CHENNAI, India — The dawn of the post-quota era has proven a mixed blessing for Indian manufacturers.
Many report an uptick in orders, but at the same time say their customers are demanding price cuts of 10 percent to 20 percent.
Government officials and industry executives are projecting their industry will post major increases in the coming years, now that its apparel and textile exports to the 147 other members of the World Trade Organization will no longer be restrained by quotas. India is the second most populous nation in the world after China, and it’s also repeatedly cited as being expected to have the world’s second-largest apparel manufacturing industry after China, once the dust settles.
Officially, India is aiming at a target of $50 billion in annual textile and apparel exports by 2010, about four times the current figure of $14 billion. Permal Udani, president of the Clothing Manufacturers Association of India, predicted that India’s overall apparel exports would grow 20 percent in the fiscal year that ends in March 2006, quadruple the growth rate of recent years.
Many Indian executives share that bullish assessment.
“I have known for several years that our company business will grow substantially once the quotas go away,” said Sudhir Dhingra, chairman and managing director of Orient Craft, one of the country’s largest apparel exporters. “The limiting factor for us was not lack of business or the ability to produce, but the high cost of quota categories such as cotton knitted shirts and cotton pants.”
Dhingra said Orient Craft’s exports would pass $150 million in the company’s fiscal year that ends March 31, up from $117 million the previous year.
“This increase can be attributed purely to the quota-free world today,” he added.
Shekhar Agarwal, vice chairman and managing director of Rajasthan Spinning & Weaving Mills Ltd., said he’s already seen an uptick in orders from buyers in the U.S. and Europe.
“Volumes are definitely about 25 percent more than previous years, and I do see a long-term commitment from buyers to source garments from India,” Agarwal said.
Some executives contended it’s too early to get a real read on how the end of quotas will influence demand for Indian goods.
“There is an impression that a lot of orders are flowing in, but most factories are still working on pre-January orders,” said S. Ramalingam, senior general manager for overseas operations at buying agency SNQS International. “We will know the exact position in April.”
At the moment, India’s short-term growth prospects are a bit clearer than China’s. When that country joined the WTO in 2001, it agreed to submit to a system of safeguard quotas that could limit its apparel exports for the next three years. India, a founding member of the 11-year-old group, faces no such restraints.
While they’re expecting significant growth in the number of units they’ll be shipping, most executives interviewed said they’re facing pressure from buyers to cut their selling prices.
“We were expecting pressure on prices,” said Dhingra of OrientCraft. “This has come through every customer we work with, and they are expecting 10 percent to 15 percent reduction in cost of materials.”
Agarwal of Rajasthan Spinning said buyers have been asking his company to cut prices by 15 to 20 percent.
Executives acknowledged that quota prices had been built into their pricing, but said it’s also clear that buyers are using the increased competition of the post-quota environment to push for deeper discounts.
Ramalingam of SNQS International said buyers were coming to India after visiting China and demanding lower prices.
“China is quoting very competitive prices,” he said. “Industry has to learn to cope with price pressures.”
Indian exporters are hoping to make up for lower prices by improving productivity and internal processes. Orient Craft, for instance, has been working to improve efficiencies in its pre-production and production processes for several years, hiring foreign consultants to train its staff. Rajasthan Spinning also is looking to boost its product development services.
A study by McKinsey & Co. found productivity of Indian apparel factories was only 35 percent of the level in the U.S., compared to 55 percent in China.
“India can compete with China if productivity improves,” said SNQS International’s Ramalingam. “Specialization will be the name of the game, and those factories that specialize and have minimum economies of scale will survive.”
India’s manufacturers are ramping up their production capacities to meet the demand for higher volume. Rajasthan Spinning, according to Agarwal, is expanding capacity of its apparel factories from 21,000 pieces a day in October 2004 to 50,000 pieces a day by April. Denim maker Century Textiles & Industries Ltd. is almost doubling the capacity of its plant in central India to 22.9 million yards a year. Orient Craft is in the process of setting up two washing and finishing plants, while Gokuldas Exports is preparing to open its own finishing facilities.
Overall, India’s nine leading companies have invested $550 million in boosting capacity in the past year, according to government figures. Overall, the textile industry has seen investments of $11 billion over the past four years.
A study done by the New Delhi Chamber of Commerce & Industry predicted that, with quotas lifted, India could increase its share of the U.S. textile market to 15 percent from 4 percent. According to U.S. government data, last year India shipped $3.63 billion worth of textiles and apparel to the U.S.
KSA-Technopak, a consulting firm based in New Delhi, said India has the ability to service high-value, niche orders and has better designer resources, while China caters to the mass segment. This is reflected in the average export prices of the two countries, with India’s mean prices hovering around $4 an item while China’s prices range from $3 to $3.50.
Other than the external challenge from China, Indian exporters also face internal challenges. These include rigid labor laws, poor infrastructure and port congestion, high import duties on textiles and high interest rates.
The government is addressing some of these problems. In the federal budget to be announced at the end of February, Finance Minister P. Chidambaram is expected to cut customs and excise duties on textile raw materials to help the synthetic fiber and fabric industry.
“India needs to introduce massive reforms and modernization drive for its textile sector,” said the Associated Chambers of Commerce & Industry, which suggested reform of local markets to attract foreign investment, flexible labor laws and amendments in tax rates.
The government has estimated that India’s textile sector needs a capital investment of 270 billion rupees — $6.18 billion at current exchange rates — to take on global market opportunities.
Both the government and industry are setting up facilities aimed at boosting exports. Last month, Finance Minister Chidambaram opened the country’s first apparel industrial park project in the southern Indian town of Tirupur, known for its knitwear exports. The apparel park brings together many factories in one area so that the government can provide infrastructure facilities easily.
The Apparel Export Promotion Council is setting up a chain of training and design centers to upgrade the technical skills of its workers. The first such center opened in January in Gurgaon, near New Delhi.