competitiveness of Indian firms would be contingent on developing long term distinctive ... Firms in these countries are gradually moving up the product.
COMPETING THROUGH CAPABILITIES: STRATEGIES FOR GLOBAL COMPETITIVENESS OF THE INDIAN TEXTILE INDUSTRY
Pankaj Chandra Professor Production & Quantitative Methods Area Indian Institute of Management Vastrapur, Ahmedabad 380015
Revised June 1998 This paper appeared in "ECONOMIC & POLITICAL WEEKLY" vol.XXXIV, no. 9, M17-M24, 1999.
Abstract The global textile trading regime is going to change drastically from the year 2005 with the phase-out of MFA. Its implication on competition will be significant. Countries that have already put competition policies in place and firms that have been improving their capabilities are the ones that are going to benefit the most. In this paper, we discuss the nature of competition that Indian textile firms are going to face domestically and abroad in a few years from now. We point towards some of the characteristics of competitive firms that will emerge in the ensuing period. The paper presents a summary of comparisons of Indian primary textile firms with those of China and Canada (based on a primary plant level survey in the three countries). In addition, we discuss some processes that are helping the Chinese textile industry grow rapidly. We argue that competitiveness of Indian firms would be contingent on developing long term distinctive capabilities. We also present three key strategies, namely Commitment, Coordination & Cooperation, for developing distinctive capabilities and provide illustrations of initiatives at the firm level, industry level & the government level that would form part of the implementation package for each strategy.
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Acknowledgement The author thanks an anonymous referee for several useful comments.
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I. Introduction Does the phase-out of MFA on January 1, 2005 not mean that the Indian textile industry will be able to increase its global market share ? Does the cost advantage that Indian firms have not imply a continuing comparative advantage ? Do Indian firms have an advantage while supplying the home market because of better understanding of and proximity to the market ? Are there distinctive competencies that firms need to have in order to remain competitive in the future ? Is technology investment a sufficient condition for sustaining growth in the sector ? These are some of the many issues that need to be addressed in assessing the competitiveness of the Indian primary textile industry and in designing strategies for meeting the challenges in the post-MFA period. What is quite clear is that, since the nature of competition will change dramatically, firms will have to evolve newer strategies that are based on contingent strengths and long term perspectives. In this paper we argue that only those firms that develop unique capabilities will qualify to compete in the global textile markets. The global market share by value of the Indian primary textiles hovers around 2.8% (as of 1996) as compared to 12.5% of China. Countries like Korea (with a market share of 5.6%) and Taiwan (5%) are ahead of India while Turkey (2.75%) has caught up and others like Thailand (2.3%) and Indonesia (2.0%) are catching up rather quickly. On the one hand, technology which has become a commodity has changed drastically in this century alone with spinning speeds having increased 25 times and weaving speeds having increased 20 times (Hartmann, 1997). On the other hand, trade blocks around the world have created there own “captive low cost production zones”: Turkey, Hungary, Poland and Czech Republic in EU; Mexico, Honduras and Caribbean in NAFTA; and Vietnam, Laos, and Cambodia in the ASEAN. Factor advantage is shifting away from traditional low cost countries. Firms in these countries are gradually moving up the product complexity ladder and are finding new sources of innovation, chiefly new applications and enhanced processes. The spinning sector in India has performed extremely well in the last four years - it is expected that the world market share would touch 30% by the end of 1997. Most of this impressive performance has come through large scale investments in new ring spinning machines - in 1996, of the total of such new machines purchased around the world, 52.6% was procured by India (Strolz, 1997). It is interesting to note that the recent devaluation of the bhat in Thailand and the rupiah in Indonesia have led to drastic lowering of yarn prices and spinners in India are struggling to recover their costs. With inventories sitting in warehouses and the interestclock ticking on capital investments (most often made in foreign currency), it would be a while before our spinning industry starts to recover. This begs a question: what are some distinctive capabilities that these firms have developed other than technology (that is already a commodity) which will ensure that firms are able to withstand the increasing uncertainties of global markets ? And more important, how do firms develop such competencies ? Are there certain industry practices that help firm manage such uncertainties with relative ease ? In this paper we argue that firms in the Indian primary textile industry will have to develop some distinctive capabilities to compete in the future once the Agreement on Textiles & Clothing (ATC) expires. In the next section, we present the emerging competitive scenario and highlight the nature of competition that Indian firms are going to face. In section III we present a summary of the finding of a multi-nation benchmarking study that establishes the operational status of 4
Indian textile industry. In section IV, we present some salient features of practices from the Chinese textile industry and the impact that they have had on industry performance. In section V, we develop a framework for “capability based competitiveness” and discuss key strategies towards building distinctive capabilities. We also point towards the role of textile policy in assisting such efforts. We present our conclusions in the last section II. Competitive Scenario When MFA expires on 31st. December, 2004, most of the product categories in which North America and Europe compete would have already seen free trade for at least a year while those which are crucial for Indian exports would then get off-quota. One implication of this backloading agreement would be that Indian firms may start to see increased domestic competition from foreign firms in about two years time from now. They will face imports from other countries as well as entry of MNCs in existing domestic product segments as well, in addition to preparing for export markets that would open-up in 2005. These new firms will also bring in new products to the domestic markets. The competitive environment is poised to change in several other ways as well, e.g., *
new products will replace some of the existing mix thereby affecting capacities of domestic firms;
*
increase in variety with a considerable reduction in volume per variety; a study of the textile firms in the US by Abernathy et al. (1995) reveals that the average number of SKUs1 per business unit increased from 6,411 in 1988 to 13,261 in 1992 and that in 1992 firms on the average introduced 7,257 new SKU’s while they dropped from the product line, on the average, 5,788 SKUs;
*
several countries will have upgraded their technology stock with latest versions by the year 2005; for example, Turkey has been the largest investor in open-end rotor in 1996;
*
strong productivity increases by firms in North America & Europe; for example, Unify Inc. a spinning firm in the USA has tripled its sales since 1988 to US$1.7bn and most of addition in capacity has come through process improvements and not capital investments (McCurry, 1997);
*
stronger environment requirements both from the citizens as well as the legislature; the process industry is already penalized for not treating its effluents responsibly; pressures will also come from international consumer groups to adopt processes that do not generate polluting effluents;
Firms around the world have developed different kinds of capabilities that have allowed them to perform well in the face of severe competition. In the long run, a competition between firms is a 1
A SKU or a Stock Keeping Unit is simply the product for which inventory is maintained. For example, a size 40 plain white cotton twill shirt will be a separate SKU from a size 44 plain white cotton twill shirt as would be a size 40 plain pink cotton twill shirt.
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“contest of competencies”. Firms whose competencies are more robust and more distinctive tend to gain more than others. Examples of such competencies are given below. What is worth noting is that it would be firms with these type of capabilities who would compete with Indian firms both in the domestic and international markets in few years from now. Some examples of how firms around the world have been changing are: *
In Prato, Italy, large mills have disintegrated to form a cluster of smaller firms that specialize in a single process. They compete on end products and collaborate on technology development and infrastructure maintenance. The output of this cluster and the variety produced has increased many fold since this “graceful disintegration”.
*
German manufacturers have implemented “lights out” weaving for 24 hours where weaving machines have are loaded with weft packages just before shutdown on Sundays and computers adjust weaving speeds to optimize yarn speeds.
*
Japanese and American plants are using TQM practices like Design of Experiments for optimizing Weaving Practices.
*
In Indonesia, one operator works 48 looms and shares the profits stemming from them.
* last
Burlingtons in USA have reduced manufacturing and delivery lead times 200% in the five years and in-plant defect rates are now measured in parts per million.
*
Firms in southern USA are researching the use of genetic engineering, cellular biology and tissue culture to grow coloured cotton in order to eliminate the dyeing process.
*
Firms are using “looming robots” to setup looms, load and unload them and to transport the cloth to the stock room.
References on the above and details are documented in Chandra (1998). Successful firms are changing their technology stock and the organizational structure that uses this technology simultaneously. The former includes updating machinery, plant infrastructure, transport & handling equipment, storage facilities, process control, ventilation & environment control systems, effluent generation & treatment systems, etc. The later includes reporting & communication structures, manufacturing management practices, data collection & planning mechanisms, training & evaluation, grievance handling process, process & product innovation, subcontracting networks etc. It is now well established that firms that pursue technological change along with organizational changes get maximum advantage of investment in technology. In other words, technology (or codified knowledge) that is not developed in-house is accessible to all competitors and it does not provide a distinctive advantage to a firm. However, managerial practices (or tacit knowledge) that are uniquely designed to take advantage of technology can be copied less easily and hence provides competitive advantage. Toyota’s development & implementation of the JIT is once such example. In textile industry, these managerial practices form the important link between technology adoption and competitiveness. The key issue is the ability of firms to increase their productivity between two epochs of technology acquisition. 6
Manufacturing management has played a critical role in linking technology with competitiveness. It requires (a) development of an effective work environment, (b) emphasis on capability building process (of both people and technology) and (c) a mechanism for evaluating the performance of the manufacturing regime. The reader is referred to Chandra et. al. (1998) for a literature review and discussion on each of these factors. Gold (1997) mentions that recent industrial experience from US suggests that extensive advertising/marketing, take-overs of competitors by firms have provided only short term profitability & competitiveness. His study shows that the two most consistent sources of improved competitiveness have been “increasing the performance capabilities of the products, and offering more favourable product prices for comparable products”. Improving the basic technology on which the product design & its performance is based, improving the quality & mix of materials (raw material or intermediate products) and advances in effectiveness & quality of the manufacturing operations are seen by Gold as the three key sources for achieving the above. They also shape the long-term capabilities of any firm. In the next section we report some finding from a benchmarking study to assess the capabilities of the Indian primary textile industry based on the above discussion. These findings will highlight how well, on the average, our firms are prepared to meet the competition from firms that have characteristics as described above. III. Benchmarking the Indian Primary Textile Industry In this section we describe the findings of a plant-level, cross-country study to benchmark the capabilities of firms on a variety of operational parameters. This was a collaborative study between the Indian Institute of Management, Ahmedabad, McGill University, Montreal and Renmin University, Beijing. Primary data was collected from 173 plants in Canada, China and India through a standardized questionnaire and detailed interviews were conducted with managers at several of these plants. Indian firms have been compared with Chinese (representing a high growth country in terms of global market share) and Canadian (a proxy for high productivity oriented North American firms) firms. The sample comprised composite mills as well as firms that performed one or more of the spinning, weaving and dyeing & finishing operations. Most firms were medium to large in size (in terms of employment & sales). A large majority of firms were profitable and care was taken that each country sample included a representative proportion of firms that were performing well in global markets. Information from various trade journals were used to identify such firms. Similarly, the sample also included a few firms who focused on domestic markets only but were sucsessful in terms of sales turnover. A sample of these findings is reported in Table 1. The numbers in the table represent an index giving a relative position of firms on a given factor as compared to the Canadian sector (whose index is taken as 100 for all factors). These comparative indices are based on raw data which is provided in Chandra et al. (1998). The index value for a country on each parameter is determined by scaling the raw data on that parameter vis-a-vis the Canadian raw data and then representing it on a base of 100. For example, the index on the quality of work environment is based on actual data on wages, incentives for plant workers (e.g., profit sharing, housing & transport, pay for 7
knowledge etc.), worker motivation programme (e.g., job rotation, flexible work schedules, employee suggestion programme, alcohol/drug abuse programme etc.), type & frequency of grievances filed (e.g., related to discipline & discharge, safety & health, overtime assignment etc.), nature & extent of training programmes etc. Chandra et al. have developed aggregate raw scores for each such factor. These scores were used to create our index. These findings represent “average values” while outliers existed in each of the three country samples. Table 1 is a representative sample of these comparisons. It may be noted that many of the observations that are made in the following paragraphs are based on data on specific factors that have been aggregated to give the indices that are shown in Table 1. Both Canadian and Chinese policy makers have recognized the importance of this sector to their respective economy and have developed targeted programmes (like the Programme to Enhance Productivity or PEP in Canada) to improve productivity of their firms. It is apparent from the table that Indian firms have typically produced a large variety of counts which, on one hand reflects the flexibility at the plant level while on the other hand reflects a lack of strategic response at the firm level, i.e., focusing on few products and developing capabilities to improve quality of both the product & the processes. Many firms in India continue to serve, profitably, the low end of the market. This has had two salient effects in conjunction with domestic protection: first, these firms have not graduated to producing & serving higher value added market segments; and second, they have not made efforts to introduce better products (at the same cost) to replace the low quality offerings. While there exist islands of excellence in firms like Arvind or Coats or Bombay Dyeing etc., organizational practices within firms in the primary textile sector are often “Dickensenian”. It is not unusual to find firms where large scale dyeing is still done manually (by hand) or where the humidity in loom rooms are unbearable or where the worker (as well as managers, at times) motivation is very low. Such plants are to be seen in China as well. While the wage levels in India are low, those in China are almost half of those in India. When one factors in the quality of the workforce, the impact of wages on competitiveness decreases as the ability of the workforce to bring about sustained enhancement in productivity is limited. This is one of the factors why Indian firms do not ‘indulge’ in any indigenous R&D (the average value is 0.2% of sales) - more on this later. Interestingly, there now exists a market for innovation in China - periodically, innovators get-together and share/sell their innovation to firms. Many PSUs in China have a floating payroll system where the wage bill of a firm is pegged to a negotiated output level. This has been inducing certain amount of change in the internal environment of firms as many benefits have been linked with productivity. Most firms in Canada and some in China and India have recognized that in order to improve productivity of plants, workers must be treated fairly and that work environment must be healthy and safe. McCurry (1997) points out that the textile worker, in times to come, cannot afford to remain uneducated as new technology demands new skills. He points that successful firms in the US are holding extensive education programs for their workers and managers. For example, establishing process capability of machines has become necessary to control defects. This requires operators to plot statistical charts, interpret them and then modify process parameters accordingly. Many computer assisted machines generate and capture such performance data automatically. The ability of firms to use such a technology (and consequently produce a value adding product mix) 8
may, to a very large extent, depend on the skill level of its workforce. The relative lower quality of the technical workforce & the operators, as shown in Table 1, is directly linked with low investment in training by Indian firms. Similarly, the technological capabilities of Indian firms are lower, on the average, as compared to those in Canada or China. Most investments in India, in recent years, has been in spinning units. However, 65% of spinning machinery is still more than 10 years old as compared to 90% in Italy which has the most modern spinning sector (Strolz, 1997). The picture in weaving and dyeing & finishing processes is much worse. China invested in 68,000 shuttle-less looms between 1987 and 1996 as compared to 8,000 in India or 30,000 in Indonesia or 81,000 in Korea. Its is estimated that half of the 3.6 million shuttle looms around the world are in India (Strolz, 1997). There is a noticeable absence of adequate capacity in good quality dyeing and finishing processes. These two processes limit the entry of Indian textiles into higher value products despite a modern spinning sector. Some other challenges that the Indian primary textile firms will have to overcome can be classified as (a) operational, (b) structural, and (c) strategic. Operational challenges include reducing manufacturing & delivery lead times, improving product and process quality and improving plant & equipment maintenance. Chandra et al. (1998) show that production cycle times in Indian plants are almost twice those in Hong Kong or Korea. Specifically, production run sizes are longer in Indian plants (across the three processes) as opposed to those in Canada thereby resulting in higher waiting times for a lot and, consequently, resulting in higher working process inventory. The average manufacturing & delivery lead times from procurement of yarn to shipment (i.e., receipt by customer) for our apparel exports is between 144 to 182 days (Raman, 1995). This is often longer than an entire fashion season. Most firms do not follow any scientific approach to shop floor planning and control, thereby, leading to poor coordination between processes. Batches wait for days before they get processed at each machine due to nonsynchronized order releases. Planning tools like MRP or JIT are almost non-existent in most Indian textile plants. There is lot of scope for improvement on these factors by introducing appropriate shop floor planning systems. For example, a good bale management system which allows proper combinations to be formed from various quality bales would go long ways to reduce waiting times and defect rates. (Interestingly, such a system can be setup at a central facility for common use). High defect rates (about 3-5% in India, 1-3% in China and 0.01-0.1% in Canada) are another source of delay, in addition to increased costs. In fact, a recent survey of 300 spinning mills in 27 countries revealed that, of the 14 most contaminated varieties of cotton, 8 were from India (Strolz, 1997). Most quality problems stem from weak quality measurement and control systems. Moreover, spinning a poor quality cotton or weaving a poor quality yarn is wasting productive machine capacity. This calls for identifying and removing defects at source. Improving quality practices at the ginneries should be one of the most crucial item on the agenda of the textile industry. It can be easily shown that improvements in quality at this stage not only benefits the spinners but also the ginners via higher premiums on their product. The same can be said of poor housekeeping and weak plant & equipment maintenance systems in Indian plants. Healthy work environment (both for people & machines) is necessary for higher productivity. Best practices (for example, in world class plants one cannot enter a loom room without ear plugs) only add value in the long run. They help in attracting better customers, employees and suppliers.
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Structural challenges include looking at the operations of the entire sector as a single entity. There is poor coordination between different entities that comprise the supply chain, like the cotton producers, ginners, spinners, weavers, dyers & finishers, knitters & apparel producers. There is still no recognition of the fact that they are interdependent in their growth. No longer are firms competing in global markets by themselves. When Benetton competes with Stefenal, it brings the strength of its own supply chain (i.e., cotton farms with which it has special relationship, its 1000 or so small suppliers, its transport network, its franchises etc.) to the market. Benetton has linked its suppliers’ low cost weaving skills with its own high quality dyeing resources to deliver orders at short lead times and at low cost. Ad hoc supply chains based on short term advantages and poor coordination between various entities are resulting in delayed information and product flow between various entities. This is leading to high inventory level in Indian supply channels. This is corroborated by our survey which revealed that 36% of Indian textile firms kept more than 75 days of RM inventory as opposed to an average of 11% and 13% of firms in China and Canada respectively. Similarly, poor managerial practices and technology in the processing sector is limiting the ability of many yarn and cloth producers to climb up the quality & value added ladder. Another challenge before the sector can be termed as strategic in nature. There are two aspects of this problem that are worth noting - first, there appears to be too much conflict between the small-medium and the large players in the industry. Composite mills or large plants lack flexibility to produce variety or small orders at low costs. Powerlooms/small plants have the flexibility due to low overheads but have outdated technologies and work practices to produce high quality products. In a market where garments have to be delivered quickly at low cost, a modern powerloom sector will be an asset but a reservation price of Rs. 3 crores cannot buy even 20 Sulzer loom (and such investments may be required every 5-6 years to remain competitive). The second issue is related to the first - decisions on product mix choice and product markets are very local and short term oriented which result in short term gain at the cost of long term effectiveness. As a tautology, technology choice decisions have been linked to this later issue. Strategically, a plant cannot be both low cost producer as well as variety provider. Plants make choices on whether to focus on few products at high volumes or to produce a large variety at lower volumes per variety. This becomes necessary as for each type, design of operations, layouts, practices, processes, factors to focus on etc. are different. Plants in India that have followed such an approach have done extremely well (e.g., Arvind, Ashima, Modern etc.) but many others still believe in opportunistic market seeking which introduces in-efficiency in operations. In summary, there appears to be an overdependence on low wages & raw material costs as source of competitive advantage. The textile policy regime, protected environment, and certain historical factors have all contributed in making this sector very static and un-responsive to changes that have been happening around the world. Table 2 summarizes some of these concerns though we have decided to focus on firm level strategies and responses (note: several of these concerns were highlighted during discussions at Texcon 97).
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IV. What The Chinese Are Doing Right ? Chinese textile industry is an interesting case study of how policy intervention, firm level changes, and strategic technology choices helped it to become an important player in the world market. It is important to point out that most of these changes have taken place over years and that the industry has been successively climbing up the value added ladder. While it is difficult to create a single visual of these efforts, one can identify several factors that have contributed positively to the growth of the Chinese textile sector. As Wang (1998) points out that the “four modernization” programme in China after the Cultural Revolution recognized textiles as a key sector which could generate large amounts of foreign exchange which was necessary for investment in other sectors of the economy. As a result, the number of textile enterprises grew from 4,551 in 1978 to 11,242 in 1991. Together, their current global market share is close to 26% including both primary textiles and apparels. The Chinese industry has followed a two pronged strategy in building market share, i.e., developing large volume/low cost units and low volume/high value adding units. This dual strategy has drawn Chinese expatriates from Hong Kong, Taiwan, Europe and the US who have played the role of “market makers” as well as producers with factories in China. It must, however, be mentioned that the quality of the domestic market is far inferior to that of export markets and is thereby open to competition, just like India, after year 2004. In fact, the extent of competition in the domestic market is not as intense as one finds in India. Chinese policy has encouraged export oriented units in a variety of ways that range from the availability of credit for buying new equipment to canalizing raw materials and finished goods through centralized channels. This has helped in reducing uncertainty in availability of good quality material for exports. In addition, it has setup a single apex body for each of the sub-sectors in order to facilitate export formalities and to better coordinate across the sub-sectors. With implementation of the “responsibility system,” pressures on most state enterprises has increased to perform, especially, since the wage bill has been linked to output levels. This has driven many firms to export as that was the only way to fund purchase of new technology through which they could increase their output and consequently their wages bills. Another pillar in this modernization process has been technological upgradation. Since 1985, cotton & silk firms have imported equipment worth US$ 1bn each year (Wang, 1998). However by the year 2000 only 2025 % of the total technology stock would have been updated. (In 1992, 1.08 million cotton spindles and 18,000 looms were made obsolete & eliminated.) Another example of such investments has been the State run Beijing No. 3 Cotton Mill which has invested close to US$1bn in new equipment in the last ten years. Another feature of this growth has been a spate of joint ventures that each of these firms have entered with firms outside China - most of these firms produce to specifications provided by foreign partners. There has been another facet of development in the Chinese textile industry which has provided a significant long term benefit to individual firms. China does not have a long or strong history of managerial initiatives. However, its secondary and technical education programs are very stringent. Chinese firms have recognized this lacunae and have started to invest in in-company training of its workforce in modern technology and managerial skills. On the average, Chinese 11
textile firms give 70 hours of training each year to an experienced worker as opposed to 32 hours in Canada and 10 hours in India (Chandra et al., 1998). This survey also found that about 16% of Indian firms did not provide any training to a new employee as compared to 1.8% in China. To put these efforts in perspective, the training that a long term auto worker gets as a new hire at Saturn’s plant in the USA is between 350 to 700 hours (Rubinstein et al., 1993). Chinese workunits on shop floor are increasingly making productivity related decisions. Interestingly, the focus of all shop floor programs or technology investments has been improvement of quality which is quite similar to that in India. Joint ventures have brought in new managerial practices which are helping firms upgrade their capabilities. The Chinese government has been anxious to enter new application areas in textiles and has set up a commercial R&D organization, the Chinese Textile Science and Technology Development Corporation, to help develop new capabilities especially in industrial textiles. Finally, Hong Kong has been playing a key role in China’s growth. It provides high quality design & apparel manufacturing and marketing services, efficient financial and shipping facilities that have considerably reduced delivery times, and plants that are capable of quick ramp up to meets customers’ short delivery requirements. This network of low cost operations in mainland China, fashion design, operational skills for quick turn-around & efficient port handling in Hong Kong, and Chinese market makers in Europe & USA have allowed the Chinese textile industry to make significant strides. V. Capability Based Competitiveness The challenges for the Indian textile industry range from defending domestic market shares, starting about two years from now, to entering new markets with existing products to entering domestic & new markets with new products. These require very different types of responses from firms as compared to their current approaches that have been highlighted earlier. A majority of Indian textile products are in the low cost, low value added segment which will never generate enough economic surplus for continuous investment in technology, practices and research. In addition, this segment is most susceptible to competition from other low cost countries, like Bangladesh, Morocco, Honduras, Vietnam etc., who are slowly climbing up the technology ladder. Firms whose source of low cost is any of the following are going to be most vulnerable to competition: * * * * * *
protection in various forms, low wage workers especially with no or little training, old machines which require heavy breakdown maintenance, externalizing of environmental costs to society, clever accounting practices, and product mix that has not changed in a decade.
New markets and applications that can generate higher profit margins will require very different strategic responses from firms. Similarly, new strategies will be required to meet the competition from firms around the world in a post MFA era. What is needed is to change focus from “cost based competition” to “capability based competition”. It must be noted that capability based competition does not preclude low cost, high quality, low delivery time and high value added operations. 12
A firm’s ability to engage in “capability based competition” depends on three key strategies: Commitment, Coordination and Cooperation. Commitment is a decision to be in the business in the “long run”. Coordination is the willingness to see industry as a single “supply chain”. And, Cooperation is learning to jointly develop “operational & technological” capabilities. By focusing on these three key strategies, firms can build distinctive capabilities that will allow them to create a niche for their products. There are several issues worth mentioning here - how does a firm develop such a focus or what is the role of the industry at large or the government policies in developing such a focus ? Or what is preventing firms from developing such capabilities ? While these issues need to be dealt with comprehensively, we will illustrate how a firm or the industry or the government policies can improve the levels of commitment, coordination & cooperation. It must be noted that such initiatives must be able to overcome some of the current weaknesses and should be able to draw from successful models around the world. Table 3(a), (b) and (c) give illustrations of the nature of key initiatives that form the portfolio of successful strategies with respect to developing commitment, coordination and cooperation respectively. Commitment can be developed by investing in long term resources like education of the workforce whether in-company or in-institution. Both, government and industry have to invest in this resource. The government can develop a scheme whereby a fraction of a firm’s tax can be put in an escrow fund which can be withdrawn exactly in amounts spent on worker training. It is not only important for the firm but also for the State to ensure that the industry has well educated workers. Even when workers are empowered, they need to have abilities to make productivity improvements and hence the need for extensive training. Similarly, any investment in improving the quality of life of the workers and their families, outside the realm of salary or bonuses, will provide a long term benefit to growth of the firm in terms of good personnel practices, worker motivation & productivity improvement. Levine (1995) has reported numerous examples where practices like pay for knowledge, employee ownership, sharing of gains, employment security with reciprocal contracts by both workers & management have lead to considerable increases in productivity and profitability of firms. Investment in technology has to be strategic in nature - the timing, nature and extent of investment should provide strategic advantage to a firm at least for a period of two-three years in the future. This issue is closely related to choice of product markets to compete in - product mix should be based on “market pull” rather than “technology push”. Most firms focus on optimizing individual elements that comprise a supply chain (i.e., raw material suppliers, intermediate goods suppliers, end-product producer, distributors and/or retailers) which leads to lack of synchronization. This results in either high inventories in the chain or long delays. Lack or information on production plans, inventory levels, market offtake etc. and variability due to uncertainty in availability of resources, breakdowns, defects, expediting exacerbate this problem. Coordination strategy seeks to bring information at the place of usage and attempts to reduce variability which helps in synchronizing different levels of decisions across the chain. At the firm level, shop floor improvement programmes, evaluation of the value of coordination, and implementation of pull production systems like JIT help in improving coordination. Industry associations can play a crucial role by coordinating demands and flows across the ginners, spinners, weavers etc. Internet can be used successfully to create 13
such a database that can be updated continuously. Similarly, an Advanced Technology Centre needs to be set up which holds regular displays of the state-of-the-art textile technology from world over, coordinates the flows of technology to industry and networks with machinery producers & research centres to provide solutions to various technical problems. To facilitate the coordination process, it then becomes necessary to develop an independent certification agency which can rate the production units and the quality of products coming out of the plants. This is essential given the failure of capital markets to reveal to investors the true (and not the perceived) performance of textile firms. This could help firms to raise funds for long term investments in technology etc. It could form a basis for identifying partners in developing networks. For example, spinning units could enter into long term relationship with certain good (i.e., certified) ginneries; in turn, progressive ginneries would improve their processes in order to get certified which may bring premium to their products. Similarly, government policies can assist this strategy by ensuring that the idea of global supply chains become viable in each segment. This would not only ensure that firms improve their processes but will also ensure that good quality raw materials are available in the right markets at the right time. To remove intersectoral policy distortions, the government will have to re-organize the textile ministry to include all elements of the textile supply chain. This may be an effective way of not only coordinating policies but also in identifying weaknesses across the entire supply chain. (Or else, how will we ever stop receiving complaint of the kind recently made by knitting weavers in Far East about the inferior quality yarn of 30s & 40s counts that came from India. The yarn producers blamed the cotton farmers for providing poor quality & contaminated cotton Shankar-6, H-4 and LRA varieties of cotton while the cotton farmers blamed the Gujarat Government for providing tainted seeds of S-6, S-8 and S-10 varieties. (Business Standard, 1997)). Another strategy which will help firms to develop distinctive competencies is that of Cooperation. Whether it is a firm in the Prato region or Benetton in Italy or textile PSUs in China, they have one thing in common - ability to cooperate on technology development and operational effectiveness. Firms in other industrial sectors, for example, most Japanese automotive companies, Sematech for semiconductor R&D in the US or the Airbus consortium of EU etc., have successfully practised advanced versions of cooperation to mutual advantage of participating firms. Maruti Udyog Limited is one such successful example in our country. Cooperation can take a variety of forms - firms can form strategic alliances for technology development or for pre-competitive R&D or for common infrastructure development. For example, it would be wise for most spinning or weaving units to come together and help ginners improve their technologies & practices as they affect the quality of downstream operations. Similarly, large industrial houses could participate in joint research to develop new varieties of synthetic material with properties of cotton or for developing coloured cotton. When it would come to commercialization, these same firms could compete with different end-products or using different processes. Strategic partnerships can also exist at another level in the form of a “Central-Satellite Firms (or CSF) Network”. Such a network would naturally have a large firm at the centre to which a variety of small firms (representing different elements of the chain) are linked. Such a network will have powerlooms, spinners, ginners, finishers, textile machinery producers, transporters etc. linked together to deliver products to customers. Of course, such alliances are based on unique 14
capabilities that each firm will bring to the CSF network. It allows for firms to develop specific capabilities (by devoting resources to focused activities), reduces uncertainties in operations and provides flexibility to the network. It is clear that, very soon, competition would not be between firms but between network of firms. And those networks that are able to innovate quickly and more frequently in order to provide better quality & variety at low cost are the ones that will increase their market share. For example, this will enable a large mill to accept both large and small volume orders and deliver it using different entities in its own network. This would also leave large firms to play the role of a “master innovator” on a continuous basis. Firms that are willing to accept shared vulnerability and vision of growth as a reality will gain considerably. Moreover, such a concept is based on recognition of the fact that innovation takes place through “technology chains”. For example, to create a new type of a weave or to weave an existing cloth using a new process, the weaving firm will have to depend on the innovative ability of the textile machinery manufacturer who in turn may depend on the machine tool producers or an electronics control company to deliver such a effective machinery. One thing is clear from the experience in other sectors, the government cannot develop and must not control such a network. It can only provide partnership programmes for R&D (including declaring it as an infrastructure activity) or provide patenting support or help in the development of competition policy etc. in order to encourage firms to come together. Individual firms along with the textile industry associations will have to assiduously develop such a system. This would require that various industry associations representing different entities in the textile supply chain (including the textile machinery manufacturers) will have forms an alliance based on shared vulnerability and vision. Then only will the industry be able to shift competition from between firms to between networks which is a hallmark of capability based competition. One would be failing in duty if we do not recognize that the list of top ten corporate houses in India, in terms of R&D investment as percent of sales, includes a textile machinery manufacturer, i.e., Lakshmi Machine Works (the only one from the textile, clothing & related sector in this list) at sixth position for the year 199596 . VI. Conclusions It is apparent, from the benchmark studies, that Indian textile industry has “islands of excellence” but the capability and performance of the average firm is not very high when compared to those in several other countries. The technology stock and work practices in our textile industry are outdated. There are distinct weaknesses in the structure of the industry, in processes like ginning and dyeing (and to some extent, in weaving because of its inability to weave high value fabric), lack of product or process innovation, poor shop floor practices, poor use of modern management practices, inadequate plant & equipment maintenance etc. Given that the trading regime is going to change drastically in the next few years, the Indian textile industry as well as the textile policy will have to be re-organized and reworked. What complicates this effort further is that many countries are either ahead of us in this respect or have forged alliances with several trade blocs which follow a variety of restrictive practices. While this paper does not propose either of the two countries that we have studied, i.e., Canada and China, as models for Indian firms in totality, there are several lessons that we can learn from them to design strategic responses that will provide comparative advantage to our primary textile sector. This, obviously, must include leveraging on our inherent strengths and changing the old mindset on competition. 15
Re-organization of the textile sector has to be done at two levels - the firm level and at the industry level. This re-organization as well as technology upgradation will require highly skilled workforce which the industry, currently, does not have as a whole. Strategic thinking to improve the competitiveness of the sector will require new industry policies, more investment in work force education & technology on a continuous basis, improvement of manufacturing practices in plants, better linkages between various entities that form the textile supply chain and continuous investment in process & product R&D. This will help firms to develop capabilities and processes that would be difficult to imitate by a competitor. The domestic textile sector has been quite competitive and has witnessed many upheavals. It has certain inherent strengths which have to be built upon and new contemporary strengths need to be added. This will make the industry more vibrant and competition more dynamic. With the removal of policy distortions and firm level non-competitive practices, the industry will be on its way to become one of the most modern in the world.
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References
Abernathy, F.H., J.T. Dunlop, J.H. Hammond, D.Well (1995) “The Information -Integrated Channel: A Study of the U.S. Apparel Industry in Transition,” Brookings Papers on Economic Activity: Microeconomics, eds. M.N. Bailey, P.C. Reiss, and C. Winston, Brookings Institution, Washington D.C., pp.175-246. Business Standard, “Tainted Cotton Seeds Spoil Yarn Quality, Exporters Hit Hard,” Dec. 26, 1997, Mumbai. Chandra, P. (1998) “The Primary Textile Industry: Trade Policy, Technology and Practices,” in Technology, Practices and Competitiveness: The Primary Textile Industry in Canada, China and India, ed. P. Chandra, Himalaya Publishing House, Mumbai. Chandra, P., Ming X. Wang, J. Saha, and P.R. Shukla (1998) “ Manufacturing Management in the Primary Textile Industry: Some Assessments from a Plant Level Study in Canada, China and India,” in Technology, Practices and Competitiveness: The Primary Textile Industry in Canada, China and India, ed. P. Chandra, Himalaya Publishing House, Mumbai. Gold, B. (1997) “Changing the International Competitiveness of U.S. Industries: The Roles of Technological Capabilities and Management Pressures,” Technology Management & Applications, Vol. 3, 87-91. Hartmann, U. (1997) “Strategic Alliances,” mimeo, Presentation at Texcon 97, IIM Ahmedabad, December 14-16, 1997. Levine, D.L. (1995) Reinventing the Workplace: How Business and Employees can Both Win, The Brookings Institution, Washington, D.C. Raman, A. (1995) “Apparel Exports and the Indian Economy,” Harvard Business School Case # 9-696-065, Harvard University. Rubinstein, S, M. Bennett and T. Kochan (1993) “The Saturn Partnership: Co-Management and the Re-invention of a Local Union,” in B.E. Kauffman and M. M. Kleiner, eds., Employee Representation: Alternatives and Future Directors (Madison, Wis.:Industrial Relations Research Association. Strolz, H. M. (1997) “Strategies for Global Competitiveness,” mimeo, Presentation at Texcon 97, IIM Ahmedabad, December 14-16, 1997. Wang, M.X. (1998) “Country Study: Chinese Primary Textile Industry,” in Technology, Practices and Competitiveness: The Primary Textile Industry in Canada, China and India, ed. P. Chandra, Himalaya Publishing House, Mumbai. 17
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Table 1: Benchmarking The Indian Primary Textile Industry Canada
China
India
100 100 100 100
52 36 116 36
20 20 164 52
100 100 100 100
52 68 200 68
36* 36 170 20
CAPABILITIES: People Quality of Workforce Managerial Technical Operator Training & Development
100 100 100 100
52 132 68 84
116 116 52 52
CAPABILITIES: Technology Extent of Investment in Technology Type of Technology Available Indigenous Development
100 100 100
84 84 148
68 68 116
100
52
84
ENVIRONMENT: External to Firm Infrastructure Regulatory Regime Breadth of Home Market Quality of Home Market ENVIRONMENT:Internal to Firm Quality of Work Environment Absenteeism Wages R&D Investments * we have“islands of excellence”
CAPABILITIES: Managerial Practices
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Table 2: Some Key Concerns of the Indian Textile Industry
Operational 1. 2. 3. 4. 5. 6. 7.
A large proportion of exports from the powerloom sector is in grey due to lack of good quality processing houses outside the mill sector; Weak work culture - an worker in Indonesia can operate 48 looms at a time while in India it would be around 8; Worker skills are very poor; dependence on agriculture worker; dependence on untrained women in the garments sector; Poor ginning facilities; Poor cotton agriculture practices; Transportation, port & customs procedures are very lengthy, unclear, and cumbersome; Long production cycle times & high inventories
Structural 8. 9. 10. 11.
Garment exporters have to depend on the powerlooms (whose quality & reliability levels are low and reas mill sector is not able to supply in small volumes to small exporters; Relationship of cotton growers etc. with mills or spinners etc. is short term oriented; Weak indigenous textile machinery sector especially those related to looms and processing; Multiple agencies represent different entities of the supplier chain;
Strategic 12. 13. 14. 15. 16. 17. 18. we 19.
Powerloom sector does not have resources to invest in new technology for quality improvement; Interest rates are very high - firms find it risky to invest in new technology in addition to high pre-shipment & post-shipment export credit rates; Indian exports are 80% cotton based while world trade is shifting towards the use of synthetic fibre (75% of world trade); Entrepreneurs are very inward looking; Water charges in Bombay are highest in the world - firms are unable to re-locate with the changing cost environment Entrepreneurs do not see themselves as part of a national industry - behaviour is short term and opportunistic; Indian producers are competing with other Indian counterparts in the export markets; choice of product mix is based on orders and not so much on long term capacities - are competing in the same segment with similar products ? Industry has not been able to forecast properly the demand for various product-market segments;
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20.
European and N. American producers are shifting production bases to Morocco, Tunisia, Portugal, Turkey, Mexico, Honduras, Czech. Republic, Hungary and other low wage CIS countries;
Regulatory 21. 22. 23. 24.
25. 26. 27. 28.
29. 30.
Regulatory Requirements: Hank yarn requirements, Essential Commodities Act, Excise etc. have a detrimental effect on the competitiveness of firms; Evasion of Excise, false branding etc. by small scale producers; Synthetic fibre is very expensive in India due to a variety of duty and other restrictions; Large units are not allowed in the garment sector until they export 75% of their production; the country, however, will not be able to restrict imports of garments from large units; Import of raw materials is restricted, at best; Power availability is very irregular; Cascading taxes and local levies are close to 10%; Duties, reservations and other structures imposed by the government are forcing people to cheat or behave in a manner which is un-economical in the long run; e.g., fabric that is reserved for the handloom is actually coming from the powerlooms; Non-tariff barriers to exports exist; Devaluation of Rupee will hurt in the long run until the domestic Textile Machinery Industry is strengthened.
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Table 3(a): Design of Initiatives to Develop Distinctive Capabilities - Commitment Firm Level Initiatives * * * * *
Focus on SPEED and QUALITY to Reduce Costs Product Mix Choices to be based on “Real” Competencies in Operations Focus on Quality of Life of the Employee Extensive Education of Workforce Strategic Investment in Technology
Industry Level Initiatives * * *
Support Long Term Textile Related Education Programmes Design Industry Policies Establish TEXTILE QUALITY COUNCIL
Government Level Initiatives * * *
Establish Escrow Fund for Education in Textiles Remove Structural Impediments like Reservation Come up with a new Textile Policy focusing on year 2015
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Table 3(b): Design of Initiatives to Develop Distinctive Capabilities - Coordination
Firm Level Initiatives * *
* * * *
Focus on Supply Chain Management Emphasize Excellence in Production - Housekeeping, Statistical Process Control, Shop Floor Synchronization, Productive Maintenance & Value Engineering Map and Reduce Variability in the Operations (e.g., reduce expediting) Move towards Pull Mode of Production Invest in New Technology that will keep you ahead for at least two years Increase Use of Computers
Industry Level Initiatives * * * *
*
Spread Good Manufacturing Practices Identify Weak Links like Processing Houses & help upgrade technology Invest in an Advanced Technology Centre that holds regular displays of new textile technology from all over the world Coordinate Flow of Goods & Information between different Cotton farms, ginneries, spinners, weavers, processors & garment producers via EDI technology etc. Develop an Independent Certification Agency
Government Level Initiative * * * *
Remove Restrictions on Availability of Domestic & Imported Raw Materials Need to re-organize the Textile Ministry to include all elements of the Supply Chain - remove Inter-Sectoral Policy Distortions Need to Strengthen Domestic Textile Machinery Industry Provide Tax Benefits to small & medium firms that are investing, in say, quality improvement rather that organizing seminars for them
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Table 3(c): Design of Initiatives to Develop Distinctive Capabilities - Cooperation
Firm Level Initiatives * * *
*
Strategic Alliances Between Indian Firms on Technology Development, Pre-Competitive R&D, Infrastructure, Funds Availability etc. Strategic Partnership with Other Entities in the Supply Chain Cooperation between small/medium and large firms: Formation of Central - Satellite Firms (CSF) Network - reduction of risk for small & medium firms and increase in flexibility for the large firms Investment in R&D upto at least 2% of Sales
Industry Level Initiatives * * *
Help Firms develop a CSF network - selling the idea to firms that they will survive only if they cooperate Facilitate shifting of competition from between firms to between various CSF Networks - initiate the partnering process Transform into a single INTEGRATED TEXTILE INDUSTRY ASSOCIATION
Government Level Initiatives * *
Float Partnership Program for Pre-Competitive Product Development Tax Benefits for Patents Obtained and Income from Patents made Tax Free
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