fashion

Apparel industry: All dressed up and nowhere to go?

The health of the apparel market has improved since the times of the recession of 2008-2011, but it has been a slow, though steady, progress so far. Subir Ghosh looks at the global apparel industry buoyed by a healthier US economy, especially given the possibility of the Trans-Pacific Partnership (TPP) becoming a reality, the announcement of the Foreign Trade Policy (FTP) which was a disappointment for the Indian textile and apparel industry, and the state of the industry in other BRIC nations.

It’s getting better; maybe marginally, but better nonetheless. The global apparel industry is expected to grow at 3.5 per cent. The rate of growth will be the same as that last year, marking a leisurely but steady recovery process. In 2013, the industry had grown at 3 per cent, and 2.5 per cent the previous year. The period between 2008 and 2011, during the peak of the global downturn, had seen the growth rate of the industry dwindling to a paltry 1 per cent. The worst, on the face of it, is over.

A quarter into the calendar year, and stepping into the new financial year, it would be pertinent to look at a few challenges, and also at a few trends that may have a bearing on the global apparel industry.

Broadly speaking: How the global dynamics will play out

The global apparel market is stable, but fortunes are likely to be mixed, contends market research provider Euromonitor International. Its 2015 ‘Apparel and Footwear’ edition, released late March, says consumers worldwide spent $1.7 trillion on fashion in 2014, an increase of 4.5 per cent over 2013, at fixed US dollar prices. The estimate is about the fashion industry as a whole, but the numbers do indicate resilience in the market. This is where hope for the industry lies.

The country that can singly tilt the balance is, expectedly, China. It is this same country that now holds a mixed bag, and its fortunes through this year are expected to be mixed. Last year, China registered its slowest growth in a decade. In spite of the sluggish growth, Euromonitor expects it to overtake the US as the largest apparel and footwear market in 2015. China’s problems lie not in growth, but in consumers who are fast becoming like their Indian counterparts: price-sensitive and ever-demanding.

The apparent revival in the US economy is expected to have a positive impact on the global apparel trade, thereby offsetting the pull-back effect of recessionary Europe. After a decade of decline in the 2000s when 40 per cent of all large factories closed their doors, American manufacturing is adding jobs at its fastest rate in decades, with 877,000 new manufacturing jobs created since February 2010.

The trade deficit in the US textile industry is decreasing, given the unexpected Chinese slowdown. US textile exports will continue to grow for the fifth straight year in 2015. And, trade policies will once again have a substantial impact on the industry, with the Trans-Pacific Partnership (TPP) negotiations under way, and the Trade Promotion Authority (TPA) bill being deliberated in the US Congress.

But unfortunately, textile and apparel, the second-largest employment provider in the country, has not got its due in the new five-year FTP. The textile sector has been granted duty scrips of 2 per cent only for mainstream cotton textile products at a time when it is facing challenges in the form of high tariffs and barriers due to preferential tariff arrangements. In contrast, higher rates have been given for handlooms, carpets, coir products under the MEIS. Coming close on the heels of the Union Budget 2015-16, which barely had anything specific for the textile industry that had been high on expectations, the new FTP is a big disappointment for the textile industry.

The Indian textile and apparel industry contributes significantly to industrial output, employment generation and export earnings. The textiles sector is one of the mainstays of the Indian economy. It is also one of the largest contributing sectors of the country’s exports contributing 11 per cent to the country’s total exports basket. The textiles industry is labour-intensive, and is one of the largest employers. The industry realised export earnings worth $41.57 billion in 2013-14.

The Indian textile industry, estimated to be around $108 billion, is expected to reach $200 billion by 2020. It is the second largest employer after agriculture, providing direct employment to over 45 million and 60 million people indirectly. The industry contributes approximately 5 per cent to GDP, and 14 per cent to overall Index of Industrial Production (IIP).

The Indian textile industry has the potential to grow five-fold over the next ten years to touch the $500 billion mark on the back of growing demand for polyester fabric, according to a study by Wazir Advisors and PCI Xylenes & Polyesters. The $500 billion figure includes domestic sales of $315 billion and exports of $185 billion. The current industry size comprises domestic market of $68 billion and exports of $40 billion. The lack of any recent announcement to boost the sector, therefore, comes across as a dampener.

It’s not in India that hope lies for 2015 – it is in the Western markets. Even though Western Europe is not as much in the doldrums as Russia is, the global growth in 2015 in all likelihood will be driven by North America, particularly the US. The US textile industry is predicted to be in a good shape this year. The shipment of textile mills is expected to increase 3-4 per cent in 2015. The value of apparel manufacturing too may increase by 5 per cent. The market demand for basic mill products (fibres and fabrics), nonwoven fabrics and fabrics designed for activewear are all expected to be strong this year. With China taking a beating, US textile exports will continue to grow for the fifth straight year in 2015.

12 Retail trends and predictions for 2015

  1. Boomers and millennials will continue to heavily influence retail.
  2. Social networks will serve as shopping platforms.
  3. Brands will double down on Corporate Social Responsibility.
  4. Loyalty-wise, the points-for-purchases model will no longer be effective.
  5. Retailers will adopt and experiment with technology.
  6. Data will be more accessible and powerful.
  7. Companies will find better ways to manage risk and protect customers.
  8. More retailers will take control of their value chain and improve order fulfillment.
  9. More e-commerce sites will set up shop offline.
  10. Retailers that localise their product mix and store formats will win.
  11. Mobile will continue to grow in all directions.
  12. Stores with omnichannel strategies will continue to thrive.

Source: Retail software provider, Vend

The other big country (at least in size, if not in absolute market terms) – Russia – is in the throes of its most severe financial crisis since 1998. The growth rate, previously projected to increase at 10 per cent both in 2014 and 2015, were revised to 6 per cent in 2014 and -1.2 per cent in 2015. The apparel-footwear market there is expected to register a negative growth of 7 per cent. The ongoing political turbulence and the fluctuating ruble are making things worse for that huge, but chaotic nation.

The largest consumer market in South America – Brazil – too has its share of problems. The apparel-footwear market there dipped to less than 3 per cent last year, and is expected to be dormant over the next few years. The cost of doing business in Brazil is still on the higher side, and infrastructure just as dismal. In plain and simple words, Euromonitor projects a bleak forecast, which of course does not take into account the recent political turmoil in the country where almost a million protestors last month took to the streets demanding that the President be impeached for corruption.

Given this backdrop, it is not surprising that India has been described by the study as “The last BRIC standing.” With the three other BRIC nations either stagnant or seeing a decline, India is being seen as “a key next step in global expansion strategy for major fashion brands.” This year two fashion heavyweights are expected to enter the Indian market: Gap and H&M. India is expected to contribute $19 billion to the global apparel-footwear market by 2019. That’s lucrative, but doesn’t take into account the fact that India at 4 per cent still lags far behind China with 38 per cent in terms of the global textile-apparel pie.

But it’s not in India that hope lies for 2015 – it is in the Western markets. Even though Western Europe is not as much in the doldrums as Russia is, the global growth in 2015 in all likelihood will be driven by North America, particularly the US. The US textile industry is predicted to be in a good shape this year. The shipment of textile mills is expected to increase 3-4 per cent in 2015. The value of apparel manufacturing too may increase by 5 per cent. The market demand for basic mill products (fibres and fabrics), nonwoven fabrics and fabrics designed for activewear are all expected to be strong this year. With China taking a beating, US textile exports will continue to grow for the fifth straight year in 2015.

Spinning a yarn: Recent developments

The global textile and apparel industry has been going through challenging times in this century. Several structural changes (especially the end of the quota system) have paved the way for an environment that the industry needed time to adapt to and still does. In 2001, China joined the World Trade Organisation (WTO) and a mammoth market suddenly became a big player in itself. Three years later, the traditional quota system for textiles and apparel was phased out. This provided new opportunities to countries that were so far restricted by the quota system, and posed challenges to those countries that had been protected all this while. Finally, the recession of 2008-2011 had a negative effect on the global economy in general, and the global textile-apparel industry in particular. During this phase itself, cotton prices started rising, reaching $2.40/lb in March 2011, and falling to $0.80/lb in April 2013.

The rise in prices was the result of low cotton supply during the slowdown. China, where the minimum cotton price was one-and-half times the international cotton prices of $0.90, piled up stocks. The price volatility had an adverse effect on the textile-apparel industry all through the supply chain. Global cotton yarn production too fell and rose correspondingly. The latter was a fall-out of China’s expansion of installed spinning capacities. Other yarn producing countries like India, Vietnam, Bangladesh, Pakistan and Indonesia made the most of this by increasing exports to China. Global fabric production too fell in 2008, then rose marginally, and has since stagnated. On this count too, given the scenario in China, the rival countries are expected to benefit. China is still reportedly holding a stock of more than 10 million metric tonnes (mt) of cotton. This is equivalent to the total annual Chinese cotton consumption alone.

Meanwhile, global yarn production decreased in the third quarter of 2014 compared to the previous quarter due to lower output in Asia and Europe, the International Textile Manufacturers Federation (ITMF) said earlier this year. During the same period, yarn production in North America increased moderately, while in South America it recorded a strong rise. On an annual basis, the global yarn production rose, and was supported by a strong increase in Asia. In Europe, North and South America, in contrast, yarn output fell year-on-year. Global fabric production too fell in that quarter compared to the previous quarter with all regions showing declines. However, on an annual basis world fabric production improved. Thereby, output in Asia and Europe increased, while it fell in South America. World fabric stocks in the quarter were increased quarter-on-quarter with all regions supporting this development. Year-on-year, the picture was mixed with increases in Asia and North America and decreases in Europe and South America. Overall, global fabric inventories fell annually. Fabric orders in the quarter fell in Europe and rose in Brazil quarter-on-quarter as well as year-on-year.

The Trans-Pacific Partnership (TPP), if implemented, will be the biggest challenge for the Indian textile industry as the US accounts for almost one-fourth of India’s apparel exports. India would be at a disadvantage with regard to tariff. Exporters from TPP member countries such as Vietnam would get preferential access to the US market as compared to exporters from non-TPP countries like India. Moreover, since the yarn-forward rule makes it mandatory to source yarn, fabric and other inputs that are used in making clothes from TPP partner countries for availing duty preference, this would make garment manufacturers in TPP countries to source their input from TPP countries, even if the suppliers in that region are not very efficient. That India felt left out of the negotiations was reflected officially in the ‘Economic Survey’, published in February-end. It said domestic factors such as weak infrastructure were slowing down India’s exports, and suggested that for better prospects the country should upgrade its trade capability and join the TPP.

The US market: Holding the key to 2015

The apparent revival in the US economy is expected to have a positive impact on the global apparel trade, thereby offsetting the pull-back effect of recessionary Europe. After a decade of decline in the 2000s when 40 per cent of all large factories closed their doors, American manufacturing is adding jobs at its fastest rate in decades, with 877,000 new manufacturing jobs created since February 2010. Manufacturing production is up by almost a third since the recession, and the number of factories manufacturing across the US is growing for the first time since the 1990s. The American textile industry is adding jobs for the first time in two decades, increasing shipments by nearly a fifth since the recession, and winning globally with a 45 per cent increase in exports since 2009.

Apart from the overall economic growth which invariably acts as a catalyst for increased textile and apparel activity, there are a number of other reasons why matters are auguring well for the country’s industry. There has been an import slowdown in the US, coupled with rising overseas costs. Both wages and energy costs are reducing the foreign competitors’ hitherto cost advantage. The US production costs as a percentage of shipments, at the same time, have dropped significantly.

The outsourcing craze, that had reached a feverish pitch some years back, is dying down, and lower production costs have prompted a renewed interest in re-shoring. Overall mill shipments will be up 3-4 per cent, finally rising over the single per cent growth. Basic mill products (both fibres and fabrics) are expected to push this increase. In any case, the after-tax profits of American mills in the third quarter of 2014 were 27 per cent above a year earlier. Moreover, according to the Cotton Lifestyle Monitor, nine out of 10 US consumers now prefer activewear for activities other than exercise. This is reckoned to be a key driver for the industry in the coming months. The prediction is also in sync with what Euromonitor believes. The denim market will be another important segment that will also drive growth.

Mill utilisation rates in the US are still nowhere near the peak 85 per cent of the late 1990s, just before the country was swamped by Chinese imports. Even till the fag end of 2014, domestic mills in the US were operating at 74 per cent of their potential. The US textile industry wants to bring back “made in USA” through capitalisation. New plant and equipment spending have been growing in the industry of late. About 2.2 percent of a mill shipment dollar will now go for new investment. In other words, company executives are backing their views of a still buoyant industry with cash infusions.

In March this year, US President Barak Obama announced the launch of a Competition for New Textiles-Focused Manufacturing Innovation Institute with a $150 million public-private investment. The competition, kicked off by the Department of Defence, is the ninth such innovation institute competition. The Revolutionary Fibres and Textiles Manufacturing Innovation Institute will have a $75 million public investment matched by more than $75 million of private investment in researching, prototyping, and commercialising fibres with extraordinary properties.

The trade deficit in the US textile industry is decreasing, given the unexpected Chinese slowdown. US textile exports will continue to grow for the fifth straight year in 2015. And, trade policies will once again have a substantial impact on the industry, with the Trans-Pacific Partnership (TPP) negotiations under way, and the Trade Promotion Authority (TPA) bill being deliberated in the US Congress.