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Hail the new textile
maharaja
By Siddharth
Srivastava
NEW
DELHI - Beginning this year, the world has
moved from a four-decade paradigm that
limited the developing countries' textile exports
to advanced nations, unleashing trade worth US$300
billion and opening rich Western markets to
such countries as India. While this shift will be at the cost of
jobs, mainly in the United States and the European
Union, it will also see the two biggest Asian powers
- India and China - slugging it out in
the international market for garments and textiles.
India will benefit from the lifting of quotas
right away while China will be able to access
the same markets only two years hence. To
India's further advantage, with George W Bush
retaining the US presidency, fears that textile
outsourcing could turn into a political hot potato
have subsided.
Textiles
and garments are major export items for India,
raking in $14 billion last year (compared with $10
billion in software). Now the sector is likely to
witness a complete change. On January 1,
the 10-year-old Agreement on Textile and Clothing
came to an end as per World Trade Organization
(WTO) norms. This marks the beginning of a new regime
in which quotas that determined how much
countries could sell to each other will no longer
exist. Until now, low-cost countries such as India, China,
Pakistan and Indonesia could not increase their
exports to lucrative markets such as the US and
the EU because of the quotas.
India
is looking at a major step-up in exports.
India's commerce minister, Kamal Nath, recently said
he expects 50% growth in exports to the freed US
and EU markets in the very first year.
Textile Minister Shankarsinh Vaghela expects
India's apparel exports to double in the next two
years. According to estimates by industry consultants
KSA Technopak, Indian textile exports could jump
from the current $14 billion to $50 billion by
2010. High-cost destinations such as Mexico,
the Caribbean and Central American countries, apart
from neighbors such as Sri Lanka and Bangladesh, are likely
to lose out. The potential of the sector is also
evident from the expected growth of the global
textile trade, which is estimated to increase from
$400 billion to $700 billion by 2010. The Indian
government's new textile policy has set a target
of textile and apparel exports of $50 billion by
2010, which in terms of world share could mean a
rise of 2 percentage points to 5.6%. Incidentally,
India's much-touted information technology sector
accounts for only 0.5% of world share.
India has several advantages vis-a-vis
other countries, with only China enjoying similar
conditions and lower costs. There is vertical
integration of the complete production process -
from cotton growing to in-betweens such as yarn,
fabrics and garments. India is the third-largest
producer of cotton, with the highest area under
cotton cultivation in the world. It is also the
second-largest textile producer. Given its cheap
labor and skilled manpower, no other country, with
the exception of China, enjoys the competitive
advantages that India does.
A
recent study by Indian industry body PHDCCI says
the country could increase its share to the US
textiles market to 15%, nearly four times the 2002 level of
4%. In the EU's garments market, India's share
could rise to 10-13% from the current 6-9%. The
study says that India has an edge over China
and Southeast Asia in terms of labor costs in
textiles and clothing. As a proportion of total
cost, labor accounts for only 6% in India, compared with 10%
in China, 19% in Mexico, 22% in Thailand, 29%
in Turkey, 51% in South Korea and 69% in Germany.
Only Indonesia has a lower labor cost - 5%.
India enjoys a capital-cost advantage too, with the
proportion of capital costs to gross output being
6.7% in textile and 7.8% in garment making, while
those in China are 12.2% and 12%.
The US
International Trade Commission report also sees
India as a major alternative source to China.
"Retailers and apparel suppliers acknowledged that
India is likely to remain competitive after quota
removal because of its large, relatively low-cost
labor force, a large domestic supply of fabrics
and the industry's ability to manufacture a wide
range of products," the report says. There are
also indications that several buyers from the US
and the EU are keen to develop India as an
alternative source to China in order to prevent
the growth of a monopolist in the market. As quota
restrictions will be applicable to China until 2008
because of its late entry into the WTO, analysts
believe that the gains of the quota-free regime
will mostly accrue to India.
There
is already significant activity in preparation of the new
regime, with several US firms pitching for
new business. Wal-Mart, JCPenney Co, Target,
Federated Group, Russell Corp and Sears Roebuck are among
the major US retail chains and apparel companies
that are entering into new deals to step
up outsourcing of textiles from India. According to
a report in Business Today, during the three-day
KSA Technopak annual summit in Delhi last
year, Wal-Mart placed orders worth $500 million, JCPenney $300
million and French retail giant Carrefour
$100 million. Executives from these companies have
been flying into India looking for new suppliers
to sign big contracts with. JCPenney's president (purchase)
visited India recently and held discussions with
key apparel-makers, including Aditya Birla
group company Madura Garments. Reports suggest that JCPenney
plans to source $700 million to $800 million
worth of apparels from India over the next few
years. The three biggest retailers - Wal-Mart, JCPenney and
Target - have already set up operations in India.
The impact on the US textile
industry could be significant. According to a study by
the American Textile Manufacturing
Institute in Washington, more than 630,000 textile jobs
could be lost in the US and 1,300 plants could shut
down as manufacturing shifts to low-cost
destinations. The study predicts that US textile mills will
lose billions of dollars in yarn and fabric orders.
The two largest home-textile companies in the US -
Pillowtex (shedding 6,500 jobs in North Carolina,
the largest mass layoff last year) and Westpoint
Stevans have closed up shop and filed for
bankruptcy, resulting in a substantial flight of
manufacturing capacity to India.
Indian textile
companies, on their part, have embarked on major
capacity expansion plans to meet the increase
in demand. All textile majors, including Raymond,
Zodiac, Welspun, Arvind and even some medium
and small companies, are expanding capacities.
Arvind Mills has doubled its garment capacity
at Bangalore. Raymond, one of India's largest
fabric makers, is setting up a suit and
trouser plant in Bangalore. Zodiac Clothing has
recently expanded its shirt manufacturing capacity
from 5 million to 6 million shirts per annum.
OrientCraft and Creative Garments are building up
substantial additional capacities.
So far,
India has been focused more on low-value fabric
exports than high-value clothing exports because
of quota restrictions and government policies. The
key lies in moving up the value chain by
increasing garment exports, removing technological
obsolescence and improving quality. It is expected
that the removal of quotas will provide the
necessary fillip to building scale and upgrading
resources and productivity.
However, a lot will
depend on the fallout in the United States. A couple of
years ago when cheap steel imports rocked the
country, it culminated in the controversial SEC
301 anti-dumping duty. If textiles turn into a
political issue, there is the likelihood of
non-quantitative barriers. Unlike the software
industry, India's textile sector is largely
disorganized and may be open to attacks over its
lack of minimum working conditions, wages, child
labor and environmental concerns. But if matters
are handled delicately, it is quite likely that
after software, textiles will be the next big
story with billion-dollar deals the order of the
day.
Siddharth Srivastava is a
New Delhi-based journalist.
(Copyright
2005 Asia Times Online Ltd. All rights reserved.
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