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Battle for the textile and apparel industry in Southeast Asia

  • The reasons for China’s decreasing presence in the industry
  • Initiatives by the governments in Southeast Asia to boost the textile trade
  • Vietnam and Bangladesh’s quest to conquer apparel industry and surpass India

 

Textile manufacturing is characterised as a high labour-intensive industry and the enterprise has been steering the economic growth in Southeast Asia. The industry is closely linked to the agriculture sector and the raw materials such as cotton and jute, which are easily available, this along with high crop subsidies have supported the growth of textile manufacturing in the region.

China has been dominating the industry for more than three decades as far as production and exports of fibres, fabrics and garments are concerned. However, following the economic recession in 2009, the country’s exports fell by roughly 5% for the very first time in 2015. Additionally, the principal reasons for such a decline were the mounting labour and land costs in China, apart from the slow growth in Europe and appreciation of Yuan. Although China’s production capacities are still unparalleled in the world, manufacturing and sourcing are shifting to Asian nations like India, Bangladesh and Vietnam. Secondly, as per the 13th five-year plan (2016-20), the administration in China is turning its focus towards high value-added tech-intensive industries like home furnishing and industrial textiles.

A stark difference can be seen through the statistics on the average labour cost in the textile sector, this stood at $68/month in Bangladesh as against $321/month in China. The labour costs in India and Vietnam are also much cheaper as compared to China as seen in the below chart.

Globally, China is the leader in textiles exports, while India progressively became the 3rd largest exporter of textiles in the world and 5th largest exporter of clothing (country-wise exports as per the below graph).

The textile industry in India is pegged at $120 billion and is expected to surpass the $230 billion by 2020 (Source: India Brand Equity Foundation). The major reasons for this growth are a strong multi-fibre base (cotton, jute, silk, wool and synthetic), excessive investments, rising disposable incomes and governmental initiatives. In the 2016-17 budget, the customs duty on raw materials for technical textiles was reduced to as low as 2.5%, this decreased the production cost for textile manufacturers. Moreover, initiatives like tax incentives, job security and EPF schemes will make the textile sector more robust. In addition, India also received an FDI of $620 million in 2016-17, this is triple the size of the FDI in 2013-14. Addedly, several investments are in the pipeline. Max Fashion, a Dubai based venture is planning to invest $60 million to expand its sales network through 400 stores in the country (next 4 years) and Reliance Industries signed a JV agreement with Shandong Ruyi Science and Technology, this will leverage Ruyi’s global presence, technology and distribution network in India.

However, India is gradually losing out to Vietnam and Bangladesh, these nations surpassed India in garments exports in 2003 and 2011, respectively. While India saw a negative growth of 1% (2015-16), Bangladesh accomplished a growth of 6% owing to the accessibility of cheap labour and its capability in form of big garment factories to process large orders. The garment factories can employ merely 150 people, while garment units in Bangladesh staff around 600 workers. Indian garment factories are not in a position to handle exceptionally large orders due to the size constraints and are losing their business to the counterparts in neighbouring nations. 

The Bangladeshi government does not want to leave any stone unturned in order to boost the growth for clothing manufacturers. According to the nation’s textile policy 2017, the administration will ensure access to duty-free markets, and aid private firms for development of infrastructure and encourage the use of IT in textiles. It will also establish colleges and training institutes to promote local brands in fashion and textiles. However, the government will have to strictly enforce the compliance of international standards in manufacturing units, especially in the wake of a recent industrial catastrophe of an outbreak of fire and collapse of the garment factory building. This is required to ensure that cheap manufacturing should not be provided at the cost of the safety and security of workers and good working conditions should not be compromised upon.

Similarly, Vietnam’s apparel sector saw a whopping export growth of 10% (2015-16). New foreign investments spurred in the spinning and weaving sectors after the elimination of non-tariff barriers and implementation of Trans-Pacific Partnership Agreement (TPP). Although the USA, which is the biggest importer of Vietnamese textiles and garments has withdrawn from the TPP, the other 11 nations with a combined GDP of $12.4 trillion (Source: Reuters) have agreed to sign the deal. The agreement will help Vietnam to get deep access to the global supply chain, improve its exports and will also reform its labour market. Texhong Textiles (China), Itochu (Japan) and Kyung Bang (South Korea) have all invested in Vietnam to set up spinning and spindle factories. The young labour force in the nation is willing to work at low wages besides a small capital investment is required to set up a factory, this has made Vietnam the hub for setting up of manufacturing factories. Thus, big brands such as Nike and Samsung moved their production from China to Vietnam in the recent years due to the above reason. 

In order to understand the operational efficiencies of these countries, Televisory selected the leading players from each of these nations and did a comparative analysis (FY 2016-17).

Loyal and Vinatex are almost at par with each other with respect to the production of fabrics and finishing of textiles as per the below table. However, Vinatex and Ha-meem are way ahead in terms of garment manufacturing. This is in line with the aforementioned fact that Vietnam and Bangladesh are denting India’s share in the export of garments. In fact, Vinatex displayed the highest efficiency in terms of annual capacity per manufacturing plant, the figures stood at 13.6 million pieces. The firm will invest $240 million in fibre, fabric and garment development to further strengthen its production capacities in 2017. Furthermore, as Ha-meem is a renowned apparels name in America and Europe, it will soon venture into knitted products and capitalize on the economies of scale.

Televisory compared Loyal Textile and Vinatex for their efficiency ratios (FY 2016-17) as represented in the below tables. Loyal’s asset turnover is higher than Vinatex, implying the effective use of assets to generate revenues. But, Vinatex’s asset base is much larger than Loyal’s which cannot be ignored. Although Vinatex’s payables turnover is much lower than Loyal’s. However, the ratio of both the companies has been falling for the last 3 years. This indicates that these companies are paying off their suppliers at a slower pace than the previous years. This could be attributed to more usage of cash for investments to expand production capabilities. There exists a parity between the inventory turnover, the firms have been selling their stocks at almost equal pace, this is congruent to the fact that the sales volumes have been increasing for both the companies, which they are able to sell off on time. However, there is a stark difference in the receivables turnover with Loyal being more efficient in collecting receivables as reflected in its days of sales outstanding. Hence, as per metrics comparison, although, Vinatex has a large asset base and production capacities, Loyal has been managing its operations more efficiently to get better financial results.

Therefore, overall on account of cheap labour, raw material and land, the focus of textile and apparel business has been shifting towards the Southeast Asian companies. The textile industry has high direct costs, which is equivalent to approx. 70-80% (especially material and labour costs) than other operating expenses and this is adding further pressure for dominant international players to shift base to Vietnam and Bangladesh. The future of apparel in these countries appears bright as the governments are continuously making attempts to reduce the costs and improve the sale efforts and are also promoting small and medium-sized firms to grow bigger through various tax incentives and schemes. However, only time will tell if Vietnam and Bangladesh can improve their operational efficiencies to the extent where these nations will be in a position to supersede India in the overall textile market and not only the garment industry.