By
Gaurav Doshi
Introduction
The Multi-Fiber Arrangement (MFA) has governed
international trade in textiles and clothing since 1974. The MFA
enabled developed nations, mainly the USA, European Union and Canada to
restrict imports from developing countries through a system of quotas.
The
Agreement on Textiles and Clothing (ATC) to abolish MFA quotas marked a
significant turnaround in the global textile trade. The ATC mandated
progressive phase out of import quotas established under MFA, and the
integration of textiles and clothing into the multilateral trading
system before January 2005.
The Agreement on Textiles and Clothing
ATC
is a transitory regime between the MFA and the integration of trading
in textiles and clothing in the multilateral trading system. The ATC
provided for a stage-wise integration process to be completed within a
period of ten years (1995-2004), divided into four stages starting with
the implementation of the agreement in 1995. The product groups from
which products were to be integrated at each stage of the integration
included (i) tops and yarns; (ii) fabrics; (iii) made-up textile
products; and (iv) clothing.
The ATC mandated that importing
countries must integrate a specified minimum portion of their textile
and garment exports based on total volume of trade in 1990, at the start
of each phase of integration. In the first stage, each country was
required to integrate 16 percent of the total volume of imports of 1990,
followed by a further 17 percent at the end of first three year and
another 18 percent at the end of third stage. The fourth stage would see
the final integration of the remaining 49 percent of trade.
Global Trade in Textile and Clothing
World
trade in textiles and clothing amounted to US $ 385 billion in 2003, of
which textiles accounted for 43 percent (US $ 169 bn) and the remaining
57 percent (US $ 226 bn) for clothing. Developed countries accounted
for little over one-third of world exports in textiles and clothing. The
shares of developed countries in textiles and clothing trade were
estimated to be 47 percent (US $ 79 bn) and 29 percent, (US $ 61 bn)
respectively.
Import Trends in USA
In 1990, restrained or
MFA countries contributed as much as 87 percent (US $ 29.3 bn) of total
US textile and clothing imports, whereas Caribbean Basin Initiative
(CBI), North American Free Trade Area (NAFTA), Africa Growth and
Opportunity Act (AGOA) and ANDEAN countries together contributed 13
percent (US $ 4.4 bn). Thereafter, there has been a decline in exports
by restrained countries; the share of preferential regions more than
doubled to reach 30 percent (US $ 26.9 bn) of total imports by USA.
The
composition of imports of clothing and textiles by USA in 2003 was 80
percent (US $ 71 bn) and 20 percent (US $ 18 bn), respectively. Asia was
the principal sourcing region for imports of both textiles and clothing
by USA. Latin American region stood at second position with a share of
12 percent (US $ 2.2 bn) and 26 percent (US $ 18.5 bn), respectively,
for textiles and clothing imports, by USA. In most of the quota products
imported by USA, India was one of the leading suppliers of readymade
garments in USA. Though China is a biggest competitor, the unit prices
of China for most of these product groups were high and thus provide
opportunities for Indian business.
Import Trends in EU
EU
overtook USA as the world's largest market for textiles and clothing.
Intra-EU trade accounted for about 40 percent (US $ 40 bn) of total
clothing imports and 62 percent (US $ 32.5 bn) of total textile imports
by EU. Asia dominates EU market in both clothing and textiles, with 30
percent (US $ 30 bn) and 17 percent (US $ 8 bn) share, respectively.
Central and East European countries hold a market share of 11 percent
(US $ 11.3 bn) in clothing and 7.5 percent (US $ 4 bn) in textiles
imports of EU.
As regards preferential suppliers, the growth of
trade between EU and Mediterranean countries, especially Egypt and
Turkey, was highest in 2003. As regards individual countries, China
accounted for little over 5 percent (US $ 2.8 bn) of EU's imports of
textiles and over 12 percent (US $ 12.4 bn) of clothing imports.
In
the EU market also, India is a leading supplier for many of the textile
products. It is estimated that Turkey would emerge as a biggest
competitor for both India and China. However, with regard to unit
prices, India appears to be lower than both Turkey and China in many of
the categories.
Import Trends in Canada
Amongst the leading
suppliers of textiles and clothing to Canada, USA had the highest share
of over 31 percent (US $ 8.4 bn), followed by China (21% - US $ 1.8 bn)
and EU (8% - US $ 0.6 bn). India was ranked at fourth position and was
ahead of other exporters like Mexico, Bangladesh and Turkey, with a
market share of 5.2 percent (US $ 0.45 bn).
Potential Gains
It
may be noted that clothing sector would offer higher gains than the
textile sector, in the post MFA regime. Countries like Mexico, CBI
countries, many of the African countries emerged as exporters of
readymade garments without having much of textile base, utilizing the
preferential tariff arrangement under the quota regime. Besides,
countries like Bangladesh, Sri Lanka, and Cambodia emerged as garment
exporters due to cost factors, in addition to the quota benefits.
It
may be said that countries like China, USA, India, Pakistan, Uzbekistan
and Turkey have resource based advantages in cotton; China, India,
Vietnam and Brazil have resource based advantages in silk; Australia,
China, New Zealand and India have resource based advantages in wool;
China, India, Indonesia, Taiwan, Turkey, USA, Korea and few CIS
countries have resource based advantages in manmade fibers. In addition,
China, India, Pakistan, USA, Indonesia has capacity based advantages in
the textile spinning and weaving.
China is cost competitive with
regard to manufacture of textured yarn, knitted yarn fabric and woven
textured fabric. Brazil is cost competitive with regard to manufacture
of woven ring yarn. India is cost competitive with regard to manufacture
of ring-yarn, O-E yarn, woven O-E yarn fabric, knitted ring yarn fabric
and knitted O-E yarn fabric. According to Werner Management
Consultants, USA, the hourly wage costs in textile industry is very high
for many of the developed countries. Even in developing economies like
Argentina, Brazil, Mexico, Turkey and Mauritius, the hourly wage is
higher as compared to India, China, Pakistan and Indonesia.
From
the above analysis, it may be concluded that China, India, Pakistan,
Taiwan, Hong Kong, Brazil, Indonesia, Turkey and Egypt would emerge as
winners in the post quota regime. The market losers in the short term
(1-2 years) would include CBI countries, many of the sub-Saharan African
countries, Asian countries like Bangladesh and Sri Lanka.
The
market losers in the long term (by 2014) would include high cost
producers, like EU, USA, Canada, Mexico, Japan and many east Asian
countries. The determinants of increase / decrease in market share in
the medium term would however depend upon the cost, quality and timely
Review of Indian Textiles and Clothing Industry The textiles and
garments industry is one of the largest and most prominent sectors of
Indian economy, in terms of output, foreign exchange earnings and
employment generation. Indian textile industry is multi-fiber based,
using delivery. In the long run, there are possibilities of contraction
in intra-EU trade in textile and garments, reduction of market share of
Turkey in EU and market share of Mexico and Canada in USA, and thus
provide more opportunities for developing countries like India.
It
is estimated that in the short term, both China and India would gain
additional market share proportionate to their current market share. In
the medium term, however, India and China would have a cumulative market
share of 50 percent, in both textiles and garment imports by USA. It is
estimated that India would have a market share of 13.5 percent in
textiles and 8 percent in garments in the USA market. With regard to EU,
it is estimated that the benefits are mainly in the garments sector,
with China taking a major share of 30 percent and India gaining a market
share of 8 percent. The potential gain in the textile sector is limited
in the EU market considering the proposed further enlargement of EU. It
is estimated that India would have a market share of 8 percent in EU
textiles market as against the China's market share of 12 percent.
Review of Indian textiles and Clothing Industry
The
textiles and garments industry is one of the largest and most prominent
sectors of Indian economy, in terms of output, foreign exchange
earnings and employment generation. Indian textile industry is
multi-fiber based, using cotton, jute, wool, silk and mane made and
synthetic fibers. In the spinning segment, India has an installed
capacity of around 40 million spindles (23% of world), 0.5 million
rotors (6% of world). In the weaving segment, India is equipped with
1.80 million shuttle looms (45% of world), 0.02 million shuttle less
looms (3% of world) and 3.90 million handlooms (85% of world).
The
organised mill (spinning) sector recorded a significant growth during
the last decade, with the number of spinning mills increasing from 873
to 1564 by end March 2004. The organised sector accounts for production
of almost all of spun yarn, but only around 4 percent of total fabric
production. In other words, there are little over 200 composite mills in
India leaving the production of fabric and processing to the
decentralised small weaving and processing firms. The Indian apparel
sector is estimated to have over 25000 domestic manufacturers, 48000
fabricators and around 4000 manufacturer-exporters. Cotton apparel
accounts for the majority of Indian apparel exports.
Textiles and Garments Exports from India
The
share of textiles and garments exports in India's total exports in the
year 2003-04 stood at about 20 percent, amounting to US $ 12.5 billion.
The quota countries, USA, EU and Canada accounted for nearly 70 percent
of India's garments exports and 44 percent of India's textile exports.
Amongst non-quota countries, UAE is the largest market for Indian
textiles and garments; UAE accounted for 7 percent of India's total
textile exports and 10 percent of India's garments exports.
In
terms of products, cotton yarn, fabrics and made-ups are the leading
export items in the textile category. In the clothing category, the
major item of exports was cotton readymade garments and accessories.
However, in terms of share in total imports by EU and USA from India,
these products hold relatively lesser share than products made of other
fibers, thus showing the restrain in this category.
Critical Factors that Need Attention
Though
India is one of the major producers of cotton yarn and fabric, the
productivity of cotton as measured by yield has been found to be lower
than many countries. The level of productivity in China, Turkey and
Brazil is over 1 tonne / ha., while in India it is only about 0.3 tonne /
ha. In the manmade fiber sector, India is ranked at fifth position in
terms of capacity. However, the capacity and technology infusion in this
sector need to be further enhanced in view of the changing fiber
consumption in the world. It may be mentioned that the share of cotton
in world fiber demand declined from around 50 percent (14.7 mn tons) in
1982 to around 38 percent (20.12 mn tons) in 2003, while the share of
manmade fiber has increased from 44 percent (13.10 mn tons) to around 60
percent (31.76 mn tons) over the same period.
Apart from low cost
labour, other factors that are having impact on final consumer cost are
relative interest cost, power tariff, structural anomalies and
productivity level (affected by technological obsolescence). A study by
International Textile Manufacturers Federation revealed high power costs
in India as compared to other countries like Brazil, China, Italy,
Korea, Turkey and USA. Percentage share of power in total cost of
production in spinning, weaving and knitting of ring and O-E yarn for
India ranged from 10 percent to 17 percent, which is also higher than
that of countries like Brazil, Korea and China. Percentage share of
capital cost in total production cost in India was also higher ranging
from 20 percent to 29 percent as compared to a range of 12 to 26 percent
in China.
In India, very few exporters have gone in for
integrated production facility. It is noted that countries that would
emerge as globally competitive would have significantly consolidated
supply chain. For instance, competitor countries like Korea, China,
Turkey, Pakistan and Mexico have a consolidated supply chain. In
contrast, apart from spinning, the rest of the activities like weaving,
processing, made-ups and garmenting are all found to be fragmented in
India. Besides, the level of technology in the Indian weaving sector is
low compared to other countries of the world. The share of shuttle less
looms to total loomage in India is 1.8% as compared to Indonesia (10%),
Bangladesh (10%), Sri Lanka (12%), China (14%) and Mexico (29%).
The
supply chain in this industry is not only highly fragmented but is
beset with bottlenecks that could very well slow down the growth of this
sector. As a result the average delivery lead times (from procurement
to fabrication and shipment of garments) still takes about 45-60 days.
With international lead delivery times coming down to 30-35 days, India
needs to cut down the production cycle time substantially to stay in the
market. Besides, erratic supply of power and water, availability of
adequate road connectivity, inadequacies in port facilities and other
export infrastructure have been adversely affecting the competitiveness
of Indian textiles sector.
Conclusions
It is believed the
quota regime has frozen the market share, providing export opportunities
even for high cost producers. Thus, in the free trade regime, the
pattern of imports in the quota countries would undergo changes. The
issues that would govern the market share in the post quota regime would
eventually be productivity, raw material base, quality, cost of inputs,
including labour, design skills and operation of economies of scale.
It
is believed that quotas, by limiting the supply of goods have kept
export prices artificially high. Thus, it is estimated that there would
be price war in the post quota regime, with competitive price cuts. The
price and quantity effects would depend on the efficiency in production
process, supply chain management and the price elasticity of demand.
Due
to the expected fall in prices, developing countries with high
production cost have little choice but to compete head-on with the
biggest low cost suppliers. In this process, it is presumed that there
would be better resource reallocation in these economies.
It is
assumed that quota restrictions would continue beyond 2005 in various
forms. It is also widely recognized that removal of quota may not
directly provide easy and unrestricted access to developed country
markets. There would be non-tariff barriers as well. Standards related
to health, safety, environment, quality of work life and child labour
would gain further momentum in international trade in textiles and
clothing.
Strategies and Recommendations
Cost
competitiveness in Indian garments sector has been restrained by limited
scale operations, obsolete technology and reservation under SSI
policies. While retaining its traditional cost advantages of home grown
cotton and low cost labour, India needs to sharpen its competitive edge
by lowering the cost of operations through efficient use of production
inputs and scale operations. Besides, there are needs for
rationalization of charges, levies related to usage of export logistics
to remain cost competitive.
As fallout to the quota regime, there
would be consolidation of production and restriction on supplying
countries, which would necessarily mean improved scale operations.
Indian players should also integrate to achieve operating leverage and
demonstrate high bargaining power.
It is reported that Chinese
textile firms have already invested heavily to expand and grab huge
market share in the quota free world. In India, organised players in
this sector would require huge investments to remain competitive in the
quota free world. These players need to expand and integrate vertically
to achieve scale operations and introduce new technologies. It is
estimated that the industry would require Rs. 1.5 trillion (US $ 35
billion) new capital investment in the next ten years (by 2014) to lap
the potential export opportunities of US $ 70 billion. It is estimated
that USA and EU together would offer a market of US $ 42 billion for
Indian textiles and garments in 2014.
Technology would play a lead
role in the weaving and processing, which would improve quality and
productivity levels. Innovations would also be happening in this sector,
as many developed countries would innovate new generation machineries
that are likely to have low manual interface and power cost. Indian
textile industry should also turn into high technology mode to reap the
benefits of scale operations and quality. Foreign investments coupled
with foreign technology transfer would help the industry to turn into
high-tech mode.
Internationally, trading in textile and garment
sector is concentrated in the hands of large retail firms. Majority of
them are looking for few vendors with bulk orders and hence opting for
vertically integrated companies. Thus, there is need for integrating the
operations in India also, from spinning to garment making, to gain
their attention. This would also bring down the turn around time and
improve quality. Indian players should also improve upon their soft
skills, viz., design capabilities, textile technology, management and
negotiating skills.
Garment manufacturing business is order
driven. It would be difficult for the players to keep the workforce full
time, even in lean season. This calls for changes in contract labour
laws.
Logistics and supply chain would also play a crucial role as
timely delivery would be an important requirement for success in
international trade. The logistics and supply chain management of Indian
textile firms are relatively weak and needs improvement and efficiency.
China has already created a world class export infrastructure. Given
the volume of projections for exports by India, it may be necessary to
create additional export infrastructure, especially investment for
modernization of ports. In addition, India needs to invest for creating
brand equity, supply chain management and apparel industry education.
To
sum up, the ability of Indian textile industry to take advantage of
quota phase-out would depend upon their ability to enhance overall
competitiveness through exploitation of economies of scale in
manufacturing and supply chain. The need of the hour therefore is to
evolve a well chalked out strategy, aimed at improvement in the levels
of productivity and efficiency, quality control, faster product
innovation, quick response to changes in consumer preferences and the
ability to move up in the value chain by building brand names and
acquiring channels of distribution so as to outweigh the advantages of
competitors in the long run.
