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US and European markets dominate the global textile trade, accounting for 64% of clothing and 39% of the textile market. With the dismantling of quotas, global textile trade is expected to grow (as per McKinsey estimates) to US$ 650 bn by 2010 (3-year CAGR of 10%). However, as against expectations, in the post-quota regime, the resurgence in exports to the now unregulated markets took off rather slowly.
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India's overall market share at 5.7% in April 2008 was at an all-time high, while that of China's has declined over the past couple of months. Also, India's average realization per metre has improved in recent months.
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Post quota (FY05 – FY08) India has witnessed the third highest CAGR (9%) in apparel exports to the US after Indonesia (21%) and Vietnam (17%), while China lags behind (7%).
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India 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. However, India's inflexible labor laws have been a hindrance to investments in this segment. Unlike in home textiles, garment capacities are highly fragmented and leading Indian textile companies have been slow to ramp up their apparel capacities, despite strong order flows from overseas buyers who are trying to diversify out of China.
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Several Indian textile companies have formed alliances with their global counterparts, particularly those with strong front-end capabilities, in a bid to access global markets, tap technological know-how, design skills and branding and retailing ability. The alliances have been struck in most cases by way of JVs or stake acquisition. Tie-up with overseas companies will help them move up the value chain and focus on the more lucrative branding and retailing business.
Overseas alliances...
| Indian company |
Overseas entity |
Profile of overseas entity |
Nature of alliance |
| Raymond |
UCO NV, Belgium |
Market leader in high-end denim in Europe |
JV (50:50) |
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Gruppo Zambaiti, Italy |
Amongst Italy's top 3 high fashion cotton textile companies |
JV (50:50) |
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Lanificio Fedora, Italy |
Largest producer of carded wollen fabrics in the world |
JV (50:50) |
| Arvind Mills |
VF Corporation |
VF Corp owns popular denim and apparel brands including |
JV (40% stake of Arvind) |
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Lee, Wrangler, Vanity Fair, Nautica, JanSports and Kipling |
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| Welspun India |
Christy, UK |
UK's largest towel brand |
Acquisition (85% stake) |
| Alok Industries |
Teviz, Portugal |
Manufacturer of high end shirting fabric |
JV |
Source: Company, Equitymaster research
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| Supply |
The supply of denim has nearly doubled in the last 15 months. Most new capacities in the apparel and home textile segments are not operating at full capacities.
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| Demand |
High for premium and branded products due to increasing per capita disposable income.
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| Barriers to entry |
Superior technology, skilled and unskilled labour, distribution network, access to global customers
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| Bargaining power of suppliers |
Because of over supply in the unorganised market like that of denim, suppliers have little bargaining power. However, premium products and branded players continue to garner higher margins.
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| Bargaining power of customers |
Domestic customers - Low for premium and branded product segments.
Global customers- High due to presence of alternate low cost sourcing destinations
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| Competition |
High. Very fragmented industry. Competition from other low cost producing nations is likely to intensify. |
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In FY08, the rupee’s appreciation against the US dollar and 35% rise in cotton prices impacted the export of textiles from India and also its profitability. To mitigate the impact of the negative factors, Indian textiles companies took recourse to measures such as replacing US dollar denominated export orders with other currencies, increasing revenue from value-added products, and diversifying into other emerging export markets.
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The global textile industry also faced the brunt of economic slowdown in FY08, wherein, the US textiles and clothing imports declined by 3.8% YoY due to lower offtake by US retailers. US’ total textiles imports from China dipped 5.4% while imports from India registered a reasonable 4.6% growth. Notably, China has been seeing slowdown in exports since the past few months due the appreciation of its currency, reduction in fiscal benefits, tighter environment controls and increasing labour costs.
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Total denim capacity in India has nearly doubled in FY08, resulting in a prolonged slump in the domestic market. Most new entrants (largely catering to the unorganised market) are incapable of producing export-quality denim and have resorted to dumping their produce in the domestic market resulting in further drop in prices in FY08. Dependence on exports for vending a large part of turnover has cost the Indian textile companies foreign exchange losses due to the rupee appreciation.
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The Budget proposed allocations of funds to the scheme for Integrated Textiles Parks that will facilitate setting up of dedicated textile hubs.
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Most large textile companies in India, realising the growth potential in domestic retailing, have drawn up aggressive strategies to expand their footprint in the domestic market. These include companies like Welspun and Himatsingka, which were traditionally export-oriented, as also Raymond, which has been the pioneer in domestic textile retailing.
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Although home textile companies have recently been aggressive on the capacity expansion front, realisations have remained stable. But as new capacities come on-stream and utilisation levels pick up, this is unlikely to continue. This is because although India continues to feature amongst the lowest cost producers for the US and EU markets, competitors like Pakistan and Turkey are cannibalising its market share. Moreover, with the possibility of slowdown in the western economies looming large, a slowdown in demand cannot be ruled out.
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With retailers like Wal-Mart, JC Penney and GAP planning to substantially increase their outsourcing from India and FDI in single brand retailing making its way into the country, the opportunities for domestic apparel exporters are immense. As per the Government of India targets, while India's textile export is poised to grow from US$ 13 bn (3.3% of world textile trade) to US$ 50 bn (8.9%) by FY10, at a CAGR of 21%, its share in apparel and garment exports are set to double and triple respectively until FY10. However, oversupply led pricing pressures and forex losses continue to mar the long-term earnings visibility of the textile companies.
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India and China are currently competing in the same categories (premium segment) of apparels and home textiles and given India’s established presence in the high end segment, India could gain significant market share in US apparel imports. However, the ongoing economic slowdown in the US could result in lower orders from US retailers that, in turn, may result in lower capacity utilisation and impact profitability of textile companies in India.
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