SWOT ANALYSIS INDIAN TEXTILE INDUSTRY2012

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Scope of White PaperThe textile value chain in India is very well integrated and any movement along the chain, even at the crop level impacts the whole cycle. In fact, for the industry, it really doesn’t matter if the cotton prices are high or low, what matters is that it should be stable. If prices suddenly go up or abruptly go down then it affects the industry and disrupts their calculations, stock evaluations and orders in the pipeline. Over the past nearly two years the indecisive policies of the Government has shaken the foundation of the textile industry, yet there are many positive indications that give confidence for growth. This SWOT analysis is the result of in-depth discussions with many industry stalwarts…

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table of content

5• SWOT AnalysisSubsidies for more than 5-10

years is a bad subsidy

Weaving sector dominated by powerloom

Wet processing remains a weaknessSkilled labour migration and commitment

will seriously hamper industry

High power and transaction cost, erode

competitiveness

Spinning of cotton yarn will lead us to

glory MMF segment needs more attention

Support to weaving sector to boost textile

value chain

Declining trends in garment manufacturing

and exports

• Industry View Points 13

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SWOT AnalysisTextile Industry on Course Correction…The Indian textile industry, one of the oldest industries in the country contributes about 14 per cent to industrial production, 4 per centto the country’s Gross Domestic Product (GDP), 17 per cent to the country’s export earnings, while generating employment for over 40 million people, second only to agriculture. Yet, the industry has failed to reach heights, despite industrial optimism… but all is not lost and the Government over the last few years, and particularly in the current budget, has taken steps to strength the textile industry.

Heritage cannot be maintained at the cost of growthOne of the biggest roadblocks for growth of the textile industry isthat even today the Government equates the labour intensive textile industry to be a handicraft industry. Protection of the handloom sector is still a prime concern. Yet, the industry is convinced thatThe Handlooms (Reservation of Articles for Production) Act, 1985,needs to be revisited in view of today’s realities. The Handlooms Act has reserved almost all mass-consumed items to be produced by handlooms since 1985. This reservation continues till date, despite the fact that it would be impossible to clothe a billion people economically by using handlooms.

Over 75 per cent of the goods exported from the Karur region, through the Handloom Export Promotion Council, too, are made on powerloom or even on shuttle-less looms. “The reservation persists in spite of the common knowledge that most mass-consumed items are produced only on powerlooms. When hank yarn was brought under the excise net in 2002, powerloom units, strangely enough, were up in arms against the order, and openly admitted that bulk of the hank yarn was indeed consumed by them,” Says Manikam Ramaswami, CMD, Loyal Textiles.

Social objectives of a country should not be mixed with the manufacturing sector. They are different issues altogether and should have different approaches of being dealt with. The Government has to evaluate whether the policy/action is commercially sustainable,

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if not then both the industry and the handworker will die a natural death. One cannot be the scapegoat for the other to survive. “In view of the fast changing economic and global trade scenario, the unrealistic Act has been curtailing the liberal growth of the weaving and decentralized power looms sector for decades apart making the clothing expensive for the rural India and limiting the standard of living of the handloom weavers,” says Southern India Mills’Association (SIMA) Chief S Dinakaran seeking a new handloom policy.

Subsidies for more than 5-10 years is a bad subsidyWith a skewed view on how to support the industry, the industry has unfortunately become dependent on subsidies. Even if a subsidy has to be given it should be for a limited time period and if the industry does not sustain itself during that period then it is an industry or a company which cannot sustain in the long term. We are a developing economy, a growing country and have to be efficient to compete globally. If there is a need to support with subsidies, there shouldbe a definite plan with clear objectives and goals. Today, because of excessive protectiveness, leading to an inability to sustain themselves a handloom worker earns substantially less as compared to other business. Further, it is no secret that a large portion of the subsidy actually goes to the middleman, rather than the actual weavers.

Weaving sector dominated by powerloomAs there is a preference for small scale industries in manufacturing, so there are concessions available to smaller units and that is an incentive for people to remain small. In the rest of the world people are trying to grow and have incentives to get bigger, in India we are giving incentives the other way round. The same was true for the textile industry, till a few years ago. “One of the most important decisions that has led to major investments in textile over the last8 years is that discrimination based on size, technology and sector has been withdrawn and uniformed policy adopted. This has given confidence to the industry,” says SP Oswal, Chairman, Vardhman Group.

According to latest information there are about 1200 medium to large scale textile mills in India and the share of organized mill

Total cotton production has increased from 2689 mn kg in FY 2001-02 to 5,678mn kg according to provisional figures for FY 2012-13. While exports of cotton constituted only 0.33% of cotton consumption a decade ago, in the running FY theshare of exports is20%. Total cottonexported was 1190 mn kg., while local consumptionfor spinning was4488 mn kg.

COTTON

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fabrics in India is just 4%, while the remaining 96% comes from the unorganized sector, of which about 65% is powerloom, 10-12% is handloom and the balance is decentralized knitting. Because of faulty policies in the past, there are people who operate 20 powerloom units in different names, if they joined them it could be one big unit with latest technology, but they are more viable if they remain small. “The process of consolidation has to start now. The technology upgradation scheme has led to some modernization, but a lot more needs to happen. While the bigger mills will continue to invest, powerloom sectors are less forthcoming,” says DK Nair, Secretary General, Confederation of Indian Textile Industry.

Encouragingly, the technology in the power loom industry is improving, though it is still mostly second-hand machines from Japan and Germany. One original shuttleless loom costs about Rs. 30-35 lakhand with preparatory machines it will go to about Rs. 40 lakh plus investment and one needs at least 10 of them to be competitive, sadly, there are very few powerloom units which can afford that sort of investment, yet as of today, around 85% of garment export from India is based on powerloom and knitted fabric.

Wet processing remains a weaknessThe processing segment has also suffered because of lopsided Government policies in the past. Until 5 years back the Government was giving excise exemption to what was called hand processors while excise was being collected from organized processors, that is why 60% of fabric produced in India even today is produced by hand processors and organized processing in India till date is only about 10-15%, that too mostly with the mills.

Thankfully the Government has stopped the incentives to the hand processors, but now complying with provisions of zero discharge is almost impossible. Getting the best technology for processing is not a problem, the main problem is the environment issue, and it is not only about strict rules, it takes about 2 years to get the permission to set up a processing unit… there is a local pollution board, a state pollution board, a central pollution board, and then there are various court decisions that have to be adhered to. “The only real solutionis to develop processing clusters near the sea shores with marine discharge facility,” says Nair.

Of total fibre exportin 2010-11 of1791.76 mn kg, man-made fibre is 246.88 mn kg, which is 13.78%.The share of cotton is 68.59% at 1229.08 mn kg. At the yarn stage, of total yarn export of 1464.91 tonnes, man-made filament yarn accountsfor 30.41%, while cotton yarn including threads accounts for 47.62%.

SPINNING

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“It is true to a great extent that the processing sector is one of the weakest links in the entire textile value chain. It happened due to the historical past in terms of industrials and fiscal policy which had discriminated against the modern technology driven; volume based processing facilities in the country. However, with the changed fiscal policy regime in the last couple of years, there is a steady growth in the modern textile processing capacity in the country. With financial assistance available under the TUF scheme and capital subsidy forprocessing units in India, the situation has been undergoing a change and processing sector may emerge as a stronger segment of the textile value chain in near future,” says Oswal.

Some suggestions made by the industry on improving the processing sector, while keeping check on environment regulations include- replacing conventional rapid jet dyeing machine with low liquor ratio jet dyeing machine, replacing steam dryer with RF dryer for dyeing yarn, replacing inefficient boilers with coal-fired water tube boiler with bag-filter, replacing ordinary submersible pump with an energy- efficient ones, installing additional fourth effect caustic recoveryplants, using naphtha-based gas turbine with waste heat recovery boiler (cogeneration), monitoring for heat recovery potentials and recovery and reuse of waste water in fabric dyeing.

Skilled labour migration and commitment will seriously hamper industryWhile cheap labour and strong entrepreneurial skills have always been the backbone of the Indian Apparel and Textile Industry today, many in the industry feel that the first and the foremost hindrance to growth today for mill sectors is the crisis situation of availability andcommitment, due to the policies like NREGA which has perpetuated the absenteeism culture of the workforce. The industry stalwarts are pushing to expedite labour law reforms. In the meanwhile availability of skilled workforce is also a concern. “The recent skill development initiatives announced by the Government have been welcomed bythe industry as a step in the right direction,” said Oswal.

High power and transaction cost, erode competitivenessFor an industry that is already facing inherent problems, the continuing shortage of power mostly in south India and hike in power

Of total fabric production in FY 2011-12, 2,432mn sq. metres was produced by mill sector and 58,932 mn sq. metres came from decentralized looms.

In the mill’s sector, of the 2,432 mn sq. metres produced, 1827 mn. sq. metres is in 100% cotton, 535 mn. sq. metres is blended fabricand 70 mn. sq. metres is 100% non cotton fabrics.

Of the total 38,279 mn sq metres of fabric produced by the decentralized powerloom segment, 11,958 mn sq metres is cotton fabric, 6,228 mn sq metres consists of blended fabric and 20,093 mn sq mtrs is of 100% non- cotton fabrics.

FABRIC

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cost in other states is a matter of grave concern. Competitiveness of the industry depends on many factors and there have been demands from big players to introduce power sector reforms to make power available at internationally competitive cost.

Another major concern for the industry is the relatively higher transaction costs compared to other countries with whom India is competing in the export markets. Transaction cost, which includes cost for documentation, customs clearance, port and terminal handling and inland transport and handling cost for exports inIndia stands at US $ 945 per container as compared to US $ 500 per container for China. The factors that led to the relatively highertransaction costs are multiplicity of rules and regulations, inadequate infrastructural facilities and thus higher inland transportation costs and higher port and terminal charges, rule-bound administrativeprocedures, practices, amongst others. Hence in addition to addressing the various other trade policy issues, reduction of transaction costs is another priority area that needs to be addressed.

Spinning of cotton yarn will lead us to gloryThe one segment we are really good at is spinning, because that is the only segment where there was no handloom sector, no excise issue, so proper industrial set-up could be established from the starting. Today, we are the second largest producer of yarn in the world, second only to China. With China decreasing their yarn production due to increasing cost, India is the ideal choice of country to increase yarn production. The Indian industry has 34 million cotton textile spindles for manufacturing cotton yarn which accounts for 70% of India’s textile exports. China has 40 million cotton spindles.

Major expansions are happening in spinning. Interestingly, a major reason for bigger investment in spinning also stems from the fact that it is less labour intensive and technologies for automation in spinning have brought success for many. The target is to cross yarn production of China by 2020.

MMF segment needs more attentionIn man-made fibre, the problem is that we have very few big producers of the yarn – Reliance Industries and Indo Rama in polyester and Grasim in viscose. In fact, in the case of polyester

The percentage share of mill’s sector in total fabric production was 3.96% in FY 2011-12.

FABRIC

The combined installed capacity of the three largest components inthe man-madefibre segment – Viscose staple fibre, polyester staple fibre and polyester filament fibre is 3735.54 mn kg of which production is of 2531.89 mn kg.

Exports of Indian MMF textiles scaled an all-time highof US $ 5,699 mn in 2011-12, as compared to US $ 5,013 mn in 2010-11, registering a year-on-year growth of 14%.

MMF

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around 80% are small producers, that too mostly of filament yarn like those in Surat, which are used to make georgette, voiles, crepe and chiffon fabric, used by exporters for ladies fashion wear. The high-end spun yarn, used in fabric for sportswear and high-end ladies shirts is coming only from the organized mills. There is high excise duty on man-made fibre and if weavers want to import the fibre the customs duty is very high. Interestingly, a substantial portion of our man- made fibre is being exported because of the policy of ‘import parity pricing’(That is when the price charged for a domestically produced good is set equal to the domestic price of an equivalent imported good – thus the world price plus transport cost plus tariff is included). It is ironic that while in cotton India has millions of cotton farmers, nevertheless cotton fibre can be imported at zero duty today, but we have barely 3 producers in man-made fibres, yet import of man-made fibres attracts duties!

This is a very illogical approach because internationally the total man- made fibre composition for garments is 62-63%, while in the case of India, more than 60-65% is cotton, there is a mismatch in what we are producing and what the market is asking for. Availability of blended yarn is also very small, because you need a good percentage of man- made fibres to produce blends. Interestingly, India is in a far better position than China in terms of raw material availability for man-made fibres. China, which is the largest manufacturer of man-made fibresin the world, is highly dependent upon imports for its raw materials requirements. While China accounts for around 62% of global polyester production, its share in global production of MEG is mere 11.4% and in PTA, it is only 26.5%. In the case of India, the share in the global market is 7% and its share in global production of MEG is 4.7% and in PTA, it is 7%.

The installed capacities of man-made fibres are currently adequate in India. However, operating rates have been around 73% on account of depressed demand in recent times. Since more capacities are expected to come up in future, operating rates may fall further. The man-made fibre industry is a capital intensive industry with long gestation period. Hence, addition of capacities without adequate demand would lead to drop in operating margins of the industry, which is already under pressure making it even more difficult

In the three key categories of man- made fibre, 21.61% of production was exported in FY 2011- 12.

MMF

In MMF, fabrics were the largest product category accounting for 41% of total exports, with the Middle East emerging as the largest market, accounting for nearly 25% of textile exports from India, while Asia accounted for 23%.

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for manufacturers to lower the prices and to make any further capacity expansions

Support to weaving sector to boost textile value chainThe top four per cent companies in the mill sector like Raymond, Arvind, and Vardhman do not want to work with garment exporters as exporters expect fabrics similarly priced as the powerloom fabrics, no matter how much superior in quality and design mill fabric may be, which is not possible, so organized mills find exports to be more lucrative. Again there is difference in size, the organized mills are large, and they need large quantities, whereas most of the garment exporters are not largeenough in size… there is a compatibility problem.

But working with the powerloom sector has its own set of problems, especially if someone wants to produce 50,000 pieces and above.If the fabric is sourced from the powerloom industry, it has to be procured from at least 50 different people and most of these small fabric manufacturing factories also have small processingunits, so one can’t get the final fabric from one processor resulting in different shades of the same colour. “To directly address thisproblem the industry has to consolidate and for that incentivizing the ‘small’ should stop. If the industry continues with the same kind of powerloom production, which we currently have, it will lose out in the fabric segment,”says Nair.

Realizing the need to act now as weaving is critical to the textile chain as it produces demand for yarn and also supply for garments, the Government announced major fiscal incentives in the Union Budget 12-13, which included fully exempting automatic shuttle-less looms from basic customs duty of 5% and creation of a powerloom Mega Cluster in Ichalkaranji in Maharashtra with budget allocation of Rs.70 crore.

There are 291 public limited textile and garmentcompanies, of these 50 companies registered lossesin FY 2010-11accounting for17.18%. In FY 2011-12, the number of companies that registered losses increased to 121, accounting for 41.56% of the public limited companies.

Out of 291 Public Ltd. textile and apparel companies, 12 companies have a turnover of over Rs. 2,000 cr. and encouragingly all have seen top line growth, but six of them have registered decline in profits.

PUBLIC LTD. Co.

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Declining trends in garment manufacturing and exportsToday we have a situation, where yarn exports, fabric exports and even home exports are increasing, but garment exports are on the decline, in the five-month period of April-August of FY 2012-13 garment exports from India have declined by 12.16% in comparison to the five-month period a year earlier. It shows that we are losing competitiveness in the garment industry, which is very bad for the textile value chain, as the demand for the entire textile chain has to be provisioned by the final products. If the garment industry loses out, then the yarn and fabric suppliers will have to start looking outside the country.

Even the garment manufacturing industry is facing lot many problems and will continue to do so for the same reason that the Government has chosen not to recognize the sector as an industry till date but pitch it against the handloom sector, not allowing FDI in manufacturing for fear of antagonizing the handloom weavers who still are dying of hunger and secondly keeping it as a small industry, not allowing the benefit of industrialization for thesame reason.

Now that the labour laws are not favouring the industry and minimum wages have skyrocketed as well as the people running the companies have ventured into other alternate industries… it is difficult or impossible to lure them into making new investments, also no new players are entering the field. Look at Bangladesh, Sri Lanka and now Myanmar they are the future of the industry with a more structured form and investments coming from India, Korea, Pakistan and other countries, these countries have really taken off… “Though, Indiahas always threatened to be a ‘Textile Super Power’ and it has the potential, but there is some way to go for it being translated into reality. To achieve the goal, most important is to improve efficiency and productivity – we need to benchmark ourselves against the best in the world,” concludes Sanjay K Jain, Managing Director, TT Ltd.

PUBLIC LTD. Co.

Among the public limited companies in textile 21 areintegrated companies from spinning to garmenting. Of these companies 6 could not grow their top lines in FY 2011-12 and 9 saw decline in profits.

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Industry View Points

“Indian textile industry is one of the largest and most important industries in the Indian economy in terms of output, investment and employment generation. The textile industry has made committed efforts to harness the fundamental strengths which are aptly visible in growing investments. With augmentation of capacities, well integrated production base, investment in state- of-the-art technologies and constant innovation, India is fast emerging as a preferred sourcing destination globally. The manufacturers are simultaneously conscious of the deliverables required for thecustomers in terms of quality, timeliness and sustainable innovations. With growing demand, both in domestic and overseas markets and supportive Government policies, Indian textile sector are sure to take the lead.”

SEL is creating a state-of-the-art Greenfield Mega Integrated Textile Park with an investment of about Rs. 1500 crore. The project will have capacities of 188,160 spindles in ring spinning, 40 mn metres per annum in denim fabric and 8 mn pieces of denim garments per annum.

“According to me the major hindrances for growth of the textile industry is the frequent changes in the Government policy, absenteeism culture of ourworkforce and policies like NREGA, non-availability of machinery suppliers for weaving/knitting/garmenting and lack of any advantageous bilateral/multi-lateral agreement for market access. Also emphasis onbest technology and automation should be there

Neeraj Saluja,MD, SEL

Group Turnover Rs. 2331 CR.

Sanjay K Jain,MD, TT Ltd.

Group Turnover Rs. 502.84 CR.

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as incentives like TUF wouldn’t be for life, and in an inflation-prone economy it’s best to invest in capital so that your depreciation and interest cost is a bigger portion of costs which are free of inflation risks.”

TT Ltd.’s Rs 100 crore spinning expansion project in Gujarat was completed in March taking spindle capacity to over a lakh.

“With textile technocrats taking the reign of the textile industry globally, just on the basis of their techno- commercial competency the textile sector has been fast arriving at taking on a bigger role in the global arena, especially with adoption of hi-tech automations and high productivity levels as attained by Indian manufacturing businesses. It has actually led Indiato become the world leader in which the biggest competitor like China is falling far behind.”The new unit having 51840 ring spindles has been fully commissioned. This addition makes RSWM Ltd, Gulabpura as the biggest manufacturing facility with total 1.68 lacs spindles, all on synthetic yarns at one location.

“Strong measures are needed to increase the presence of Indian textile industry in global textiles. Some ofthe measures that will boost the industry in a big way are – power sector reforms to make power available at internationally competitive cost; enhance availability of skilled manpower; expedite labour law reforms; reduce transaction cost; help the textile exports to enter in new territories with development schemes and focus market schemes – need to improve effectiveness of the Cotton Mission and cotton productivity in the country

Rajeev Jain,COO, RSWM Ltd.

Group Turnover Rs. 2000.15

CR.

SP Oswal,Chairman,Vardhman

TextilesGroup Turnover Rs. 4640.71

CR.

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to be taken to world average level and enter into PTA/ FTA with major importing markets like EU/USA.

We are confident of the future of the industry and will invest Rs. 1,300 crore in the coming year to expand capacity in various segments. In spinning, we already have installed capacity of 35,000 spindles and 5,000 rotors. Now, we are going to setup further 1.50 lakh spindles and 5,000 rotors with an estimated investment of around Rs. 600 crore.

Today, globalization has brought opportunities for Indian textile industry. At the same time it is also exposed to threats, particularly from cheap imported fabrics. Thus, the industry has to fight for its sharein international textile trade. Indian textile industry should not only rely on its strengths, but should also endeavour to remove its weaknesses.“The Textile Industry is a ‘Sunshine industry’ – It’s an industry which has been there; it’s an industry which will be there. However, if the industry continues with the same kind of powerloom production, which we currently have, it will lose out in the fabric segment.”

DK Nair,Director General, CITI

OP Jain,MD, Birla Cotsyn (I) Ltd.

Group TurnoverRs. 98 CR.

Dr MP Agarwal,CMD, Shri Lakshmi Cotsyn

Group Turnover Rs. 1946.54 CR.

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