Comparison of Polyester Industries in China & India
Introduction

Everyone wants to see a comparison between China and India but why? They do not share eating habits, common sports, lifestyle or culture. They do not even have the same land mass. The economic policies and political systems are also different. Yes, both have a long rooted history and similar population base and both produce polyester and textiles. But that's where the similarities between the two countries end.

The polyester industry in China has grown remarkably to 14 million tons per year and will soon reach 18 million tons. India has close to 2 million tons of capacity today and will soon increase to 3 million tons. Indian companies often worry about what the Chinese will do, but the Chinese producers are rarely curious of Indian companies.

The success of China's polyester weaving industry is the result of recent investments and the substantial rise in China's capacities is also the result of recent relocation of Taiwan's polyester industry to the PRC.


Chinese Scenario

China's economy developed rapidly after the implementation of reformation and the open-up policy implemented twenty years back. The average increase of GDP keeps growing at a healthy 9.8% annually. This high rate continues and the stable increase of China's economy provides a good foundation for development of the country's chemical fiber industry.

Over the last three years, polyester growth in China has been driven by government policies of "preferred product," availability of funding through local banks and subsidised power. Moreover, China got ready to meet the global challenges of free trade through WTO.

China's textile industry has a long history and maintains a high level of processing technology. With its low labour and textile processing costs, China has a competitive advantage over many other countries, and is able to compete all around the world.

China is the world's largest producer and consumer of synthetic fibre, with production and consumption of these products accounting for one-quarter and one-third of the global total. China currently ranks first in terms of polyester production; with its 2004 polyester output reaching 7.25 million tons, up 74.6 per cent year-on-year. The polyester industry will expect an annual increase of 8.3 per cent in domestic consumption, to reach 15.3 million tons this year and 18.3 million tons by 2008.

The big player obviously is China. Polyester production in China grew from a 12-percent share of a 19 billion-pound market in 1990 to 37 percent of a 46 billion-pound market in 2002. This rate


(20+ percent compounded annually from 1995 through 2002) cannot be sustained, and it is projected that China will produce approximately 36 billion pounds of polyester in 2010, a 10-percent annually compounded rate of increase from 2002. This effectively will force the rest of the world to limit polyester production.
It is amazing how private entrepreneurs made investment choices quickly and came on stream faster than anyone could think off. A typical polyester plant built in 24 months was a record back in the mid-1990s. China set the new record by cutting this to 14-15 months. Many of the existing producers consume their own fiber or yarn for in-house processing and value addition. Most POY producers have in-house texturing, some even have knitting, weaving and dyeing facilities. Most are large companies, expanding exponentially over a short period of time. Land, power and infrastructure were available and abundant. Funding was provided based on what the Chinese call fazhi (regulations) and guanxi (relationships). Import duties were waived for imported technology and equipment. Western capacity, which faced much higher production costs, began shutting down and the world watched as China expanded polyester capacity at an amazing rate. For a few companies, this became a great opportunity to sell PTA and MEG, the raw materials for polyester.


But something happened in the last 12 months. China started facing power shortages, raw material shortages and a tightened monetary policy. China today faces widespread power outages in all the industrial areas and a tightening of working capital. On top of this, the domestic PTA shortage is 4.50 million tons and the MEG shortage is 2.60 million tons. Soon these numbers will grow to 5.70 million tons for PTA and 2.80 million tons for MEG.


The Indian Scenario

The Indian polyester industry of the early 1980s was built under the "License Raj" (the Government of license). The licensed plant capacity was set at 15,000 tons per year, the so-called "minimum economic size." Several plants were built in that time frame, some even in rural areas to earn tax benefits. In the early 1990s another growth spurt took place, with two major players, Reliance Industries Ltd. and Indorama adding significant capacities. Chemtex - DuPont (now Invista) built most of these plants and it is still a leading supplier of polyester plants to India.

Reliance integrated backwards to raw materials, Paraxylene and then to basic chemicals. This made Reliance the only company (in the world) to start with oil and go all the way down the value chain to the sale of fabrics. Indorama, already in the textile business, integrated back to polymerisation. This resulted in two major polyester producers and one major Purified Terephthalic Acid producer. Subsequently, Reliance acquired several smaller producers and converted those assets to specialty fibers. At the same time, several smaller producers invested in batch lines and chip-fed POY machines. The chip consumption in Surat (the major textile area in Northwest India) is close to 300,000 tons.



Earlier this year, India predicted that capacity would double to 4 million tons with large investments by several companies.

Investment has happened to some extent, but is controlled by two major players. It was also predicted that several of the chip-to-POY producers would install CP capacity and not rely on chip supply from external sources. Plans to get to 4 million tons have been drawn up, and the textile industry is reshaping itself from a fragmented system to large modern facilities. Several companies are upgrading their facilities in capacity and quality to meet the free trade system under WTO.

Even with such a small polyester capacity, India is still a net exporter of textured yarn and spun yarn. With higher quality materials and lower than Western costs, this still remains a small but viable source for Western companies. The environment is highly suitable to build new capacity due to reduced import duties, lower interest rates and more than $100 billion worth of foreign reserves. Banks were prepared to lend money based on project feasibility, market demand and not based on fazhi.

But something happened in October this year. Increased raw material prices and reduced POY prices hit the small chip-based producers. Making POY from chip is not a viable option under such circumstances. Capacity started shutting down and most small companies are operating at 50% utilization rates. If the situation continues, they will be forced to drop below the 30% level or even shut down. Short term, ideas of integrating back to polymerization are not viable, and Reliance and Indorama plan to bring more than 780,000 tons of new polymer capacity on stream in 2005 and 2006. Recent polyester expansion moves by India's big players. will dramatically change the supply posture to the Indian subcontinent. It is unlikely that India seriously will threaten China's dominance in the market.

India has adopted the Japanese Ministry of International Trade and Industry (MITI) model of industry and government cooperation in fibers, textiles and apparel. According to reports, the program is just reaching the commercial phase. It appears there will be a competition between India and China in polyester fiber manufacturing. Countries with smaller commitments to polyester will be squeezed as these two goliaths meet each other in the marketplace of commodity staple polyester.

An assured supply of raw materials, a competitive supply chain, quality-conscious production processes and respect for intellectual property rights are the core strengths of the Indian textile industry. These factors will serve India well as it seeks to take advantage over the competitors.

Textile Industry Structure in India & China

Conclusion

Can anyone guess what will happen with polyester growth in China and Indian. China will continue to have raw material shortage through 2006 and India will have surplus raw materials. Nevertheless, although the industry in both countries seems to be stalled temporarily, it is certain that it will pick up in both countries in 2005 and 2006 as polyester demand growth worldwide is simply too strong. And more than likely, over 75% of new capacity will be built in either India or China.

Even though the per hour labour cost in China is said to be higher than that in India, the Indian exporters widely claim that the Chinese labour productivity is 50 per cent higher than that of India, which, in the final analysis, renders the cost per piece of any finished textile product in China lower by 25 per cent.

Also, land in China is 100 per cent owned by the Government and enterprises can only lease it for 39, 49,59, 69 or 99 years depending on the location. For industrial sites, land can be leased from as low as US$ 2 to US$ 16 per sq. metre - one-off payment for the entire period. The enterprises would just need to spend on superstructure and they would have to pay only nominal tax and other utility fees. This makes the rental cost negligible compared to India.

The power cost in China is rated at least 40 per cent cheaper than that in India. While these are the general benefits enjoyed by Chinese-owned companies.

With a total world market approaching 65 billion pounds by 2010, competition for market share will be intense, with oil prices pushing up the bottom and a world fiber market squeezing down the top.


Textile Industry Structure in India & China

Conclusion

Can anyone guess what will happen with polyester growth in China and Indian. China will continue to have raw material shortage through 2006 and India will have surplus raw materials. Nevertheless, although the industry in both countries seems to be stalled temporarily, it is certain that it will pick up in both countries in 2005 and 2006 as polyester demand growth worldwide is simply too strong. And more than likely, over 75% of new capacity will be built in either India or China.

Even though the per hour labour cost in China is said to be higher than that in India, the Indian exporters widely claim that the Chinese labour productivity is 50 per cent higher than that of India, which, in the final analysis, renders the cost per piece of any finished textile product in China lower by 25 per cent.

Also, land in China is 100 per cent owned by the Government and enterprises can only lease it for 39, 49,59, 69 or 99 years depending on the location. For industrial sites, land can be leased from as low as US$ 2 to US$ 16 per sq. metre - one-off payment for the entire period. The enterprises would just need to spend on superstructure and they would have to pay only nominal tax and other utility fees. This makes the rental cost negligible compared to India.

The power cost in China is rated at least 40 per cent cheaper than that in India. While these are the general benefits enjoyed by Chinese-owned companies.

With a total world market approaching 65 billion pounds by 2010, competition for market share will be intense, with oil prices pushing up the bottom and a world fiber market squeezing down the top.