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In the Face of Obstacles, Indian Manufacturers Get Creative
By Padma Nagappan
Since olden times, when India was a key player in the silk and spice trade route, the textile industry has been an important, labor intensive money spinner for the country and is still the second largest provider of employment, after farming.
But with the shifting trade winds of a fluctuating global market, the post-Multi-Fiber Agreement (MFA) era and unfavorable government policies, Indian apparel manufacturers and exporters are dealing with more than their fair share of supply side issues, while keeping pace with traditional rivals such as China and more recent competitors such as Vietnam, Bangladesh and other South East Asian countries.
India's share of the global apparel trade is around 2.5 percent and it has neither gone up nor down, post-MFA, according to Sudhir Sekhri, an exporter who heads the Export Promotions sub-committee at the Apparel Export Promotion Council (AEPC), the official body of India's apparel exporters and host of the semi-annual India International Garment Fair, with more than 40 offices and 8,000 members.
Increasing global competition has made Indian manufacturers more attentive to quality requirements, which is giving the country a leg up, says Sekhri. "The effect will be seen in the next few years, when India will be on par with the others. We have better quality than China, but China has a wider range of products," Sekhri says.
Higher energy, transportation and raw materials costs
One of the advantages China has over India is the ability to transport merchandise from factory to port within 48 hours, whereas for exporters like Sekhri (owner of Trendsetters International) who are located close to dry ports such as the capital city of New Delhi, it takes 8-10 days to reach the nearest port, Mumbai. "This is a huge hidden cost," Sekhri says, explaining that infrastructure improvements have been slow, because the Indian government has other priorities.
Power supply and transportation issues have been and continue to be huge problems, in addition to ill-advised government policies that make it a far cry from a level playing field for apparel manufacturers competing with rivals such as Bangladesh, which has greater incentives, cheaper energy and very favorable government policies and free trade agreements.
"While roads have been laid from Tirupur to the Tuticorin port, the main problem now is electricity in Tamil Nadu. We get only five to six hours of power, and then we use generators," says A.Sakthivel, the chairman of Poppys, a $60 million company that employs more than 8,000 people and whose clients include Polo Ralph Lauren and Hanes. Sixty percent of Poppys' exports head to Europe, 35 percent to the United States and five percent to Canada.
He also heads the Tirupur Exporters' Association (TEA), an apparel hub in the southern state of Tamil Nadu, where the lack of power and the need to buy diesel fuel for generators has driven up energy costs and limited the number of hours worked by shift workers.
This is just one of many handicaps apparel manufacturers contend with, while striving to become nimble, efficient and competitive in the global market.
Exporters across the country that Apparel spoke with concurred about the very serious drawbacks they face, echoing the same frustration with infrastructure issues and unfriendly government policies that have driven up energy, transportation and raw material costs.
Giving Bangladesh a helping hand
"India has high energy costs and very low transparency regarding excise duty. Another mistake is that India does not allow foreign flag vessels to carry cargo between Indian ports. So the cost of carrying cotton to Dhaka (the capital of Bangladesh) from Gujarat (a Western state in India that produces cotton) is half of what we pay to transport it from Gujarat to South India," explains Manikam Ramaswami, the chairman and managing director of Loyal Textiles group, a $95 million vertically integrated, public company based in Chennai, Tamil Nadu, specializing in industrial workwear, with joint ventures in Italy, Germany and the U.K.
In addition, Ramaswami highlights the fact that India gives export concessions to its cotton producers, such that Bangladesh buys Indian cotton at prices that are five percent cheaper than what Indian manufacturers pay, in addition to transportation costs that are 10 percent cheaper.
"Export cotton trade in India is in the hands of a few people, so they have convinced our government to do this," says Ramaswami, who does not mince words and is an outspoken advocate within the textile industry. "So India is helping Bangladesh grow at the cost of its own industry."
Bangladesh is India's neighbor and a major competitor whose apparel exports have surpassed India's levels. It has very low energy costs because 70 percent of its energy is powered by natural gas, primarily derived from agricultural residue, scrub wood and animal waste. Its energy consumption is also much lower than India's, whose primary source is coal. (Despite being the third largest producer of coal, India faces coal shortages.) This situation will change however, because Bangladesh is now facing an acute gas shortage.
Aside from this and the very obvious advantages that India has inadvertently proffered to its neighbor, thus tipping the scales against Indian manufacturers, there are other lopsided policies that continue to tilt the balance.
The Bangladesh government has given huge subsidies to the Bangladesh apparel industry, because it considers it a priority sector, unlike India, which did so until 10 years ago, before the software services sector overtook apparel exports, according to Sekhri. He explains that the industry is both the second largest source of employment and also the second largest employer of rural women, after the farm sector. "The government has not given apparel manufacturers the kind of attention we deserve," he says.
Bangladeshi exporters also have preferential market access to the EU market, which gives them an automatic price advantage, because port duty into the EU ranges from 10 percent to 13 percent, depending on the country.
Lapses in administration and politicians who favor special interest groups have largely contributed to these inequalities for the Indian apparel industry, which is trying to rectify the situation through straightforward appeals rather than underhanded tactics.
The trend towards offshoring hits home
Offshore investments by Chinese and Indian companies have also helped Bangladesh.
"If India seeks a free trade agreement with the EU, the offshore advantage will vanish. Plus, we need to incentivize the industry," says Ramaswami, who explored options, but decided not to set up operations outside India. "The hope that we will have a receptive government soon keeps me from taking my production outside India," he says.
Many exporters followed the offshoring trend in order to level the playing field, by establishing offices in Bangladesh and Vietnam and setting up factories there.
Sekhri is one of those who retained merchandising, purchasing and product development in India but relocated most of his production to Bangladesh. With Vietnam and Cambodia becoming expensive, AEPC members are already exploring African countries, he says.
He thinks that this trend will continue. Others, like Ramaswami, think otherwise, preferring to focus on niche markets and spearhead advocacy efforts to change obsolete policies through lobbying.
Leveling the playing field
Given the current scenario, how do Indian exporters survive and overcome the odds? By being creative, by consolidating the back end of the supply chain and by carving out a niche for their products.
Ramaswami's Loyal Textiles used to make knitted garments, bed linens and industrial workwear. Today, he focuses only on industrial garments with unique value additions.
"We try to make something that is far superior to what is available in the market, with value added treatments like flame resistant, acid resistant, high visibility, anti-static or even a combination of all these. And we differentiate ourselves with the comfort value of our technical garments," he says.
He cites the example of the Italian Electricity Board, whose workers died in an accident because they did not wear their industrial uniforms, contending that they were too uncomfortable. The organization is now his customer, drawn by the comfort of the safety garments he makes.
Sekhri concurs, emphasizing that value additions and embellishments differentiate Indian exporters from competitors. Given the price advantage that Bangladesh enjoys and the GSP quota that Vietnam leverages for exports to the Unites States, there will be a shift from core products (t-shirts and other lower-end items) to value added, specialized products, such as embroidered apparel and industrial garments.
For apparel firms such as those in Tirupur, which primarily focus on lower-end basic apparel, moving up the value chain is the only way to compete with exporters from Bangladesh.
"Our members are focusing on cutting costs, increasing efficiency, bringing in new technology and people from Hong Kong and Korea for line systems," says TEA President Sakthivel.
TEA contracted with Lee Muir to build an inland container terminal in Tirupur and then handed it over to private enterprises to run. This enables local exporters to save time and money, by bypassing the middle men and shipping direct and by not having to transport containers to Tuticorin, the nearest port in Tamil Nadu for this apparel hub.
"We have a history of textiles to draw inspiration from, well-developed design capabilities, skilled manpower and an English-speaking executive class," says Prashant Agarwal, who leads the textile practice as vice president of Technopak Advisors, a consulting firm based in Gurgaon, Haryana, and a strategic affiliate of Kurt Salmon Associates. Technopak offers advice and implementation solutions to domestic and international companies in the areas of apparel, textiles, retail, food and hospitality.
Agarwal points out that the Indian industry has leveraged these advantages in the post-MFA world by being in the right place when buyers were looking for strategic alliances in various countries. "We've risen to the opportunity by buying manufacturing units close to markets, specifically in Europe, and we've founded a number of joint ventures for a win-win situation with apparel companies overseas."
Industry insiders also contend that India is the place of choice for buyers in the United States and the EU when it comes to product development or merchandising.
Jockeying for market share with Bangladesh, China and Vietnam
"For fashion, India is the first choice, despite Bangladesh's price advantage. As for China, buyers don't want to place all their eggs in one basket so they source from India too," says Sekhri.
The trade-off between China and India for buyers is about better communication or lower prices. But what about Vietnam? Sekhri dismisses the rise of Vietnam, arguing that he has explored and researched the country thoroughly. "It was competitive last year, but now inflation is around 20 percent and it is not as competitive."
However, Ramaswami disagrees. "Vietnam has lower prices than India and better communication than Chinese counterparts, so Vietnam is not going to go away."
To rectify some of the drawbacks facing the Indian industry, the AEPC has transformed its role, from monitoring quotas during the MFA phase to becoming a powerful advocate and facilitator of training and development for its members, sourcing machinery, brokering deals and promoting and showcasing its members' abilities.
The organization has set up an academy to train and improve the skills of floor-level workers and executives, and partnered with foreign institutions to provide expertise.
It has also recently set up a product development cell to promote 25 apparel categories in which India has not been very active, including swimwear and lingerie - areas where China leads the field. Plans are on to promote these categories to its members, equip them with design capabilities and bring in designers from destination markets.
U.S recession reverberates in India
Those who export a significant portion of their products to Europe have been able to ride out the turbulent waters. Earlier, margins used to vary from 15 percent to 20 percent. Now, it is around five percent to 10 percent, "if you are lucky."
"Most of my exports were to the U.S. before. Today, the U.S. is only 25 percent of my business, whereas we have had 100 percent growth in Europe," says Sekhri, whose revenues are down from $30 million to $15 million, after orders from U.S. buyers shrunk.
The bulk of his exports were to Wal-Mart, Sears and Target, but two years ago he shifted his focus to Europe.
"We improved our product development and design, which has really paid off in terms of volume growth, but not in dollar terms, due to the loss of orders from the U.S.," he explains, adding: "It has been a tough year. I don't believe anyone exporting to the U.S. has made money in the last year but they hope the tide will turn."
Hoping for change
After the recession began, with retail clients placing fewer orders, especially those in the United States, some apparel players have been forced to lay off workers and close down factories. This has prompted the government to wake up a little and take note of the plight of the exporters, says Sekhri.
Elections were held nationwide in May; the Congress Party was re-elected to power in a stunning victory, securing more parliamentary seats than before, along with its coalition partners. This has resulted in a political shift, because the coalition government does not need the backing of the communist parties, whose support had led to restraint in economic reform policies.
The textiles portfolio has been allotted to a young, dynamic minister, Dayanidhi Maran, who was highly lauded when he was formerly the union minister of information technology and communications. He spearheaded industry reforms, brought in significant investments and propelled growth in the sector.
The apparel industry in India is tracking the developments and hoping for a change in textile policies, for the better.
Padma Nagappan is based in San Diego and frequently writes about the apparel industry, sustainability, clean technology and CSR.
Snapshot of an apparel hub Gurgaon, located in the north of India
Location: State of Haryana
Description: Former farming community that was transformed into an urban mecca 20 years ago by developers
Apparel Export Volume: $403 million out of $4 billion in total local exports for 2006-07
Apparel Units: 727 units making ready-to-wear, employing more than 84,000 workers
Product Categories: Primarily women's separates, dresses, children's wear, at medium to high price points
Geographical Advantage: Located on the national highway, close to capital city New Delhi and the international airport there; well-developed infrastructure renders
it attractive for high value projects, foreign collaboration & investments
Plus Points: Highly skilled labor; the AEPC (Apparel Export Promotion Council) has its headquarters here, offers showroom space and hosts buyer-seller meets and trade shows. Manufacturers are given a slew of incentives to locate here, including registration rebates
Other industries: Auto parts, engineering, IT, food processing, poultry & agriculture
Reader Resource: Gurgaon Industrial Association www.giaonline.org
Snapshot of apparel hub Tirupur, located in the south of India
Location: State of Tamil Nadu
Description: Also known as Knit City, it is a thriving hot spot for hosiery and knitted garments; the first textile unit was established in the 1930s, exports took off in the 1970s
Apparel Export Volume: Around $2.2 billion for 2007-08; 50 percent to EU; 40 percent to U.S, 10 percent rest of the world
Apparel Units: More than 7,000 units, out of which about 800 medium to large companies form the Tirupur Export Association (TEA); employ well over 1 million workers;
Product Categories: Casual wear and sportswear, from inner wear to double-lined jackets, price points range from 50 cents to $50
Geographical Advantage: An inland container terminal established locally allows manufacturers to ship direct, save time and money related to port transportation; proximity to Coimbatore City, India's 'Manchester of the South' which is an established textile and textile machinery center, with its own airport
Plus Points: Quick turnaround; unique rapport with local trade unions enables an amicable atmosphere - no labor strikes since 1990; training and development for workers and executives provided by the local branch of the National Institute of Fashion Technology (NIFT); city boasts a consistent annual growth rate of 30 percent and vastly improved infrastructure; consolidation has come to this formerly fragmented industry, with 50 percent of manufacturers now vertically integrated
Reader Resource: Tirupur Exporters Association www.tea-india.org
Profile of Shahi Exports, a leading apparel player in the north
Based in: Faridabad, State of Haryana, with 21 factories in New Delhi, Bangalore, Tirupur & Salem (the latter cities are in the state of Tamil Nadu); Warehouse in New Jersey
Turnover: $181 million for 2007; 100 percent export market only; until the recession, 85 percent shipped to U.S, rest to EU & Asia
Capacity: More than 3 million knitted & woven garments/month; more than 20,000 employees
Products: Loungewear, golfwear, sportswear and sleepwear
U.S Customers: Bobbie Brooks, Sag Harbor, Hollister Co., The Children's Place, Ralph Lauren, GAP, Wal-Mart (client for 20 years), JCPenney (17 years), Target, Liz Claiborne, American Eagle, Old Navy, Abercrombie & Fitch, among others
Management: Privately owned and managed; founded by Harish Ahuja
Awards: Best vendor of the year awards from Wal-Mart, JCPenney and Target; best exporter awards from the AEPC
Other facts: Home furnishing forms a significant chunk of Shahi's exports; vertically integrated group; ISO 9001 & SA 8000 accreditations; uses Intentia Fashion solutions
Social Initiatives: On-site daycare; paid maternity leave (80 percent to 90 percent of employees are female); HR policies developed using Kurt Salmon Associates' training procedures; follows CSR principles; provides on-site, free medical care
Profile of Gokaldas Exports Inc., a leading supplier in the south
Based in: Bangalore (now Bengaluru), State of Karnataka. Headquarters and a majority of its 43 factories are located here
Turnover: $198 million for fiscal 2007, down about 20 percent due to slow retail sales in the U.S; primarily supplies export markets, but also has select domestic retail clients
Capacity: 2.5 million garments/ month; more than 40,000 employees
Products: Men's, women's and children's wear: jackets, blazers, pullovers, tops, casual pants, chinos, sportswear, activewear, swimwear and denim apparel
U.S. Customers: Derives 50 percent of its business from U.S. retailers such as GAP, Nike, Abercrombie & Fitch, JCPenney and Wal-Mart
Management: Founded and managed by the Hinduja family; public company; listed on the Mumbai & National Stock Exchanges, symbol: GOKL; international private equity firm Blackstone Group acquired 70 percent stake in 2007, which gives Gokaldas access to the firm's worldwide customer base
Awards: Several from Nike for 99 percent on-time delivery and on-site development, numerous awards from Indian agencies for achieving highest category export volumes
Other facts: ISO 9001 2000 certified; vertically integrated, from fabric to trim, elastics and packaging
Retail operations: The Wearhouse, high profile stores in some southern cities
Social Initiatives: Offers medical dispensaries with free consultation and treatment for employees and their families; fully equipped ambulances on call 24/7
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