End-product is key to profits

Reshma Krishnan

A BIG feature of the underlying trends in the garments industry has to do with the changing nature of the clothing business. There are three stages to the making of a garment. To understand why the readymade garments segment is the vehicle for future growth, it is vital to understand the changes in the cycle itself.

The first stage involves the fabric. There was a time when the garment to be manufactured was dependent on the availability of the fabric -- and this was supplier-driven. So there was little choice but to accept what the supplier offered. Now, however, the market belongs to the consumer and not the supplier. This is because there is much more fabric available now, especially to the export market. In addition, come adherence to the WTO norms in 2005, any fabric would be allowed into the country, even for the domestic market. This will escalate competition in the readymade garments market and hurt fabric manufacturers unless stiff tariffs are imposed.

The second stage involves design. Earlier not much could be done to formals. But now that the semi-formals and casuals segment have appeared, there are a number of design opportunities to be had, especially if the segment for readymade apparel for women takes off. Design would be crucial to attract the customer. Design will no longer be reserved for the couture market or boutiques, but should appeal to the mass market as high street fashion.

The final stage, branding and retail, has perhaps evolved the most. The consumer is willing to pay for quality. There is no better guarantee for quality than a brand that is associated with it, such as Levi's or Van Heusen. As Mr Anees Noorani, Managing Director, Zodiac said: ``I see a revolution in the industry. The itinerant retailer will gradually disappear and quality and branding will take over.''

Branding

Consequent to this shift, the importance of fabric is diminishing. Many major firms have woken up to the fact that their core competence has no value, and that the real value is being realised in the end product. The fabric market is shrinking. According to the Centre for Monitoring Indian Economy (CMIE), it is shrinking by 3 per cent annually and there are many who feel that the textile industry in its present form will become obsolete as branding becomes more important. This is an exaggeration considering that the branded market forms less than 5 per cent of the total clothing business. However, it is clear that readymade garments will be key profit centres. Ultimately, the margins on fabric will be low.

Indian Rayon is an interesting example of how readymade garments are changing a company's strategy. Until January 2000, it was a fabric manufacturer. It bought six high profile brands from Madura Garments -- Louis Philippe, Van Heusen, Allen Solly, Peter England, San Frisco and Byford for Rs 187 crore. The acquisition has already contributed Rs 164 crore to Indian Rayon's Rs 698 crore turnover. And, as value addition enhances margins, bottomlines should see better growth.

Technology

One of the reasons the Indian textile industry is in decline is the lack of technological upgradation. Even though the Technology Upgradation Fund Scheme (TNUF) was set up in 1999 and has encouraged the industry with loans to upgrade technology, there has been little or no progress. A strong feature of the TNUF scheme is that it reimburses about 5 per cent of the interest charged by the lending agency for technology upgradation. The lack of technology is hampering the textile industry's prospects at home and internationally.

Favourable policy changes

Perhaps the most important development is the textile policy change. It has totally lifted the reservation of the readymades sector to the small scale units. This move is important and has allowed the big players to enter this market. The reason is that once the WTO norms come into effect, only the big players would be able to achieve the economies of scale necessary to compete effectively in the international market.

With the foreign direct investment cap of 24 per cent being lifted, there may be more investments in the sector. Now that 100 per cent investment is allowed, companies such as Raymond, Zodiac and Pantaloon can install state-of-the-art machinery.

As Mr Kishore Biyani, Managing Director of Pantaloon India says: ``We have been waiting for this for a long time. It is about time we had the opportunity to install world class facilities in this country to give our products a world class finish. The investment will allow us to take advantage of this boom''.

The new policy also allows 100 per cent FDI investments, which are likely to act as catalysts to a more professional and technology-savvy environment in the country. The mandatory 50 per cent export obligation has also been removed, allowing companies to concentrate on the lucrative domestic market too.