chapter ii industry overview

8/10/2019 Chapter II Industry Overview

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Industry Overview

Section A: Textiles Industry

IntroductionThe Indian textiles industry plays an important role in the countrys economic growth. The industry is important in terms

of output, foreign exchange earnings and employment. It contributes around 14% to industrial production, 4% to GDP and

17% to the countrys export earnings. One of the key trends seen in the liberalised post-quota period is that India emerged

a major sourcing destination for new players. With growing interest in the Indian textiles and clothing sector, a number

of buyers opened their sourcing/liaison oces in India. The recent couple of years were challenging for the Indian textilesindustry as a result of the global economic slowdown. Back home, the industry faced challenges of strong demand side

pressures due to inationary trends and volatility in commodity prices.

Size and structure of the industryThe Indian textile industry is fragmented, with only a few large players and numerous small and medium-size companies.

The industrys size is estimated at US$ 55 bn with 64% companies catering to domestic demand. The textiles industry

provides direct employment to more than 35 mn people and indirect employment to 47 mn. In addition, the industry

generates signicant employment through forward and backward linkages, both in traditional (production of coon and

other natural bres) and modern activities (textile design, etc). In fact, the textiles industry is the second-largest employment

generator aer agriculture.

The clothing sector is the nal stage of the textiles value chain, with maximum value addition at this level. It is a low-

investment and high labour-intensive industry; an investment of `0.1 mn creates 6 to 8 jobs. The industry employs around

5 mn workers, of which, around 2.5 mn are in the export sector. The clothing industry consists mainly of knied and woven

garment segments. This industry is fragmented and is predominantly in the small scale sector.

Apparel clusters in India

The apparel industry is concentrated mainly in eight clusters: Tirupur, Ludhiana, Bengaluru, Delhi/Noida/Gurgaon, Mumbai, Kolkata,

Jaipur and Indore. While Tirupur, Ludhiana and Kolkata are major centres for knitwear, Bengaluru, Delhi/Noida/Gurgaon, Mumbai,

Jaipur and Indore are major hubs for woven garments.

Industry structureThe textiles sector in India comprises both organised and unorganised segments. More than 70 textile and clothing clusters

account for about 80% of total production in the country. There are 39 power loom clusters in the country. Major states

with a number of clusters are Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka, Kerala and Uar Pradesh. Thetextiles industry is extremely diversied with hand-spun and hand-woven sectors at one end and the capital-intensive,

sophisticated mill sector at the other. The de-centralised power loom/hosiery and kniing sectors form the largest section

of the textiles industry.

Major sub-sectors of the textiles sector are organised coon/man-made bre textiles mills, man-made bre/lament yarn,

wool and woolen textiles, sericulture and silk textiles, handlooms, handicras, jute and jute textiles and textiles exports.

Chapter II


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Exhibit 2.1: Textile industry value chain

Source: D&B Research

Table 2.1: SWOT analysis of the Indian Textile industry

Strengths Opportunities

Various types of raw materials are available in abundance Government initiatives to encourage exports and upgrade

technology Low cost of labour Strong presence across the entire value chain, from bre to

garments

Favourable demographics in the domestic market; increasing youngpopulation coupled with rising income levels

Emergence of retail Industry as a whole and development of variousmalls provide huge opportunities for the apparel segments

Opportunities in product diversication (for e.g, Technical Textiles) Increasing working female population with higher propensity to spend

compared with home keepers Change in consumption paern, including rising demand for high-

quality premium fabrics and development of various products caterto global needs

Replacement of the Multi Fibre Agreement (MFA) and integration of thetextile industry resulting in huge opportunities for exports. Moreover,gradual development in the technical side of the industry provides an

opportunity

Weaknesses Threats

Low coon yield per hectare, high nancing cost and lackof adequate technology

High dependence on EU and US for exports Highly fragmented industry with large number of small-

size and technologically-outdated plants, lacking benetsof economies of scale

Infrastructure bolenecks for handling huge volumes

Lack of trained manpower and low labour productivity dueto lack of technological development

Increased, cost-based competition from other countries (Bangladesh,Vietnam, and Sri Lanka)

Pricing pressures due to removal of US and EU quotas on imports fromChina

Fluctuations in the demand in exports due to the elimination of quotaregime

Higher borrowing cost which aects the protability of the small and

medium rms Rising input costs


Growth in cloth production accelerated in FY10Between FY03 and FY11, Indias cloth production recorded year-on-year growth in each of the years, barring FY03 and

FY09. Aer the 2% decline in production in FY09, cloth production grew 9.8% to 60,333 mn sq metres during FY10.


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Chart 2.1: Trend in cloth production

*ProvisionalSource: Oce of the textile commissioner

Composition of cloth productionThe composition of cloth production has remained more or less unchanged during the past decade. The average share of

coon in total cloth production was around 47.4% during FY02-FY11. Average share for non-coon cloth was 37.8% during

this period. During FY11, production of coon cloth grew 7.9% to 31,201 mn sq mtrs. On the other hand, production of

non-coon cloth declined 5.2% to 21,663 mn sq mtrs.

Chart 2.2: Composition of cloth production (mn sq mtrs)

Source: Oce of the textile commissioner

Exports scenarioTextile exports play an important role in overall exports from India. The Indian textiles and clothing industry is one of the

largest contributors to the countrys export. Textile exports constitute about 12% of Indias total export. Indias share in the

world textile and clothing market, although small, is rising steadily. Indias share in the global textile and apparel markets

is 4% and 2.8% respectively. The export basket of the Indian textiles industry consists of a wide range of items: readymade

garments, coon textiles, handloom textiles, man-made bre textiles, wool and woollen goods, silk, jute and handicras,

including carpets.


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Basic facts: Indian textiles and clothing (T&C) exports

Indias share in global T&C trade: 4% in textiles and 2.8% in clothing

Indias rank in world trade: 7th in textiles and 6th in clothing

Share in the countrys total exports basket: 12%

Readymade garments share: nearly 50% of total textile exports

Indias textiles products are exported to over 100 countries Two-third of Indias textiles are exported to the US and EU

Other major export destinations include Canada, UAE, Japan, Saudi Arabia, Republic of Korea, Bangladesh and Turkey.

Source: Ministry of Textiles

Indias textile exportsIndias textile exports declined in FY09 mainly due to fall in demand owing to the global slowdown. However, during

FY10, exports recovered and recorded a marginal increase of 0.52%. Nonetheless, exports of textiles increased to US$ 10.9

bn during FY11 marking a remarkable growth of 19.3% compared with FY10.

Chart 2.3: Exports of Textiles (US$ bn)

Source: DGCI&S

Chart 2.4: Composition of textile exports FY11 (%)

Source: Oce of the textile commissioner


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USA and EU account for about two-third of Indias textiles exports. The other export destinations include Canada, UAE,

Japan, Saudi Arabia, Republic of Korea, Bangladesh, and Turkey. Although India exports textiles to more than 100 countries,

they are heavily skewed in terms of export destinations. The top 10 destinations for Indias readymade garments exports

account for nearly 80% of Indias total readymade garments exports. Even among the leading 10 export markets, the US

accounts for the largest chunk; readymade garments exports from India to the US had the largest share of 25% during

FY11.

The Middle East, particularly UAE, is another important destination for Indias readymade garment exports. UAEs share

in total RMG exports from India had halved from 10% in FY01 to around 5% by FY06. Nevertheless, since FY07, there has

been a reversal in trend; UAEs share recovered to 9.6% in FY11.Chart 2.5: Major destinations for Indias readymade garments exports* (%)

*For FY11; up to FebruarySource: DGCI&S

Chart 2.6: Top-10 destinations for Indias readymade garment exports* (US$ mn)

*For FY11; up to FebruarySource: DGCI&S

Major government policies/initiatives

Post liberalisation, Government of India (GoI) has undertaken several key initiatives to boost the industrys growth. It hasremoved barriers that hindered growth and expansion. Some major policies include:


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National Textile Policy - 2000In 2000, GoI announced the National Textile Policy 2000, which replaced the previous Textile Policy of 1985. One of the

main objectives of the new policy is to enable the textile industry to aain and sustain a preeminent global standing in

manufacture and export of clothing.

Some other key objectives of the policy are:- Equipping the industry to withstand pressures of import penetration and maintaining dominant presence in the

domestic market

- Liberalising controls and regulations so that dierent segments of textile industry are able to perform in a greater

competitive environment

- Developing a strong multi-bre base with thrust on product upgrade and diversication

- Sustaining and strengthening the traditional knowledge, skills and capabilities of the weavers and crasmen.

De-reservation of the garments sectorPrior to the National Textile Policy 2000, Indian garment sector was reserved for the SSI sector; large enterprises could

manufacture apparels, provided they met the export obligation of minimum 50% of output. This policy acted as an

impediment to growth by preventing capacity expansion and technological upgradation of garment manufacturing units.

To improve competitiveness of garment manufacturers, the Textile Policy 2000 removed this restriction and de-reserved

garments, hosiery and knitwear from the SSI sector.

Foreign Direct Investment 100% FDI is allowed in the textiles sector under the automatic route; this encourages international

textile companies to set up base in India. The chart below depicts inow of FDI into the Indian textiles industry:

Chart 2.7: Inow of FDI into the textiles sector (Rs bn)

*Up to October 2011Source: Ministry of Textiles

Technology Upgradation Fund Scheme (TUFS):TUFS was initially commissioned in April 1999 for ve years to facilitate

modernisation and upgradation of the textile industry. It is a agship programme of Ministry of Textiles and has acted

as a catalyst in aracting investments into the textiles sector. Under this scheme, GoI provides credit to manufacturers in

the organised and unorganised sector at reduced rates. It provides capital subsidy of 10% and interest subsidy of 5% on

installation of machinery for manufacture of technical textiles, garmenting machinery and processing machinery under

TUFS. The scheme has now been extended up to March 31, 2012.


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Chart 2.8: Share of major textile sectors in TUFS (%)

Source: Ministry of Textiles

Table 2.2: Progress under TUFS - Garment manufacturing

Received

No. of applicationsProject cost

(`bn)Amount of loanrequired (`bn)

Non-SSI 560 85.57 39.52SSI 1,433 16.42 9.47

Sanctioned

No. of applicationsProject cost

(`bn) Amount (`bn)

Non-SSI 549 84 32.8

SSI 1,433 16.44 9.25

Disbursed

No. of applications Amount

(`bn)

Non-SSI 546 29.73

SSI 1404 7.81

Note: Provisional; April 1, 1999 to June 30, 2010Source: Oce of the textile commissioner

Scheme for Integrated Textile Parks (SITP):This scheme has been implemented to facilitate seing up of textile units with

appropriate support infrastructure. The total project cost (including land, infrastructure, buildings and common facilities,factory building for production and installed plant and machinery) is funded through a mix of equity/grants - from the

State Industrial Development Corporation, Industry and Project Management Consultant and Loan from banks/nancial

institutions. GoIs support under the scheme is via grant or equity, limited to 40% of the project cost, subject to a ceiling of

`400 mn.

The way forwardThe Ministry of Textiles targets growth of 16% per annum to US$ 115 bn for the Indian textiles and clothing industry

by end of the Eleventh Five Year Plan period; it also intends to secure a share of 7% in global textiles and clothing trade.

Achievement of this target would also translate into the industry having a potential to employ 45 mn people by 2012. Going

forward, the domestic readymade garments industry is expected to be driven by a buoyant economy, increasing purchasing

power and increase in retail activity.


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The Indian textiles and clothing industry is of signicant importance to domestic economic growth. The vision statement

for the textiles industry for the Eleventh Five Year Plan (2007-12) envisages India securing 7% share in global textiles trade

by 2012. Notwithstanding the bright prospects, on the export front, the industry faces certain critical constraints: lack of

proper infrastructure, high power and transaction cost, incidence of state level cess and duties, lack of state-of-the-art

technology.

On the export front, to reduce over-dependence on the EU and US markets, thrust should be on tapping new markets such

as Japan, South Asia, Australia, Latin America, and South Africa to promote exports.

To ensure sustained growth and expansion of the Indian textile industry, it is necessary to maintain healthy export growth

momentum, increase production and productivity in coon yarn, enhance value addition in garmenting and apparel

sectors, promote the rich heritage of handlooms and handicras, institutional strengthening in the jute sector, and enhance

acreages under mulberry production and safeguard employment opportunities. More concerted eorts need to be taken to

bridge the skill gap in the textiles industry.

Exhibit 2.2: Future growth drivers of readymade garments


India is still a relatively small but growing player in the global apparel market. With recovery in the world economy and

anticipated increase in demand, particularly in the emerging economies, prospects for growth of the Indian readymade

garments industry and the overall textiles industry seem bright.

Section B: Auto Component Industry

The Indian auto component industry is one of the few sectors that have a distinct global competitive advantage in terms of

cost and quality. It is also one among the fastest growing industries in India. The Indian auto component industry gradually

transformed from a local supplier to a global auto parts supplier to major global automobile companies. Indias cost-

competitiveness in raw material and labour and its established manufacturing base is a compelling araction for global

Original Equipment Manufacturers (OEMs) to outsource components from India.

Industry Structure

The Indian auto component industry grew robustly at 19.9% CAGR over FY05-FY11 and reached`1368 bn in FY11. Theremarkable growth can be aributed to government initiatives and incentives, additional subsidies, formation of various

clusters, gradual increase in the per capita income as well as disposable income giving a boost to the demand of automobile

industry and in turn auto component industry. Moreover, innovative marketing strategies and increase in competition due

to entry of various foreign players have further helped to drive the improvement in end products. Economic liberalisation,

coupled with technological, cost and manpower advantages, has made India one of the prime business destinations for many


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global automotive players. Indian auto components manufacturers can be broadly divided into organised and unorganised

players. The organised sector accounts for three fourth of total production. The forte of the organised sector is high, value-

added precision engineering products, a large unorganised sector characterises the lower value-added segments.

Chart 2.9: Size of Indian auto component industry

Source: Automotive Component Manufacturers Association of India (ACMA)

Industry Classication

The Indian auto component industry can be classied into various product range of which eight components contributemajorly to the industry. Engine parts contributed remarkably 31% towards the auto component industry in FY11 followed

by drive transmission and steering component manufacturing. Electrical parts contributed only 9%, lowest in the Indian

auto component industry.

Chart 2.10: Classication of Indian auto component industry

Source: Annual Report FY11, ACMA

The Indian auto component industry is categorised based on their class and size of their location as Tier I, Tier II and Tier

III rms. Tier I rms mostly include large rms. Tier II comprises medium-sized companies and the smaller, single-auto

component manufacturing rms, mostly unorganised players, form Tier III.

The facilities provided and technology used in manufacturing varies across the three tiers. Tier I is referred to as an

advanced region and most OEMs operate here. They are equipped with high-end technology on par with global standards.

Further, most companies have high-end research and development centers to carry out new innovation. On the other hand

Tier II and III regions have less access to the latest technology and they generally use traditional technology and methods

to manufacture various components.


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Exibit 2.3: Location wise categorization of Indian auto component industry

Source: D&B research

Table 2.3: Auto components: Regional clusters

Cluster Cities

Western Cluster Pune, Aurangabad, Nashik (Maharashtra)

Southern Cluster Chennai & Coimbatore (Tamil Nadu); Bengaluru (Karnataka)

Central Cluster Pithampur, Dewas, Indore (Madhya Pradesh)

NCR Cluster Faridabad & Gurgaon (Haryana); Alwar, Bhiwadi, Khuskhera & Chopanki (Rajasthan)

Eastern Cluster Jamshedpur & Guptamani near Kharagpur; Singur (West Bengal)


Table 2.4: Auto component clusters in India

State Number

Andhra Pradesh 1Delhi 1

Gujarat 5

Haryana 3

Jharkhand 1

Karnataka 2

Maharashtra 5

Madhya Pradesh 1

Punjab 4

Tamil Nadu 1


Demand DriversDemand for auto components directly relates to demand for automobiles; hence, demand drivers for automobiles indirectly

inuence those for auto components. Factors that inuence original equipment demand for auto components dier from

those that inuence replacement demand for components. The key demand drivers are listed below:

Demand drivers for OEMs:

Economic growth

Infrastructure development

Easy availability of nance and sales promotion oers

Inadequate public transport

Frei ht rates.


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Demand drivers for the replacement market:

Automobiles

Rising penetration of personal vehicles

Vehicle life

Use of automobiles.

Auto components

Growing market for used vehicles

Overloading of vehicles

Deteriorating road infrastructure

Upgradation of emission standards.

Supply DynamicsRaw materials constitute a major cost component in the auto components industry, accounting for ~60% of total expenses,

followed by labour charges with ~10%.Indian auto components manufacturers have been focusing on R&D, innovation,

design and engineering to meet global quality standards and emerge as full-service providers to OEMs. Notwithstanding

the slowdown in the global economy in recent years, the Indian auto components industry continues to aract investments

and the industry continues to add new capacities.

Investments in the industry increased from US$ 3.10 bn in FY04 to US$ 9 bn in FY10, growing at 19.40% CAGR. Investments

are estimated to have increased to US$ 12 bn in FY11. Major foreign companies have been investing in the domestic industry

through joint ventures and partnerships or seing up their own production plants. Domestic component players are also

investing heavily in the industry to reap benets of long-term growth prospects.

Chart 2.11: Auto components industry: Investments snapshot

*EstimatedSource: ACMA

Exports ScenarioExports constitute 15% of the Indian auto components industrys total turnover. Exports of auto components from India

grew from US$ 1.69 bn in FY05 to US$ 5 bn by FY11at 19.80% CAGR. Exports were at in FY10 at US$ 3.80 bn primarily due

to slow recovery in developed countries. However, they once again bounced back in FY11, registering sharp growth of 32%.

During FY11, global OEMs/tier-I manufacturers accounted for 80% share in the Indian auto component industrys exports

and global aermarkets accounted for the rest. Europe accounted for nearly 37% of Indias exports and continues to be oneof the major export destinations, followed by Asia.


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Chart 2.12: Auto components: Composition of export destinations (%)

Source: ACMA

Table 2.5: SWOT analysis of the Indian Textile industry

Strengths Opportunities

Comparatively lower cost of operations Beer quality control Beer access to updated technology Easy availability of raw materials and other resources

Easy availability of industrial parks with state-of-art technology andmany incentives from government

Beer regulatory policies

May serve as sourcing hub for global automobile majors Signicant export opportunities may be realised through diversication of

export basket Implementation of Value-Added-Tax (VAT) in FY2004 will negate the cascading

impact of prices

Weaknesses Threats

Low level of research and development capabilities Very high competition Exposed to cyclical downturns in the automotive industry High dependency on global majors for technology High rate of interest for working capital and also taxation issues

Presence of a large counterfeit components market Pressure on prices from OEMs continues Imports pose price based competition in the replacement market Marginalisation of smaller players Comparative technology dierence with reference to other countries


Issues and ChallengesThe auto components industry is in a robust growth phase. However, the industry faces certain challenges to growth that

include:

Technological capability not enough to match global standards

Surging raw material prices puing pressure on prot margin

Slowdown in global economy aecting exports

Players losing bargaining power with larger OEMs

Increasing rivalry among players with numerous small rms targeting the same customer segments

FTAs signed with other developing countries increasing bulk imports of cheaper auto components.

Way ForwardGoing forward, the Indian auto components industry is well poised to achieve strong growth owing to rising domestic

demand in the OEM market and expanding replacement market. The export market for auto components is likely to see

strong traction once the global market stabilises and economic uncertainty diminishes. According to the Auto Components

Manufacturers Association (ACMA), the Indian auto components industry is likely to grow to US$ 110bn by 2020 with

the domestic market share of ~US$ 80 bn. The share of the auto components industry in the countrys GDP is likely to

increase to 3.60% by 2020, up from 2.10% in FY10. Given good long term demand prospects in the domestic market andwith India emerging as a favoured low-cost sourcing destination, auto component manufacturers are likely to invest in

increasing production capacities and technological capabilities. Further, companies would continue to diversify their

product portfolio to de-risk their businesses. However, competition is expected to increase and prices of raw material are

likely to follow an upward trend. This is expected to exert pressure on the industrys prot margins. In such a scenario, cost

control programmes would assume greater signicance for the industry players, both big and small.

chapter ii industry overview

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