One of the worst hit sectors during the skyrocketing interest rate scenario in the late 90s and early 2000s, the debt-laden Indian textile industry has spun many turn-around stories since then. Aided by lower interest rates, restructuring packages from financial institutions and the recent dismantle of quotas, the sector is today well poised to capture growth opportunities. In 2005, the sector contributed 20% to industrial production, 9% to excise collections, 18% of employment in industrial sector, nearly 20% to the country's total export earnings and 4% to the GDP. The textile sector employs nearly 35 m people and is the second highest employer in the country. Infact, it is estimated that one out of every six households in the country directly or indirectly depend on this sector. Here we analyse the sector's dynamics through Porter's five-factor model.
Bargaining power of customers (demand scenario)
Global textile & clothing industry is currently pegged at around US$ 440 bn. US and European markets dominate the global textile trade accounting for 64% of clothing and 39% of textile market. With the dismantling of quotas, global textile trade is expected to grow (as per Mc Kinsey estimates) to US$ 650 bn by 2010 (5 year CAGR of 10%). Although China is likely to become the 'supplier of choice', other low cost producers like India would also benefit as the overseas importers would try to mitigate their risk of sourcing from only one country. The two-fold increase in global textile trade is also likely to drive India's exports growth. India's textile export (at US$ 15 bn in 2005) is expected to grow to US$ 40 bn, capturing a market share of close to 8% by 2010. India, in particular, is likely to benefit from the rising demand in the home textiles and apparels segment, wherein it has competitive edge against its neighbour. Nonetheless, a rapid slowdown in the denim cycle poses risks to fabric players.
Bargaining power of suppliers (supply scenario)
India is the third largest producer of cotton in the world after China and US and has the largest area under cultivation. Cotton, a key raw material in the textile and garment industry, accounts for about 30% of the fabric cost and 13% of the garment cost. India has an abundant supply of locally grown long staple cotton, which lends it a cost advantage in the home textile and apparels segments. Other countries, like China and Pakistan, have relatively lower supply of locally grown long staple cotton. Moreover, low cotton prices due to a bumper cotton crop would enable India to lower its production cost and sustain pricing pressure. Further, efforts on improving the yield per hectare would ensure higher productivity and production, thereby providing the much-needed security of raw-material supply to textile producers.
India also enjoys a significant lead in terms of labour cost per hour (US$ 0.6 in 2004), over developed countries like US (US$ 15.1) and newly industrialised economies like Hong Kong (US$ 5.1), Taiwan (US$ 7.1), South Korea (US$ 5.7) and China (US$ 0.9). Also, India is rich in traditional workers adept at value-adding tasks, which could give Indian companies significant margin advantage.
Threat of new entrants
In the quota free regime, capacity expansion is the name of the game in the textile sector. Resultantly, smaller players who cannot venture into the global markets are flooding the domestic markets with excess supply, thus weakening the pricing scenario. Be it denim (Arvind Mills), home textiles (Welspun and Alok Industries) or branded apparels (Raymond), new capex and consolidation with international players is also not likely to safeguard margins for the larger players, unless they can tap a significant pie of the overseas markets.
Threat of substitutes
Low cost producing countries like Pakistan and Bangladesh (labour cost 50% cheaper) are also posing a threat to India's exports demand. Infact, players like Arvind Mills have already started feeling the pinch as overseas buyers have started shifting to 'alternative sources', thus impacting their incremental volume off-takes.
India's logistic disadvantage due to its geographical location can give it a major thumbs-down in global trade. The country is distant from major markets as compared to its global competitors like Mexico, Turkey and China, which are located in relatively close vicinity to major global markets of US, Europe and Japan. As a result, high cost of shipments and longer lead-time coupled with lack of infrastructure facility may prove to be major hindrances.
The fragmented structure of the industry has also stood in the way of achieving true integration between the various links in the supply chain. The sector has one of the longest and most complex supply chains in the world, which the larger players are trying to correct by integrating their operations and improving efficiency levels.
Textiles being a fairly regulated sector till the recent past (quota regime), another indispensable leg of the above analysis is government regulations. Technology Upgradation Fund Scheme (TUFS) was launched in FY99 for a period of five years (later extended upto FY07) to promote the upgradation of the textile and jute industry. The scheme aimed at providing loans to the sector at internationally comparable rates of interest (5% lower than the domestic interest rates), which enabled the players to upgrade their technology at lower cost of capital. Establishment of 'Apparel Export Parks' and fiscal incentives in the recent budgets also indicate the government's resolve to aid the sector's growth and international competitiveness.
As one can comprehend from the above analysis, the potential for the sector's growth are ample, but the trick lies in competing effectively against rivals. Consolidation of the industry and delivery of better quality at effective rates and minimum lead time would certainly help the players surmount all competitive pressures.