Investment opportunity for textile machinery manufacturing in India

While there is an immense opportunity for tapping the Indian textile machinery market, there is likewise a couple of challenges that needs to be tackled in order to gain sustainable growth.

The current global apparel market is estimated at $1.8 trillion, which is dominated by the European Union and the United States with a share of approximately 42 per cent. The next biggest markets are China, Japan, India and Brazil, in descending order with a cumulative share of approximately 24 per cent. The global textile and apparel industry will continue to grow along with growing consumption of textile and apparel products in developing countries. It is estimated that the global apparel market will reach $2.6 trillion by 2025 with China and India as the fastest growing apparel markets, both growing in double digits.

Along with the growing consumption, global textile and apparel trade is also expected to grow at a YoY growth rate of approximately 6 per cent from the present level of $743 billion (2016) and reach $1,230 billion by 2025. Growth in global trade will bring investments in the countries having strong supply base for apparel and textile products. India will be one of the gainers from investment point of view.

With growing textile and apparel trade and consumption, textile machinery shipments have also increased since 2005. The highest percent growth is registered in segment of electronic flat knitting machinery followed by that in open end rotors and shuttle less looms. The shipments of short staple spindles is the only one to register a decline from 2005 to 2016 (Table 1).

It is also worth noting that Asian and Oceanic countries have nearly 80 to 90 per cent share in shipments of all the segments of textile machinery.

Growth opportunity for Indian textile & apparel
Indian textile and apparel industry plays a vital role in the economy of the country. The industry is set for strong rise steered by both domestic and export markets.

The growth of domestic market is driven by changing demographics of Indian consumers and their increased spending on apparel. The current domestic market stands at $90 billion, which is expected to grow at 12 per cent CAGR to reach $220 billion by 2025. Apparel constitutes the majority share of the market with a value of $67 billion. in 2017. Technical textile is also a promising segment which is expected to grow at a CAGR of 13 per cent.

India’s textile and apparel exports have grown at a CAGR of 6 per cent since 2005 and reached $37 billion by 2017-18. By 2025, they are expected to reach $80 billion, growing at a CAGR of 10 per cent. Apparel exports are expected to grow faster at 12 per cent CAGR and reach $42 billion from the existing $17 billion.

With increasing manufacturing costs in China and issues of social compliance in Bangladesh in the recent past, global buyers are looking towards sourcing destinations with costs lower than China and reliability higher than Bangladesh. China’s bulging domestic market will also need more attention than earlier from its textile and apparel manufacturers which will decelerate their export growth. The trend of buyers diversifying their sourcing base is reflected in China’s apparel exports growth slowdown while exports from Bangladesh and Vietnam have increased at exponential rates. Even though exports from the competing countries will continue to grow, India stands to gain the most in the long run with abundant availability of skilled manpower and a well-integrated supply chain from fibre and finished product.

The total domestic and export market of India will grow at a CAGR of 11 per cent from the present value of $127 billion to $300 billion by 2025.

Investments worth $50 billion will be required for textile and apparel manufacturing in India to support this growth.

Growing demand of textile & apparel machinery
India is the second largest country in terms of installed capacity of spindles and it is growing further. The shipments of short staple spindles have grown at a CAGR of 2.6 per cent from 2005 to 2016 while that of open-end rotors grew at a CAGR of 9.5 per cent in the same period. The shipments for texturing spindles remained almost stagnant in the time period.

Shipments of shuttle-less looms and knitting machines have shown higher growth as compared to spinning machinery. Shipments of flat-bed knitting machines witnessed an outstanding growth at 40 per cent CAGR from 2005 to 2016, while shipments of shuttleless looms and circular knitting machines grew at a CAGR of 10 per cent and 13 per cent, respectively in the same period.

With increasing scale of textile and apparel manufacturing in India, the organised mill sector is growing fast and a large part of this additional demand for machinery will be driven by the investment by organised/large mills. This will further drive the demand for modern high technology machines and offer an attractive market for leading textile machinery manufacturers.

Advantage India
With a growing market and manufacturing scenario in India, textile machinery manufacturing will become more attractive and beneficial. Following are some of the reasons:

India’s strong and improving manufacturing competitiveness: Over the years, India has established a strong and vertically integrated supply chain in textile and apparel manufacturing and has become one of the leading manufacturing destinations for the rest of the world. India continues to be a competitive manufacturing destination for textiles because of the escalating labor costs in competing nations. At an overall level, India is a cost competitive manufacturing base for all types of product across the value chain. Buyers still look at India as the next alternative of China as it offers the big domestic market, better adherence to compliance and political stability. Costs in China are rising: There is no doubt in the fact that China has been a strong manufacturing base in recent years but the production costs in China are rising at a faster rate than other developing countries. Increase in manpower cost is the major factor, which will impact the cost of machinery manufacturing as well. The hourly labour cost in China has almost quadrupled since 2000 and is further expected to increase in the near future. In addition to it, the demographic shifts in China will inhibit the labour force in coming years due to ageing population. In contrast, India has very favorable demographics with a young population base with 65 per cent of its population below 35 years of age.

Better service & availability of spare parts: Apart from the cost advantage, manufacturing in India will give significant competitive advantage to the global machinery manufacturers in providing better service to buyers, especially in terms of spare parts. Import of spare parts has increased at 5 per cent CAGR from 2005 to 2016, growing from $194 million. In 2005 to $339 million, in 2016, directing towards rising requirement in India.

Once machinery manufacturers decide to set up their unit in India, spare parts suppliers will also follow them. Many Indian companies will also start manufacturing the machinery parts looking at the potential future demand. Similar scenario has already been observed in automobile industry. Once spare parts availability becomes easier and quicker, it will also help in increasing market size of those machineries.

Export potential of textile machinery: Indian subcontinent is increasingly becoming dominant in textile and apparel manufacturing. India also has signed bilateral and multilateral treaties with different countries that have consequentiality presence in textile manufacturing. As the cost of manufacturing in China is increasing, India is emerging to be the export hub for different product categories including automobiles. The present textile machinery manufacturers are already exporting all over the world and the fresh investment in this sector will scale it up many times.

Challenges for textile machinery manufacturing
While there is an immense opportunity for tapping the Indian textile machinery market, there are likewise a couple of challenges that need to be tackled in order to gain sustainable growth.

Several textile manufacturers prefer to purchase second hand machinery to supplant their old/worn out machinery as it is accessible on lesser prices than new machinery. However, with increasing quality consciousness and increasing share of organised sector, demand of state-of-the-art new machinery is increasing looking at the long term benefits.

The vendor base for spares and technology components for modern machines is not very strong in India now. Subsequently, a large part of it might need to be imported from other countries till a strong vendor base is developed.

Product basket of India is very much diversified, which requires different machine specifications and technology. Moreover, the machinery preferred by organised sector and small and medium enterprises is very different. Different technology levels are also used for supplying to domestic and export markets. So, the overall market size gets divided into many segments, which in turn may be below economic size. However, with the ongoing consolidation process in the industry and diminishing quality gap between domestic and export markets, such segmentation will reduce significantly.

The article is authored by: Varun Vaid, Associate Director, Wazir Advisors, and Ayushi Puri, Consultant, Wazir Advisors.