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Indiantextileindustry:Porteranalysis...
One of the worst hit sectors during the skyrocketing interest rate scenario in the late 90s and early
2000s, the debtladen Indian textile industry has spun many turnaround stories since then. Aided by
lower interest rates, restructuring packages from financial institutions and the recent dismantle of
quotas, the sector is today well poised to capture growth opportunities. In 2005, the sector contributed
20% to industrial production, 9% to excise collections, 18% of employment in industrial sector, nearly
20%tothecountry'stotalexportearningsand4%totheGDP.Thetextilesectoremploysnearly35m
peopleandisthesecondhighestemployerinthecountry.Infact,itisestimatedthatoneoutofeverysix
households in the country directly or indirectly depend on this sector. Here we analyse the sector's
dynamicsthroughPorter'sfivefactormodel.

Bargainingpowerofcustomers(demandscenario)
Globaltextile&clothingindustryiscurrentlypeggedataroundUS$440bn.USandEuropeanmarkets
dominate the global textile trade accounting for 64% of clothing and 39% of textile market. With the
dismantlingofquotas,globaltextiletradeisexpectedtogrow(asperMcKinseyestimates)toUS$650
bnby2010(5yearCAGRof10%).AlthoughChinaislikelytobecomethe'supplierofchoice',otherlow
costproducerslikeIndiawouldalsobenefitastheoverseasimporterswouldtrytomitigatetheirriskof
sourcingfromonlyonecountry.ThetwofoldincreaseinglobaltextiletradeisalsolikelytodriveIndia's
exportsgrowth.India'stextileexport(atUS$15bnin2005)isexpectedtogrowtoUS$40bn,capturing
amarketshareofcloseto8%by2010.India,inparticular,islikelytobenefitfromtherisingdemandin
the home textiles and apparels segment, wherein it has competitive edge against its neighbour.
Nonetheless,arapidslowdowninthedenimcycleposesriskstofabricplayers.

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Bargainingpowerofsuppliers(supplyscenario)
Indiaisthethirdlargestproducerofcottonintheworld
after China and US and has the largest area under
cultivation. Cotton, a key raw material in the textile
and garment industry, accounts for about 30% of the
fabriccostand13%ofthegarmentcost.Indiahasan
abundant supply of locally grown long staple cotton,
which lends it a cost advantage in the home textile
and apparels segments. Other countries, like China
and Pakistan, have relatively lower supply of locally

grownlongstaplecotton.Moreover,lowcottonpricesduetoabumpercottoncropwouldenableIndiato
loweritsproductioncostandsustainpricingpressure.Further,effortsonimprovingtheyieldperhectare
would ensure higher productivity and production, thereby providing the muchneeded security of raw
materialsupplytotextileproducers.
India also enjoys a significant lead in terms of labour cost per hour (US$ 0.6 in 2004), over developed
countrieslikeUS(US$15.1)andnewlyindustrialisedeconomieslikeHongKong(US$5.1),Taiwan(US$
7.1),SouthKorea(US$5.7)andChina(US$0.9).Also,Indiaisrichintraditionalworkersadeptatvalue
addingtasks,whichcouldgiveIndiancompaniessignificantmarginadvantage.
Threatofnewentrants
Inthequotafreeregime,capacityexpansionisthenameofthegameinthetextilesector.Resultantly,
smaller players who cannot venture into the global markets are flooding the domestic markets with
excesssupply,thusweakeningthepricingscenario.Beitdenim(ArvindMills),hometextiles(Welspun
and Alok Industries) or branded apparels (Raymond), new capex and consolidation with international
playersisalsonotlikelytosafeguardmarginsforthelargerplayers,unlesstheycantapasignificantpie
oftheoverseasmarkets.
Threatofsubstitutes
LowcostproducingcountrieslikePakistanandBangladesh(labourcost50%cheaper)arealsoposinga
threattoIndia'sexportsdemand.Infact,playerslikeArvindMillshavealreadystartedfeelingthepinch
as overseas buyers have started shifting to 'alternative sources', thus impacting their incremental
volumeofftakes.
Competitiverivalry
India's logistic disadvantage due to its geographical location can give it a major thumbsdown in global
trade. The country is distant from major markets as compared to its global competitors like Mexico,
Turkey and China, which are located in relatively close vicinity to major global markets of US, Europe
and Japan. As a result, high cost of shipments and longer leadtime coupled with lack of infrastructure
facilitymayprovetobemajorhindrances.
Thefragmentedstructureoftheindustryhasalsostoodinthewayofachievingtrueintegrationbetween
thevariouslinksinthesupplychain.Thesectorhasoneofthelongestandmostcomplexsupplychains
in the world, which the larger players are trying to correct by integrating their operations and improving
efficiencylevels.
Textiles being a fairly regulated sector till the recent past (quota regime), another indispensable leg of
the above analysis is government regulations. Technology Upgradation Fund Scheme (TUFS) was
launchedinFY99foraperiodoffiveyears(laterextendeduptoFY07)topromotetheupgradationofthe
textileandjuteindustry.Theschemeaimedatprovidingloanstothesectoratinternationallycomparable
ratesofinterest(5%lowerthanthedomesticinterestrates),whichenabledtheplayerstoupgradetheir
technologyatlowercostofcapital.Establishmentof'ApparelExportParks'andfiscalincentivesinthe
recent budgets also indicate the government's resolve to aid the sector's growth and international
competitiveness.
Asonecancomprehendfromtheaboveanalysis,thepotentialforthesector'sgrowthareample,butthe
trick lies in competing effectively against rivals. Consolidation of the industry and delivery of better
quality at effective rates and minimum lead time would certainly help the players surmount all
competitivepressures.
EquitymasterAgoraResearchPrivateLimited.Allrightsreserved.
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