Analysis of Indian Textiles and Apparels Industry: A Focus on Market Structure and Competitiveness Abstract: The Indian textile industry is one of the oldest and most significant industries in the country. It accounts for around 4 per cent of the gross domestic product (GDP), 14 per cent of industrial production and over 13 per cent of the country’s total export earnings. In fact, it is the largest foreign exchange earning sector in the country. Moreover, it provides employment to over 35 million people. The Indian textile industry is estimated to be around US$ 52 billion and is likely to reach US$ 115 billion by 2012.
The domestic market is likely to increase from US$ 34. 6 billion to US$ 60 billion by 2012. It is expected that India’s share of exports to the world would also increase from the current 4 per cent to around 7 per cent during this period. India’s textile exports have shot up from US$ 19. 14 billion in 2006-07 to US$ 22. 13 billion in 2007-08, registering a growth of over 15 per cent. This article tries to investigate the underlying market structure that has developed over the years together with the strengths, weakness, opportunities and threats the industry is currently facing.
In the course of the analysis the data shows that the industry operates in a monopolistic setup and all the assumptions for a monopolistic economy holds good. Introduction: The economic history of India cannot deny the contribution of textile industry in effectively changing the social scenario. Its presence in the Indian as well as the world economy is a commendable one. The manifestation of its significance in playing a pivotal role is discerned with its 14% contribution to the total industrial production, 4% to GDP and 16. 3% to export earnings as estimated by the Ministry of Textiles, India. The textile industry ranks second in providing direct employment to over thirty five million people after agriculture in our country. It is estimated that the textile industry is growing at a rate of 9% which is again forecasted to increase to 16% in the coming years. The uniqueness of the industry lies in its close blend with the agricultural sector thus providing the industry with the opportunity to produce a wide variety of products to be catered to different market segments in and outside India. This article ndertakes a brief and comprehensive analysis of this industry so as to find out the competitiveness and the market structure underlying it. Brief History: The colonial regime virtually decayed the traditional textile industry in India which was well known since ancient times. The birth of the modern textile industry however took place in the nineteenth century with the establishment of the first textile mill near Kolkata in 1818. The beginning of the cotton textile industry was in Bombay in 1850s with the advent of Parsi cotton merchants engaged in internal trade and export of yarn and cloth overseas to Chinese and African markets.
Ahmadabad emerged as the next immediate rival to Bombay with the first cotton mill established in 1861. The cotton textile industry rapidly progressed in the second half of the nineteenth century with 178 mills but during 1900 it suffered a setback due to the great famine when a number of mills got closed. The industry received a sudden stimulus during the Swadesi movement and the two world wars. In 1992 to 1937 the industry faced a turbulent situation as several mills in Bombay changed hands. But the surge in the production gained momentum during the Second World War as import of textiles from Japan stopped.
Gradually the number of mills grew to 4. 5 lakh looms in 1901 to 249 mills with 13. 35 looms in 1921 and subsequently to over 20 lakh looms in 1941. By 1945 there were 417 mills employing around 5 lakh workers. Again the industry was affected during independence and partition 14 mills and 22% of the land under cotton cultivation went to Pakistan and India was left with 409 mills. Some mills were also closed during the period. But post independence the industry made rapid progress. Total looms increased to over 26 million by 1990.
Textiles and Apparel Trade As per the latest figures available with the Ministry of Textiles, India exported textiles worth US$ 15. 27 billion during April-December 2008. Indian textiles, handlooms and handicrafts are exported to more than 100 countries, with the US being the largest buyer. Readymade garments (RMG) are the largest export segment, accounting for almost 41 per cent of total textile exports. RMG exports from India were worth US$ 9. 06 billion in 2007-08. During April 2008February 2009, RMG exports were worth US$ 8. 59 billion, an increase of 4. 6 per cent over the corresponding period of 2007-08. Significantly, apparel is the second largest retail category in India. The domestic apparel retailing industry is estimated to be round US$ 2. 7 billion and in spite of recession is likely to grow at 5-7 per cent in 2009-10. The domestic organised garment retailing clocked a growth of 13-14 per cent for year ended March 2009. The accessories market is pegged between US$ 298. 6 million and US$ 597. 3 million, which has been growing at 15 to 18 per cent. Within this, the branded accessories segment is growing at 25 per cent.
Current scenario and position in world economy: Although the production of cotton declined from 156 lakh bales in 2000 to 1. 40 lakh bales in 2001, production of man made fibres increased from 835 million kgs to 904 million kgs. Spun yarn production also increased to 3046 million kgs with a growth rate of 3. 7%. Man made filament yarn registered a growth of 2. 7%. Production in mills has gradually declined over the years but handloom and power loom production and hosiery sector has increased at a rate of 2%, 2. 7% and 5. 1% respectively. Export registered a growth of 21% in 2005. 0% of the world’s spindleage capacity is contributed by India which is second highest after China. It also contributes 6% to the world rotorage and 62% of the world loomage. But the industry lacks high tech shuttless looms and contributes an insignificant 4. 1% to the world shuttles loomage. 12% of the world production of textile fibres and yarns comes from India and also India is the largest producer of Jute, second largest producer of silk and cellulose fibre yarn, third largest producer of cotton and fifth largest producer of synthetic fibres. Industry Structure and segments: There are three broad divisions in Indian textile industry: 1.
Cotton textiles 2. Synthetic textiles 3. Others like wool, jute, silk etc. Cotton textiles dominate the industry with a 73% share even though all other divisions have their own place. This is because the cotton textile industry has a very complex structure with the coexistence of older technologies of hand spinning, weaving together with the recent and advanced sophisticated automated looms and spindles. Overall the entire industry structure is mixed in nature with highly mechanized mill sector, handloom sector and the decentralized small scale powerlooms sector.
Indian textile industry is mostly composed of small scale, non-integrated spinning, weaving, finishing and apparel making enterprises. This sort of unique industry structure is primarily because of the legacy of government policies which has promoted labour intensive small scale operations which discriminated itself from large scale firms. Another way of looking at the situation is by categorising the industry into organized and unorganized sectors. The organized sector includes firms that indulge in a capital intensive production process characterized by sophisticated mills and efficient use of advanced machineries for mass production.
On the other hand a dominant part of the industry is the decentralized unorganized sector utilizing traditional practices of hand weaving and spinning in cloth production and is thus highly labour intensive. The different types of firms comprising the industry are given below: Composite Mills: These are comparatively large-scale mills which has integrate spinning, weaving and, fabric finishing activities common in other major textile-producing countries. These types of mills however in India contribute only about 3 percent of the output.
There are now 276 composite mills operating across India, mostly public sector owned. These mills are located in mostly in Gujarat and Maharashtra. Spinning: Conversion of fibre into yarn to be used for weaving and knitting is called the process of spinning. Chiefly located in northern India the spinning sector is technology intensive and the productivity is a function of the quality of cotton and the cleaning process used during ginning. It is the most consolidated and technically efficient sector in India’s textile industry largely due to the deregulation beginning in the mid1980s.
The plant size is in average small. Weaving and Knitting: The heart of the textile is weaving and knitting. The weaving sector was a total production of about 46 percent for cotton cloth, 41 percent for 100% non-cotton including khadi, wool and silk and 13 percent for blended cloth yearly. Handlooms, powerlooms and knitting machines comprise the three distinctive technologies that are used in this sector. Weaving and knitting activities converts cotton, manmade, or blended yarns into woven or knitted fabrics. The weaving and knitting sector is highly fragmented, small-scale, and labour-intensive.
In India this sector consists of about 3. 9 million handlooms, 380,000 “powerloom” enter-prises that operate about 1. 7 million looms, and just 137,000 looms in the various composite mills. “Powerlooms” are small firms, with an average loom capacity of four to five owned by independent entrepreneurs or weavers. Modern shuttleless looms account for less than 1 percent of loom capacity. Fabric Finishing: Fabric finishing or processing includes dyeing, printing, and other cloth preparation before the manufacture of cloth. It is also dominated by a large number of independent, small enterprises.
About 2,300 processors overall are operating across India, which includes around 2,100 independent units and 200 units that are integrated with spinning, weaving, or knitting units. Clothing: About 77000 small and medium scale domestic manufacturers, exporters and fabricators comprise this criterion of firms in India. Textile and Apparel Supply Chain: The supply chain in the textile industry is highly diverse in terms of raw materials used, technologies implemented and products produced. Fig 1: Textile Industry Supply Chain (Cahndra, 2006)
The entire setup consists of procurement of diverse raw materials, ginning facilities, spinning and extrusion process, processing sector, weaving and knitting facilities and garment manufacturing that supplies to an extensive distribution channel. Almost 70% by value of the production to the domestic market is provided by the supply chain. The distribution network is comprised of wholesalers, distributors and large number 8 of small retailers. Exports are mainly taken care by Export Houses or commissioning offices of large global retailers. Major Players • • • • • • • • • Arvind Mills Ltd.
Raymond Ltd. Alok Industries Vardhman Spinning ; General Mills Ltd. Indian Rayon (IRIL) Century Textiles ; Industries Welspun India Himatsingka Seide Ltd. Bombay Dyeing Export and post MFA scenario: India has emerged as one of the main clothing exporting country over the years, but, its stagnant market share in the world textile and clothing trade, comparatively lower unit value realization, lack of presence in high value segment together with the aggressive performance of China, Turkey, Bangladesh, Mexico, Korea and other Asian countries are a great concern for Indian Textile Industry.
The Multi Fibre Arrangement (MFA) governed international trade in textiles and clothing from 1974 to 1994 which ultimately phased out in 2004. Most of the distortions in tariff are expected to reduce and the firms with robust capabilities may gain momentum in the global trade of textile and apparels. The Indian Government is also taking steps to increase global competitiveness. The second year after the phase-out of the MFA, China, India and Bangladesh exporters showed a remarkable performance fetching benefit to millions of low-income textile workers.
The leading trading partners of India are Germany, USA, UAE, Bangladesh, Turkey, Italy, South Korea, Egypt, Japan and Turkey. (Refer Table 1 in appendix for comparative data). In the readymade garment sector also India is showing significant growth. Government Initiatives In an effort to increase India’s share in the world textile market, the government has introduced a number of progressive steps. • • • • • 100 per cent FDI allowed through the automatic route. De-reservation of readymade garments, hosiery and knitwear from the smallscale industries sector in end-2000.
Technology Mission on Cotton was launched in February 2000 to make quality raw material available at competitive prices. Technology Upgradation Fund Scheme (TUFS) which was launched to facilitate the modernisation and upgradation of the textiles industry in 1999 has been given further extension till 2011-12. A total of 18773 applications involving a project cost of US$ 24. 91 billion have been sanctioned under TUFS upto March 31, 2008. 40 textile parks are being set up under the Scheme for Integrated Textile Parks (SITP) which will attract an investment of US$ 4. 38 billion.
In current times of a global meltdown, the government has come out with an economic stimulus package for the textile industry. This includes: • • • Additional allocation of US$ 285. 66 million to clear the entire backlog in TUFS, which would enhance cash flow of the exporters. Extension of interest rate subvention of 2 per cent on pre and post shipment credit Additional fund of US$ 224. 42 million for refund of terminal excise duty SWOT Analysis: Strengths: 1. Abundant Raw materials: As mentioned earlier India is one of the largest producers of natural and man made fibres. This in turn allows the industry to reduce costs and lead times.
Fig: 2 Production of cotton in major countries in 2008 (Source: USDA) 2. Low cost skilled labour: India is a source of cheap labour. This provides a competitive advantage for the firms as well as the entire textile industry. Figure 3: Labour cost in major countries in 2008 (Source: IBEF) 3. Growing Domestic market: The per capita textile consumption in a country is extremely dependent on fashion trends and fads. The global average per capita consumption of textiles is around 6. 8 kgs, where as in US it is 20 kgs and Japan 12 kgs. But in India per capita textile consumption is just an insignificant 2. 8 kgs.
Hence there is a lot of scope for growth and expansion in the domestic market. 4. Core competitiveness in cotton textile to drive export growth: The unique competitive position of the textile industry especially in the cotton textile segment is the key growth driver of India’s export (See appendix Table 4). It is in turn driven by strong presence across the textile value chain, low labour cost and abundance of raw material. 12 5. Product differentiation: Several players in the textile industry who operate in the niche segments catering to higher price range customers are largely driven by design, quality, flexibility and lower lead time.
India has an edge over the other countries with its pool of quality designers, state of art manufacturing and processing facility and obviously low cost advantage thus gaining the strong marketing front end necessary to capture the premium market worldwide. 6. Government focus: Over the years the Indian textile sector has been the second largest employment generator and it has already captured the government’s attention which will work in its favour. Weakness: 1.
Fragmented and unorganized nature: The industry is largely unorganized, almost 95% as a result of which companies are prohibited from taking large orders or achieving economics of scale thus limiting the scope of expansion. Again the industry is highly fragmented which in turn reduces the ability of expansion as few sectors influence the whole industry. For example in the fabric, a large section of the industry is in the powerloom sector about 83% and 12. 1% in handloom where as mills and hosiery sector is left with just 3. 5% and 1. 5% respectively. (See appendix Table 3) 2.
Lower productivity: The productivity of the labour force in India is much lower compared to competing countries like China and Sri Lanka. Lack of technical manpower is also of major concern. There exist barely 30 programmes at graduate engineering (including diploma) levels graduating about 1000 students which is insufficient for bringing about technological change in the sector and to add to that Indian firms invest very little in training its existing workforce thereby limiting their skills to the existing processes. 3. Cost competitiveness: The problems of scale are predominant in all the different sectors except spinning.
The textile firms in India are comparatively smaller than their Chinese or Thai counterparts and there are very few numbers of large textile firms. Some large Chinese firms have got some 1. 5 times higher spinning capacity and more than 6 times the revenue in garment sales than their counterparts in India. As a result of these differences in scale the cost structures are the most affected and the Indian textile industry also loses the ability to attract bigger customers and orders. To add to these problems are the high tax and interest rates and labour problems. . Technological Obsolescence: A considerable portion of the processing capacity in India is obsolete. Though state of art integrated textile mills exist, majority of the capacity lies currently in the hands of the powerloom sector (Refer appendix Table 3). Actually the degree of modernization and investment in technology in India is considerably low as compared to other parts of the world. Thus overall value addition in the industry is reduced. Country Degree of modernization World 30. 2% India 4% Europe 77% Pakistan 70% America 60% Opportunities: 1.
Expected growth in Global textile industry: Economic forecasts predict that the global textile industry is likely to grow from 309 US billion dollars to 856 billion US dollars in 2014. Thus the Indian textile industry which currently holds 4% of the global market share has tremendous opportunity for expansion in recent times. 2. Research and development: With the given present economic scenario focus on research and development is a must for the efficient growth of the textile industry. R&D can enable the production of newer specialized fabrics with specialized treatments keeping pace with the changing fashion trends.
Investment in design centres and sample labs will also find out ways of reducing turn around times, and efficient trend forecasting. Also increased use of CAD is necessary to increase design capabilities. 3. Increase in cotton yield: Improved variety of cotton through biotechnological developments is now being marketed to the farmers. Bt cotton being one of the remarkable achievements. Increased acreage under Bt cotton will in turn boost the cotton yield does adding significant contribution to the existing raw material availability. (Also refer Table 2 in appendix for 2008 cotton yield data)
Fig 4: Cotton cultivated area in major cotton producing countries (Source: USDA) 4. Quality supply and vertical presence: Large buyers now a day look for complete package solution which includes product development support, flexibility in volumes, vertically integrated manufacturing, quality and cost management fused with strong logistic infrastructure. Given the cost structures and reliability Indian textile industry is capable of efficiently cash in the opportunity. On the other hand reductions in lead times are necessary to get along the shortening to the global fashion cycles.
To counter these forces few domestic and global retailers in order to rationalize their supply chain are looking for vertically integrated players who can provide one stop solution. Threats: 1. Competition from China and other low cost countries: In the backdrop of a projected global growth in textile industry India is likely to face steep competition from low cost countries which may affect production volumes. China is one of the most adjacent competitor and major threat to Indian textile industry because it has got better infrastructure and economics of scale and obviously lower cost of production. Refer Table 5 in appendix for cost competitiveness). 2. Fibre prices: India has a typical tropical monsoon type of climate, hence fibre prices specially cotton are largely determined by extraneous factors like whether conditions, rainfall etc. So the firms have to face raw material fluctuations quite often. 3. Forex fluctuations: one of the major components of revenue in the Indian textile industry is the export element. Hence rupee value appreciation is disadvantageous for the firms. 4. Fluctuations in fashion trends and execution risk: Fashion cycles are now a day’s too short, so mass customization in long run is risky.
Any drastic change in the fashion trends that is apart from a company’s key product could lead to lowering of production volumes. And at the same time coping up with the trends may cause project delays which as a result can deter sales and profits ad at the same time may lead to cost overruns. 5. Competition in domestic market: The signing of the free trade agreement with Singapore and Thailand will allow producers overseas to meet the expectations, demand and aspirations of the domestic buyers with prices and quality quite competitive in nature.
Hence ignorance of these facts may create peril for the indigenous firms in the long run. And to add to these difficulties high retail property pricing and supply chain margins impede growth. So a leaner supply process is a necessary dimension to overcome these problems. Analysis of industry competitiveness: HHI indices 140 120 100 Value 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year C4 indices 0. 16 0. 14 Percentage 0. 12 0. 1 0. 08 0. 06 0. 04 0. 02 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year
Both the Harfindal index and the four farm concentration ratio over a span of ten fiscal years starting from 1999 till 2008 of the textile industry in India suggest that the sector is highly competitive. There are large numbers of small players who contribute significantly to the total industry sales. Now if this data is coincided with the market structure and segment analysis discussed above it clearly justifies the fact that the textile industry in India has got a monopolistic nature. All the major assumptions for a monopolistically competitive market are vivid in this industry.
There is the existence of enough product differentiation across firms and even the products are imperfectly substitutable in consumption as a result of which if the price of one good rises some consumers are bound to switch their purchases to another product within the industry. And the consumer demand for these differentiated products can be explained by the 16 distinctive approaches of love of variety and ideal variety. The above discussion also implies that there is free entry and exit of firms if chances of economic profits fluctuate.
Economics of scale has also been a major consideration internal to the firms which can be incorporated as downward sloping average cost curves. Thus if average costs fall as and when firm output gets increased i. e. per-unit cost falls with an increase in the scale of production. Regression analysis: Variables selection: In order to find out whether the year on year Harfindal indices have any significant effect in explaining the variance of operating profit (OP) and return on capital employed (ROCE) of firms in the Indian textile industry a crosssectional regression analysis is done.
Thus the model consists of two dependent variables: ROCE and OP as indicators of firm performance; one independent variable HHI as a indicator of market competition; and three controlled variables: Age of the firm, Log sales as a proxy for firm size and Log assets as a proxy for firm resources. Sample selection and data processing: A set of 303 farms are selected and their data for ten years from 1999 to 2008 corresponding to the variables stated above are collected from CMIE prowess database.
Harfindal indices for the entire Indian textile industry are calculated out for each year using data from the same source. Collected data is then filtered to get rid of small discrepancies like data unavailability for particular years etc. The entire process thus resulted in 2443 data points. Model 1: Regressing ROCE on selected explanatory variables: HHI, Age of the firm, log Sales and log Assets of the selected sample of companies, it was found that the model showed insignificant F statistics. Hence the model itself is not valid.
Model 2: Regressing OP on selected explanatory variables: HHI, Age of the firm, log Sales and log Assets of the selected sample of companies showed significant F statistics. It implies that the model holds good and the R square and adjusted R square values are 0. 133588637 and 0. 132167125 respectively. And only two explanatory variables log sales and log assets are significantly explaining the variance of OP at a 5% level of confidence. But the P value of the independent variable is higher suggesting that HII has no significant role in explaining the variance of OP of the firms. Refer Table 6 in appendix for summary output). Conclusion: The textile and apparel industry in India is thus being one of the oldest and potent economic sectors in terms of output and foreign exchange earnings, though enjoys some strategic and competitive advantages, still there remains several challenges that it has to face. India’s textile industry is an attractive sector that is poised for higher growth. The industry enjoys significant advantages, aided by India’s key strengths in availability of raw material, labour, domestic market and supportive government policies.
While the domestic market has been growing consistently and offers attractive growth potential, exports are poised for a quantum increase after the removal of quotas under MFA. The industry is also undergoing transformation, determined by a few key trends. While the structure is predominantly of small-scale, unorganized players, dereservation and removal of quotas has led to a growth of vertically integrated, larger scale units as well. India thus has a potential to be a significant player not only in complex, customized designs, but also in low cost mass production.