The clothing industry, a multibillion dollar affair ranges from haute couture to garments for the masses. The vastness of apparel market can be witnessed by the growth of apparel sales worldwide. The global apparel consumption stood at US$ 1.8 trillion for the year 2017 and is expected to grow at 5% CAGR to reach US$ 2.6 trillion by 2025. As apparel is a leading example of Global Value Chains (GVC), the global apparel trade is also growing. The trade has grown at 4% CAGR since 2005 and stood at US$ 444 billion in 2017. Further, it is expected to reach US$ 600 billion by 2025, growing at the same pace.
The growth in global apparel consumption and trade indicates an attractive opportunity for investments in the sector. In this post, explore how India, a country with large garment manufacturing capacities and competitive manufacturing capabilities can be the next leader in this sector.
1. Rising Apparel Consumption
Considering the emergence of new markets and categories, the apparel market is expected to grow at 5% CAGR and reach US$ 2.6 trillion by 2025. Currently, the top eight markets constitute ~70% of the total consumption. The top two markets, USA and EU-28 combined account for 42% of the market share. These markets are followed by China, Japan, India and Brazil.
In China and India, the consumption rates are quickly rising up. These countries are expected to be the major growth centers for apparel consumption with growth rates in double digits. China and India, combined accounted for approximately 16% of the global consumption in 2017 and this share is expected to grow up to 23% by 2025. Indian apparel market, which stood at US$ 67 billion in 2017, has grown at 10% CAGR in the past decade and is expected to grow at a much faster pace of 12% in the coming decade. This growth in consumption can be attributed to the large population and the rise in affluent strata among the population.
The increase in apparel consumption in Indian market can also be witnessed by the growth of fashion retailers and brands in the country. The rising apparel consumption, both globally and in India, is opening gates for numerous investment opportunities in garment manufacturing as well as retail.
2. Global Dynamics Supporting India’s Apparel Trade
With rise in apparel consumption, India’s apparel exports have also seen a steady growth in the past decade. India, the 6th largest apparel exporter, has witnessed growth of 4.6% (compounded annually) in its apparel exports from 2005-06 to 2018-19. It is further expected to grow from US$ 16.2 billion in 2018-19 to reach US$ 38 billion by the year 2025-26.
Nearly 35% of the global apparel imports are catered to by China, which is followed by Bangladesh with a share of 7%. These garment manufacturing countries have achieved this position by leveraging their competitive cost of manufacturing, high productivity in industrial sewing machines and by establishing large scale infrastructure. However, a downtrend has been observed in the China’s share of exports in global apparel trade in the past few years. This shift in trend can essentially be attributed to the increase in consumption in its domestic market and rise in its manufacturing costs.
Bangladesh’s garment industry is also witnessing challenge in terms of adherence to compliance norms by global buyers and increasing wages. These changing global dynamics are paving way for competing countries like India to increase its share in the global trade.
3. Government Support Increasing Competitiveness
As global dynamics make way for India’s exports across the globe and the consumer base grows, the Government of India, under its aspiration of Make in India, is working towards creating an entrepreneurial ecosystem across the country. The conducive government policies have helped bring in a lot of greenfield investment into textile and garment manufacturing. Further, to attract investments, the Central and State Governments are offering multiple fiscal and non-fiscal incentives for textile and garment factory setup.
Some Indian states have come-up with very lucrative policies for investors looking to invest in garment manufacturing. These states include Gujarat, Jharkhand, Andhra Pradesh, Madhya Pradesh, Uttar Pradesh. etc. These state policies provide various types of subsidies such as capital subsidy, interest subsidy, power tariff subsidy, wage subsidy, etc. In some of these states, which have a high focus on bringing in investments in textile and garment industry, the quantum of these subsidies allow reimbursement of 100% or more of the capital investments made into the business. The capital subsidies focus on plant and machinery including installing industrial sewing machines, taking green measures such as ETP, etc. The incentives provided by state governments are encouraging new manufacturing business ideas for garment factory setup in these states by established or new players.
4. Existence of a Strong Supply Chain
Throughout history, India has been an important and big part of the global textile and garment industry. India is one of the few textile and garment manufacturing countries in the world to have the presence of the entire textile value chain i.e. from fiber/filament to made-ups/clothing manufacturing. The huge capacities across textiles value chain offers raw material security and hence reduced raw material costs for production. This also provides flexibility to stakeholders for diversifying into various segments of the value chain, depending on the market demand and profitability. A lot of these highly developed textile ecosystems are present in the states which promote investment in this sector.
Another major issue with apparel manufacturers in India is overstaffing of manpower due to the low individual efficiencies. Although, the wages for skilled workers are higher than un-skilled workers, the difference made through their efficiencies generally are higher than the money invested in hiring them. However, there is a lack of abundant workforce skilled for apparel production in India. To tackle this issue, the Government of India and several State Governments have launched their skill initiatives to increase the skill levels of the youth in the country. To support such initiative, the manufacturers should also undertake training of their workforce for skill upgradation.
5. Garment Manufacturing: Low Investment, High Returns
High returns on investments are another feather in the cap in a garment factory setup. Garment manufacturing is a less capital intensive business, with a high Return on Capital Employed (ROCE). When compared to other industries such as cement, telecommunication, automotive, food processing and consumer goods, the ROCE in garment manufacturing is very high; the range of ROCE generally falls between 10-30% for the former ones, while for the latter it can go up to as high as 40%.
Wastra estimates that a 500 industrial sewing machine set up for garment manufacturing would require approximately Rs. 17-18 crores of investment, which can in turn result in a turnover of Rs. 60- Rs.70 crores. This shows that the capex to revenue ratio is approximately 3.5-4 times the initial investment in garment manufacturing.
We, at Wastra, believe, in line with the reasons mentioned above, India beyond doubt has the potential to be the next leader in the global apparel trade. The conducive policy environment and supportive ecosystem in the country will allow garment manufacturers to stay ahead of the curve, enabling them to expand quickly and be agile on demand. However, an investor needs to maintain all checks and balances to establish a successful garment factory setup; a set-up, which entails not only selecting the right opportunity and a suitable location but also has its operations set efficiently right from the first time. Wastra can help investors in their garment manufacturing journey as we have a team of garment industry consultants who help convert garment business plan to an efficient and compliant garment factory.