Driving Forces

India’s textile and apparel sector enjoys good growth prospects, driven by the long-standing traditions
of textile and apparel manufacturing, steady government support, and a rising and increasingly
affluent middle class wishing to spend more on clothing. The latter has facilitated the spread of fast
fashion, as opposed to premium fabrics and brands. India’s textile and apparel sector is well -
positioned to respond to demand for both fast fashion and premium products, alongside a third
emerging niche, namely that of industrial fabrics. Domestic textile and apparel conglomerates invest
in R&D in an effort to develop fabrics with reduced environmental footprint and enhanced
performance features. All this raises hopes that India’s textile and apparel sector will enjoy robust
growth in the future.

External

India’s government recognises the importance of the textile and apparel sector in terms of exports
and employment generation, so it actively adopts policies aimed to boost exports and investment,
bring employment opportunities to underdeveloped regions, and preserve the sector’s cultural
heritage. A major driver for textiles and apparel in the country is India’s rising middle class and ongoing
urbanisation which results in westernised tastes, consumption, and spending. This creates
opportunities both for manufacturing and the penetration of global textile and apparel brands. On the
other hand, China has been losing ground as the world’s top textile producer and market because of a
government incentive shift towards planting less cotton, and rising power and labour costs. 100% FDI
in textile and apparel manufacturing is allowed, and potential investors can set up manufacturing units
in Special Economic Zones (SEZs) and National Investment and Manufacturing Zones (NIMZs) at
subsidized rates.

Internal

The Indian government is very pro-actively supporting the textiles and apparel sector with a liberalised
FDI policy, export and investment incentives, job-creation initiatives, and moves to preserve and
spread traditional textile skills. Increased government efforts to raise the quality of Indian -made
woolen and silk yarn and fabrics help raise the global profile of these products and of India as a quality
wool and silk manufacturer. Since FY2013, India’s textile exports have moved up the value chain, from
yarn to textiles. Organised sector companies are typically large conglomerates developing both their
own brand portfolios and selling international fashion brands in India, which diversifies their business
risk and helps them avoid liquidity problems. An increasing share of them has been working to develop
omni-channel presence in an effort to capture and retain more of India’s increasingly tech-savvy and
aspiring customers. Many manufacturers have been expanding their distribution footprint to tier 2 and
3 cities, thereby facilitating the spread of modern retail in less affluent parts of the country.

Source:
 Restraining Forces

Despite generally enjoying good fundamentals and prospects, India’s textile and
apparel sector is challenged by structural and regulatory issues that hurt its
adaptability to rising global trends and undermine its exports, thereby helping
smaller textile producing countries get ahead. Man-made textiles, the segment the
most likely to attract FDI, is treated less preferentially than cotton both in terms of
export incentives and taxation, which hurts its opportunities to grow. At the same
time, rigid labour laws make it hard for companies to scale down operations if
necessary, while investment incentives are often tied to job creation targets which
may result in liquidity problems.

External

The Indian rupee appreciated against the US dollar in FY2017, which made India’s
textile exports uncompetitive, in addition to attracting cheaper imports from
Bangladesh and China. The dominance of cotton in the yarn and textile production
mix and the rigid labour laws of the country, alongside inconsistencies in the foreign
trade policy, have caused India’s textile and apparel sector to lose ground to smaller
producers like Bangladesh and late entrants like Vietnam. The textile and apparel
sector in the country is largely unorganised, which results in fragmentation,
technological backwardness, and uneven skill development. Cotton yarn and textile
processing requires substantial amounts of fresh water which is scarce in India, thus
making cotton yarn and textile processing – the livelihood of millions of households –
unsustainable in the long term. Environmentally-friendly processing, on the other
hand, requires investment in R&D which is within the reach of organised sector players
only. All of this would mean that the share of unorganised players will gradually shrink,
resulting in social issues India would need to address in the coming decades.

Internal

India’s textile and apparel is dominated by cotton yarn and fabric manufacturing, which is against
the global demand trend for man-made fibre, textiles, and specialty yarn apparel. Cotton
farming is a source of substantial employment in the country, and traditional textile processing
of cotton yarn such as handloom and khadi weaving are part of India’s cultural heritage and
identity. Thus, responding to the global demand for man-made fibre would not be easy for India.
Textile and apparel claim around 13% of India’s exports but manufacturers believe export
incentives post-GST in particular, have been hurting exports rather than stimulating them. This
has made some textile producers establish units in countries with more favourable export duty
policies, such as Ethiopia. India’s most recent textile policy was adopted in 2000 and by 2018 is
considered in need of amendments to respond to current disruptors such as the rise of online
retail, the demands of fast fashion, and the marked shift to man-made fibre demand.

India - Textile Mills - Five Forces Analysis

Five Forces Analysis

The textile mills market will be analyzed taking manufacturers of yarns and fabrics as players. The key buyers will
be taken as apparel and non-apparel manufacturers, and chemical companies that produce resins for extrusion into
synthetic fibers as the key suppliers.

Summary

Figure: Forces driving competition in the textile mills industry in India, 2018

Rivalry within the textiles industry is assessed as strong overall, with a large number of players offering fairly
undifferentiated products.
The textiles industry has attracted significant foreign investment over recent years and is likely to continue to do so.
Buyer power is heavily dependent upon their size: the potential impact on a supplier of the loss of a large buyer is
likely to be substantial. The absence of brand loyalty and low switching costs improves their power, but this is
tempered by the importance the suppliers' goods may have to the product stream of the buyer. The specific nature of
some companies means that they will only have the resources to supply raw materials such as cotton or wool.

Suppliers of this kind have very limited power; those with more power are able to adapt to the changing nature of
the industry. Increasing end user concern over ethical business practices will improve the power of suppliers which
can conform to the latest animal welfare standards. Synthetic fibers are largely supplied by multinational chemical
manufacturers, giving them elevated supplier power. Their size ensures they can keep the number of competitors
low, limiting the choice buyers face, increasing supplier power.

Strong government level support encouraged impressive growth in the Indian industry in 2016. This kind of state-
level support serves to increase the threat of new entrants. However, the market dropped into severe decline in 2017
as the result of a huge tax reform program in the country named the Goods and Services Tax (GST) which
disproportionately hurt the textiles industry. 2018 has seen some recovery from this problem however. Players with
appropriately diversified manufacturing capacity can use several different raw materials, and the degree of
diversification influences the threat of substitutes. If a fiber manufacturer specializes in one industry segment, such
as woolen yarns, then the threat of substitutes is strong. In practice, it is common for textile fiber manufacturers to
offer products in more than one industry segment. This significantly weakens the threat of substitutes in many cases.

With a fragmented industry and a large number of players, rivalry is boosted. Exit barriers are high; it would be
relatively hard to divest specialized assets. With the exception of some niche, specialist fibers and yarns, most
products within each category are only weakly differentiated, strengthening competition.

Buyer Power

Figure: Drivers of buyer power in the textile mills industry in India, 2018

Yarns and fabric products have a wide assortment of uses, the most common of which are for apparel, carpeting,
upholstered furnishings, etc. They may also be used in industrial and scientific processes. Various uses for textiles
lead to copious buyers within the industry.
Additionally, many buyers may rely on the products supplied by players, as these products may be central to buyers'
operations. These factors weaken buyer power somewhat. Buyers can range from small to large multinational
companies with significant financial muscle. Large buyers experience increased buyer power: the loss of a contract
with such a buyer has the potential for a significant negative impact on players' revenues. Smaller buyers do not
enjoy this boost to their power.

There is virtually no brand loyalty in this industry, and switching costs are fairly low. This, coupled with the
commoditized nature of the products (except for some niche materials), means that buyer power is strengthened
considerably.

Buyers will, generally speaking, be sensitive to changes in price, meaning that the profit margins of players are
under pressure. However, the likelihood of buyers backwards integrating is minimal, which reduces buyer power
somewhat.

Overall, buyer power is assessed as moderate.

Supplier Power

Figure: Drivers of supplier power in the textile mills industry in India, 2018

Yarns and fabrics can be made from various raw materials coming from sources as diverse as natural animal,
vegetable and mineral fibers (e.g. wool and hemp) to synthetic cellulose, mineral and polymer fibers (e.g. polyester
and nylon).

Cotton, wool and silk dominate both segments, although other animal hair and synthetic or artificial products are
also used.

The creation of a voluntary standard for animal welfare, Responsible Wool Standard (RWS), developed by the
Textile Exchange was recently launched. It has ambitions to spread globally and was based upon industries across
the world. If it becomes commonly accepted supplier power would rise; given changing consumer attitudes, textile
manufacturers would likely wish to source wool from suppliers complying with the latest welfare standards.
Supplier power is boosted by the relatively small levels of domestic production of wool. India for example imports
just as much wool as it produces.

Suppliers in this industry include chemical companies that produce resins for extrusion into synthetic fibers and
similar inputs. Some of these are multinationals. However, many of these inputs are commodities, and smaller
suppliers can be found. In India, despite many of the important inputs being global commodities, local prices for
cotton or yarn can be cheaper than found in international markets. This is considered to be one of the key reasons
why the market performed well in 2018. This factor does reduce supplier power somewhat, because cheaper input
prices for the players mean they can survive the pressures of international market forces and reduce their reliance on
any one supplier.

Different kinds of fiber require raw materials from radically different industries and therefore act as alternatives to
each other. The specific nature of some companies means that they will only have the resources to supply raw
materials such as cotton or wool. For example, if cotton prices began to rise, a fiber manufacturer may be able to
increase its usage of nylon (provided the company had already invested in suitable equipment); however, it would be
very difficult for cotton growers or traders to defend against this strategy by moving into chemical resin
manufacturing. This weakens supplier power.

Suppliers may employ different supply chain strategies for different products, due to the differentiation of product
demands into functional and innovative products. Responsive supply chain strategy may be used for innovative
products and efficient supply chain strategy for functional products. These two strategies are focused on the
downstream supply chain, aiming at shortening the time to research the industry and reduce stock levels.

Overall, supplier power is assessed as moderate.

New Entrants

Figure: Factors influencing the likelihood of new entrants in the textile mills industry in India, 2018

Textile manufacture is based on the conversion of different types of fiber into yarn, then woven or non-woven
fabrics. These are then fabricated into apparel or other products. Potential new entrants are required to invest in
specialist production equipment, such as fiber extruders, carders and ring spinners. Additionally, reasonably large
factory facilities and a trained workforce must be maintained. Such factors significantly increase entry costs. New
entrants do not have to compete with strong existing brand recognition; brand strength is of little significance in this
B2B industry. However, new entrants have to compete with large players who benefit from significant economies of
scale.

Entry to this industry may be easier than in other countries. India possesses a large regional industry share in Asia-
Pacific, and its large size and large potential for growth is attractive to new entrants. The Indian industry is therefore
seeing government support via the Integrated Skill Development Scheme which aims to train approximately
2,675,000 people by 2017 within the textile industry - at present, only a minority of the Indian workforce has
formally recognized skills. The Indian government in July 2016 also announced an INR60bn ($0.9bn) package, that
would see the creation of a million new jobs in the industry. Strong government level support has encouraged
impressive growth in the Indian industry in 2016. This kind of state level support serves to increase the threat of new
entrants. This increased threat is further boosted by an unforeseen effect of tax reform in the country. Recent
changes to tax laws in 2017 and 2018, although intended to make tariffs fair between domestic and foreign
producers, have in effect led to higher tax rates for domestic producers and this has allowed new entrants good
opportunities.

Despite this, there has been reduced competition from China. Wages in China have been consistently rising in recent
years, and Indian state level officials have explicitly stated that they wish to take advantage of this situation and
strongly support their textile sector. This increases the threat of new entrants.

This positive scenario has helped to attract significant direct foreign investment into the textile industry. Trident
Group, one of the leading manufacturers and exporters in India, has entered into a partnership with French firm
Lagardere Active Group, to launch a premium range of home textiles. Other similar investments have been made
into India. Improving modernization should reduce costs and improve production, further encouraging new entrants.

However, potential new entrants may be put off by regulations, which refer to technical, labor and environmental
standards. Adhering to such strict regulations is costly, with regards to both money and time. Worldwide, the World
Trade Organization (WTO) outlines particular rules for international commerce. Specifically, the WTO legislation
regarding textiles is known as the Agreement on Textiles and Clothing (ATC). A contraction in the historic period
also serves to strongly reduce the threat of new entrants.

Overall, the threat of new entrants is assessed as moderate.

Threat of substitutes
Figure: Factors influencing the threat of substitutes in the textile mills industry in India, 2018

There are limited options for fiber substitution. This is particularly true of the synthetic fibers which have been
developed to satisfy a need. For example, nylon is dominant in women's hosiery, some areas of lingerie and carpets,
whilst polyester is dominant in the heavy work wear and 'minimum care' apparel industries.

Players with appropriately diversified manufacturing capacity can use several different raw materials, and the degree
of diversification influences the threat of substitutes. If a fiber manufacturer specializes in one industry segment,
such as woolen yarns, then the threat of substitutes is strong. This is because if woolen yarn manufacturers try to
increase the price too much, yarn buyers (fabric manufacturers) can reduce their usage of wool and increase
production of cotton or synthetic-based textiles - subject, of course, to satisfying demand from their own buyers. A
wool fiber specialist cannot readily respond to this, as the production techniques for wool, cotton, and synthetic
fibers are quite different, requiring investment in different equipment.

In practice, it is common for textile fiber manufacturers to offer products in more than one industry segment. This
significantly weakens the threat of substitutes in many cases.

The benefits of substitutes to buyers are not always clear-cut. For example, buyers with substantial activities in
denim manufacturing cannot readily substitute cotton yarns with a different material, as their own product has to be
made mainly of cotton. Overall, the threat of substitutes is assessed as moderate.

Degree of rivalry
Figure: Drivers of degree of rivalry in the textile mills industry in India, 2018

The Indian textile mills industry remains fragmented, and the large number of players present tends to boost rivalry.
It is also very capital-intensive: factory premises and specialized equipment are required. Exit barriers are high, as it
would be relatively hard to divest specialized assets. Advances in technology mean the industry is highly automated,
with a reduced need for a highly-skilled workforce. Additionally, production capacity can be increased readily when
needed. This defuses rivalry somewhat.

Companies are similar in respect to their production; however, some may specialize more within natural fibers than
synthetic, and vice-versa. In many cases, the fiber and yarn production business is highly important to a company's
operations, meaning rivalry is intense, as a company may not have any other operations to fall back on. With the
exception of some niche, specialist fibers and yarns, most products within each category are only weakly
differentiated, strengthening competition. Given small margins, there is significant difficulty in undertaking swift
expansion in production, which would possibly require new manufacturing premises. Manufacturers must also abide
by regulations which determine allowable manufacturing processes and disposal of waste products.

A contraction in the size of the Indian industry overall in the historic period serves to increase the degree of rivalry,
as players have to compete more intensely in order to generate the same level of revenue as they did in the past.
However strong state level support for the Indian textile sector serves to alleviate rivalry somewhat as it should spur
growth. Overall, rivalry is assessed as strong.

Value Capture in Textiles Industry

Industry Overview

 India is among few countries to have presence across the textile value chain.
 The industry is dominated by small scale players (~70,000 units) across the value chain.
 Value capture in the Indian textile industry follows a minimization strategy.
 Strength of the Indian industry lies in value added work like embroidery.
 Competitive Advantage - Abundant availability of raw materials such as cotton, wool,
silk and jute.
  Comparative Advantage - Skilled manpower and cost of production.
 Contributes 15% to India's export earnings and 2% to GDP.

Support Activities

 Firm Infrastructure (General Management)

Offices, outlets and factories
Yarn & Fiber segments
Processed fabrics & Apparel segments
 Human Resource Management
Employs 45 million people
Manmade garments are the largest contributor to total textile and apparel exports
 Technology Development
Makes use of technologies like cotton lab, chemical testing, color quest, calibration lab
Second largest spindle capacity (22% of the world)
Highest loom capacity (61% of the world)
 Procurement
Largest cotton acreage, one of the largest yarn producers

Primary Activities

 Inbound Logistics
Sourcing - After designing, the coordinating company handles procurement from
suppliers
 Operations
Finishing - Dyeing etc.
Fabric Development - Spinning, knitting, weaving
(Highly fragmented, small scale and labor intensive)
 Outbound logistics
Quality Assurance - Finished garment is produced, tested and showcased
 Sales & Marketing
Branding - Pricing, segmenting and targeting
Distribution - Warehousing, shipping
Wholesalers and retailers often overlap
 Service and Support
Customer service - Catalogs, Web development

Margin
 Margins are generally low and the industry is mainly volume driven
 Low P/E ratios of around 3 to 5
 Growth rate has been around 5%, lower than the GDP growth rate