but scale and technology. To survive the competitive onslaught, size will be a key determinant. The industry will have to transform its unorganised, small-scale character to become large, organised and capable of high-cost investments in modern, high-speed equipment.

The garment industry being a small scale industry, not surprisingly, when India's overall quota was distributed among exporters, the allotments were skewed in favour of small units. Until the late 1990s, with 80 per cent of garment production coming from small-scale units and 70 per cent of the quota being distributed on the basis of 'past performance entitlement' (PPE) manufacturers had no reason to expand their operations or invest in expensive equipment. Those who did grow did so by more small-scale units, usually making a separate garment category.

Another 15 per cent of the quota was reserved for allotment on a 'first-come, first-serve entitlement' (FSFSE) for manufacturers with a turnover limit of Rs5 crore. This again blocked large manufacturers from quota entitlements. Their only option was to obtain quotas from the 10 per cent entitlement for the 'new investment entitlement (NIE)' category; in short, the policy did everything to discourage large Indian clothiers from exporting and making it nearly impossible for the larger textiles units from diversifying into garments. Only the residual 5 per cent falls under non-quota entitlement (NQE), open to those who could not get quota entitlement under any the other category.

With the quota system being scrapped from 1 January 2005, leading garment manufacturers can now begin consolidating and expanding their capacities. Even the larger of the existing small-scale export manufacturers, freed of the compulsion to create small satellite units to acquire a larger share of the prized quota, are now expanding capacities to achieve economies of scale.

The government's own efforts are now aimed at undoing some of the earlier policies to encourage size and competitiveness. Recognising the threats of global survival post-MFA, it has embarked on the role of an industry-friendly facilitator, with policy measures that would help exporters.

  • Garments have been removed from the list of industries reserved for the small-scale sector
  • Machinery import duty has been reduced to a nominal 5 per cent
  • Excise duty has been reduced sharply
  • A textile upgradtion fund scheme (TUFS) has been introduced to provide a reimbursement of 5 per cent interest on loans or finance charged by the lending agency on a bankable project of technology upgradation.
  • The central value added tax (CENVAT) network has been extended to all players in the handloom, powerloom and organised sectors.
  • The small-scale industry excise duty exemption up to Rs1 crore has been removed.

All this is fine. But a vital hurdle to growth has not been removed. Since the beginning of pervasive economic reforms in 1991, successive governments have been chary of taking on the trade unions by reforming labour laws. The garments industry is labour-intensive; it is also subject to highly seasonal demand, and therefore needs flexible labour laws. 

In the meanwhile, another issue that requires resolution is the state of poor infrastructure in India. Overseas buyers and domestic suppliers all have their own horror tales of delayed shipments due to the deplorable congestion at Indian ports, the sordid condition of roads from the manufacturing centres to the shipment points leading to consignments stranded in broken-down vehicles, traffic choke-up at the numerous octroi collection centres … none of which seem as acute in countries with whom India will compete post quotas.

However, weaknesses notwithstanding, the industry is not devoid of significant strengths. Undeniably, the post-quota global trade era will create a huge opportunity for the industry. Integrated operations would lead to significant cost savings. India, along with China, enjoys both horizontal integration (manufacturing versatility with different fibres like cotton, PSF, VSF) and vertical integration (fibre-to-yarn-to-fabric-to-garment manufacturing to retailing branded products).

India also has an advantage of being the third largest cotton producer, which lends itself to lower freight cost and shorter lead times. Since the country also produces a variety of cottons, it provides greater flexibility, to meet varied requirements and arbitrage opportunities.

The per-unit cost in India is currently higher than in China but India has the ability to counter the Chinese cost dragon through:

  • Amalgamation of manufacturing units and high technology equipment to ensure economies of scale and lower unit prices.
  • Mark-ups of 20 per cent to 25 per cent of the FOB prices, arising out of the odious 'premium cost' to acquire quotas from those who had them, which disappears with the abolition of quotas.
  • Reforms to reduce the 'hidden costs' - import licence, inland freight movement, octroi malpractices, etc.

Labour cost, as a percentage of manufacturing cost in India is already lower than in China and all India needs is to achieve higher manpower productivity. That, of course, is easier said than done.


Source: Textile Outlook International

Major Indian exporters are already expanding their capacities in order to avail of economies of scale. Gokaldas Exports, India's top garments exporter, has added eight factories in the past two years - larger and more modern in terms of technology and infrastructure. Gokaldas now has 41 factories with a workforce of 31,000 - up 30 per cent. Orient Craft, with 18,000 people on its rolls, is also adding 30 per cent capacity, with three new factories this year and two in 2005.

In India, 95 per cent of garments makers have annual sales of less than Rs50 crore; and of the 16,000 export manufacturers, only around 100 companies are able to cross the Rs100-crore sales level per annum.

The value of Indian garment exports was Rs28,000 crore ($5.4 billion) in the last fiscal. To achieve exports of $25 billion by 2010, India would have to expand its manufacturing capacity five-fold; expansion of 30 per cent by top players will just not suffice.

Harminder Sahni, associate director, KSA Technopak , however, is quite optimistic. "China is no doubt a very large player, but most of the customers feel over-bought in China and hence are very keen on having a second source of supply. So it is more like China and India in most cases. Also, US buyers are dominant in China, so EU buyers are keener on being dominant in the Indian subcontinent.". Anyway India, with its closer proximity to Europe, has traditionally enjoyed a larger export share to the EU countries.

There is no denying India is competitive enough and will become even more competitive once its infrastructure issues are sorted out. China has probably already reached its peak and further improvements may not be as dramatic, henceforth.

Key countries / regions

Key positives

Key negatives

China

Efficient, low cost, vertically integrated

Growth at the cost of profits

India, Pakistan

Vertically integrated, low cost

Lacks economies of scale and infrastructure support

Mexico (NAFTA), Turkey

Proximity to market, duty and quota free

Lack China and Indias degree of competitiveness

ASEAN (Vietnam, Cambodia, Indonesia)

Cheap labour

No other cost or locational advantage

AGOA (African) countries, Bangladesh

Quota and tariff free, cheap labour

Lacks integration and China and Indias degree of competitiveness

Hong Kong, Korea, Taiwan

Trading hubs proximity to China

No cost advantage, protected currently by quotas

USA and EU

Non-quota barriers likely to prove irritant to imports

US$ 400 bn trade loss likely ov

Source - Industry, I-SEC Research


The world market share

In spite of the Chinese dominance, India has a fair opportunity to grab a substantial stake in the projected garment market share. According to PHD Chamber of Commerce and Industry (PHDCCI), post-MFA, India's market share in the US is expected to go up to 15 per cent from the present 4 per cent. In the EU, the market share increase is expected to be 50 per cent - from the current 6 per cent to 9 per cent.

The competitive advantages and rankings also skew conditions in India's favour.
 

Turkey

Vietnam

China

Kenya

India

SriLanka

Mexico

Labour skill

Medium

Medium

High

Poor

High

High

High

Benefits

-

Duty free

-

Duty & tax free

Nil

EU quota free

Quota free

Services

-

Poor

Good

Poor

Fair

Good

Good

Flexibility

High

Low

Low

Low

High

High

High

Capacities

Medium

High

High

Medium

Medium

High

High

Textile sector backing

Present

Absent

Present

Absent

Present

Absent

Mild

CMT costing

Medium

Low

Low

Low

Low

Medium

High

Avg industry efficiency

50%

50%

55%

40%

40%

50%

60%

Avg working hours

60

54

80

60

60

60

60

Fashion

High

Low

Low

Low

High

High

High

Logistics

Good

Good

Poor

Poor

Good

Good

Good

Political

Stable

Unstable

Stable

Unstable

Stable

Stable

Unstable

Source: KSA Technopak Analysis

In the more competitive and experienced world fashion markets, buyers well understand the need for geographical de-risking - the SARS breakout in China early this year affected the apparel industry severely, sending buyers to build linkages with India, Hong Kong and others. Besides, there have been incidents of terrorist attacks, hurricanes and earthquakes, which can disrupt supply management and hence the 'need' for better geographical diversification.

For most buyers China may be the first choice for many, but India comes a close second. Harnessing China-like strengths of an integrated textile chain, strong raw material base, an inexpensive and skilled labour force, availability to legal recourse, strong democratic institutions besides a stable government and a highly developed fashion industry are strong intangibles in its favour.

China is a large-scale manufacturer and focuses on bulk manufacturing of basic apparel category. They lack flexibility for medium to small orders. They also fall behind in the value added fashion segment. All such orders that it receives are currently farmed out to Hong Kong or Taiwan which might not be as smooth as earlier. MK Panthaki, director, Clothing Manufacturing Association of India, says, "Whether these countries will oblige China in the post-quota regime is a moot question."

Reports also suggest that China has reached its optimum and its economic growth momentum could be affected by temporary shortages of power and labour. Though temporary, as the government has already introduced tightening policies in late April, it could well affect an increase in cost of production. And slow the pace of investment and production.

India fails to satisfy the requirement of the fall / autumn-winter season, when the demand for cotton fabric dips. The wool output from the country is of low quality as the shearing and breeding of sheeps and goats is not scientific. Though Reliance Industries is the world's biggest polyester maker, synthetics account for just 14 per cent of India's exports. To balance its exports between its peak spring-summer peak demand periods, India needs to diversify into synthetics and wool.

Crumbling infrastructure is another major issue. According to a PHDCCI study, infrastructure is a major bottleneck to India's export efforts. In addition to poor roads and slow port movement, there is no deep-water port - mother vessels cannot dock in Indian ports, a fact highlighted in ICICI Securities' Equity Research (August 2004). Developing deep-water capabilities and smaller ports in addition could help handle the container pressure. The waiting time at ports is still eight to 12 days, which goes up to weeks. Ports apart, roads and power infrastructure also need to be upgraded according to the study.

Garments of Indian origin were traditionally thought to be of low quality. However, the perception has been changing and the unit value realisation (UVR) has been improving in recent years.

Year

Million pieces

Million $

$/piece

2001-02

1.422

5005.45

3.52

2002-03

1.543

5,749 (+15%)

3.73 (+6%)

2003-04

1.606 (estd)

6,435.78 (+12%)

4.01 (+7.5%)

Volume figure estimated on the basis of AEPC Export Statistics
Source: Ministry of Commerce

Garment manufacturers require more than production efficiencies to survive in the years ahead. They need professionalism to undertake hard-core marketing, focused and consistent positioning, and most of all, a keen understanding of fashions and trends to cash in on the advantage of competing in a world without quotas.

Above all, a change in mindset backed by consistent efforts in the rough and tumble of quota-less competition, will be required to attain a standing in the world garments market. Without them, the global buyers will wait and watch just long enough before moving over to more suitable supply centres.

also see : Sorry Infrastructure
What is the Multi Fibre Agreement?
The need for labour reforms
The labour conundrum
The China syndrome
Other reports on World Trade Organisation

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Indian garments in a brave new world