ON
Indian SMEs – Growth & Opportunities and
Recommendations for Future Financing Decisions in 5
Sectors where ICICI has Current Exposures
By
Hemant Kakkar
A REPORT
ON
Indian SMEs – Growth & Opportunities and
Recommendations for Future Financing Decisions in 5
Sectors where ICICI has Current Exposures
By:
Hemant Kakkar
Hemant Kakkar
ACKNOWLEDGEMENT
In order to complete a project like this, one needs intellectual nourishment,
professional help and constant encouragements from many quarters.
First of all, I would like to express my sincere gratitude to Mr. Amit Bhatia
(Chief Manager, ICICI Bank) for giving me the platform and opportunity to
do a project and providing me with an enriching experience, with the right
blend of theoretical as well as practical exposure. He has not only provided
me with his valuable inputs out of his experience but has also been a source
of inspiration throughout my association with the company.
Last, but not the least,I would like to thank all others who,in one way or another
have helped me so much along the way
Hemant Kakkar
I would like to express my sincere gratitude to my faculty guide,Mrs.Geetanjali Bhatnagar for not only
facilitating me to take a meaningful project but also,
List of Tables
TABLE 1:SMES IN INDIA ................................................................................................................. 5
TABLE 2: MSES PERFORMANCE: UNITS, INVESTMENT, PRODUCTION, EMPLOYMENT & EXPORTS ................... 9
TABLE 3: COMPARATIVE GROWTH RATES .......................................................................................... 10
TABLE 4: CONTRIBUTION OF SMES IN THE GROSS DOMESTIC PRODUCT (GDP) ........................................ 10
TABLE 5: ROAD NETWORK IN INDIA ................................................................................................ 101
TABLE 6: HIGHWAY NETWORK IN INDIA .......................................................................................... 101
List of Figures
FIGURE 1: PRODUCTS OF MSES ........................................................................................................ 7
FIGURE 2: EMPLOYMENT IN MSE SECTOR ......................................................................................... 11
FIGURE 3: AUTOMOBILE COMPONENT INDUSTRY GROWTH ................................................................... 34
FIGURE 4: MAJOR EXPORT DESTINATIONS FOR THE INDIAN AUTOMOBILE COMPONENT INDUSTRY WITH THEIR
3RESPECTIVE MARKET SHARES ...............................................
..................................................... 7
FIGURE 5 : COMPONENTS OF AUTO COMPONENTS EXPORTS ................................................................. 37
FIGURE 6: TREND OF IT‐BPO EXPORT REVENUES OVER THE YEARS .......................................................... 52
FIGURE 7: IT INDUSTRY MARKET‐MIX DURING FY 2008 ........................................................................ 52
FIGURE 8: THE CHART SHOWS A RECOVERY AFTER Q2‐Q3 FY 10. .......................................................... 57
FIGURE 9: HIRING TRENDS: ............................................................................................................. 59
FIGURE 10: BPO REVENUES ........................................................................................................... 64
FIGURE 11: TYPES OF SERVICE PROVIDED BY A TYPICAL LOGISTICS SERVICES PROVIDER ................................. 73
Table of Contents
ABSTRACT ........................................................................................................................................................... 9
Introduction ..................................................................................................................................................... 10
PURPOSE ........................................................................................................................................................ 1
SCOPE ............................................................................................................................................................. 1
LIMITATIONS .................................................................................................................................................. 1
SOURCES ........................................................................................................................................................ 2
METHODS OF COLLECTING DATA ................................................................................................................... 2
REPORT ORGANISATION ................................................................................................................................. 2
Chapter 1: The Indian SME Sector ...................................................................................................................... 3
1.1 What are SMEs? ............................................................................................................................................ 4
1.2 Definition of SMEs in India ............................................................................................................................ 4
1.3 Importance of SMEs ...................................................................................................................................... 5
1.4 SMEs in the Global Scenario .......................................................................................................................... 6
1.5 The Indian Context ........................................................................................................................................ 7
1.5 PERFORMANCE OF SMESs ............................................................................................................................. 8
1.6 COMPARISON OF THE MSE SECTOR WITH THE OVERALL INDUSTRIAL SECTOR:........................................... 10
1.7 EMPLOYMENT IN MSE SECTOR ................................................................................................................... 11 .
1.8 Challenges Faced by SMEs ........................................................................................................................... 12
1.9 Impact of Recession on SMEs ...................................................................................................................... 16
1.10 Recent Government Policies and Measures .............................................................................................. 17
1.11 SME Policy Initiatives in 2009 .................................................................................................................... 19
1.12 Budget 2010 Implications on SMEs ........................................................................................................... 20
1.13 The Budget That Wasn’t ............................................................................................................................ 22
1.14 Recommendations .................................................................................................................................... 23
Chapter 2: The Bank Finance Products ............................................................................................................. 28
2.1 Introduction ................................................................................................................................................ 29
2.2 Fund Based Financing .................................................................................................................................. 29
2.3 Non Fund Based .......................................................................................................................................... 30
Chapter 3: The Automotive Component Industry ............................................................................................ 32
3.1 Introduction to Automotive Component Industry ....................................................................................... 33
3.2 Characteristics of the Automotive Components Industry ............................................................................ 33
3.3 Key Trends of Automotive Components Industry ........................................................................................ 39
3.4 Key Drivers of Automotive Components Industry ....................................................................................... 42 .
3.5 Key Inhibitors of Automotive Components Industry .................................................................................... 45
3.6 Impact of Global Economic Slowdown on Automotive Components Industry ............................................. 46
3.7 Budget 2010 Implications on Automotive Components Industry ................................................................ 47
3.8 Way Forward for Automotive Components Industry ................................................................................... 48
Chapter 4: The Information Technology Industry ............................................................................................ 50
4.1 Introduction to IT Industry .......................................................................................................................... 51
4.2 Characteristics of the IT Industry ................................................................................................................. 51
4.3 Key Trends of the IT Industry ....................................................................................................................... 53
4.4 Key Drivers of the IT Industry ...................................................................................................................... 54
4.5 Key Inhibitors of the IT Industry .................................................................................................................. 55
4.6 Impact of Global Economic Slowdown on the IT Industry ............................................................................ 56
4.7 Budget 2010 Implications on the IT Industry ............................................................................................... 59
4.8 Way forward ............................................................................................................................................... 60
Chapter 5: The Information Technology Enabled Services Industry ................................................................ 62 .
5.1 Introduction to the ITES Industry ................................................................................................................ 63
5.2 Characteristics of the ITES Industry ............................................................................................................. 64
5.3 Indian BPO Segments .................................................................................................................................. 65
5.4 Key Driversof the ITES Industry ................................................................................................................... 66
5.5 Impact of Global Economic Slowdown on the ITES Industry ........................................................................ 67
5.6 Way Forwardfor the ITES Industry ............................................................................................................... 68
Chapter 6: The Logistics Industry ..................................................................................................................... 69
6.1 Introduction to the Logistics Industry .......................................................................................................... 70
6.2 Industry Structure ....................................................................................................................................... 73
6.3 Characteristics of the Logistics Industry....................................................................................................... 74
6.4 Key Trends of the Logistics Industry ............................................................................................................ 79
6.5 Key Drivers of the Logistics Industry ............................................................................................................ 80
6.6 Key Inhibitors of the Logistics Industry ........................................................................................................ 82
6.7 Impact of Global Economic Slowdown on the Logistics Industry ................................................................. 84
6.8 Budget 2010 Implications on the Logistics Industry ..................................................................................... 85
6.9 Way Forward for the Logistics Industry ....................................................................................................... 85
Chapter 7: The Garments & Textiles Industry .................................................................................................. 87
7.1 Introduction to the Garments & Textiles Industry ....................................................................................... 88
7.2 Characteristics of the Garments & Textiles Industry .................................................................................... 89
7.3 Key Drivers of the Garments & Textiles Industry ......................................................................................... 92
7.4 Key Inhibitors of the Garments & Textiles Industry ..................................................................................... 94
7.5 Impact of Global Economic Meltdown ........................................................................................................ 96
7.6 Budget 2010 Implications on the Garments & Textiles Industry .................................................................. 97
7.7 Future Outlook for the Garments & Textiles Industry ................................................................................. 97 .
Chapter 8: The Road Industry ........................................................................................................................... 99
8.1 Introduction to the Road Industry ............................................................................................................. 100
8.2 Characteristics of the Road Industry .......................................................................................................... 101
8.3 Key Enablers of the Road Industry ............................................................................................................. 106
8.4 Key Inhibitors ............................................................................................................................................ 106
8.5 Budget 2010 Implications on the Road Industry ........................................................................................ 107
8.6 Way Forward for the Road Industry .......................................................................................................... 108
Attachments .........................................................................................................................
References............................................................................................................................
ABSTRACT
LIMITATIONS
•
•
•
The study in an industrial analysis and has heavy reliance on data available on the
internet. Unavailability of updated data is a significant drawback.
Data regarding live projects is highly confidential for the bank due to which not
all important information important for complete analysis will be available.
India being a dynamic economy is ever revolving, the research and findings
would be impacted in case of major policy decisions post the completion of the
project.
•
Also no country in the world works in complete isolation, so external events shall
also impact similarly to internal changes.
1|Page
SOURCES
The report is on:
A. Industry Analysis
The data used for the first area of study have been obtained from secondary data sources
which include books, articles on websites, research papers published on net.
REPORT ORGANISATION
The report begins with a study of study of the Indian SME’s and the latest government
policies and budget implications.
Next section gives an overview of the financial products used in financing SMEs.
The next section includes the five sector industry analysis where a preset flow of topics is is
adapted to each industry.
2|Page
Chapter 1: The Indian SME Sector
This chapter includes:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
What are SMEs?
Definition of SMEs in India
Importance of SMEs
SMEs in the Global Scenario
The Indian Context
Performance of SMEs
Comparison of the SME Sector with the Overall Industrial Sector
Employment in SME Sector
Challenges Faced by SMEs
Impact of Recession on SMEs
Recent Government Policies and Measures
SME Policy Initiatives in 2009
Budget 2010 Implications and SMEs
The Budget That Wasn’t
Recommendations
3|Page
What are SMEs?
Small and medium enterprises (also SMEs, small and medium businesses, SMBs, and variations
thereof) are companies whose headcount or turnover falls below certain limits.
The lack of a universal definition for SMEs is often considered to be an obstacle for business
studies and market research. Definitions in use today define thresholds in terms of employment,
turnover and assets. They also incorporate a reasonable amount of flexibility around year-to-year
changes in these measures so that a business qualifying as an SME in one year can have a
reasonable expectation of remaining an SME in the next. The thresholds themselves, however,
vary substantially between countries. As the SME thresholds dictate to some extent the provision
of government support, countries in which manufacturing and labor-intensive industries are
prioritized politically tend to opt for more relaxed thresholds.
Importance of SMEs
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key
source of economic growth, dynamism and flexibility in advanced industrialized countries, as
well as in emerging and developing economies. SMEs constitute the dominant form of business
organization, accounting for over 95% and up to 99% of enterprises depending on the country.
They are responsible for between 60-70% net job creations in Developing countries. Small
businesses are particularly important for bringing innovative products or techniques to the
market. Microsoft may be a software giant today, but it started off in typical SME fashion, as a
dream developed by a young student with the help of family and friends. Only when Bill Gates
and his colleagues had a saleable product were they able to take it to the marketplace and look
for investment from more traditional sources.
The importance of SMEs can be summarized as follows:
•
Boosting industrial growth: By enhancing existing capacities, and by delivering cost-
efficient goods and services as per the requirements of the local markets, SMEs have been
driving industrial growth.
Inspiring Consumption and Social Change: SMEs play a defining role by offering
reasonable, yet revolutionary goods and services to cater to the changing market
requirements. Currently, SMEs have made its presence felt in areas like education, medical
care, transportation, entertainment and local infrastructure development.
Minuscule investment: SMEs need low capital investment, in terms of per unit of output
5|Page
•
•
•
•
•
•
Increased Employment Opportunities: SMEs generate both direct and indirect
employment opportunities, in 2006-07, for instance, for every ten million rupees invested by
the SME sector spawned employment opportunities for over 150 people. However, the same
amount of investment carried out by the overall economy generated employment for just 37.
4 people.
Fuelling the local economy: SMEs make use of natural resources and domestic skills to
cater to the domestic market. The growth of SME sector also helps in socio-economic
upliftment as it generates employment opportunities for untapped masses, living in urban and
rural regions.
Discourages migration to urban areas: SMEs are synonymous for entrepreneurship. And
the best part being setting up an SME doesn’t include much risk. If SMEs generate
employment opportunities in rural and semi-urban areas, migration to urban areas can be
stemmed to a great extent.
Transition from Agriculture Economy to Service-oriented one: SMEs can play a crucial
role in achieving the transition from a dominant agricultural economy to a service oriented
economy, akin to Japan. Japan’s agricultural workforce has gone done from 68 percent to 4.9
percent, in case of United States, from 44 percent to 9 percent.
Further, Indian agriculture sector can no longer generate extra employment opportunities to
meet the requirements of the ever-growing population. In such a situation, only SMEs can
come to the nation’s rescue.
Recognizing the contribution and potential of the sector, the definitions and coverage of the MSE
sector were broadened significantly under the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 which recognized the concept of “enterprise” to include both
manufacturing and services sector besides, defining the medium enterprises. For collecting and
compiling the data for the MSME sector (including khadi, village and coir industries), the Fourth
All India Census of MSMEs with reference year 2006-07, is being conducted in the country. The
7|Page
Census will provide the first database on the MSME sector after the enactment of MSME
Development Act, 2006.
PERFORMANCE OF SMESs
As per the quick estimates of 4th All-India Census of MSMEs, the number of enterprises is
estimated to be about 26 million and these provide employment to an estimated 60 million
persons. Of the 26 million MSMEs, only 1.5 million are in the registered segment while the
remaining 24.5 million (94%) are in the unregistered segment. The State-wise distribution of
MSMEs show that more than 55% of these enterprises are in 6 States, namely, Uttar Pradesh,
Maharashtra, Tamil Nadu, West Bengal, Andhra Pradesh and Karnataka. Further, about 7% of
MSMEs are owned by women and more than 94% of the MSMEs are proprietorships or
partnerships. In view of the MSME sector’s role in the economic and social development of the
country, the Government has emphasized on its growth and development. It has taken various
measures/initiatives from time to time which have facilitated the sector’s ubiquitous growth.
No discussion on MSMEs can be complete without a full treatment of the unorganized sector in
which enterprises are typically established through own funds or funds obtained through non-
institutional sources, they lack managerial bandwidth, do not have established channels for
marketing and are centered around a single traditional technology. More than 94 per cent of
MSMEs are unregistered, with a large number established in the informal or unorganized sector.
The National Commission for Enterprises in the Unorganized Sector (NCEUS) defines
unorganized sector as enterprise employing less than 10 workers. It has estimated such
enterprises at 58 million with employment generated of 104 million persons. Of these, more than
half the workers are classified as ‘self-employed’. A large segment in this universe of self-
employed consists of those who are engaged in non-farm activities. This segment predominantly
consists of own account enterprises, i.e., where there are no hired workers and are run by self
with or without the help of unpaid family members. The own account enterprises can be
distinguished into those running within households and those outside the households. The
household enterprises operate on the basis of family labor – organizing production on its own,
acquire its own raw material, use its own machinery and tools and market its products. Apart
from own account enterprises, this segment also consists of enterprises having hired workers
between 2 to 9. Very often, these enterprises are located in clusters but function independently
without inter-firm linkages.
8|Page
The Office of the DC (MSME) provides estimates in respect of various performance parameters
relating to the Sector. The time series data in respect of the Sector on various economic
parameters are incorporated in the following Table: -
Table 2: MSEs Performance: Units, Investment, Production, And
Employment & Exports
* The figures in brackets show the % growth over the previous year.
** Projected
9|Page
COMPARISON OF THE MSE SECTOR
WITH THE OVERALL INDUSTRIAL
SECTOR:
The MSE sector has maintained a higher rate of growth vis-à-vis the overall industrial sector as
would be clear from the comparative growth rates of production for both the sectors during last
five years as incorporated in the Table given below: -
Table 3: Comparative Growth Rates
Table 4: Contribution of SMEs in the Gross Domestic Product (GDP)
10 | P a g e
EMPLOYMENT IN MSE SECTOR
The total employment from the MSE sector (including SSSBEs) in the country as per the Third
All India Census of MSEs with reference Year 2001-02 was 249.33 lakh numbers. The units
operating with fixed premises are treated as MSEs. As per the estimates compiled for the year
2007-08, the employment was 322.28 lakh persons in the sector. The share of MSEs in the total
employment among units engaged in manufacturing and services is around 34.93%.
Figure 2: Employment In MSE Sector
11 | P a g e
Challenges Faced by SMEs
Even today, small businesses in India are set up by first generation entrepreneurs. They often
have a product or service idea, some money, a zest to hard work but limited knowledge about
markets, Government or bank procedures, cash flows or how to manage labor. This is where
mentoring a hand holding support becomes crucial. At times, this comes from an individual such
as friend, relative, an NGO or a parent unit. This is episodic and unable to meet the vast
requirement which the country has. This is sought to be institutionalized through
extension/outreach efforts of central and state Governments. Trained manpower is made
available for this task, right down the district levels, to act as the friend, philosopher and guide.
These resource persons guide in setting up an evit, making it commercially viable, interacting
with financial institutions and understanding markets, as well as the impact of globalization with
advancements in it. There is a strong more towards linking SMEs with bigger commodity or
supply chain and providing acceptable quality and delivery schedules. The Central Government's
agency for the task, the Small Industry Development Organization, has accordingly moved away
from its pre-reform regulatory to a direct promotional role of hand holding, advocacy and
facilitation. This encompasses the legislative support put in place, fiscal incentives and
protection from unequal competition.
Credit
Credit is the lifeline of business. Small businesses lack access to capital and money markets.
Investors are unwilling to invest in proprietorships, partnerships or unlisted companies. As risk
perception about small businesses is high. So is the cost of capital, institutional credit, when
available, requires collateral which in turn makes the owner of the unit even more vulnerable to
foreclosure. Credit guarantee funds which assist lending institution in advancing loans or mutual
guarantee systems involving common guarantees from a group of people have not emerged in a
significant manner. Unit finances come under severe stress whenever an occasional event such as
a large order, rejection of consignment, and inordinate delay in payment occurs. The common
stereotype about a banker lending an umbrella in sunshine and wanting it back as soon as it rains
gets reinforced in their dealing with small enterprises. It is, therefore, not surprising, that small
enterprises prefer to first tap own resources or loans from friends and relatives and then look for
externalfinance.
In India, many of small manufacturing enterprises do not access bank finance and only about
16% of total bank credit finds its way to the sector. Despite being a priority sector for lending,
small manufacturing enterprises get just about 8% of their annual turnover as working capital
requirements, as against normative requirements of 20%. Even for this, cost of credit is high.
12 | P a g e
The problem is recognized and is sought to be addressed through various ways:
•
•
•
•
•
•
Establishment of ISO 9000 certified specialized SSI bank branches in districts/clusters.
Directive for working capital finance @ 20% of annual normative turnover.
Waiver of collateral requirements up to Rs. 0.5 million.
Setting up of a credit Guarantee Trust to cover loans up to Rs. 2.5 million.
Composite loans from a single agency up to Rs. 2.5 million.
A national equity fund for equity to SSI units at 5 percent service charge
Technology
As mentioned earlier, small enterprises are often regarded for their labor intensity and the
capability to work with local resources. In the part, this has often led to less emphasis on
technology. Run of the mill technology coupled with functional packaging and inadequate
finishing have at times led to small sector products being labeled as being of poor or substandard
quality. This has a cascading impact on competitiveness. As small enterprises realize the need to
link up with large ones, they are having a relook at technology options which would improve
productivity, effectiveness and competitiveness.
Market Access
In today’s world, small enterprises can hardly match the advertising support or distribution reach
of a large corporation. In India, small units sell best in limited or neighborhood markets or when
they are meeting a low volume specialized demand which no large player can effectively cater
to. Increasingly, now the endeavor is to build the marketing activity of small units around their
competitive advantage i.e., products which are labor intensive, items which cater to niche
markets, low volume high margin products, sub assembly tasks, outsourcing jobs and
ancillarisation. Sub-contracting exchanges are being established through Government and
Industry associations to promote such interface. After sales service for imported products, AMCs
on electronic equipment, reverse engineering (to the extent that it is WTO compatible) are the
other areas being encouraged, sophisticated marketing is a task best left to large players. Small
enterprises in India are realizing that the term “marketing” perhaps implies different things to
different people for new SME businesses; head on competition with established giants makes
little sense.
Infrastructure
Small units have traditionally operated from homes or a neighborhood work shed. Slowly, they
began moving out and clustering together wherever electricity, water, raw materials, markets or
labors were easier to access. Policy makers in India had anticipated the need for suitable
13 | P a g e
infrastructure five decades ago and began a program for setting up industrial estates. Non-
assessment of economic viability, tardy implementation and poor maintenance due to drying up
of funds affected these adversely. Later in the post reform period, the problem was sought to be
addressed by setting up of such estates exclusively for small business. Almost 50 such estates
have been set up. Because of their better infrastructure such as roads, telecommunication, power,
effluent treatment plants, power, banks, watch & ward, and reasonable cost, they have proved to
be popular with small manufacturing for factory accommodation, allotment of sheds on hire
purchase as well as outright sale etc. A concerted move has also now been initiated for upgrading
existing estates.
Globalization
The globalization of trade & commerce has been given a push by agreements in the WTO and
changed the business environment. It has therefore become necessary to sensitize SMEs about
these changes and prepare them for the future. In India, a number of steps have been taken in this
regard. Apart from setting up a WTO cell in the nodal ministry, 28 sensitization workshops were
conducted across the country. Workshops have also been held on intellectual property rights and
bar coding. Monitoring of imports in specific sectors where SMEs have a significant presence
and initiation of anti-dumping action where dumping was noticed, are the other steps taken in
this respect.
Procedures
Government and bank procedures coupled with inspections remain a major hurdle in growth of
small units. There are over 60 central, state and local laws which regulate small businesses in the
areas of labor, factory maintenance environment, municipal bye laws, taxation, power etc. These
require the maintenance of as many as 116 registers and forms. To enforce these, there is an
army of inspector who visit units leading to harassment, delay, obstruction and increase in cost
of production. Many small units are one man shows and cannot satisfy the letter of the law. The
streamlining of such rules and regulations has become necessary if the creative genius of Indian
entrepreneurs is to be fully unleashed. Some state governments have exhibited initiative in this
regard. The Central Government has initiated a study to enact a single law for small businesses.
This enactment should ease the situation considerably.
Exit Mechanism
Like products, Industries too have life cycles. There are industry segments which have seen their
best days. Similarly, there are individual units where no amount of additional funds will help.
Their bank loans have become bad and non performing. A sound exit policy which also
safeguards labor interests has therefore, become necessary. It is anticipated that as of 1998, over
14 | P a g e
Rs. 3.8 billion were locked in sick/weak units. An exit policy would help fresh circulation of a
significant amount. The first steps in this regard have been taken recently by India’s central bank
where by one time settlement of dues as on 31 March, 1997 was allowed. The results have been
encouraging.
Strategy Interventions for Revitalization and Growth
Significant charges in economic environment are being heralded in by the WTO. The removal of
QRS has led to increased competition with imports. Many sectors of industry are facing
competition from Chinese or Taiwanese imports within the country or from Bangladesh, Sri
Lanka or Nepal in export markets. It is the belief of the Indian Government that promotion and
not protection is the answer to the issues of survival and growth. Thus, while reservation of items
for exclusive production continues, the focus must now be on strengthening capabilities. This
implies a holistic look at the concerns of industry. As part of this, the following strategic
interventions have been initiated
I.
II.
III.
IV.
V.
VI.
VII.
Easing access to general credit
Introduction of options of limited partnership and factoring
Subsiding cost of finance for upgrading technology
Industry specific technology up gradation programmes
Fund for developing and accessing overseas markets for export
Expanding reach of infrastructure programmes
Ushering in a regime of self certification in lien of inspections for various regulations
Interventions in the future require that hurdles to growth are removed. They must encourage a
seamless movement from small to medium to large. The Indian Government, therefore, is
working on a new vision for the SSI sector through a flexible approach and a motivated team.
The advocacy role of Government now involves new dimensions such as building up and
arguing cases before the world trade body or dispute redressal for a, articulating needs of small
enterprises before decision makers and other agencies. Credit is increasingly being made
available at international rates. Technology upgrades at both the cluster and the individual level
are being assisted. Cluster level technologies will be at Government cost with only user charges
recovered credit guarantee scheme has been put in place if our market has opened up to due to
WTO, we need to enable our small units established foot holds in new markets opened up for
then by globalization. Thus, along with improving quality, they are being given the opportunity
of over seas travel, conducting market surveys, test marketing etc. The existing industrial centres
are being revamped by involving industry associations with some government assistance and
finally a migration from sunset industries to sunrise industries is being encouraged through a
comprehensive and graceful exit policy, which balances interest of labor with those of the
owners.
15 | P a g e
Conclusion
The singular contribution of SMEs is on account of their unique characteristics. Their role in
economic activity is manifest in both tangible and intangible ways. If this contribution is to be
sustained, then their uniqueness needs to be nurtured in an overt and explicit manner. The Indian
experience has shown that it is possible to design targeted interventions be they area specific like
clusters or be they sector / sub-sector or product-specific. Other countries, be they Asian or
OECD, also have policies which aim at similar support. The need of the hour is for us to learn
from each other, drawing upon experiences and identity" "best practice policies". These in turn
have to meet local conditions and circumstances. A "one size fits all" approach will not work.
Nevertheless, there can be no two opinions about the priority that SME policies deserve for
achieving the socio-economic goal of employment growth and social justice, along with the
individual "aspirations".
18 | P a g e
SME Policy Initiatives in 2009
A continuous attention to ongoing schemes to assist MSME has demonstrated success in several
areas. However, the Ministry of MSME and other government departments are still working hard
to pull the sector out of the recession and overcome some inherent problems.
Several of the schemes started by the Ministry of Micro, Small and Medium Enterprises
(MSME) to promote the development of micro, small and medium enterprises in the country saw
success last fiscal year. This section outlines some progress areas in 2009 that have made a
positive impact on MSMEs, especially during the painful process of recovering from an
economic recession.
Better Credit Flow: The ‘Policy Package for Stepping up Credit to Small and Medium
Enterprises (SME)’ was set up by the government in August 2005 for doubling the credit flow to
the MSME sector within a period of five years. Credit flow from Public Sector Banks (PSBs) to
this sector has increased from Rs.67,634 crore at the end of March 2005 to Rs.1,91,307 crore at
theendofMarch2009.
Skill Development on Priority: Various measures like enhancing the training capabilities of the
Tool Rooms, MSME Development Institutes and other organizations under the Ministry of
MSME have helped to train nearly 2.61 lakh trainees during 2008-09. The target set for 2009-10
is to train 3.2 lakh persons, with several programs organized free of cost for the weaker sections
of society.
Success of Credit Guarantee Scheme: MSMEs are often unable to provide collateral as
security to procure loans. The government’s credit guarantee scheme has been rather successful
because of timely interventions to make the scheme more attractive to lenders and borrowers.
For instance, the loan limit was enhanced from Rs.25 lakh to Rs.100 lakh, the one-time
guarantee fee was reduced from 2.5% to 1.5%, etc. Success can be gauged from the data on
increased coverage. From about 40,000 proposals received (for loans of Rs.1000 crore) at the
end of March 2004, more than 2.27 lakh proposals (for loans of over Rs.8200 crore) at the end of
November 2009.
Capital Subsidy Spreads Coverage: Under the Credit Linked Capital Subsidy Scheme for
Micro and Small Enterprises (CLCSS), 15 per cent capital subsidy is provided on loan amounts
up to Rs. 100 lakh for technology up gradation. From the 47 products/sub-sectors with nearly
1400 well-approved technologies/machines for subsidy under the scheme, now 179 new
technologies machines for pharma sectors have been added to this list. Until October 2009, 7810
proposals of subsidy were approved and Rs. 338.68 crore was released to the MSEs under the
scheme.
19 | P a g e
Quality Improvement on Priority: The ISO-9000/ISO-14001/HACCP Certification
Reimbursement Scheme is an incentive scheme to upgrade technology and improve quality that
provides for one time reimbursement of charges for acquiring ISO-9000/14001/HACCP (or its
equivalent) certification to the extent of 75% of the cost subject to a maximum of Rs. 75,000/- in
total. Decentralized in 2007, the scheme saw growing popularity in 2009, with about 690 units
amounting to Rs. 2.88 crore being reimbursed up to November 2009 during 2009-10.
Employment Generation: The Prime Minister’s Employment Generation Program (PMEGP)
was launched in August 2008 with a total plan outlay of Rs. 4735 crore including Rs. 250 crore
for backward and forward linkages. Around 38 lakh additional employment opportunities in the
terminal four years (2008-09 to 2011-12) of XI Plan are expected. The program provides
financial assistance to set up microenterprises costing up to Rs. 10 lakh in service sector and Rs.
25 lakh in manufacturing sector in the form of subsidy up to 25 per cent of the project cost in
rural areas and 15 per cent for urban areas. Until March 2009, 2,17,762 applications were
received under PMEGP, of which 83,454 candidates were selected. About 36,444 projects were
sanctioned financial assistance by banks for generating an estimated 3.64 lakh additional
employment. Loans were disbursed in 25,507 cases by banks giving employment opportunities
to about 2.55 lakh persons until 31st August 2009. About 4.5 lakh additional employments will
be generated in 2009-10.
Recommendations
To unleash the Indian manufacturing SME`s, on one hand we need to address the structural and
institutional weaknesses in the system and on another we will have to equip and provide them
assistance for bracing global competition unabashedly.
It is believed that manufacturing capabilities and exportability are inter-related and mutually
reinforcing. Sustainable competitiveness cannot be achieved only by provisioning of short term
measures such as currency manipulation or hedging or SWAPs. In medium and long term,
competitiveness could only be ensured by increasing productivity and reducing transaction costs
in economy.
There are some key exogenous and endogenous factors that stifle manufacturing growth and
limit exportability. Following are some of the recommendations to the SME groups which have
come out as a result of the analysis of the entire study.
23 | P a g e
The measures suggested aim at improving the current situation of SME`s.
1. SME Audit of Laws
Constitute a mechanism whereby all laws and bills go through mandatory ‘SME Audit’
(on lines of US and EU) pre-empting negative fallout of existing and emerging
regulations.
On an average the accounting activities of the SME’s has been found to be fairly slow
since on an average it was found it takes around 50 days to prepare the balance sheet one
the annual account closes. This is primarily because the accounting activities are
primarily taken care by an external CA who seems to be overburden with all the financial
and accounting activities of the company. The SME’s can think of keeping a separate
small accounts team to manage the activities efficiently and quickly. It is recommended
that all companies should do budgeting for every year & have financial planning for
various functional areas for each year.
2. Labor Laws
Many states follow a flawed mechanism of determining Minimum Wages based on
sectors in which a worker is employed. Therefore, a worker in engineering sector is
entitled to a different rate than the one in food processing sector.
Nationally let there be a consensus on three issues:
a. Base minimum wages on rational criteria and not sectorally or specific to industry
(unlike the current situation in many states where a worker in Engineering sector is
entitled to a different rate than the one in food processing sector)
b. Allow Contract labor (as already in many states)
c. Provide an option to SMEs for using market based mechanism for ESI and PF and after
having contributed let them be freed from keeping records and unnecessary formalities.
(ESI in particular is one of the schemes where huge contribution goes waste in
dilapidated ESI infrastructure that nobody uses.)
3. Seamless movement of goods across states
Establish unified Regulatory Agency to ensure seamless movement of goods across
states.
4. Promotion of Innovation
There has been a shortage among most of the SME’ s in tracking and reporting important
factors like innovation .Innovation as perceived by most of the SME’s has been launching
of completely new products. However tracking and reporting internal innovation in terms
24 | P a g e
of cutting down cost does not seem to be a focus area of majority of the SME’ s. This
needs to be taken care.
5. Managing attrition
This seems to be an area that SME group does not lay much emphasis on. Although
SME’s have a lot of contract labors, there have been a significant number of permanent
employees who leave the companies. Hence there should be employee friendly policies
which would help SME’s retain employees for long.
6. Alternative Avenues to SME financing:
Highlighting the emergence of risk capital funds and equity funds for SME financing
compared to conventional borrowing, adding that there is a need to create more
alternative SME financing techniques for sustainable double digit growth. An SME
exchange with appropriate framework is needed, besides primary and secondary markets
for SME, simplification of NRI investment policy and the Foreign Exchange
Management Act, implementation of the MSMED Act and the enactment of Limited
Liability Partnership Act (LLP Act), emphasizing the need for increased FDI
participation in SME sector through removal of the 24 per cent cap on FDI investment in
companies according to present policy.
7. Improve Industrial infrastructure
a. Step-up building of hard infrastructure. Neither the current outlay and nor the
institutional and operational mechanisms are commensurate to address huge existing gaps
b. Urgently renew focus on creation of industrial areas with basic infrastructure – an area
now languishing for over 15 years because of lack of attention ( Creation of SEZs will
not improve SMEs’ plight)
8. Easy access of capital for less matured companies or start ups.
Induce massive competition in financial sector opening it up to foreign banks and lifting
restrictions unilaterally. Establish independent Regulatory Authority for Banks and
Finance Institutions to induce competition and improve service quality and let RBI
concentrate management of larger macro-economic issues. Deregulation of the Rating
Companies for better service codes, their rating models and pricing. Do not let
monopolies build in this domain.
9. Significant improvement in infrastructure needed especially power.
a. Improve access to economically priced and adequate Electricity
25 | P a g e
b. Support collective SME initiatives for distribution of electricity in geographical
concentrations, industrial areas and clusters
c. Remove policy impediments in open access particularly levy of subsidy element on
collective initiatives
d. Accord top priority on providing electricity to manufacturing units (as has already been
done in a few states)
10. The creation of a “Single Window” facility
This takes care of all issues concerning water, electricity, labor, land etc and is fast
enough to respond to the needs of these SME’s. Take for instance the case of China,
where it takes two days to start a new business.
11. Provide Representation to SME bodies
Provide due representation to SMEs in Prime Minister’s Economic Council, Board of
Trade and other Trade related decision making bodies in Ministry of Commerce for better
appreciation of their needs in policy decisions (none of SME bodies are represented in
these committees).
12. Education and Skilled workforce
SMEs are suffering from acute skill shortages. Most ITIs have become redundant. The
recent ITI up gradation program is not SME need sensitive and is likely to have only
marginal impact.
a. Fund ‘district-wise skill deficiency mapping’ exercise and invite private parties to train
people, develop skills, get them third party rated and pay fee based on success. (There are
already successful initiatives at a few places particularly in Gujarat)
b. Fund Audio-visual and print aids for skill enhancement (on lines of US)
and create channels for continuous skill development coupling it with distance education.
c. Fund massive skill identification and grading program for those not having any formal
education but possessing requisite skills (on lines of recent UNDP sponsored program for
leather craftsmen in Agra wherein 62,000 skilled craftsmen were identified and graded on
skill level and ID cards issued to 47000 of them).
13. Taxes
Area based exemptions create huge disparities with in India. The current dispensation
rewards inefficient companies and punish efficient ones. SMEs suffer most in such
conditions.
26 | P a g e
14. Bankruptcy and Insolvency Codes
Put in place the modern bankruptcy and insolvency codes reflecting the needs of ruthless
competitive markets and uncertainties in globalization so that while entrepreneurs are
encouraged to take risk, lenders are confident of quick disposal of cases and repossession
of assets after failure.
15. Stamp Duties
High stamp duties on transfer of property and on commercial transactions such as on
financial instruments create huge cascading effect. Harmonize the Stamp Duties across
states and drastically reduce them.
16. Comprehensive Program for Internationalization of SMEs
Many Indian SME`s are unaware of the brand creation. In today’s scenario this area
needs intensive attention and efforts so as to make Indian firms accepted world wide and
enhances its core competencies.
27 | P a g e
Chapter 2: The Bank Finance
Products
This chapter includes:
1.
2.
3.
Introduction
Fund Based Financing
Non Fund Based Financing
28 | P a g e
Introduction
Financing can be for working capital ( for ongoing business expenditure ) or term loans (for
capital expenditure). Working capital credit can further be segregated into fund based and non-
fund based . The terms Fund based limits and Non fund based limits are used in connection with
working capital requirements of a Company.
Fund based limits include those where actual funds are proposed to be given. Cash Credit or
overdrafts are the common examples of Fund-based Working Capital Credit Limits. Packing
credit or pre-shipment credit is an example of such Limits where credit is extended to the
exporters for purchasing raw materials/goods, processing and packaging for eventual export sale.
However the borrower has to submit an irrevocable letter of credit and/or a confirmed export
order for availing of Pre-Shipment Credit. Advance at pre-shipment stage is to be adjusted by
submitting export bills. Once the export bills are negotiated/purchased/discounted, pre-shipment
credit shall extinguish and post-shipment credit would commence. Non Fund based limits
include those arrangements where the fund is not actually provided to the borrower for use.
These are commercial documents guaranteeing payment by the bank to the beneficiary, who is
usually the seller of merchandise, against the underlying transaction.
33 | P a g e
Figure 3: Automobile Component Industry Growth4
The potential Compounded Annual Growth Rate (CAGR) of the Indian automobile
component industry has been anticipated to be at 11% during 2008-2015 5 . By 2016, the
industry is likely to contribute 10% of Gross Domestic Product (GDP) and 30-35% of the
industry.6
•
Structure
The Indian automobile component industry can be divided into organized and the
unorganized categories of manufacturers. The original equipment market is predominantly
catered for by the organized sector of the industry. The organized automobile component
manufacturers typically supply automobile components to at least one of the OEMs. They
also usually have access to technology due to their ties with foreign collaborators or through
Automotive Vehicle Manufacturers (AVMs). The unorganized sector, on the other hand,
predominantly caters to the aftermarket. They operate independently with little investment
4
5
http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf
http://www.google.co.in/search?hl=en&q=indian+automotive+industry+2009%2Bacma%2Bppt&meta=&aq=f&oq=
6
7
www.acmainfo.com
http://www.indiacar.net/news/n28729.htm
6
http://ibef.org/artdisplay.aspx?cat_id=60&art_id=9077&in=2
6
http://www.ibef.org/download/Autocomponent_060109.pdf
34 | P a g e
and have a small scale of operation. Their primary focus is high volume and low technology
components. They generally produce components based on copied drawings and their quality
is sub-standard. These small-scale industries secure direct and indirect tax benefits through
favourable government policies. A sizeable amount of production of automobile components
comes from the unorganized sector.
According to the Automotive Components Manufacturers Association (ACMA), companies
with an annual turnover of less than Rs. 50 crore can be classified as Small and Medium
Enterprises (SMEs).
The majority of these units produce internationally competitive components. More and more
SMEs are now looking for foreign partners for technology, skills and to find a potential
market for their products. On a turnover basis, it is estimated that SMEs contribute around
20% of the total production in India and about 1% globally7
•
Sources of Demand8
The demand for automobile components is derived from three sources: the OEMs, the
replacement market and exports. Currently replacement demand accounts for close to 35% of
total demand, while OEMs account for 50%, with exports accounting for the balance 15%.9
The industry is on the fast track, clocking a CAGR of nearly 28% growth in the last four
years, and is expected to grow at 13% per annum over the next decade to reach around US$
130-159 billion by 2016. 10 This has been propelled by strong domestic demand and an
indigenization drive.
OEM demand: The pattern of growth in the automobile segment affects the performance of
the automobile component segment as the content of the components differs significantly
across vehicle categories. The demand emanating from the automobile segment could have a
significant bearing on the performance of the automobile component manufacturers
supplying this segment. In recent years, the principal drivers of demand for automobile
components from the OEM segment have been passenger cars and commercial vehicles. In
addition to the growth in production (on the strength of rising demand), increasing
indigenization levels of the manufacturing operations of most of the OEMs that have entered
the Indian market have also contributed to the growth in demand from OEMs.
Replacement demand: The automobile component supplier also caters to demand from the
replacement market. Historically, the replacement market provided higher margins to
http://www.ibef.org/download/Autocomponent_060109.pdf
7
35 | P a g e
vendors, but now the margins for vendors are declining as OEMs have increased their focus
to boost their spare sales. The replacement market is also characterized by the presence of a
large number of unorganized sector players who compete on prices. The five factors that
primarily influence the aggregate annual demand for replacement parts are:
Size of the national vehicle population;
Average age of the national vehicle population;
Pollution norms and Government regulations;
Average number of kilometres driven per vehicle; and
Roads and other related conditions.
Export demand: India is a significant exporter of automobile components. Exports of
automobile components from India have clocked a CAGR of 26% during 2003-2008 and the
potential CAGR is expected to be around 27% during 2008-201511.
Automobile components manufactured in India are mainly being exported to the US and
European markets, which have a high population of automobiles. Neighbouring countries in
South Asia are the next most significant export destination12. The major export destinations
for the Indian automobile component industry with their respective market shares are
depicted below13:
11
12
http://www.google.co.in/search?hl=en&q=indian+automotive+industry+2009%2Bacma%2Bppt&meta=&aq=f&oq=
http://ibef.org/artdisplay.aspx?cat_id=60&art_id=9077&in=2
13
http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf
36 | P a g e
Figure 4: Major export destinations for the Indian automobile component industry with
their respective market shares
Exports are targeted at global OEMs, the replacement market and domestic OEMs who
export vehicles. Currently these exports largely cater to the replacement market, but this
share is declining.
The share of exports as a percentage of turnover has risen from 18.9% in 2003-04 to 20.1% in
2008-09. The composition of exports in terms of the proportion of OEM and aftermarket has
also undergone a sweeping change since the previous decade. The ratio of OEM to
aftermarket has changed from 35:65 in the 1990s to 75:25 in 2007.14
The composition of exports is shown in the figure below15:
37 | P a g e
•
Supply side
India has around 575 firms making branded automobile components, with another 6,30018 in
the unbranded space, mostly clustered near the vehicle manufacturing hubs in National
Capital Region (NCR), Pane-Mumbai and Chennai 19 . Thus, the Indian Automobile
Component Industry is highly fragmented geographically.
OEMs have neglected the aftermarket for a long period due to their focus on mainstream
products. This has led to proliferation of unorganized small-scale automobile component
manufacturers. Presently, these manufacturers have grown in size and numbers beyond the
control of OEMs. To counter this, OEMs are undertaking measures such as promotion of
genuine brands, customer awareness programs, partnerships with local mechanics, branding
of components and holographic packaging to protect against duplication.
Long controlled by families and limited to the home market, Indian firms are now looking
overseas for increasing market shares, economies of scale and to boost profitability by
attaining higher skill levels and a global customer base.
•
Tierisation
Globally, the automobile component industry is subject to a four-level tierisation:
Tier 0.5 suppliers: design and integrate components, sub-assemblies and systems into
modules placed directly by the supplier in the assembly plants of the OEMs.
Tier I manufacturers: assemble the final modular systems and supply directly to the OEM
or indirectly through Tier 0.5 suppliers
Tier II component manufacturers: supplies to Tier I manufacturers, assemble the sub-
systems that go into the assembling of the modular systems.
Tier III suppliers: supply to Tier II and Tier I players and make the components that go into
the assembly of sub-assemblies
Tierisation is the result of growing competition among the various automobile component
manufacturers which forced them to curtail manufacturing costs through tierisation. It helps
in reducing costs substantially by reducing the number of direct suppliers (i.e. purchase cost),
providing economies of scale to suppliers through large volumes, sharing design and
development costs of components, reducing time for vendor development, reducing capital
investment for assembling sub-systems etc.
The process of tierisation entails a greater inter-dependence between the two levels of the
industry. With the industry bending more towards integrated systems, component
18
19
http://www.ibef.org/download/Autocomponent_060109.pdf
http://ibef.org/artdisplay.aspx?cat_id=60&art_id=7335&in=2
38 | P a g e
manufacturers are increasingly called upon to be competent and raise their quality standards.
The efficiency of vehicle production is therefore crucially dependent on that of the supplier
base. With these changes, the supplier-buyer relations in the automobile industry are also
evolving in a more complex way.
With tierisation taking root, the Indian automobile component industry is expected to
transform itself from a low-volume fragmented sector into a highly competitive sector
marked by consolidation and world-class technology. Thus, a strategic shift is likely for the
industry players. Currently, the level of system integration and specialization in the Indian
industry is relatively low as compared with global industry standards. But as economies of
scale and systems integration become key determinants of success for automobile component
companies, size (of organization) will become a critical attribute. Accordingly, the Indian
Automobile Component industry can expect a wave of mergers and acquisitions, with the top
players consolidating their position as the rest are relegated to the Tier II and Tier III levels.
The challenges before global OEMs and Tier I players are pressure on sales and margins,
stringent regulations driving technology, discerning customer demand, shifts in global
markets and disintegration of global barriers. SMEs, that are broadly classified as Tier I and
Tier II companies, driven by productivity, cost and volume, are beginning to play an
increasingly important and supportive role to the Tier I companies, which are driven by
technology. However, being small players, it is a challenge for them to avoid issues like delay
in follow-up orders, inability to service large orders due to lack of scale and delay in
shipments.
The tierisation of the Indian Automobile Component industry is also likely to have a
considerable impact on the unorganized components sector. The weakest link in the
tierisation chain is the Tier III vendors. There aren’t enough of them in the market and those
who exist provide a poor quality of products.
39 | P a g e
margins may be lower in various cases than domestic sales due to higher costs of logistics
and product liability insurance costs. According to recent estimates, global sourcing of
components from India is to reach up to US$ 33-40 billion by 2015 from the current size of
around US$ 15 billion20. Globally, according to a recent McKinney analysis, outsourcing in
the Automobile Component sector could be worth US$ 375 billion by 2015. India has the
potential to capture up to US$ 25 billion 21 of this total value to become the developing
world’s top sourcing base.22 India has also emerged as an outsourcing hub for automobile
parts for international companies such as Ford, General Motors, Daimler Chrysler AG,
Honda and Toyota23.
Relocating to India is likely to benefit SMEs as much as the larger companies. Skilled and
cheap labour, automation at lower cost and large investments in this sector are attracting
global OEMs to India on a large scale.
Preferred manufacturing base: In the last couple of years, many automobile manufacturers
have identified India as a manufacturing base for some of their models. The higher export of
vehicles increases the demand for domestic automobile components.
Increasing focus on productivity: The increasing pressure on the margins of OEMs has
translated into increasing pressure for the component manufacturers to deliver at lower cost.
This has forced component manufacturers to enhance productivity through various techniques
that include tear-down value analysis, lean manufacturing processes, and collaborative
research among others.
Rising quality consciousness: The average quality of automobile components produced in
India has been improving gradually, particularly during the past few years. Moreover, the
increasing focus of the Indian automobile component manufacturers to address the stringent
quality norms adhered to by global OEMs, has forced Indian companies to upgrade their
facilities. Additionally, improvement in end-of-line rejection rates and customer rejection
rates, the two measures of quality, point to the improved quality levels. According to an
ACMA-McKinsey study, 564 automobile component companies in India have ISO 9000
certification, 56 have QS 9000, 397 have TS-16949, 186 have ISO 14001 and 60 have
OHSAS 18001 certification. 24
SMEs: As mentioned earlier, according to ACMA, companies with an annual turnover of
less than Rs 50 crore can be classified as SMEs.25 A well-debated issue, the definition of
small and medium enterprises in India was very recently ratified. The Micro, Small and
Medium Enterprises Bill, 2006, defines the segment on the basis of investments in plant and
machinery. Small enterprises are those with an investment of not more than Rs 50 million in
20
21
http://www.ibef.org/download/Autocomponent_060109.pdf
www.acmainfo.com
22
http://www.ibef.org/artdisplay.aspx
23
www.ibef.org
24
www.acmainfo.com
25
http://www.ibef.org/artdisplay.aspx
plant and machinery, and medium enterprises are those with an investment of over Rs 50
million but less than Rs 100 million in plant and machinery. This definition has finally put
the segment within a legal framework.26
With India becoming the preferred destination for foreign OEMs, small scale units are set to
flourish even further, provided they are prepared to scale up their capacities while
maintaining high quality levels. With a majority of automobile component units functioning
at a turnover of less than Rs 50 crore, it is necessary that timely investments are made, for
which financing options should be enhanced. It is also necessary that quality levels are
improved, along with the much needed investments in R&D. In general, SMEs, due to lack of
funds, are not able to invest in R&D activities to develop techniques that are globally
competitive. Moreover, attracting the right skills has been a big problem with the small scale
sector. In recent years, the entry of large automotive companies has helped build the
necessary capacity and provide the financial strength to expand to a number of small
suppliers27.
On a turnover basis, it is estimated that SMEs contribute around 20% of total production.
North India, on the whole, is becoming a hub for auto component companies. And the fact
that nearly 35% of auto components exports are from this part of the country makes it an
increasingly important export hub in India 28 . The division of production processes and
outsourcing among global automobile manufacturers has led to a major reorganization of the
supply base within the automobile and auto component industry. This new business model
being followed by global companies holds tremendous potential for the growth of SMEs in
India.
The key limitations that the automobile component SMEs faces include:
Fluctuations in the cost of production; especially raw materials like steel,
aluminium, polymers etc.;
Poor negotiation powers due to the fragmented nature of the industry, which in turn
limits pricing power;
Dependence on traders and agents to access overseas markets which threatens their
competitiveness;
Product substitutes due to fast-changing technology; etc.
Addressing these challenges and risks will be crucial to promoting SMEs in the automobile
component industry. The Indian Government has initiated cluster-based development –
geographical concentration of enterprises having similar lines of business – which gives rise
to external economies and favours emergence of specialized technical, administrative and
26
27
http://www.dnb.co.in/smes/smes.asp
http://www.dnb.co.in/smes/smes.asp
28
http://www.ibef.org/artdisplay.aspx?cat_id=60&art_id=11199&in=3
financial services. This form of networking of small firms is a means of achieving economies
of scale. Extending this initiative further, the Government is encouraging banks to adopt a
cluster-based lending approach to ease availability of funds to SMEs.
Multinational automobile manufacturers like Magna International of Canada, Delphi and
Ford of US and some European companies have announced plans to enter the Indian markets.
This bodes well for the automobile component industry as it would enable the collective
development of automobile component SMEs. This will bring in better technology, skills,
new products and an assured market. Strategic links and contract manufacturing is another
way forward for SMEs in the automobile component industry.29
Plant locations in proximity to OEMs: In a bid to facilitate faster delivery and lower freight
charges, automobile component manufacturers are located largely around their OEM
customers. This is particularly so since a large number of organized sector players supply
directly to the OEM.
Indo-Thai Free Trade Agreement (FTA): The Indo-Thai FTA was signed by India and
Thailand in 2003. With the signing of the FTA, under the `Early Harvest Programme,' both
sides immediately reduced tariffs on 82 products (which included automobile components),
with the objective of reducing them finally to zero by 201030. These 82 items cover 7% of the
Indo-Thai trade31. The FTA was expected to boost Indo-Thai trade, especially with regard to
automobile component industries in the two countries. However, subsequent years have
shown there to be several factors holding back the Indian automobile component industry in
the context of the Indo-Thai FTA. These relate to high cost of production, higher import
duties, infrastructure service costs and a huge interest rate differential compared with
Thailand. These internal cost disadvantages are eroding the competitiveness of domestic
companies with respect to Thai imports. A comparison of the import duties on certain raw
materials in India and Thailand reveals that inputs such as glass parts and chemicals can be
imported duty free into Thailand but attract a 15% duty when imported into India 32 .
Nonetheless, the real impact of the FTA will be more apparent over the longer term.
Investments: Investments in the automobile component sector have grown from US$ 7.2bn
in 2007-08 to US$ 7.7bn in 2008-09.33 . Moreover, the Investment Commission has set a
target to attract Foreign Direct Investment (FDI) worth US$ 5 billion in the next few years.34
http://www.newmediacomm.com/publication/indo_us/julaug08/analysis.html
38
of US$ 380 million, aims to set up independent automotive centres at Manesar, Chennai,
Pune, Indore and Rae Bareily.39
Finalization of the Automotive Mission Plan (AMP) 2016 aims to increase turnover to US$
145 billion, export revenues to US$ 35 billion and provide employment for an additional 25
million people, thereby making India a preferred destination for design and manufacture of
automobile and automobile components.40
http://www.autocarpro.in/contents/marketTrendDetails.aspx?MarketTrendID=30
www.indiagov.com
41
http://in.rediff.com/money/2006/jun/06spec4.htm
Most international OEMs enforce a product liability clause, which stipulates that
suppliers will be charged punitive damages in case of a line stoppage or a product
recall caused by supply of defective components.
In the case of export contracts from international OEMs, the lead time from the
request for quotation until the time of commencement of actual supplies can be as
high as 3-4 years. This could prove disadvantageous for the sector.
Counterfeit products account for close to 35% with a market share of Rs. 5,300
crore of the current size of Rs. 16,000 crore of the automotive parts to the
replacement market.
www.acmainfo.com
www.acmainfo.com
companies, the smaller companies are also indirectly gearing to this trend by entering into
formal manufacturing contracts and specialization.45
The Government of India is drawing up an Automotive Mission Plan 2016 (AMP 2016) that
aims to make India a global automotive hub. To maintain the high rate of growth of the
automobile industry and to retain the attractiveness of the Indian market and further
enhancing the competitiveness of Indian companies, the Government has prepared this ten-
year AMP. The idea is to draw a futuristic plan of action with full participation of the
stakeholders and to implement it to meet the challenges coming in the way of growth of
industry. Through this AMP, Government also wants to provide a level playing field to the
players in the sector and to lay a predictable future direction of growth to enable
manufacturers to make more informed investment decisions.46
The industry is transforming, and the boost in demand will see the emergence of several new
players in the industry. The vast market for automobile components, and the diverse products
and technology involved ensures a place and role for many. At the same time, the entry of
several global automobile manufacturers will bring in more regulation into the industry and
see a pruning of the spurious market. Among the smaller players in the unorganized segment,
this implies moving away from being standalone companies, to entering into either contract
manufacturing or being ancillary units. The newly defined rules that hold the key to success
in the automobile component industry are specialization, development.
45
46
http://www.dnb.co.in/smes/overview.asp
http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/automobile.htm
Logistics, as defined by the Council of Logistics Management, is "the process of planning,
implementing, and controlling the efficient, effective flow and storage of goods, services, and
related information from point of origin to point of consumption for the purpose of
conforming to customer requirements."
Logistics primarily involves transportation, warehousing, order processing, inventory control,
and material handling activities of goods and services.61
With business organizations increasingly looking to use logistics services at some point or the
other in their routine business, the importance of logistics is increasingly being emphasized.
For instance, manufacturers need to move input materials from their origins to their plants
and then distribute the finished product to their clients. Apart from this, they also have to
meet requirements such as storage of input materials and products during the process.
There are several current trends in the management of logistics. The principal trend, driven
by competitive pressures and client needs, and enabled mainly by information technology, is
to combine and streamline various logistics activities, such as purchasing, storage and
transportation. This trend is occurring both within organisations that handle their own
logistics requirements in-house, and within the operations of logistics services providers. For
example, trucking firms often offer storage, packaging and other related services.
Consequently, as traditional service providers continue to increase their lines of business,
they tend to join the Third Party Logistics (‘3PL’) component by becoming capable of
offering seamless or integrated services tailored to meet the exact needs of clients. A 3PL
service provider is one that manages all or a significant part of the logistics requirements of
manufacturers and traders, performing tasks which include transportation, location and
product consolidation activities, on an outsourced basis.
The evolution of 3PLs came to India in the recent past. It has gradually evolved from the
stage where the Indian firms outsourced their labour requirements, in order to avoid
problems. Subsequently, basic services such as transportation and warehousing began to be
outsourced as well. In most of the cases, these services were outsourced to different service
providers that were essentially 2PLs, i.e., process or functional specialists. With the
increasing demand, the service providers started offering integrated services plus other value-
added services that could help organizations to streamline their supply chains. This, coupled
with competition from multinationals has forced the logistics service providers to transform
themselves from mere transportation providers to value-added service providers.
61
http://indiquest.wordpress.com/2009/02/04/the-indian-logistics-sector-%e2%80%93-a-bright-future-prospect
50 | P a g e
51 | P a g e
The road freight industry in India is worth about INR 1.42 trillion and is growing at about 6-8
percent year on year. Manpower spends amount to only about 4 percent of sales as against the
overall sector average of 8-10 percent. The industry has traditionally been extremely
fragmented - almost 75 percent of the trucking 'companies' are single truck operators and
almost 90 percent of trucking companies have a turnover of less than INR 10 million
A majority of players in this industry have been small entrepreneurs running family owned
businesses. Given their small scale and limited investment capability, most of their
investments have been focused on short term gains - direct and immediate impact on the top
line / bottom line of the business being the key decision criterion. As a result, investments
that pay off in the longer term, such as those in manpower development, have been minimal
historically. Also, these businesses are typically tightly controlled by the proprietor and his /
her family and as such, making it unattractive for professionals. Poor working conditions, low
pay scales relative to alternate careers, poor or non-existent manpower policies and
prevalence of unscrupulous practices have added to the segment's woes creating the image of
a segment that holds few attractions for those seeking employment.
While industry players have been incapable of investing in manpower development, the
government has also not focused sufficiently on the same. There exist very few formal
training institutions for driver training and practically none for operational training on
associated areas like loading / unloading supervisory, proper handling practices etc.
The result has been that in the current scenario, there exist gaps in core technical skills of the
existing set of personnel. For example, the backbone of the trucking industry truck drivers
lack knowledge of good driving practices and areas associated with driving like
understanding of VAT. Taking a level-wise view of the skill issues, it is seen that in the road
sector, skill issues are widespread across the board with the situation being most severe at the
operational level
Industry Structure
The logistics industry consists of truckers, air carriers, shipping lines, warehousing
companies forwarded couriers and third pes,ers,party logistic companies. The chart given below
depicts the various levels of services offered by logistics service providers.
Figure 11: Types of service provided by a typical logistics services provider
In this regard, international logistics, i.e. the management of cargo movement from one part
of the world to another, has been in the forefront, as most businesses are expanding their
operations on a global footing and are finding it more economical to outsource their logistics
functions to international service providers. The logistic function consist of two primary
sub-functions:
•
•
Actual movement of goods and services; and
Management of the movement
Historically, the actual movement of goods and services has been out-sourced asset-based
service providers like airline companies, shipping companies, and road transport companies.
These service provider form a small part of the overall logistics functions. For instance, the
road transport company is primarily responsible for transporting the goods from say, the
manufacturing facility to the airport, after which the airline will ship them to an airport joining
another location. This has remained the platform around which other allied services around
provided
The level of outsourcing of logistics functions has increased primarily due to the outsourcing
of the second sub-function: management of the movement of goods and services and allied
activities. This varies from outsourcing the cargo handling and customs clearance functions
to forwarding to complete suites of out-sourced activities, ranging from transportation, cargo
handling, and warehouse management to eventually bills and order processing.
Over time this has spawned different set of players in the logistics business offering different
suites of services with 3PLs offering the entire gamut of services. 3PL companies typically
do not own the majority of the assets used by them to provide logistics services. These
companies offer the entire suite of logistics services by pooling the services of various third
party asset providers under one roof and offer their clients a one-price, one-stop solution for
their supply chain requirements ranging from international freight to warehousing and
packaging.
The emergence of the second generation 3PL has been seen in recent times and has come to
be known as the 4PL provider. This is a new concept in supply chain outsourcing. Through
alliances between ‘best of breed’ 3PLs, technology providers and management consultants,
4PL organizations can create unique and comprehensive supply chain solutions that cannot be
achieved by any single provider.
The important underlying reason for the existence of the logistics industry is that the
customer is outsourcing the function because it is able to get a better return on its capital by
outsourcing this activity at a price to the service provider rather than carrying out this
function on its own. This puts a ceiling limit on the mark-up that a service provider can put
on its total cost since the customer will be continuously measuring the cost-benefit ratio of
outsourcing the function against carrying it out itself. In such a scenario the key determinants
to growth are an increase in the portfolio of services provided and the bulk discounts that one
can generate by consolidating the requirements of clients having similar needs and providing
asset providers with a larger volume of business annually.
marketing
intermediaries
for
Forwarders/Brokers
Book freight/warehousing space on behalf of
their clients
Provide market intelligence to asset providers as
well as asset users
Do not take responsibility for cargo
Custom House Agents
Cargo handlers/Stevedores
Arrange clearance of import and export cargo
Loading and unloading of cargo at the port/airport
Third party logistics Take responsibility of goods
providers/Couriers
Manage the entire transportation and customs
clearance process
Provide the information technology backbone for
shipment tracking and tracing throughout the
transit period
3PLs in India originate from several business segments with a large amount of functional
similarities in their operations. This is in line with global trends.
• Industry Participants
The different types of players in the Indian logistics scenario are given below:
a) Single location focused players – Fragmented, low value add services local / inter - city
operators like local and inter - city courier companies, port handling agents for a single
location, single port owners, single CFS owners, etc.
b) Niche players – High value addition but limited to one activity. They cater to a particular
segment in the entire value chain across the country (e.g., CFSs across a region, courier
companies, bulk truck transporters, etc)
c) Regional players limited by their geographical reach – They cater to logistics solutions
in a particular region or segment (port based, road based, etc).
d) Integrated players offering total logistics solutions – A one-stop shop for logistics and
use multimodal forms of transportation to deliver anything anywhere with the help of their
tie-ups all over the world.
In India, the space for integrated player still remains vacant. Integrated players are at the
high end of the service spectrum and earn superior margins due to the integrated services.
• Revenue Model
The various services offered by the international logistics service providers revolve around
the base line product of managing the international leg of the shipment, by air or sea. The
other services are offered as value added services at either the origin or the destination.
As mentioned earlier, it is pertinent to note that in such arrangements it is not possible for
either of the companies to mark-up the other’s services excessively, since this may break the
ceiling limit chargeable by a service provider. The important underlying criteria for the
existence of the logistics industry is that the customer is outsourcing the function because it is
able to get a better return on its capital by outsourcing this activity at a price to the service
provider rather than carrying out this function on its own. This puts a ceiling limit to the
mark-up that a service provider can put on its total cost since the customer will be
continuously measuring the cost benefit analysis of outsourcing the said function.
In such a scenario the key determinants to growth are an increase in the portfolio of services
provided and whether he is able to make a difference between the prices at which it sells
freight to the customer and the price at which it buys from the airline/shipping line. As
mentioned earlier, this depends on bulk discounts it is able to command by giving the asset
provider a larger volume of business annually.
Operating Model - Global Reach Local Presence
Since the logistics service provider takes custody of the product at the origin (as opposed to
the freight forwarder), it is imperative for it to have a presence of its own or engage an
overseas partner. While most of the multinational companies have their own offices all over
the world, Indian companies enter into alliances with logistics companies for specific regions.
These companies also provide value added services to the Indian companies’ client at the
destination like customs clearance etc. If the client so desires and provides reciprocal
arrangements for the sales made by the overseas partner.
Key Trends of the Logistics Industry
Growth within the organised sector: The logistics and warehousing sector in India, till
now, has been highly fragmented and characterised by the presence of numerous unorganised
players. A large number of players have been providing services in individual segments like
transportation, warehousing, packaging etc. In 2007, organised players accounted for only 6
per cent of the total US$ 100 billion Indian logistics industry However, changing business
dynamics and the entry of global third party logistics players (3PL) has led to the remodelling
of the logistics services in India. From a mere combination of transportation and storage
services, logistics is fast emerging as a strategic function that involves end-to-end solutions
that improve efficiencies.
Entry of Large Corporates: Another trend witnessed over the last few years has been the
entry of several large Indian corporate houses – such as the Bharti group, Tatas and Reliance
Industries Limited – into the logistics sector. The Indian conglomerates foresee huge
potential for specialised logistics and warehousing facilities, particularly in industries like
retail. Companies like Bharti, Tata Realty & Infrastructure, GE Equipment Services and
Reliance Logistics cater to the logistics needs of their own group companies as well as
provide services to the other companies.
Emerging concept of third party logistics: Third party logistics or 3PL is a concept where a
single logistics service provider manages the entire logistics function for a company.
Although still at a nascent stage, the Indian 3PL industry is growing at a rapid pace. Global
sourcing activity and fierce competition amongst manufacturers to cut costs have made
movement of materials rather complex, giving rise to the emergence of several third party
logistics players.
Fuelled by the increasing trend of outsourcing, coupled with the rapid growth in the Indian
manufacturing sector, 3PL is estimated to grow at about 30 per cent annually and become a
US$ 30 billion industry by 2010.
Rapid growth of the warehousing sector: The role of a warehouse has also transformed
from a conventional storehouse to an inventory management set-up with a greater emphasis
on value added services. Warehouses now provide additional services like consolidation and
breaking up of cargo, packaging, labelling, bar coding, reverse logistics etc. It has emerged as
a critical growth driver, leading to large investments by logistics companies for the
development of warehouses and logistics parks. Warehousing and related activities currently
account for about 20 per cent of the total logistics industry. Currently, the organised
warehousing industry in India has a capacity of approximately 80 million metric tonnes (MT)
and is growing at 35 to 40 per cent per annum. An investment of approximately US$ 500
million is being planned by various logistics companies for the development of about 45
million square feet of warehouse space by 2012
Logistics parks – One-stop shop for logistics needs: The concept of a consolidated logistics
centre can be traced back to the Foreign Trade Policy of 2004, which led to the development
of Free Trade Warehouse Zones (FTWZ). While FTWZ were aimed at facilitating import and
export of goods, the need for a one-stop shop that could additionally cater to the domestic
market led to the development of logistics parks as a part of the infrastructure industry in
2005-6. A logistics park is a notified area that facilitates domestic and foreign trade by
providing services like warehousing, cold storage, multimodal transport facility, container
freight stations etc. This area also acts as a place where a company can unload cargo for
distribution, redistribution, packaging and repackaging.
http://www.yarnsandfibers.com/news/index_fullstory.php3?id=13880§ion=34&country=India&p_type=General
Characteristics of the Garments &
Textiles Industry
• Industry Statistics
The total market size of Indian textile and apparel industry was about $52 billion during the
financial year 2008-09, out of which the domestic industry accounted for $34.6 billion and
the remaining was accounted for by exports68.
The Indian Textile sector provides direct employment to over 33.17 million people and is the
second largest provider of employment after agriculture. 69 Besides, another 54.85 million
people are engaged in its allied activities. The sector contributes about 4% to the country’s
gross domestic product (‘GDP’), 11% to industrial production, 14% to manufacturing sector,
9% of excise collections, 18% of employment in the industrial sector and 12% to the
country's total exports70. The sector which was growing at 3-4% during the last six decades
has now accelerated to an annual growth rate of 16% in value terms and is expected to reach
the level of US $115 billion (exports $55 billion and domestic market $60 billion) by 2012.71
Indian textiles, handlooms and handicrafts are exported to more than 100 countries, with the
US being the largest buyer. Readymade garments are the largest export segment, accounting
for almost 41 per cent of total textile exports. The Indian Government aims to increase textile
exports from India to $50 billion by 2010 and is taking steps to achieve the desired target.72
The strong international competitiveness of India's textile and apparel industry can be
attributed to a number of factors:-
•
Vertical Integration: India's textile industry is truly vertically integrated from
raw material to finished product, including fiber production, spinning,
knitting and weaving, and apparel manufacture. Business and cultural
linkages with neighboring countries like Bangladesh, Sri Lanka, Nepal,
Thailand, Myanmar and China provide a platform for sourcing from them as
well.
Production Variety: Raw material production includes cotton, silk, wool,
linen and man-made fibers such as polyester, viscose, acrylic, and
polypropylene. Indian companies have built global scale even in non-
•
http://www.ibef.org/industry/textiles.aspx
http://www.conversationsforabetterworld.com/2009/07/women-and-poverty-indias-textile-industry/
70
http://www.citiindia.com/indian_overview.asp
71
http://smetimes.tradeindia.com/smetimes/news/top-stories/2008/Oct/13/textiles-industry-achieves-16-percent-growth-
rate.html
72
http://www.india-server.com/news/indias-textile-exports-at-20-5-billion-467.html
69
68
traditional areas. Fabric production includes fine dress fabrics, shirting,
fabrics for trousers/shorts, worsted suiting, denim, fleece, jersey, flat/woolen
knits, technical fabrics, and more. Apparel production includes active
sportswear, outerwear, foundation garments, suits, socks, infant wear etc.
Production of made-ups includes a wide variety of bed, bath, and table
linens, kitchen accessories etc.
•
Labor Force: India's textile and apparel industry directly and indirectly
employs millions of people. The country has an abundant, low-cost base of
labor which has long-term sustainability and skill in fabric and garment
making.
Capacity: India's industry has consistently remained flexible in terms of
production quantity and lead time and thus presents the possibility of
producing quantities as low as a few hundred pieces.
Operating Environment: The textile and apparel industry is an important one
to India. Import duties on capital equipment are low. Fabrics and other raw
materials can be imported duty-free if made up into garments and re-
exported. The apparel industry can import duty free specified trimmings and
embellishments like fasteners, rivets, garment stay, laces, badges, sewing
thread, sequin, tape & others for export production.
Complete Supply Chain: India has a complete supply chain - from fibres to
finished products. At the start of the supply chain, India is one of the world's
biggest suppliers of raw cotton. At the end of the chain, India is capable of
supplying large volumes of apparel and home textiles - and the quality of its
products is improving all the time.
Flexibility: The industry in India is also highly flexible. Large firms are able
to export basic apparel products which require large-scale production, while
small and medium size firms can offer high fashion garments which need to
be manufactured in small quantities and delivered quickly.
Growth Opportunities: As well as being a major exporter, India also
provides growing opportunities for foreign investment, collaboration and
joint ventures following a liberalization of its foreign direct investment
(FDI) policy.
Other drivers of investment and collaboration include India's expanding
domestic market for foreign brands and the benefits to be gained from
partnering with competitive Indian firms for selling in overseas markets.
•
•
•
•
•
•
• Textile Exports
India’s textile exports can be broadly categorized into two large segments- apparel, which
contributes nearly half the revenues, and non-apparel exports like yarn and fabrics, both
natural and man-made.
The Indian apparel export sector has witnessed a whole graph of ups and downs till early
nineties. With buying patterns changing, the repercussion of the shift in retail sourcing is
being felt at the sourcing centres around the world and more so in India. India has always
been recognized for its traditional skills and exclusivity in garment designs and has been a
major sourcing destination, primarily for the European market, which is much more fashion
conscious and has a more evolved retail system.
The emphasis is moving away from one centralized buying agency to different buying agents,
looking after specific product needs. Over the decade, the abilities of Indian apparel exporters
have become regionalized and every region has come to be known for a specific type of
product category, which the buyers, over the years, have also come to recognize. In an
attempt to capitalize on these strengths, buyers have developed sourcing relations with
different buying agents in different regions.
India can broadly be divided into two major buying hubs viz. North and South. While the
Northern hub (particularly Delhi) has come to be recognized as a strong centre for value-
added and high fashion garments, the Southern hub (particularly Bangalore/Chennai) is more
recognized for its ability to do better in basic garments. The reasons for this growing
polarization of capabilities are influenced by many factors including management attitudes,
availability of skilled and disciplined labor, ease in import of fabrics and the emphasis on
compliance and product development.
India's textile exports declined by about 2% during the financial year 2008-09 to
$21.75 billion due to slump in demand from global economies like the US and Europe which
are reeling under the impact of the financial meltdown73. The worst hit was handicrafts which
saw a decline of 48% during the year under consideration, followed by cotton yarn and jute
products which fell by 11.8% and 9.5% respectively.
73
http://www.highbeam.com/doc/1G1-201410600.html
Key Drivers of the Garments & Textiles
Industry
Some of the key drivers of the Indian Apparel Industry are as under:-
Phase-out of MFA: Under the WTO-negotiated agreement on Textiles and Clothing, the
whole global textile and apparel trade is now free of quota restrictions, which allows
producers to export as much as they can sell. Moreover, it is now considered likely that
international retailers will begin sourcing from countries like India and China in order to
survive the cut-throat pricing war being waged in the Global retail segment74. The Indian
textile industry is witnessing high dynamism after abolition of quota restrictions. CRISIL
Research expects garment exports from India to grow at a CAGR of 11-12% to $16 billion by
2009-10 while the domestic sale of ready made garment is expected to grow at a CAGR of
10-11% to $24 billion by 2009-10.
Increasing demand: The increasing demand for branded clothes coupled with higher
spending power has pushed up the leading players to set up shops and increase their market
penetration.75 More than a dozen international retailers have set up shop in India over the last
couple of years to source their apparel requirements, dispensing with the earlier practice of
operating through local buying agents. This development coincided with the Indian
Government's decision to throw open the garment sector to large players some years ago and
the entry of a number of domestic textile majors into the apparel segment in a big way. The
opportunities for Indian manufacturers are huge in ready-made garments. India’s ready-made
garments sector was stripped off its small scale industry status less than four years ago. As a
result, textile firms were able to undertake massive capacity expansion drives over the past
couple of years. The extension of the textile up-gradation funds scheme (TUFS) will allow
for further expansion.
Comparative Advantages: India has several comparative advantages in the textile sector,
including an abundant availability of raw material and labor. It is the third largest producer of
cotton in the world after China and USA accounting for about 14% of the world cotton
production. It has the distinction of having the largest area under cotton cultivation in the
world ranging between 8 million to 9 million hectares and constituting about 26% of the
world area under cotton cultivation 76 . The country also accounts for about one fourth of
global trade in cotton yarn besides having high level of operational efficiencies in spinning
and weaving. Moreover it ranks fourth in terms of staple fiber production and sixth among
filament yarn production77.
74
75
http://www.blonnet.com/2004/09/27/stories/2004092702320100.htm
http://www.textilereview.com/mar_editorial.htm
76
http://www.cotcorp.gov.in/shares.asp
77
http://www.commodityonline.com/commodities/fibers/kapas.php
Sourcing choices arise from profitability. This includes considering costs, such as, buying
factors of production, like land, buildings and machines versus factors affecting revenues,
including pricing, marketing, and distribution. The issues of labor, material, shipping costs
and tariffs structure also affect sourcing choices. Since apparel production is a labor-intensive
activity, wage rates are also a major factor in sourcing decisions. This gives immediate
competitive advantage to producers in countries like India and China to export to more
developed and high cost countries like the United States and the European Union.78
Good Training Institutions: With the establishment of training institutions like the National
Institute of Fashion Technology, many high quality designers who are able to churn out
modern designs and interact with buyers are making an impression. This is a distinctive
strength of Indian companies.
Government initiatives: Government policies have played a vital role in the steady growth
and development of the Indian apparel export industry. 79 The Government is creating a
congenial environment by reducing cost of production, rationalization of excise duty structure
and removal of infrastructure bottlenecks.80 Some of the recent reform measures that have
been undertaken by the Government are as follows:
•
Creating level domestic market playing field by extending de-reservation,
uniform application of excise duties and further reduction in import duties on
apparel, textiles and machinery.
Revising labor laws (flexible exit policy), improving infrastructure
(minimize power outages and port delays) and improving availability of high
quality textiles in order to increase foreign direct investment.
Establishing bilateral agreements with US and EU under the quota free
regime, to be competitive against other low cost exporters such as Sri Lanka.
Setting up institutes for training skilled operators on new technologies so as
to speed up production and gain scale.
Foreign Trade Policy:-
Handicrafts and Handloom sectors, among others, have been
identified as Special Focus Initiatives;
Duty free import of trimmings and embellishments for Handlooms &
Handicrafts sectors have been increased from 3% to 5% of Free On
Board value of exports;
78
79
•
•
•
•
http://www.iigm.in/apparel.html
http://www.dailytimes.com.pk/default.asp?page=2008%5C03%5C15%5Cstory_15-3-2008_pg5_6
80
http://www.hindu.com/2006/05/21/stories/2006052104201000.htm
Import of trimmings and embellishments and samples shall be
exempt from Countervailing Duty;
Handicraft Export Promotion Council has been authorized to import
trimmings, embellishments and samples for small manufacturers; and
Establishment of a Handicraft Special Economic Zone
http://www.rediff.com/money/2005/aug/26guest.htm
84
can be facilitated by collaboration with marketers and fashion houses in the United States,
European and Japanese markets.
Processing Houses: There is a scarcity of processing (dyeing and printing) houses in India.
Hence, a policy support is needed from the government and big manufacturers to set up large
processing houses. Garment manufacturing is labor-intensive, and mostly uses female labor.
Seasonal Nature: Garment manufacturing is highly seasonal as people all over the world
tend to buy more new clothes in certain seasons. On the other hand, as fashions tend to
change, it is not possible to manufacture and keep stocks for any length of time. Therefore,
the garment industry tends to be highly seasonal. Furthermore, if as a result of any reason
beyond the control of the manufacturers, the export market takes a dip, the manufacturer will
have to scale down operations. Employment laws in India are not very flexible to
accommodate these special characteristics and requirements of the garment industry.
Domestic Market: While the Indian domestic market is very competitive at the low end of
the value chain, the mid or higher ranges are over priced (i.e., ‘dollar pricing’). Firms are not
taking advantage of the large domestic market in generating economies of scale to deliver
cost advantage in export markets. The Free Trade Agreement with Singapore and Thailand is
expected to allow overseas producers to meet the aspirations of domestic buyers with quality
and prices that are competitive in the domestic market. Ignoring the domestic market, in the
long run, will peril the export markets for domestic producers. In addition, high retail
property prices and high channel margins in India will restrict growth of this market. Firms
need to make their supply chain leaner in order to overcome these disadvantages.
85
http://www.fibre2fashion.com/industry-article/17/1658/recession-cannibalizes-more-indian-textile-jobs1.asp#
Budget 2010 Implications on the
Garments & Textiles Industry
•
The Finance Minister has proposed a one-time grant of Rs 200cr to the government of
Tamil Nadu towards the cost of installation of a zero liquid discharge system at
Tirupur to sustain knitwear industry. The dyeing units of Tirupur, which is one of the
major textile hub of India, have been facing problems because of environmental
concerns.
The new environmental regulations require the dyeing units to migrate to a zero
discharge system. The government’s proposal to set up an effluent treatment at the
textiles cluster is expected to offer a much-needed relief to the struggling industry.
The Finance Minister has offered extension of existing interest subvention of 2.0% for
one more year till March 31st, 2011 for exports covering handicrafts, carpets,
handlooms and small and medium enterprises (SME). The export oriented units have
seen massive layoffs and shutdowns in the wake of slowdown and the government’s
move is expected to give push to the exports sector with exporters getting access to
funds at cheaper interest rates.
The Finance Minister has proposed to launch an extensive skill development program
in the textile and garment sector by leveraging the strength of existing institutions and
instruments of the Textile Ministry to train 30 lac persons over 5 years.
•
•
•
Key Inhibitors
•
Investment climate parameters such as availability of skilled staff, operational issues
(land, licenses and clearances, governance) and taxation were perceived as the prime
constraints, followed by material costs, contract enforcement and dispute resolution,
barriers to entry, and subsidies and fiscal concessions. Foreign contractors who were
surveyed cited as the most critical issues cultural bias in project management style,
poor governance, bureaucracy and corruption, risk allocation practices and contract
conditions, visa and travel document processing for expatriates, and lack of
information on the road construction industry. Besides these, foreign contractors also
perceived some intangible constraints, such as preference given to domestic
contractors during the bidding process.
Delays in pre-construction activities are a recurring problem across all road
construction contracts. On average for national highway projects it takes 50% more
•
•
•
time than scheduled to hand over encumbrance free land to the contractors. Often,
encumbrances such as the extent of land acquisition, utilities to be shifted and trees to
be removed are not clearly identified and dealt with in a timely manner. These
activities are also hampered by cumbersome procedures for obtaining the necessary
clearances, unclear laws and regulations and a lack of coordination between the
various government departments and levels. There is a distinct lack of a ‘spirit of
partnership’ between the contractor and the employer. This is critical to effective
project execution, as evidenced in other countries. The result is time and cost overruns
and related disputes that invariably end up in litigation.
Contractors from other sectors face entry barriers such as strict qualification
requirements related to previous technical experience in the sector. Rampant
cartelization and collusion among contractors in some states also prevent these
contractors and non-regional bidders from even submitting their bids. Furthermore, it
is not possible for small and medium contractors to get a rating that would facilitate
easier access to credit for expanding their business. The lack of a single construction
law (such as in China and Singapore) with the requisite legal framework governing all
aspects of construction is another barrier to entry for players interested in entering this
sector. Such a law would also strengthen the dispute resolution mechanism and reduce
the burden on the courts and the ensuing delays in satisfactory resolution of cases.
Inadequacy of skilled human resources is a major constraint across the road
construction industry. Its slow evolution, the rising appeal of other streams of
engineering such as computer science, the closure of civil engineering specialization
in some institutes, the non-availability of suitable jobs upon graduation (in some
states), and the availability of more lucrative jobs in information technology and
financial services are all draining the industry of civil engineers.