Chapter - VI Competitive Assessment of Indian Textile Industry

Transcription

1 Chapter - VI Competitive Assessment of Indian Textile Industry Competitiveness - An Introduction Competitiveness is a widely used term which can be understood from different angels and in different contexts. According to Porter (1990), for any company, competitiveness is the ability to provide products and services as or more effectively and efficiently than the relevant competitors and competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Competitiveness is about productivity, which in turn is a function of factors related to cost of products, as well as those related to non-price factors such as delivery schedules, reliability of producers, and such intangible factors like image of the country/company and brand equity. Competitiveness and World Textile Market Clothing manufacturing in many developed countries has almost disappeared, probably more quickly than the ATC signatories imagined. The Japan Textile Importers Association now estimates that 87 percent of clothes on sale in Japan are imported: the American Apparel and Footwear Association estimates 89 percent of US clothes. Nonetheless, the apparel industry in rich countries is fundamentally different in 2002 from what it was in 1994, and this change affects the way in which the political debate around further liberalization is likely to occur. India has emerged as a major sourcing base of cotton clothing worldwide and most of the leading US retailers such as Gap, J.C. Penney, and Nordstrom have set up sourcing offices in India

2 As government policies world-over have become more strongly oriented towards trade liberalization, the industries have become progressively exposed, through multilateral and bilateral deals, to the foil force of international competition from a growing array of international suppliers. At the same time, the emergence of large, sophisticated retail groups together with intense retail competition has found retailers exercising their bargaining leverage by squeezing suppliers for lower prices, and higher levels of service and product innovation. There has also been an increasing trend among large retailers to source direct or use foreign intermediaries. Market needs have become more changeable and fragmented, and consumers have become more discriminating with regard to product novelty, quality and value. Technological change has resulted in a broadening and a deepening of the financial and intellectual resources textile and apparel companies need to compete. Companies have been faced with making heavy investments in new technologies against the background of poor profitability, uncertain competitive outcomes and difficulties in gaining access to capital at non-discriminatory rates. Analysis of Indian textile industry using the Porter s model The Indian Textile Industry - Porters Diamond Analysis Source: KPMG Analysis

3 Factor Conditions India is one of the few developing countries today with a fully developed textile value chain extending from fibre to fabric to garment exports. The presence of these activities across the value chain within the country helps to reduce the lead time for production and cuts down the intermediate shipping time. Abundant supply of low priced domestically produced cotton coupled with competitive labour costs is a significant advantage to the country. India not only has the largest area under cotton in the world, but also produces nearly twenty-three varieties of cotton. This diversity makes India capable of catering to various segments in the world trade. Further, this inherent strength in raw material availability prevents any supply side shocks. Table 1: India s Key Advantages Favourable factor conditions present a key competitive advantage for India Cost competiveness Yarn: US$ per kg of yarn Fabric US$ pgr yard of fabric Open-ended yarn and fabric Cost competiveness Yam: US$ per kg of yarn Fabric US$ per yard of fabric fung yam arid fabric Cost competiveness Yarn: US$ per kg of yarn Fabric: US$ per yard of fabric Paired yim and fabric * South Korea * China 1 Brazil 1 India 8 South Korea * China I Brazil i India S South Korea B China 1 Brazil i India Source; IBEF Report 2008

4 The graphs represents the comparison of India viz a viz other nations in terms of cost comparisons-both material cost as well as labour cost, which are two very critical factors for competitiveness. Table 2:Labour Cost Comparisons Labour cost per hour (U$$) Source;IBEF Report, US$ per Hour Demand Conditions The changing demographics have impacted the Indian textile industry in a positive way. The increasing levels of disposable income, consumer awareness and propensity to spend has changed the Indian consumers' mindset which has lead to a trend of increased consumption of lifestyle and personal care products as well as branded products. This trend offers great growth opportunities for companies across various sectors, including textiles. According to NCAER data, the Consuming Class, with an annual income of USD 980 or above, is growing and is expected to constitute over 80 per cent of the population by This rise in demand for consumption is well supported by the retail

5 sector. The springing up of malls, theme stores, supermarkets and franchisees across the urban areas has played a key role in structuring the Indian domestic markets. Thus, it can be said that India offers a large and vibrant market for textile and apparels with a potential for sustained growth. There has been a growth in the domestic demand, as the disposable income of the consumers is on the rise and their changed life style is responsible for increase in the expenditure on consumption including textiles. Table 3:National Income at Current Prices at curre prices) FY FT FY 2936 FY 2005 FY 20D4 FY 2MB Source: IBEF Report QD QQ 1000 US billion

6 Table 4: Private Consumption (at Current Prices') Private consumption (at current prices' FT 2008 iei FY 200? FT 2008 FY 2005 FY 2004 FY SOD 700 US billion Source:IBEF Report,2008 Strong presence of related and supporting industries To meet the ever increasing demand, the textile industry is supported by wellestablished institutions and industries in terms of design, engineering and machinery. Institutions like NIFT (National Institute of Fashion Technology) and Apparel Training Institutes and various colleges like Indian Institutes of Technology and National Institutes of Technology produce qualified and skilled manpower in areas of textile engineering and design. The growth of the organised branded market as well as the entry of larger companies sourcing from India, has given an opportunity to the fashion management graduates to hone their skills and provide a pool of talent to domestic as well as international companies like Nike, Reebok, Next, Asda, Wal- Mart, Tesco etc.

7 The Indian textile engineers have supported the industry by providing sophisticated machines of high speed and production capabilities at competitive prices, thus boosting the production process. With international brands like Adidas, Benetton, Gap, Banana Republic entering India, the industry has been facing tough competition which impels the firms to increase their production and innovation of the products. The reason why India is one of the lowest cost manufacturers of textiles is because of the international rivalry which has prompted the firms to focus on quality improvement, cost reduction and productivity increase. Firm's strategy, structure and rivalry The Indian textile industry is fragmented and complex with the segments of the industry spanning over the organized and unorganised sector where weavers, artisans and farmers form the base of the industry. The unorganized sector is comprised of three major segments viz. handloom, powerloom and hosiery. In addition these, there are khadi as well as carpet manufacturing units in this sector. This fragmented nature of the industry makes it difficult for the Indian players to reap the benefits of economies of scale as enjoyed by its other Asian competitors during the post-quota regime. The major reason being the reservations provided for the small-scale players in the textile industry, which have very limited opportunity to grow. Even the big textile houses have preferred to set up several smaller companies rather than having one or two monoliths, in order to save taxes. However, very few exporters have gone for the integrated production facilities.though the presence across the entire supply chain can be instrumental in reducing lead time, if SCM can be implemented, but since the supply chain in the textile industry is weighed down with bottlenecks this hamper the growth of the sector.major reason for this being the fragmentation of the industry and presence of small scale players across the industry.

8 Fig-Value Chain Analysis In order to overcome these problems, many textile houses are implementing a growth strategy making the most of the opportunities provided in the post quota regime. They are in process of expanding their capacities in order to meet the increasing demand pressure in the domestic as well as the foreign markets making productive use of the funds provided by the TUFS, a few are establishing subsidiaries outside India to increase their share in the international markets by launching various brands. The aim behind this strategy is to increase its consumer base in international markets and cope up with other Asian competitors and reducing production costs and move up the value chain by producing innovative and differentiated products. Government's Regulation and Support To boost the performance of the textile sector, the Government has increased the allocation of funds for the Technology Upgradation Fund Scheme (TUFS) by Rs.100 crore (from Rs.435 crore to Rs.535 crore), allocated Rs.189 crore for the Scheme for Integrated Textile Parks (SITP) with an intension of creating 25 textile parks, and also intends to launch a Jute Technology Mission to protect the interest of jute players in the industry.

9 The Government has reduced excise duties on all man-made fibre yams like PSF, POY, acrylic, viscose etc. have reduced from 15% to 10%, also the excise on Filament yam has been reduced from 16% to 8%. Further, there has been reduction on import duties on specified textile and machinery from 15% to 10%. All this will help the textile players to attain competitive edge in the quota free regime. India's Global Competitiveness Over a decade and a half has passed since India embarked on liberalisation. There has been no dearth of fervent declarations affirming India's determination to acquire the capabilities that will add to its competitiveness and enable it to be counted among other recognised global players. However, has India been able to cash on inherent and acquired advantages in terms of competitiveness? Three different bodies assign three different grades to India: The 2009 World Competitiveness Year Book, compiled by the Switzerlandbased International Institute for Management Development (HMD), has placed India at 30th rank, out of a total of 57 countries, in international competitiveness. Each nation is evaluated on economic performance, government efficiency, business efficiency, and infrastructure. The Global Competitiveness Report of Geneva-based World Economic Forum (WEF) puts India at 49th place out of 133 countries in overall rankings. The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit organization. The Global Competitiveness Report s competitiveness ranking is based on the Global Competitiveness Index (GCI) which is based on 12 pillars of competitiveness, providing a comprehensive picture of the competitiveness landscape in countries around the world at all stages of development. The pillars include Institutions, Infrastructure, Macroeconomic Stability, Health and Primary Education, Higher Education and Training, Goods Market

10 Efficiency, Labour Market Efficiency, Financial Market Sophistication, Technological Readiness, Market Size, Business Sophistication, and Innovation. According to the report India s GDP has grown 6.6 percent per year on average since 1991, when many economic reforms began in earnest, yet its GDP per capita remains just above US$1,000 a third and a tenth, respectively, of those in China and Russia. A wide gap also remains between rural India and its thriving economic and technological hubs. India hosts some of the best universities in the world, and a number of Indian corporate giants have become major global players or even leaders in their fields. At the same time, some 42 percent of the population lives on less than $ 1.25 a day (in PPP international dollars), more than twice China s equivalent figure. Mirroring this dichotomy, India s competitive performance continues to exhibit a rather reversed development pattern. It ranks an outstanding 28th in the most complex areas measured by the business sophistication and innovation sub index, ahead of several advanced economies. The country also boasts fairly well functioning institutions (54th), bustling financial markets (16th), and a sound banking sector (25th) supported by a vast domestic market (4th largest in PPP terms). On the other hand, the country underperforms on some of the basic determinants of competitiveness, namely health and primary education (101st), macroeconomic stability (96th) though improving and infrastructure (76th). In addition, penetration rates for mobile telephony (116th), the Internet (104th), and personal computers (96th) remain among the lowest in the world, while inefficiencies in the labor market (83rd) prevent an optimal allocation of human capital. Improvements in these areas would place India on a stronger growth trajectory going into the future. In these evaluations, the rankings on certain specific parameters are more worrisome than the overall figures. India's weakest areas in all the surveys include: uncertainty in government policies; infrastructural deficiencies; unsatisfactory corporate and financial management of both private and public sector enterprises; inept corporate boards; insufficient attention to human development; low productivity; undependable quality; inadequate customer orientation; and negligible investment on R&D, with special reference to information technology.

11 SWOT Analysis of Indian Textile Industry Present below is SWOT analysis of Indian Textile industry Strengths India has abundant raw materials for textile industry. It is largest producers of jute; 2nd largest producer of cotton yam, cellulosic fibre, and silk; 3 rd largest producer of raw cotton; and 4th largest producer of synthetic fibre/yam in the world. India is the fifth largest country in tenns of gross national product (GNP) and purchasing power parity (PPP). It constitutes one of the fastest growing markets in the world. India is rich in manpower/human resources. It is counted among the richest with regard to cheap skilled labour, scientific and technological resources, and entrepreneurial talents. The country has a huge advantage due to lower wage rates. Because of low labor rates the manufacturing cost in textile automatically comes down to very reasonable rates. India is highly competitive in spinning sector and has presence in almost all processes of the value chain. Indian garment industry is very diverse in size, manufacturing facility, type of apparel produced, quantity and quality of output, cost, and requirement for fabric etc. It comprises suppliers of ready-made garments for both, domestic or exports markets. Weakness Knitted garments manufacturing has remained as an extremely fragmented industry. Global players prefer to source their entire requirement from two or three vendors and the Indian garment units find it difficult to meet because of capacity requirements. Industry is still plagued with some historical regulations such as knitted garments still remain in SSI domain.

12 Technology obsolescence is also a very big problem despite measures such as TUFS. India seriously lacks in trade pact memberships, which leads to restricted access to the other major markets. Indian labour laws are relatively unfavorable to the trades and there is an urgent need for labour refonns in India. Absence of concrete labour laws have resulted in strikes that have not allowed the sector to expand and modernize, resulting in many undersized operations. The country faces logistical disadvantages due to its geographical location; since the country is farther from the major markets than her competitors such as Mexico, Turkey and China (which are closer to major markets such as the US, Europe and Japan respectively), thus increasing shipping cost. Inadequate export infrastructure and poor road connectivity affects the textile sector's competitiveness. A simple consignment of fabric can take up to 25 days to reach the manufacturers in India (particularly in Mumbai or Delhi) as compared to 15 days in Sri Lanka. Opportunity Low per-capita domestic consumption of textile indicating significant potential growth. Domestic market extremely sensitive to fashion fads and this has resulted in the development of a responsive garment industry. Increased use of CAD to develop designing capabilities and for developing greater options. Threats Competition in post-2005 is not just in exports, but is also likely within the country due to cheaper imports of goods of higher quality at lower costs.

13 Standards such as SA-8000 or WARP have resulted in increased pressure on companies for improvement of their working practices. Even though the quota restrictions have been dismantled, the Indian textile industry still continues to struggle with government regulations like 'Handloom Reservation Order' and 'Hank Yam Obligation Order'. According to the study conducted by the Textile Committee, only 6% of the total workforce in the Indian apparel industry has received formal training. This will directly impact the overall productivity despite of the availability of cheap labour. The power cost in India is much higher in comparison with other countries such as Brazil, China, Italy, South Korea, Turkey and the USA. Power comprise nearly 10-17% of the total cost of production for activities like spinning, weaving and knitting, which is much higher than its competitors. Despite being the major producer of cotton yam and fabrics, the productivity of cotton is measured by yield per unit of land is much lower than other countries. Where the level of productivity in China, Brazil and Turkey is more than 1 tonne per hectare, India's productivity is about 300 kgs per hectare. According to the Handloom Reservation Act, eleven textile products are still reserved for the handloom sector. The sector faces an urgent need to de-reserve these products in order to encourage greater usage of the powerlooms to scale up production and provide a stable supply network for foreign markets. The textile industry is being dominated a host of small scale industries that brings in the problem of productivity due to lack of resources to invest in appropriate technology / retraining or re-engineering of the processes. It has been a known fact that the current productivity of Indian factories are at half to one-third of levels that might otherwise be achievable.

14 Challenges facing Indian Textile and Apparel Industry Textile supply chains compete on low cost, high quality, accurate delivery and flexibility in variety and volume. Several challenges stand in the way of Indian firms before they can own a larger share of the global market: Scale: Except for spinning, all other sectors suffer from the problem of scale. Indian firms are typically smaller than their Chinese or Thai counterparts and there are fewer large firms in India. Some of the Chinese large firms have 1.5 times higher spinning capacity, 1.25 times denim (and 2 times gray fabric) capacity and about 6 times more revenue in garment than their counterparts in India thereby affecting the cost structure as well as ability to attract customers with large orders. The central tendency is to add capacity once the order has been won rather than ahead of the demand. Customers go where they see both capacity and capabilities. Large capacity typically goes with standardized products. These firms need to develop the managerial capabilities required to manage large work force and design an appropriate supply chain. For the size of the Indian economy, it will have to have bigger firms producing standard products in large volumes as well as small and mid size firms producing large variety in small to mid size batches (the tension between the organized and un-organized sectors will have to be addressed first, though). Then there is the need for emergence of specialist firms that will consolidate orders, book capacities, manage warehouses and logistics of order delivery. Skills : Three issues must be mentioned here : (a) there is a paucity of technical manpower - there exist barely 30 programmes at graduate engineering (including diploma) levels graduating about 1000 students - this is insufficient for bringing about technological change in the sector; (b) Indian firms invest very little in training its existing workforce and the skills are limited to existing proceses (Chandra 1998); (c) there is an acute shortage of trained operators and supervisors in India. It is expected that Indian firms will have to invest close to Rs bn by year 2010 to increase its global trade to $ 50 bn. This kind of investment would require, about 70,000 supervisors and 1.05mn operators in the textile sector and at least 112,000 supervisors and 2.8mn operators in the apparel sector (assuming a 80:20 ratio of

15 investment between textiles and apparel). The real bottleneck to growth is going to be availability of skilled manpower. Cycle Time: Cycle time is the key to competitiveness of a firm as it affects both price and delivery schedule. Cycle time reduction is strongly correlated with high first pass yield, high throughput times, low variability in process times, low WIP and consequently cost. Indian firms have to dramatically reduce cycle times across the entire supply chain which are currently quite high (Chandra, 2004). Customs must provide a turnaround time of V2 day for an order before Indian firms can they expect to become part of larger global supply chains. Indian firms need a strong deployment of industrial engineering with particular emphasis on cellular manufacturing, JIT and statistical process control to reduce lead times on shop floors. Penetration of IT for improving productivity is particularly low in this sector. Innovation & Technology: A review of the products imported from China to USA during January-April 2005 reveals that the top three products in terms of percentage increase in imports were Tire Cords & Tire Fabrics (843.4% increase over the previous year), Non-woven fabrics (284.1% increase) and Textile/Fabric Finishing Mill Products (197.2% increase) (FICCI, 2005). None of these items, however, figure in the list of imports from India that have gained in these early days of post-mfa. Entry into newer application domains of industrial textiles, nano-textiles, home furnishings etc. becomes imperative if we are to grow beyond 5-6% of global market share as these are areas that are projected to grow significantly. Synthetic textiles comprise about 50 per cent of the global textile market. Indian synthetic industry, however, is not well entrenched. The Technology Upgradation Fund of the government is being used to stimulate investment in new processes. However, there is little evidence that this deployment in technology has accompanied changes in the managerial regimes - a necessary condition for increasing productivity and order winning ability. Domestic Market: The Indian domestic market for all textile and apparel products is estimated at $26 bn and growing. While the market is very competitive at the low end of the value chain, the mid or higher ranges are over priced (i.e., dollar pricing5). Firms are not taking advantage of the large domestic market in generating economies

16 of scale to deliver cost advantage in export markets. The Free Trade Agreement with Singapore and Thailand will allow overseas producers to meet the aspirations of domestic buyers with quality and prices that are competitive in the domestic market. Ignoring the domestic market, in the long run, will peril the export markets for domestic producers. In addition, high retail property prices and high channel margins in India will restrict growth of this market. Firms need to make their supply chain leaner in order to overcome these disadvantages. Institutional Support: Textile policy has come long ways in reducing impediments for the industry - sometimes driven by global competition and, at other times, by international trade regulations. However, few areas of policy weakness stand out - labour reforms (which is hindering movement towards higher scale of operations by Indian firms), power availability and its quality, customs clearance and shipment operations from ports,. credit for large scale investments that are needed for upgradation of technology, and development of manpower for the industry. These are problems facing several sectors of industry in India and not by this sector alone. Critical Factors that Need Attention Though India is one of the major producers of cotton yam and fabric, the productivity of cotton as measured by yield has been found to be lower than many countries. The level of productivity in China, Turkey and Brazil is over 1 tonne / ha., while in India it is only about 0.3 tonne / ha. In the manmade fiber sector, India is ranked at fifth position in terms of capacity. However, the capacity and technology infusion in this sector need to be further enhanced in view of the changing fiber consumption in the world. It may he mentioned that the share of cotton in world fiber demand declined from around 50 percent (14.7 mn tons) in 1982 to around 38 percent (20.12 mn tons) in 2003, while the share of manmade fiber has increased from 44 percent (13.10 mn tons) to around 60 percent (31.76 mn tons) over the same period. Apart from low cost labour, other factors that are having impact on final consumer cost are relative interest cost, power tariff, structural anomalies and productivity level (affected by technological obsolescence). A study by International Textile Manufacturers Federation revealed high power costs in India as compared to other

17 countries like Brazil, China, Italy, Korea, Turkey and USA. Percentage share of power in total cost of production in spinning, weaving and knitting of ring and O-E yam for India ranged from 10 percent to 17 percent, which is also higher than that of countries like Brazil, Korea and China. Percentage share of capital cost in total production cost in India was also higher ranging from 20 percent to 29 percent as compared to a range of 12 to 26 percent in China. In India, very few exporters have gone in for integrated production facility. It is argued that countries that would emerge as globally competitive would have significantly consolidated supply chain. For instance, competitor countries like Korea, China, Turkey, Pakistan and Mexico have a consolidated supply chain. In contrast, apart from spinning, the rest of the activities like weaving, processing, made-ups and garmenting are all found to be fragmented in India. Besides, the level of technology in the Indian weaving sector is low compared to other countries of the world. The share of shuttle-less looms to total loomage in India is 1.8% as compared to Indonesia (10%), Bangladesh (10%), Sri Lanka (12%), China (14%) and Mexico (29%). The supply chain in this industry is not only highly fragmented but is beset with bottlenecks that could very well slow down the growth of this sector. As a result the average delivery lead times (from procurement to fabrication and shipment of garments) still takes about days. With international lead delivery times coming down to days, India needs to cut down the production cycle time substantially to stay in the market. Besides, erratic supply of power and water, availability of adequate road connectivity, inadequacies in port facilities and other export infrastructure have been adversely affecting the competitiveness of Indian textiles sector. Conclusion Competitive strategies are developed by sector level firms and its their individual and collective initiatives that secure higher market share in global trade. While one has to be ever vigilant of non-tariff barriers in the post MFA world, the new market will be won on the basis of capabilities across the supply chain. Policy will need to facilitate

18 this building of capabilities at the firm level and the flexible strategies that firms will need to devise periodically. The Global Textile trade suggest very wast scope for the Indian Industry.The need of the hour is to analyse the strengths that are the core competence of the Industry, capitalize on them to make the most of it.the following chapter suggest the measures to be taken by the Industry and Policy chages required in the system to leverage the potential opportunity in the global arena.