Post the dismantling of the quota regime, the global apparel (readymade garment) industry has seen a gradual but steady shift of 'sourcing hubs' to the developing nations like India and China. The same was facilitated by circumstances that typically characterise developing nations. Firstly, the apparel industry is labour intensive - labour costs are cheap in developing nations and secondly, the industry requires very little capital investment - developing nations lag behind developed countries with respect to industrialisation.
China and India combined are expected to capture 65% of the export market to the USA in the next 5 to 7 years. This is taking into consideration changes in relative prices, rendering the previously restricted low-cost producers more competitive and thus, increasing their market share. The only limitations herein are production capacity constraints and the fact that increased demand for unskilled labour will raise the wage rates and cost competitiveness will be reduced to that extent.
Structurally, apparel (clothing) industry is one of the most fragmented sectors of the Indian textile industry, due to historical government policies, which favoured the small-scale sector. The segment has an estimated 27,000 domestic manufacturers.
India's apparel exports have grown at a CAGR of 13% in the last decade. While the share of cotton textiles in the total textile exports has reduced, that of apparels has increased from 43% to 46%. However, the growth in apparel exports continues to remain dwarfed when compared to China. With larger economies of scale and better pricing ability, the neighbouring competitor has catapulted its market share in the post quota regime.
Some of the factors that could enable India give China a run for its money in this sector could be:
Design skills: Consumer demand is relatively difficult to forecast and orders are usually placed in small lots according to seasonal sales trends. An ability to suggest design changes and a skilled workforce are needed for the successful manufacture of these garments. The focus on value-addition will also automatically ensure development and growth of upstream segments of the textile value chain. This is a distinctive strength that Indian companies have not yet exploited.
Raw material advantage: Although India has just 3% share of the global textile trade, its positioning as one of the largest raw material producers gives it an inherent advantage. India is the world's third-largest producer of cotton, second-largest exporter of cotton yarn, third-largest exporter of cotton fabric and fourth-largest exporter of synthetic fabric.
Skilled Labour: India already enjoys a significant competitive advantage in terms of labour cost per hour, over developed countries like US, EU and newly industrialised economies like Hong Kong, Taiwan, Singapore and China. India is rich in traditional workers adept at value-adding tasks, which could give Indian companies significant margin advantage.
Need for de-risking supply: China is expected to gain market share significantly as has been experienced in categories that were opened up to China in the previous years. However, buyers would want to de-risk their procurement across geographies and would outsource their requirements to other countries also. India, therefore, would stand to gain, especially if quota restrictions are imposed on China.
FDI in single brand retailing: With FDI in single brand retailing now being allowed in India, brands like Tommy Hilfiger and Lee, which earlier restricted themselves to entering into alliances with Indian textile giants like Raymond and Arvind Mills, will be encouraged to open their own franchise in India.
Future of Indian apparel players...
The Indian apparel market is currently worth Rs 430 bn. The apparel segment of the value chain will drive the textile industry's growth in the longer term. This sector provides the highest value addition for India's exports and thus has the potential to position India as a large-scale sourcing base. To achieve this, apparel companies need to choose between 'operational excellence' and 'design and innovation'. Operational excellence-led companies will compete on the basis of lower costs and will be distinctive in their economies of scale, sourcing of fabrics and labour productivity. Players competing through design and innovation will be characterised by innovative fabric R&D, close relationships with suppliers, relationships with retailers' design departments, a good understanding of fashion trends and an ability to offer a range of readymade designs to customers.
It however needs to be seen that such competencies do not remain restricted to the industry leaders but filters down to the smaller players, so that they can collectively contest against the 'Dragon'.