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Mergers, joint ventures, franchise arrangements: Shifting from China to India?

M K Panthaki

The EU/USA-China spat on apparel export surge has renewed interest of US and EU entreprenueurs in the Indian apparel market. Both the EU and USA, alarmed at the meteoric surge in garment exports from China to their markets have clamped quotas on various categories of garments.

The EU quotas for garments arrived at after protracted negotiation stipulated increases of 8 per cent (over base period) in 2005, 10 per cent each in 2006 and 2007, with quotas terminating on December 12, 2007.

The pace of shipments is so large that even though quotas were applied from almost the middle of the year, not only were the quotas upto December 31, 2005 fully covered but large consignments were held up in customs warehouses. These held up consignments wZere against orders placed by retailers sometime in July 2005 and later, for which even payments had been made. These goods were meant for autumn/winter sales. Blocking of these consignments, apart from hardship to retailers, would mean that consumers would have to face empty stands in stores during the season. Consequently, retailers had been pressing their respective governments to clear the held up consignments. A via-media now appears to have been reached whereby half the held-up consignments would be cleared against 2005 quota and the balance by debiting the quota for 2006. Though this decision will bring some relief, available quota for 2006 will be depleted to the extent of the released consignments. Perhaps a similar arrangement in 2006 will mean depleted quota for the final year 2007 when the pinch will be felt most acutely, since there will not be any quota available to be debited.

Consolidations in Indian garment industry

Wary of these developments, retailers have turned their attention to India. With a view to meet the increased demand, the pace of consolidators in the garment industry in India has gathered momentum. Raymonds which held earlier the shirting wing of Sam Nirayat, has also acquired Colour Plus in 2002. The Pantaloon group has acquired stakes in Indus League of Bangalore in 2004. Recently, ITC is in similar talks with Silvia Apparels of Noida, which itself is a joint venture EoU of Mafatlal Apparel and Le Perla, an Italian company.

Backward and forward integration

Aware of the shortening processing cycles to keep abreast of shrinking delivery schedules of overseas buyers and further realising the need for reliable and qualitative raw material supply, knitted garment units have been backward integrating into the manufacture of yarn to meet their requirements in keeping with their satisfaction of overseas orders.

Realising the potential of the knitted garment sector as the final phase of added value, some spinning units especially in South India, are forward integrating by setting up circular knitting machines for manufacture of seamless knitted garments which have the additional quality of comfort and stretchability, besides involving the minimum of manufacturing cost and the benefit of manufacturing a set of knitted garments of a single variety at one go.

Foreign investments

A flurry of activity in foreign investments in the garment industry has been active especially in the processing sector to take advantage of low manufacturing costs in India.

Carrera of Italy has come up with an investment of $ 250 million to set up a garment processing unit at Solapur and a textile engineering facility at Kolhapur.

Cuthbert Babywear of the UK is setting three garment units at Bangalore, one of which is on Mysore Road with 1,000 machines employing 2,000 workers.

M.A.S. Holdings has units in Bangalore and Chennai supplying to brands like Triumph and Victoria’s Secret, and has acquired 22 acres of land near Bangalore for expansion.

Freshtex of Germany has tied up with Orient Craft for setting up an Apparel Processing and Laundry in Delhi and Bangalore with an investment of Rs 40 crores.

Adhisti Garments, Mauritius are setting up trouser plants in Delhi and Ahmedabad.

Canoilini of Italy tying up with Sintex of Ahmedabad to set up a shirt unit with an investment of Rs 40 crore.

In addition, several overseas manufacturers are investing in various parts of India for setting up textile and processing units. All this is in addition to approximately 35 joint ventures between Indian and overseas entrepreneurs in the garment industry entered into about 4 to 5 years ago. The focus is thus shifting gradually from China to India.

Fabric-garment tie-ups

A new trend set in motion is between Indian fabric makers and Indian garment manufacturers tying up with each other to assure continuous fabric supply with a genuine interest in each other by acquiring a financial stake. Latest in this is an equity-oriented joint venture between Alok Textiles and The Shirt Company of Bangalore with an assured offtake of 5 to 10 lakh metres per month. Another is a venture between Bombay Rayon Fashions (fabric maker) and Credo Brands, the owner of Mufi Brank. Similarly, Pantaloon group has taken a stake in Jealous Apparel.

Franchise arrangements

Attracted by the large Indian market and its economic growth under the present economic reforms, several foreign companies have been entering the Indian retail market, pending Indian government’s final policy on FDI in the retail sector. Arvind group has franchise arrangements for men’s and women’s garments of M/s Grants of USA. Shopper’s Stop has entered into franchise of kids wear, maternity wear and nursing equipment of mothercare of UK as well as of Austin Reed of UK. Madura Garments has entered into franchising arrangements with three companies of USA, namely Diesel; Espirit; and Armani. Similar franchising arrangements have been in vogue for the past four to five years but with the current fluid position with regard to China, this has picked up in India, thanks to the increased spending power of the upwardly mobile middle class and the boom in the Indian economy.

Pick-up in rural sector and B-class cities

Aware of the need that the fruits of economic boom should reach the people who matter the most, namely, the rural sector, efforts are being made to improve the banking sector in the rural areas to give the village folk the benefit of rural credit. Co-operative and rural banks are being galvanised to this end. Merger of weak banks with the sound ones is being encouraged and the sound banks are making efforts and have attained fair success in reducing their non-performing assets. This has helped to strengthen the banking sector which is now flush with funds to the extent that, for the first time, they have reached a situation with deposits outstripping advances. This is in spite of the low interest rates on advances to the housing sector or automobile sector.

The change in outlook of rural consumers is evident from the fact that while, earlier the rural consumer would be satisfied with a B&W television or with a central TV for viewing by the rural folk, over 50 per cent of the rural families can boast of not only a colour TV but also, of washing machines, refrigerators, scooter/motor bikes, microwave ovens, etc and the rural shops are stocked with not only food articles but also with fabrics and garments of every description. That alone speaks volumes for the penetration of reform benefits.

Upbeat mood

With the inflation rate down to 3.01 per cent, the mood is upbeat with consumers. Consumers are now looking to value for money and are prepared to pay high prices for quality merchandise. Unfortunately compulsions of coalition politics is restraining the Indian government from taking hard decisions in the interest of giving a further impetus to the economy. This is particularly so in the field of reforming labour laws by making them industry friendly and in the sale of public sector companies (both liabilities and assets). The coalition partners in the government need to take a broader perspective in view in order that benefits can accrue to the society at large.

The author is with CMAI