India’s Fragile Recovery

India’s garment factories are doing well. . .

Exports to the EU are recovering:  After a disastrous 2012 when exports fell by 19%, 2013 rose by 6% and for the period year to date March 2014 rose by 18%

Exports to the U.S. are also recovering:  After a poor 2012 when exports fell by 8%, 2013 exports rose by 4% and for the period year to date March 2014 rose by 3%

. . .but India’s garment industry is not doing well at all.

 Market share for the EU has a long way to go:  After a disastrous 2012 when market share fell by 10%, 2013 showed only a 1% recovery and for the period YTD March 2014 3%

Market share for the U.S. also has a long way to go,  Market share in 2012 fell by 7%, rising by only 20% in 2013. YTD March showed a 6% recovery, which was later reduced to 4% when the YTD data for May 2014 was released.

The seeming paradox is easily explained.

A factory concentrates on its own business. The factory does not care about market share.  The factory does not care that their increased business is the result of two factors.

  1. Increased demand for imports from their customer’s country
  2. The higher regard their customers hold the factory supplier

The factory owner cares only that his operation has new and bigger orders.  The owner does not realize that at a time when demand for imports is rising 10%, the only factory not enjoying increased orders would be one that had burnt to the ground, and even then the buyers would be rummaging through the smoldering ruins to see if any sewing machines (and of course their operators) could be recovered.

Market share discounts 1. and relies only on the customers’ regard for the supplier country’s factories.

Added to this there is a second factor.  During good times when demand for imports is increasing, customers find it more difficult to place their orders.  This benefits marginal supplying factories. Conversely when times are bad, those same customers will concentrate their orders to the most reliable suppliers

When in 2012 EU imports fell by 10%, India’s exports to the EU fell by 19% and market share by 10%.  Contrast this with turkey, a notably reliable suppler, when for the same period exports fell by 5% but market share rose by 6%.

The EU data is quite troublesome, since the EU is India’s largest export market and is twice the size of the U.S., India’s second largest market.  Looking more closely at the EU data we can see another serious problem.

EU garment imports from India can be divided into 2 sectors

  • Woven garments = 53%
  • Knitted garments = 47%

These two sectors move quite differently, and that difference is crucial to the future of India’s garment industry

  1. Exports and market share
    1. In 2012 exports of woven garments to the EU fell by 19% and market share fell by 10.5%.  In 2013 market share fell by a further 2.1%, and as of YTD March 2014 market share recovered only by a marginal 0.5%.  Woven garments have shown no recovery
    2. In 2012 exports of knit garments to the EU fell by 20% and market share fell by the same 10.5% recorded for woven garments.  However, in 2013 market share rose by 4.7% and as of YTD March 2014 rose by an additional 8.2%.  Knit garments have achieved almost a total recovery

2.  Monthly Exports

In our 2013 Benchmark study (see www.thirdhorizon.org “Books” we analyzed month-by-month garment exports to both the EU and the U.S

In that work we showed that the greatest change among EU exports (March v November equaled 46.3%.  To put another way, if a sewer works 48 hours per week to produce the goods required in November, that same worker would have to work 70 hours per week to produce the goods required in March.

A 70-hour week translates into 11.7 hours per day for a 6-day week; or 10 hours per day for a 7-day week.  While both are far above international standards, it would be naïve to suggest that 70-hour weeks are uncommon in South Asia,

Looking at more recent data, we have divided the data between woven and knitted garments with some remarkable results.

As you can see from the chart above, we can that the greatest change between EU knit exports (March v December equaled 26.5%.  To put another way, if a sewer works 48 hours per week to produce the goods required in December, that same worker would have to work 60.7 hours per week to produce the goods required in March.  This is only slightly above the 60-hour week, which is the international standard.

Contrast this with woven garments where the greatest change (March v December equaled 101%.  To put another way, if a sewer works 48 hours per week to produce the goods required in December, that same worker would have to work 96.6 hours per week to produce the goods required in March. This translates to a 16-hour day 6 days week or a 13.8-day, 7 days per week.

India has one of the highest worker attrition rates in the world. However, woven factories do not lose workers, they throw them out.  This is the main reason why India’s productivity is among the lowest of the established garment export industries.

Conclusion:

The seeming current success is not sustainable.  We cannot expect EU’s double-digit growth to continue.  Garment import growth is already moderating in the U.S as will growth in the EU.  The return to modest increases in customer demand will realign market share with unit exports as both decline.

The underlying success of the knit sector serves to bring the failure of the woven sector into sharper focus.

It is undeniably true than India’s knit factories are proving to be of great value to their customers.  However, it is equally undeniably true that these same customers do not see India’s larger woven sector in the same positive light.

India’s garment export industry is too large to rely on cut-and-sew knits.

The underlying problems facing India’s garment export industry are both structural and systemic.  These have not changed.  The recent export increases serves only to mask these underlying problems.

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