An Analysis of Competitiveness of Indian Clothing Export Sector. Using Porter s Model

Transcription

1 An Analysis of Competitiveness of Indian Clothing Export Sector Lalit Mohan Kathuria* The textiles and clothing industry contributes about 14% to the country s industrial output and export earnings and also provides direct employment to about 35 million people. It is expected that by 2010, Indian textiles and clothing industry would generate over 12 million new jobs for semi-skilled and unskilled labor and out of this clothing sector would contribute direct employment opportunities with 4 million jobs. From January 1, 2005, the Multi-Fiber Arrangement (MFA) has been replaced by the Agreement on Textiles and Clothing (ATC), under which the world trade in textiles and clothing has become free without the restriction of quotas. In the post-mfa phase-out era, Indian clothing exporters are likely to face tough competition from countries like China, Bangladesh, Vietnam, and Mexico in the international market. A quota-free market may throw up both challenges and opportunities for clothing exporters from India. Intense price competition in the post-mfa phase-out period has put pressure on the suppliers in all the countries to become internationally competitive due to non-price factors such as market proximity and preferential tariffs. This paper examines some of the general implications of MFA phase-out and undertakes an analysis of competitiveness of Indian clothing export sector with the help of Porter s Diamond Determinants of National Advantage, namely, Factor Conditions, Demand Conditions, Related and Supporting Industries and Local Rivalry. Introduction The textile and clothing industry has an overwhelming presence in the economic life of India. It contributes about 14% to the country s industrial output and export earnings and provides direct employment to about 35 million people (Ministry of Textiles, 2007). A study conducted by Credit Rating Information Services of India Limited (CRISIL) and commissioned by International Conference on Multiphase Flow (ICMF) in 2004 highlighted that the Indian textiles and clothing industry is likely to grow at a much faster pace and would generate over 12 million new jobs for semi-skilled and unskilled labor. Clothing segment, alone, would provide direct employment opportunities with 4 million jobs and another 8 million jobs likely to be generated in the sectors like textiles, cotton and jute farming and other related activities ( * Assistant Professor, Department of Business Management, P A University, Ludhiana, India. lalit_kathuria@yahoo.com An 2008 Analysis The of Icfai Competitiveness University Press. of All Indian Rights Clothing Reserved. Export Sector 39

2 Till January 1, 2005, foreign trade in clothing industry was conducted on the basis of Multi-Fiber Arrangement (MFA). From January 1, 2005, the MFA has been replaced by the Agreement on Textiles and Clothing (ATC). Under ATC, the world trade in textiles and clothing has become totally free (without quotas) to integrate it into the World Trade Organization (WTO) regime. Under the quota regime, India had enjoyed an assured export market for clothing, and the comparative advantage, which India enjoys in labor, cotton availability, etc. remained her underlying strength. With the phase-out of MFA quotas, the clothing exporting countries are competing intensely for market share without the protection of bilateral quota system. Indian clothing exporters are facing tough competition from China, Bangladesh, Pakistan, Mexico, Vietnam, Sri Lanka, etc. in the international market. There has been a sense of optimism in the Indian clothing industry in the post-quota period and it is perceived that India would emerge as one of the major sourcing centers due to its comparative advantage over its competitors on availability of skilled workforce, design expertise, and an integrated supply chain of raw materials like cotton, jute, yarn and fabric. But the statistics (Tables 1 and 2) reveal that other countries like China, Bangladesh and Vietnam are registering much higher growth rates as compared to India. China s share in clothing trade globally increased from 18.2% in 2000 to 30.6% in Bangladesh has been able to increase its export share from 2.1% in 2000 to 2.8% in Similarly, Vietnam managed to garner a share of 1.7% in 2006 as compared to 0.9% in 2000 whereas India has been able to gain marginal growth in its export share as its share in world clothing trade increased from 3.1% in 2000 to only 3.3% in Table 1: Leading Exporters of Clothing in the World Trade, 2006 (in %) Countries China excluding Hong Kong Turkey India Bangladesh Vietnam Romania Pakistan Sri Lanka Source: International Trade Statistics, World Trade Organization, India may not fare too well when its clothing industry is pitched against the best. Despite its inherent comparative advantage, the study of the costs suggests that the Indian textile and clothing industry has a high cost structure, which would come in the way of achieving higher share in the world market. A quota-free market may throw up both challenges and opportunities for clothing exporters from India. In a quota-free international market, some countries will have to withdraw some of their shares because of high and increasing production costs and India would need to quickly cash in on the emerging opportunities. 40 The Icfai University Journal of International Business, Vol. III, No. 4, 2008

3 Table 2: Share of Clothing Exports in Total Merchandise Exports of Selected Economies (in %) Countries Bangladesh Cambodia China excluding Hong Kong Dominican Republic El Salvador India Jordan Mauritius Morocco Pakistan Romania Sri Lanka Turkey Vietnam Source: International Trade Statistics, World Trade Organization, Implications of Multi-Fiber Arrangement Phase-Out Major transformation is set to begin in the world clothing trade, a crucially important industry because, historically, it has always been the starting point on the road to industrialization for developing countries. Following are some of the implications of MFA phase-out on the Indian clothing export industry. Workers Will be Hurt by Job Losses The restructuring of the industry after the removal of quota is likely to lead to job losses for many. Job losses will be severe in countries with economies that are highly dependent on the clothing industry and where there are weak social safety nets and few opportunities for employment in other sectors, e.g., Bangladesh, Cambodia, Sri Lanka, etc. Unless Indian clothing exporters look for new markets or start manufacturing more value-added products, MFA phase-out may spell a disaster for several millions of workers working directly and indirectly in textiles and clothing industry. Concentration of Suppliers and Reduction in Margins World s retail clothing industry is dominated by large enterprises that are specializing by product (e.g., specialized stores selling mostly toys, office supplies, clothes and shoes) and price (e.g., high-volume, low-cost discount chains). Market power has shifted from producers to retailers, and there has been an increasing reliance on offshore production. By 2000, the two top discount retailers, Wal-Mart and Kmart, controlled approximately 25% (by volume) An Analysis of Competitiveness of Indian Clothing Export Sector 41

4 of all apparel sold in the US. By 2010, Wal-Mart alone is projected to hold close to 21% of the US apparel market ( To compete in the new global environment, these retailers are shrinking their supply chains, using fewer preferred manufacturers, offering reduced margins and are adopting stringent standards. Emergence of Non-Tariff Barriers Phase-out of quotas does not mean that regulatory framework governing the trade in clothing is going to get simpler or that there will not be any other barriers to trade. The country s clothing exporters face many non-tariff barriers like labeling of shipment, security parameters, complicated requirements of rules of origin and documentary clearance requirements in global markets, which act as a hidden trade control. To restrict the imports from emerging countries like India and China, buyers are enforcing non-tariff barriers like labor regulations, social compliance, environment legislations and Container Security Initiative (CSI) upon the clothing exporters from developing countries. The French government is planning to impose a tax of 1-2 cents per apparel for recycling of used clothing and this tax will be borne by exporters and domestic suppliers of clothing. Other Measures Affecting Clothing Trade Intense price competition in the post-mfa period has put pressure on the suppliers in all the countries to become internationally competitive due to non-price factors such as market proximity and preferential tariffs. Mexico and Turkey still enjoy the competitive advantage of market proximity to the US and European markets respectively, which provides stiff competition to Asian suppliers like India and China in the world trade. Also, due to many preferential trade agreements like North American Free Trade Agreement (NAFTA), Caribbean Basin Initiative (CBI) and African Growth and Opportunities Act (AGOA), the beneficiary countries have registered a higher growth rate as compared to those countries without any concessions. For example, Mexico, a member of NAFTA managed to increase its share in world clothing exports to 2.0% in 2006 (World Trade Organization, 2007). Competitiveness of the Indian Clothing Export Sector Competitive advantage occurs to any industry through the synergy of many factors. In this paper, an analysis of competitiveness of the Indian clothing export industry has been made with the help of four determinants of Porter s Diamond Framework, namely, Factor Conditions, Demand Conditions, Related and Supporting Industries and Local Rivalry (Figure 1). Factor Conditions India is one of the largest producers of cotton yarn in the world, and there are good resources of fibers like polyester, silk, viscose, and accounts for about 25% of the world trade in cotton yarn ( India has trained manpower in both, management and technical fields. Also, design skills of Indian artisans are well appreciated all over the world. Though India has a comparative advantage in labor cost over some of the developed countries, labor cost in other competing countries is lower than India. Low labor cost is not enough for 42 The Icfai University Journal of International Business, Vol. III, No. 4, 2008

5 Figure 1: Porter s Diamond Determinants of National Advantage Firm Strategy, Structure and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries Source: The Competitive Advantage of Nations, Porter (1990). Table 3: Comparative Labor Cost in Selected Countries (US$/hour) Countries Bangladesh NA 0.16 NA China India Pakistan Sri Lanka NA Source: Moore (1997), Ramaswamy and Gereffi (1998) cited in Vijayabaskar (2002), Gherzi Report (2003). achieving competitive edge since wages occupy only a small percentage in the cost structure of the clothing industry. Table 3 shows comparative labor cost in selected countries and reveals that labor cost in case of Pakistan and Bangladesh is lower than that of India. Also, the Indian clothing export industry has certain disadvantages emanating from low labor productivity due to low technology and modernization levels. India is far behind in labor productivity compared to countries like China, South Korea, Taiwan, etc. For example, in gents shirts, the productivity is lowest at 9.1 pieces per machine per day as compared to China s and Hong Kong s productivity levels of 14.0 and 20.9 respectively. Productivity is lower due to the use of outdated technology. Shuttleless looms, in India, constitute only 0.58% of the installed loom capacity as compared to the world average of 13.39% (Rangarajan, 2005). An Analysis of Competitiveness of Indian Clothing Export Sector 43

6 India s cost of power, steam and interest is higher as compared to other countries in the region. Financial cost (percent of interest rate on long-term loans), in India, is also higher at 13-16% compared to 5.5% in China (Gherzi, 2003). Related and Supporting Industries India has the second largest yarn spinning capacity in the world after China, accounting for roughly 20% of world s spindle capacity, and approximately 35-40% of India s spindles are less than 10 years old (USITC, 2001). Competitive advantage can be achieved through creation of relationships between quality suppliers and clothing industry. India has a complete value chain and the import content is minimum. In India, spinning sector is more modernized than the weaving sector and modernization of weaving sector remained low. Between 1987 and 1996, Indian firms invested in only 8,000 modern shuttleless looms as compared to China s investment in 68,000 shuttleless looms. Over 50% of the world s 3.6 million outdated shuttle looms are in India (Chandra, 1998). India s share of shuttleless looms in total looms is only 0.62% compared to China (9.15%), Pakistan (6.15%) and Indonesia (10.42%) (Gherzi, 2003). Though there is abundant supply of raw materials, India s clothing export industry does not have access to quality fabrics at reasonable prices from the domestic mill sector, which is adversely affecting its global competitiveness (USITC, 2003). Fabrics manufactured in handloom and powerloom sectors are poor in quality because of low technology. Due to lack of state-ofthe-art machinery and technological advancements in the fabric sector, the inherent strengths of the fabric sector have not been able to build a long-lasting favorable position. Poor quality of the fabric and untimely delivery are the major disadvantages due to the use of outdated technology in weaving, processing and finishing sectors. A World Bank study in 1998 says that average investment per machine in an Indian clothing unit was only $250 as compared to $1,500 in China and $1,260 in Thailand (Businessworld, 2003). Demand Conditions With an estimated market size of $8.1 bn, the clothing sector in India is likely to grow to $13-14 bn by 2009 (The Economic Times, 2007). The branded ready-made clothing market is believed to constitute 40% of the total market ( Due to various factors like threat of American recession looming large, competition from China, Vietnam and Bangladesh, rupee appreciation, and rising interest rates, many clothing exporters are planning to enter into domestic clothing market. For example, Orient Craft has already tied up with a leading domestic clothing company. The domestic clothing market is growing at a faster pace due to large young population and increasing disposable household incomes, and apparel exporters need to gain economies of scale by catering to the large domestic market. The Indian clothing manufacturers would be facing the heat of competition from nearby countries like Bangladesh and Sri Lanka which are likely to be allowed to export to India dutyfree 8 million and 6 million pieces of apparel per calendar year under South Asian Free Trade Area (SAFTA) agreement without any restrictions on raw material sourcing (The Economic Times, March 2008). 44 The Icfai University Journal of International Business, Vol. III, No. 4, 2008

7 Domestic Rivalry Porter has insisted upon the importance of existence of capable domestic rivals that strengthen the survival and growth of the industry. Rivalry among a group of domestic competitors creates pressures to improve and innovate. Domestic rivals search for alternative methods for gaining competitive advantages. In India, Tirupur Exporters are undertaking new initiatives like wind power generation to reduce power costs, rain water harvesting, and investing in new apparel parks to remain cost competitive. Over 52 manufacturers have invested Rs. 300 cr in the apparel park and the government is chipping in Rs. 17 cr for infrastructure like roads and water. This apparel park in Tirupur boasts of world-class production facilities. Software major, Microsoft India has trained a group of Tirupur exporters in using IT for improving efficiency. Many clothing exporters in Tirupur have ventured into yarn manufacturing. The government is planning to set up 10 new textile parks on the lines of Tirupur with an investment of Rs. 40 cr for each park. In Ludhiana, an apparel park is being set up with the help of Industry Association, State Government and Central Government. Cluster approach is gaining recognition, but slowly. A consortium in Tirupur has bagged a large order from Sara Lee while another from Ludhiana is buying raw materials, in a cluster approach. Under UNIDO s cluster development program for Ludhiana, a Knitwear Development Group has been formed, which organizes common designer services and training courses and seeks export markets and partners. Many firms benefited from international assistance in design ( If manufacturers show trust towards each other, Tirupur and Ludhiana clusters could become like Treviso, Italy s famous textiles cluster that manufactures clothing for big fashion brands. Conclusion Investment in manufacturing facilities, improvement in productivity levels with the help of benchmarking techniques and modernization will be the key factors for success in the post- MFA scenario. Cost of various inputs need to be reduced and large investment in technology upgradation is required to have a quality and price competitive supply base within India. Industry and government must work together in the interest of improving the export share of clothing industry. Domestic market base needs to be explored so that foreign suppliers will not flood the market with their competitive priced products. Factors like vertical and horizontal integration, effective delivery mechanism, quality, competitive pricing and cluster development will help in gaining sustainable competitive advantage. Only those exporters are likely to be successful who move towards competitive advantage at a faster pace. References 1. Apparel Online (2007), VDMA: Textile Machinery Industry Rebounds with Excellent Sales and Exports in 2006 and 2007 to India and China, July 1-15, p Chandra P (1998), Competing Through Capabilities: Strategies for Global Competitiveness of the Indian Textile Industry, Economic and Political Weekly, Vol. 34, No. 9. An Analysis of Competitiveness of Indian Clothing Export Sector 45

8 3. Gherzi (2003), Sector-Wide Assessment Study to Develop a Blue-Print for the Improvement of the Textile and Apparel Industry in Nigeria, prepared for United Nations Industrial Development Organization (UNIDO) and Federal Ministry of Industry, Nigeria, November. 4. Giuli M (1997), The Competitiveness of the European Textile Industry, Working Paper No. 2-97, South Bank University, London October 29, Knock, Knock Who s Ready? Businessworld, April 28, 2003, pp , New Delhi. 10. Koshy Darlie O (1997), Apparel Exports: Winning Strategies, Prentice Hall of India Private Ltd., New Delhi. 11. Ministry of Textiles (2007), Annual Report , retrieved December 05, 2007, from Nargundkar R (2006), Services Marketing, Tata McGraw-Hill, New Delhi. 13. Porter M (1990), The Competitive Advantage of Nations, The Free Press, New York. 14. Rangarajan K (2005), International Trade in Textiles and Apparel: Post-MFA Challenges and Strategic Consideration for India, Foreign Trade Review, Vol. 39, No. 4, pp United States International Trade Commission (USITC) (2001), India s Textile and Apparel Industry: Growth Potential and Trade and Investment Opportunities (Staff Research Study), Washington. 16. United States International Trade Commission (USITC) (2003), Textiles and Apparel: Assessment of the Competitiveness of Certain Foreign Suppliers to the US Market (Research Study), New York. 17. Vijayabaskar M (2002), Apparel Industry in South Asia: Rags or Riches? (A Study) International Labour Organization, New Delhi. 18. World Trade Organization (2007), International Trade Statistics Yearbook, retrieved December 11, 2007, from _toc_e.htm Reference # 48J The Icfai University Journal of International Business, Vol. III, No. 4, 2008

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