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.


Expressing concern over slow pace of integration into the global value-added chains, the Economic Survey said India should not miss out on mega-regional free trade agreements (FTA), especially the TPP. Though India is part of the Regional Comprehensive Economic Partnership (or RCEP, which includes China, 10 ASEAN countries, Japan, Korea, Australia and New Zealand), it said: "Joining RCEP might help but not fully since the expectation is that the overall standards in RCEP will be weaker than under the TPP." On the global shift in trade realities, the survey said it had two choices: measured integration (RCEP) or an ambitious one (TPP).


Looking for a partner: The US and us

Implementation of the Trans-Pacific Partnership (TPP), a proposed regional regulatory and investment treaty, is one of the primary trade goals of the Obama administration in the US. The TPP has run into rough weather because of the proceedings' secrecy, the agreement's expansive scope, and controversial clauses in drafts that have been leaked to the public. Wikileaks, which has been publishing several TPP-related documents since 2013, recently leaked an entire chapter that has created a public outcry in the US. The treaty includes 12 countries - Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Together, the bloc accounts for 38 per cent of global GDP and 25 per cent of global trade. It's a big and powerful trade group.


The recently leaked chapter reveals that firms can sue countries they are operating in through private courts, steering clear of national jurisdictions. The chapter, completed only on January 20, is about mechanisms that enable companies involved in transnational corporation investment to sue the States they operate in without the involvement of national courts. Companies can file a lawsuit if they believe to be losing profit or even have a lower expectation of profit due to changes in the "environmental, health or other regulatory objectives." If a foreign firm feels that a new law passed by a State impacts its rights under the TPP agreement, it can challenge the country's decision in the private arbitration system, called the investor-state dispute settlement (ISDS). Such mechanisms interfere with national sovereignty and lead to many problems, critics have argued. The negotiation's failure would have devastating consequences for the US leadership, for the deepening of key partnerships in strategic regions, for the promotion of market reforms in emerging economies, and for the future of the trade agenda.

 

As one of 12 countries negotiating the TPP, Vietnam was expected to benefit the most from a clause that would cut tariffs on textiles and apparel, which are the nation's top exports. The TPP was expected to offer Vietnam's apparel exports a duty-free access to the US market. Depending on rules of origin which would be eventually decided, impact would be different for the global apparel market and for textile exporters in Asia. The fate of the Bangladesh apparel industry too depended on the negotiations, since Vietnam was its strongest and direct rival in the global market. The country expected the TPP to yield an additional $30 billion in textile exports by 2020 and $55 billion by 2030.


Even during the run-up to the TPP, in order to take advantage of the tax reductions there, many Western companies shifted factories to Vietnam. The growth was reflected across the country, with textile exports increasing 20 per cent in the first quarter of 2014 in Vietnam. But, there was a catch too: the agreement would have included a yarn-forward rule, which would require Vietnam to make clothes with materials only from TPP member countries in order to receive tax-free import benefits.


The 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 only 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 argued domestic factors like 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.


"In the context of the slowdown in both world growth and India's export buoyancy exclusion from the mega-regionals would be additionally worrisome," the survey said. Expressing concern over slow pace of integration into the global value-added chains, it believed that India should not miss out on mega-regional free trade agreements (FTA), especially the TPP. Though India is part of the Regional Comprehensive Economic Partnership (or RCEP, which includes China, 10 ASEAN countries, Japan, Korea, Australia and New Zealand), it said: "Joining RCEP might help, but not fully since the expectation is that the overall standards in RCEP will be weaker than under the TPP." On the global shift in trade realities, the survey said it had two choices: measured integration (RCEP) or an ambitious one (TPP).


Catching them by the retail: Innovative trends

The top 250 global retailers generated revenue of $4.4 trillion in fiscal year 2013, each with an average size of more than $17.4 billion, the 2015 'Global Powers of Retailing, Embracing Innovation' report from Deloitte Touche Tohmatsu Limited (DTTL) had revealed in January this year. The report explored innovative trends in retail, forecasts for 2015, as well as strategies retailers are utilising to address disruptive changes impacting the sector.

 

The 250 retailers around the world were analysed based on their financial performance, geographic region, product sector, and e-commerce activity. Revenue growth, which began declining in 2011, continued to slide in fiscal year 2013. Sales-weighted, currency-adjusted retail revenue was 4.1 per cent for the top 250, following a 4.9 per cent gain in fiscal 2012. While growth continued to decline, nearly 80 per cent of the top 250 (199 companies in all) posted an increase in retail revenue in fiscal year 2013.


"The sluggish global economy in 2014 left many consumers financially constrained and retail sales under pressure. Thus, the prosperity of the global retail sector in 2015 will very much depend on the economic stability of several of the largest economies. China, the Eurozone as well as a few key emerging economies had a particularly tough 2014. Comparatively, the US and British economies continue to do well, with indicators pointing to the likelihood of strong growth in 2015 and possibly beyond," Ira Kalish, DTTL Chief Global Economist, had remarked at the time.


Emerging trends are quite a few, ones that the textile-apparel industry would want to keep track of:

  • Travel retailing: International tourism will continue to rise despite continuing global geopolitical and economic challenges. In 2015, retailers are expected to increasingly cater to high-spending travelers, especially emerging market tourists to drive growth.
  • Mobile retailing: Sixty-five percent of the global population will be using a mobile phone by 2015 and an estimated 83 per cent of Internet usage will be through handheld devices. Retailers will need to respond by offering free in-store Wi-Fi and mobile-friendly retail websites optimised for different kinds of personal devices.
  • Faster retailing: Speed continues to be important. This includes: "fast fashion" (getting runway styles to the stores as soon as possible); limited-time-only products and flash sales to drive urgency and immediate purchase; pop-up establishments to quickly get products and services to market and build buzz; and self-service check-out and kiosks to reduce or eliminate waiting. In 2015, retailing is forecast to get even faster to meet consumers' desires. Millennials will be driving this trend.



 


The need to look at cities

In 2013, consulting firm McKinsey and Company had published a paper urging apparel companies to look at cities for growth, instead of being bogged down by the BRIC (Brazil-Russia-India-China) paradigm. The rationale was this: emerging-market cities are capturing most of the global growth in apparel. Some 80 percent of top growth cities for total apparel sales by 2025 will be in emerging markets. Together, these cities will enlarge world apparel markets by an additional $100 billion.


Twenty-first century China is urbanising on a scale 100 times that seen in 19th century Britain, and at 10 times the speed. This means that the shift making Asia the world's economic centre of gravity is 1,000 times larger than the Industrial Revolution. On the other hand, it took nearly 40 years (from 1971 to 2008) for India's urban population to rise by nearly 230 million; it will take only half that time to add the next 250 million. The McKinsey study looks at cities as the next phase of growth. The world's top 600 cities (in terms of absolute GDP growth) are expected to drive almost two-thirds of the global growth by 2025. Massive urbanisation will continue across emerging markets, which will envelope three-quarters of these large cities. In 2025, there will be 60 mega cities - more than double today's number of urban behemoths where GDP will exceed $250 billion, accounting for fully one-quarter of global GDP.


The city-by-city approach can help apparel companies revamp growth strategy and bring new insights to their business models, resource allocation, and organisation structures. As the study remarks, "Rather than discussing Europe or Asia as alternative destinations,or even the UK versus France, companies can now ask themselves, 'in what 10 key cities should we next establish a strong presence?'"


However, none of the top 20 growth cities for the apparel industry is from India. This is, therefore, an area that the Indian textile-apparel industry can revisit.

 


Trade and manufacturing: The India story

The stalled negotiations with the European Union (EU) assume greater significance in light of the TPP developments. Indian apparel exporters have been seeking expeditious finalisation of the India-EU free trade agreement (FTA) to enable better market access for exporters. The EU markets account for 12 per cent share of India's clothing exports, according to the Apparel Exports Promotion Council (AEPC).


In this worrisome backdrop, India's new Foreign Trade Policy (FTP) 2015-2020 has just been announced by the Union Commerce Minister. In a bid to boost exports, the Indian government has merged all earlier export promotion schemes under the two plans - the Merchandise Exports from India Scheme (MEIS) and the Service Exports from India Scheme (SEIS) for services exporters. The import duty exemption scrips valued at 10 per cent of foreign exchange earned, which was given to service exporters as an incentive, have now been made tradeable and can be used for service tax, customs and excise duty payments.