Multi-Fibre Agreement and its Impact

January 1, 2005 witnessed an emergence of a new era in the textile and garment industry. After more than forty years, the import quota imposed on the developing countries was brought under the general rules of General Agreement on Tariffs and Trade (GATT). There is a long history of protection provided to the textile and clothing industry in developed countries of the world especially US and Europe. In 1950’s there was voluntary export restraint of the textile product to US by the country like Japan, China and India etc. A long term agreement regarding International trade in cotton textile (LTA) signed in 1961 under the GATT rule but was later negotiated and replaced by Multi-fibre Agreement (MFA) under which in order to avoid ‘market disruption’ the restricted market was orderly opened (Nordas 2004). This agreement gave a protection to developed countries and imposed quantitative restrictions on developing countries rather than tariffs (Krishna and Tan 1997). This non-transparent agreement was renegotiated many times and got finally expired in 1994. However, this expiration of MFA was followed by an Agreement on Trade and Textile under which there was progressive integration of products into GATT in four steps over 10 years:

Eventually, on January 1 2005 all the quota and restrictions on the exports of textile and apparel products from the developing countries were removed and sector was fully integrated into GATT system. Thus, exporters were free to export to any country in any quantity and so were the buyer to source textile product from any country in any amount (Weil et. al 2004). The trade under quota free regime created some winners and losers under the consolidated global supply network. The low cost supplier countries like China, Mexico, and India etc were some hefty gainers (Gereffi 2004, US ITC 2004, and Nordas 2004). There was a dramatic increase in the export of textile goods from these countries as the quota was relaxed. Especially Chinese export to US and other developed nation grew many folds within few years. According to ATMI, 2007 the share of Chinese export of textile and apparel to US grew to over two third of US market within 2 years. In 2002, the Chinese exports increased by $980 million in 29 apparel categories while other supplier saw a drop in export by $813 million. In almost all categories of textile and apparel, China share either doubled or tripled at an average increase of 244%. According to reports by WTO, 2004 the projected control of China over US textile and apparel import market will be as follow:

According to the American institute of textile paper, 2002 China was perceived to be the biggest threat to the textile and apparel industry. Relaxation of quota would increase the Chinese share in textile import to US by 71% and will leave as many as 6, 30,000 sale force jobless. According to the paper (Knappe 2004) after the relaxation of quantitative restriction on exports, the competition will intensify. The developed economies like Europe, North America and Japan would show a declining signs while new markets will be emerging in low cost Asian countries. These emerging markets will become important targets for future apparel producers. According to, ‘Change in the pattern of world textile trade’ paper (Mehar 2002) found that, “The US companies face some of their fiercest competition from government-owned Chinese companies that routinely lose money”. According to the ATMI, 2007 in competing with China, they are not only competing with low wages, they are competing with companies that do not have to make a profit. While, other Asian countries have also cost advantages and they can capture the world’s markets’.

Therefore, there was great impact of phasing out of quota which led to the changes in world textile trade with developing countries like China leading from the front (Mehar 2002).Similarly, India export in textile and apparel also grew dramatically after relaxation of MFA. India export in US apparel market also increased from 4% to 16 % after the elimination of MFA (Nordas 2004). The growth rate in export of clothing apparel was as high as 49.2% for china and about 20% for India during the 2005-2008 periods.

Research Problem

Clearly, it could be seen from above, there was a change in world’s textile trade pattern after the relaxation of quota. Especially developing countries like China and India showed a staggering increase in their export share which grew to 65% post MFA in US apparel market as against only 20% before relaxation of quota. (Financial times, 2004).

So the question here is, was relaxation of quota’s the only reason for the growth of textile industry in China and India? If yes then, why there is a disparity in export from India and China? Why the China has alone out scored all other nations in the world in textile and apparel trade? This perhaps brings us to the concept of competitiveness of an industry in an economy. According to Porter (1998) the nation’s competitiveness is defined as a country’s relative competitive position in the international market among the nation of a similar economic development. The relative position of a country depends upon various factors available to it and how it uses them? It may be in the form of cheap and skilled labour, abundance of raw material for industry and developed infrastructure facilities etc. Also, the competitiveness of an industry does not depend upon one single factor. For example, low labour cost is not solely responsible for competitiveness of Chinese textile and garment industry. If it had been the case than the countries like Indonesia, India etc which have much cheaper labour would have outperform China (Porter 1998, Ramasay and Yeung 2006). Thus, there are a number of contributing factors for the competitiveness of Chinese and Indian textile industry. What are the factors which affect export competitiveness of Indian and Chinese textile and garment industry? Various studies like ‘diamond model’ by porter (1990) and ‘nine factor model’ by Cho (2000) have evaluated some factors to measure the competitiveness of an industry. However, still there is no consensus on the factors that affect the competitiveness which makes the research more interesting.

Clearly it could be seen that China export growth and volume is much more than India. Being in same geographical location, what are reasons for this disparity in growth? The possible answer could be that the China might have some comparative advantage over India. This brings us to the second question of research. What comparative* advantage does China has over India in textile and garment industry? In which areas do China textile and garment industry outperform India? What could be possible suggestion given to Indian law maker to reach China’s standard in world trade of textile and apparel?

Aim of Thesis

The aim of thesis is to determine the factors that bring competitive advantage to Indian and Chinese textile post MFA and thereof making the requisite comparison between the two. Moreover, the research is about answering the above mentioned questions a particularly:

What are the factors which affect export competitiveness of Indian and Chinese textile and garment industry? It is aimed to provide an insight on factors such as personnel, material, infrastructure, equipment, management etc which are decisive factors in the determination of competitiveness of above mention industries in two of the fastest growing economies of the world. In other words, research would highlight the reasons of competitive advantage and disadvantage of India and China textile and garment industry.

What comparative advantage does China has over India in textile and garment industry? It is aimed to provide policy suggestions to the law maker of India by cross case comparison of the two industries on the basis of research parameters initially set. This would provide an insight on the competitive advantages that China has over Indian textile and garment industry and what could be the possible remedy, learning from China, to the problem faced by Indian textile and garment?

Moreover, during the analysis the impact of relaxation of MFA on the Chinese and Indian textile will also be discussed. However the prime focus of research will remain, to bring out the factors responsible for the competitiveness of the textile industry in India and China and make a comparison between the two. This would be useful in drawing out the reasons for India’s poor performance as against China or would bring out the reasons that Why China is most competent among all the developing countries in the global textile and garment industry?

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Selection of Research Model

On the basis of the research questions, it can be conclude that an exploratory research is conducted. Today, in a dynamic and complex business world, there are a number of factors affecting the competitiveness of an industry. Therefore, an in-depth desk research will be conducted by analysing the case studies and interviews and collecting appropriate secondary data so as to explore and explain the research problem. A qualitative approach is appropriate for this exploratory research as it is aimed to analysis the factors affecting the competitiveness of an industry in-depth.

Looking over the landscape of qualitative procedures shows perspectives ranging from postmodern thinking (Denzin & Lincoin 2000), to ideological perspectives (Lather, 1991), to philosophical stances (Schwandt 2000) to systematic procedural guideline (creswell 1998). All these perspectives could be found in the unfolding model of inquiry called ‘qualitative research which tends to provide intimate details and in depth information about the case. It is an excellent way to apply theories at micro and macro level, therefore would be best suited in analysing the factors affecting the export competitiveness of textile and garment industry in India and China.

The following table on the basis of research control over behavioural events, research questions and focus on contemporary events distinguishes five different type of research strategy as shown below:

From above it could be clearly seen that the case study analysis would be sufficient to answer the research question of what factor are responsible for the competitiveness? Nevertheless, interviews from the manager of companies (in question) are also taken to provide in-depth desk insight on the research analysis. The use of both primary and secondary interviews expands the area of research and provides more insight on the subject being discussed.

Thus, qualitative research is carried out by using multiple case study method (Yin 1994) and interview approach. Case study approach would help in developing analytic and skills to solve the complex issue in question and also give a chance to apply new knowledge and skill at the same time. It would also allow the possibility to study an organisation and its environment in a natural setting and obtain rich insight into the complex process (Yin 1999). The interview on the other hand, would allow the possibility to analysis the factors that responsible for bringing competitive advantage and disadvantage to the firm as well the industry.

The case study will be in the form of two cases one of an Indian company and other of a Chinese company which would enable us to compare the industry in both countries thereby bringing the comparative advantage of one country over the other in textile and garment industry. But the determination of factors responsible for export competitiveness could not be analysed only through the case study. Therefore various interviews, both primary and secondary, of managers of the companies concerned will be conducted to draw out the case analysis. Interviews can support researcher to gather valid and reliable data (Saunders, Lewis and Thornhill 2009).

For the present research semi-structured one-to-one interviews are conducted. Two of them are face to face while one from the Chinese manager is through telephone. The main reason for semi-structured interview is that the question asked in the interview might have a different meaning for the Indian manger and Chinese manager. Moreover, it would allow extracting more information on the subject concerned thereby expanding the scope of investigation. It is also better than other interviews as meaningful intervention might be required at various intervals during the course of interview to extract more information that is requisite for the case. Also, one-to-one face to face interview will make sure that information relevant and meaningful to research objective is collected from the subject. While face-to-face interview, provided the chance to extract more information from the subject thereby widening the scope of research and investigation (Saunders, Lewis and Thornhill 2009).

Secondary Data Collection

Secondary data are very essential for addressing any research question and even some research question can be solely relied on the secondary data. The secondary data provide valuable and a wide range of information which is of high quality and reliable as they are conducted by professionals (Ghauri and Gronhaug 2005). Therefore, some secondary interviews previously conducted by some well known professionals of top officials of the company (Chairman and President etc) are also used to analysis the cases.

Moreover, secondary data can be broadly divided in to two main groups of sources; external source and internal sources. External sources generally refer to published sources such as books articles, individual statistic, annual accounts and research reports etc and commercial sources such as panel research, scanner research and monitors etc. published sources are generally available free of charge to the audience whereas commercial sources are sold to the audience.

In the present research, secondary data was collected through source mostly via University of Manchester. Mainly following sources are used:

Government reports and studies

Academic and professional journals were through various online databases such as Science Direct, orbis and Thomson banker etc

Websites and annual report of the companies mentioned in the case study

Reports of international organisation such WTO, IMF and world bank etc

Books available in libraries of university of Manchester

Important article from daily and weekly newspaper

Articles and journals at government websites.

Nevertheless, a lot of information was available and collected from secondary data but only the relevant and compatible information contributing to research was used. Also it must be stated that the information provided on government and company websites has high possible of providing biased information so as attract the investor. However effort was made to cross check the information through online databases so as draw meaningful conclusions. For example information about Jiangsu group was verified from the online database orbis. Also some of articles and journals that were at government website appeared to bias and overstating facts were not included in the research. Nonetheless, previous paper and studies about export competitiveness of Indian and Chinese textile and garment industry which were relevant to research question were also taken into consideration.

An Overview

To began with a brief introduction about textile industry is given and then various theories related how this industry has grown, matured and transformed over the period of time are discussed. To probe the competitive advantage of firms in the case study, theories and previous study on the ‘various sources of low cost in a firm’ are discussed in the next part. After it, theory of comparative advantage and its difference from the competitiveness is briefly summarized. Then the theory of competitiveness, ‘diamond model’ and ‘nine factor models’ is discussed in detail to analysis the competitiveness of Indian and Chinese textile and garment industry, which is the essence of the report. At last, the researcher has coined his own model partly adapted from above model to determine the competitiveness of industry in the present research.

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Textile and Apparel Industry

The clothing and textile sector is a low wage, labor intensive industry and require a high level of innovation and sophisticated technology depending upon the market segment in which one is operating (Ayub 2002).Textile industry is considered to be the base of economic structure and employment in most of the countries across the world. The textile industry is regarded as a classic sunset industry of the world. However, it serve as a first point of entry for a large number of unskilled labor and is portrayed as one of the largest employers in both developing and developed nations in the world (Berger, Gartner and Karty 1997). The textile and apparel sector is one of major contributor to employment, foreign exchange, industrial output and national development where the countries like Bangladesh, Lesotho, El Salvador has clothing exports as high as 86%, 94%, 60% of the total merchandising exports respectively (Tewari 2004).

Theories Related to Stage of Development in Textile and Garment Industry

This part includes different theory of development of an industry in the world, how it is formed, matures and transform with the passage of time. Some of conceptual backgrounds about the history of industry are discussed in detail below:

Walter Model (1984) and its Relationship with Research

Khanna (1991) in his book describes in detail Walter Model (1984) wherein there are six stages of development of the textile industry by which a national textile system could be ranked. They are:

Embryonic stage:

This is the first stage of textile industry in any country across the world where mostly the fabrics and apparels are made only for domestic use and production is carried out to attain self- sufficiency. The market is highly fragmented and productivity is very low because of small scale of operations and lack of technological development.

Export of native apparel:

In the second stage of development because of low cost of the product the native products starts to get global recognition. There is an incentive for the local manufacturer to increase their scale of production to meet the needs of new global market. With the new trend of globalisation, the focus of the industry shifts to quality manufacturing and increasing the scale of production.

Increase in production of fabric and rise in apparel exports:

With the new global market, demand for the fabric increases due to which local manufacture started producing goods on a large scale in big industrial houses. Thereof, there is a dramatic increase in production of the fabrics and yarn. But the technology in this stage remains to be old and obsolete. The competency lies in low cost customised fabric and apparels.

The golden stage of increasing sophistication and rising trade surpluses:

This stage witnesses the increase in use and import of highly sophisticated modern technologies and machines and to produce world class high quality fabrics and apparels that are mostly exported leading to large trade surpluses. The competitiveness of the industry shifts to producing high quality product at low prices. Main reasons for the low prices are the low labour cost, large scale production, government policies and subsidies etc. In this stage, textile and garment industry production generally shows a double-digit growth rate and becomes huge sources of foreign revenues for the government.

Full maturity:

In this stage of development market reaches its saturation point. There is no scope and incentive for expansion and technological improvement. The competitive advantage of low cost dies down as labour becomes relatively expensive than other less developed economy. A negative or zero growth rates is seen in domestic production and exports and large industrial houses starts to offshore their production to low cost country.

6) Decline:

In this stage, there is no incentive to set up new plant as costs are too high. On the other hand, it is not economically viable to operate the existing industries in the country. Therefore, most of the plants face closure and there is a decline in the textile and apparel production.

Relationship with Research

This model by Walter (1984) helps to rank the textile industry of the developing countries and developed countries in the above stages of development. The countries like China and India are in stage four where there increase in sophistication and modernization. Large scale productions are being carried out and most of which are exported, leading to huge trade surpluses. The main sources of international competency are the low labour cost, better utilisation of the raw material and the use of highly sophisticated modern machines. In India textile and garment sector showed a growth of 7-8% annually for last five years indicating that the country operating in the fourth stage. It could be concluded that the textile industry in developed countries like US and UK has attained full maturity as there is no scope for further expansion as costs are too high. This may be a possible reason that big industrial houses are off-shoring their plants to low the cost countries in the world.

Other Development Theories

Beside the development model by Walter (1984), the various other theories like the investment development path and the product life cycle model could also used to show the emerging trends in textile and garment sector across the world.

The Investment development path (IDP) and Relationship

This theory was developed and revisited by Dunning (1988) and Dunning and Narula (1996) which emphasize the relationship between the levels of economic development of the country to its net foreign direct investment. The theory is based on the premises that structural changes are the process of economic development of a country and these structural changes affect the pattern of foreign direct investment. The stages of development are as following:


The first stage of economic development is characterized by a weak-industrial society which doesn’t have the competitive advantage and therefore,doesn’t attract foreign investment. Also, the domestic firms don’t have the firm-specific advantage to invest abroad. Therefore, a country has low inward and outward investment.


In the second stage, with rise in investment in the country there are signs of economic growth which may attract the foreign investment. However, the domestic firms still lack firm-specific advantage to make outward investment. So there is increase inflow of investment with little outward investment.


In the third stage of economic development, the domestic firms attains firm specific advantages and starts making outward investment thus there is a decline in growth rate of net foreign inward investment. Also, the firm-specific advantages of these countries are similar to those of the advanced countries.


In the Fourth stage, the country outward investment exceeds inward investment. This is because of all the domestic firms lose their firm-specific advantages mainly because of high labour cost due to which most of its production is shifted abroad.


In the last stage, the net investment position of the economy would revolve around zero, slightly positive or negative mainly because of macroeconomic factors like business cycle and high foreign exchange valuations.

Relationship with Research

According to this theory, the advanced countries like UK, USA which use to be the hub of textile and garment industry few decades ago are currently in stage 4 and 5. The outward stock of these developed countries has exceeded the inward investment and most of their productions are being carried out abroad in the low cost countries like China and India which are receiving huge inward investment. The main reason for this change is the newly attained firm-specific advantages. This theory thus, possibly explains the reasons for growth of the textile industry, trade and investment in the developing countries like India and China in recent times.

The International Product life cycle model(IPLC) and Relationship

This model was published by Vernon (1996) (reassessed by Ayal 1981) to describe the internationalization pattern of industries and organizations. According to IPLC, a local manufacture in an industrially advanced country start selling a new, high-tech product to the high income people in the local market. As the demand for the product rises in other countries or markets, the local manufacture starts the production of the product at large scale thereby removing the trade barriers. With the passage of time as product mature and the competition increases across markets, this forces the innovators in the advanced country to shift their productions to the low cost countries. Thus there are three stages of an internationalization of a product or commodity which is described as follow:-


This is the initial stage of IPLC model, where a new product is developed in advanced countries which have resources, easier access to capital market and high income consumer class to buy the product. Initially the new product is manufactured for the local consumers but eventually its export to other industrial advanced countries may also begin.


Exports to other market encourage production on a large scale wherein the production process and production designs become increasingly stable. This phase also witnesses the production being carried out in foreign countries to bring down the unit cost in the form of foreign direct investment. Production still requires high skilled and high paid labor and exports order from low income countries begin to come during the later part of this stage.


With the passage of time, the production process and product design became increasingly standardized and the prime focus of the industry is on reducing process cost rather than new product development and innovation. The local innovator loses his initially comparative advantage as labor and other operating costs become too high. Thus, in order to meet the local demand, the production is shifted to the lower income countries where the local manufacturers imitate the producers of advanced countries and start selling the identical products.

Relationship with Research

This Vernon model could be used to give a description of the ways textile industry migrated across borders over time. A major revolution in the textile industry was witnessed in the 18th century, when machines were used to manufacture innovative and high tech textile apparels by the local manufacturer of United Kingdom mainly for the local consumption. With time, during the early half of 19th century the goods were exported to other industrially advanced countries of Europe. During the latter half of 19th century, the product designs and production process became more stable and manufacturer of advanced countries in order to bring down their unit cost shifted their production plants to eastern Asia countries like Thailand, Korea, Malaysia, and Indonesia. During this period, the industry of the advanced countries was protected from the exports of low income developing countries. But by the end of 19th century with relaxation of quotas or protectionism by the developed country the industry was reallocated to the developing countries of the world like China, India, Bangladesh, Egypt, Turkey etc.

Low cost theory

This part of the literature review discusses various sources of low cost competitiveness of a firm and would be a useful tool to analyse the competitiveness of the firms in the case studies. These are:

Generic competitive strategies

Porter, 1998 in his book ‘competitive strategy’ has termed three main generic strategies for outperforming the competitor in an industry and positioning the product in the long run. These strategies are discussed in detail below:

Overall Cost Leadership:

Economies of scale, tight cost and overhead control, cost minimization in areas like R&D, advertisement and sale force are few essentials for attaining cost leadership by a firm. Also, to attain cost leadership, an organisation requires huge investment in capital, good engineering skills, adequate supervision of labour, low cost distribution system, structured organisation and tight cost control (Porter, 1998)


This means differentiating the product or services of the firm that become the unique selling proposition (USP) of the firm. It could in the form of brand name, technology, customer service, dealer network etc. This could be achieved by strong marketing abilities, strong capabilities in research and development, technological leadership, corporate reputation for quality, unique combination of skills drawn from other business.


This means focusing on particular consumer group, geographic market, segment of product line etc. This could be achieved by the combination of above policies directed at the particular strategic target.

Sources of Low Cost and Relationship

According to Barney (2006) “a firm that chooses a cost leadership business strategy focuses on gaining advantages by reducing its costs to below those of all its competitors.” There are many reasons why an individual firm may have a cost advantage over its competitors. He further explains the various sources from which this cost advantage can be derived by a firm which are described as follow.

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1) Size Differences and Economies of Scale:

According to Barney, 2006 one of the main sources of cost advantage or low cost is the economies of scale. As the firms output increases, economies of scale exist which leads to lower average cost per unit of production but this happens up to a certain level of output after which the per unit cost starts to rise. Some of the mains reason for higher volume of production leading to lower average cost is described below:

Specialized machines:

With large scale of production, a firm is able to purchase and use highly sophisticated machines and manufacturing tools that the small firms find difficult to purchase and operate. These modern machines and tools help in increasing the productivity and lowering the costs.

Cost of plant and equipment:

High scale of production enables a firm to carry large manufacturing operations. Due to large scale production, the fixed cost (in the form of plant and equipment) per unit of production becomes lower than the other small manufacturing plants. Thus, other things being equal, large scale production will lead to lower per unit cost of manufacturing operations and which in turn would lower the average cost of production

Employee Specialization:

High volumes of production ensure proper division of labour and each work is assigned to a specfic individual in the organisation. Working on one job over a period of time, be it a manufacturing task or specialised management function, leads to specialisation in that very activity. As the employees specialize, they become more efficient in performing their tasks, thereby reducing the firms cost. Whereas in small manufacturing firms, employees does multiple things at same time and thus, do not specialize in a single activity.

Overhead costs:

A firm with large scale of production has a lower per unit cost as it could spread its overhead over more number of units.

2) Size differences and Diseconomies of Scale:

With the increase in production a certain level of output is reached where diseconomies of scale generate (as discussed earlier) which starts increasing the cost. With the increase in level of output, the average cost of production starts increasing and in such case where firms are operating beyond level ‘X’, gives advantage to small scale firms. Various reasons which leads to diseconomies of scale after certain level of output are discussed below:-

Physical Limit to Efficient Size:

There are some physical limitations to the size of some of the manufacturing processes. For example, physical processes and forces generated by the nuclear reactors go non-detectable in small installations which can be, quite significant if it is shifted to huge installations. Thus, such manufacturing processes barrier exists after a certain level of output which leads to rise in cost curve.

Managerial Diseconomies:

As the firm size increases, the ability of managers to operate and control the manufacturing and management functions efficiently and effectively becomes limited. Thus after optimal level of output, there exist managerial diseconomies which increases the firms cost

Worker De-Motivation:

There exists a negative relationship between employee specialisation and employee motivation. Employee working on a same task over the year’s brings monotonous and tameness in their work. So, there is no motivation to work harder and face new challenges. According to Barney, 2006 ‘as worker become more “cogs in a manufacturing machine”, worker motivation wanes, and productivity and quality both suffer.’

Distance to market and suppliers:

Usually, the firm with large manufacturing operation or the big industrial houses are located in backward areas which are far away from the markets and supplier. Due to which they have to bear additional transportation costs generating diseconomies of scale. Thus, these large scale firms put them at a competitive disadvantage compared to small firm with less efficient plant but located nearer key markets and suppliers.

3) Experience Differences and Learning Curve Economies:

Another possible source of cost advantage for a firm depends upon their level of production. Generally, a firm has comparative lower cost in an industry when it has the substantial amount of experience in manufacturing specific service or product. The ‘learning curve’ shows the negative relationship between per- unit costs and cumulative volumes of production.

The Learning Curve and Economies of Scale:

The learning curve is more or less is similar to the concept of economics scale. The main difference between them is that the economies of scale exists up to a certain level of output and after this optimal level the cost starts to increase whereas in learning cost curve model there is no increase in costs with the increase in cumulative volume of production.

The Learning Curve and Cost Advantages:

There is empirical evidence that many industries like ships, computers, spacecraft, and semiconductors showed that the labour costs fall as the cumulative volume of output increases. This was mainly because as the cumulative output increased there was an improvement in work methods, efficiency and effectiveness in manufacturing, a fine tuning in the production operation which brought per unit cost down.

The Learning Curve and Competitive advantage:

With the increase in cumulative volume of production per unit cost is reduced. This provides cost advantage to firm over rivals. If the firms still move further down the curve then it goes for higher level of production, thereby selling the output to more customers and aggressively acquiring the market share.

4) Differential Low-Cost Access to Productive Inputs:

Low cost access to productive input is yet another source of low cost. Productive inputs like labour, capital, raw material are the main components of the cost structure. If the firm has an easy and low cost access to these inputs then it automatically lowers the overall cost of the firm. For example, in textiles raw material and power are the main component in the cost. The countries where these productive inputs are low its textile industry would have a competitive advantage over textile industries in other countries. Therefore, productive inputs play an important role in low costing.

5) Technological Advantage Independent of Scale

It is obvious that larger firm has greater access to sophisticated and modern technology that brings certain cost advantage to it over small firms irrespective of economies of scale. For example in the textile industry, if a mill is working on a large scale is ought to use high-tech machines and tools which helps them to reduce the cost of producing yarn. The main reason for this is high-tech machine are usually very costly but they have low recurring cost. The small firms find it difficult to buy where as large firms take advantage of low recurring cost of these highly sophisticated machines. This concept also applies for the technological software of the firm like quality of relation between labour and management, an organisation culture etc.

6) Policy Choices

A firm has a right to make choices of the kind of product or services it want to sell and these choices have a considerable impact on the relative cost position of the firm and are known as policy choices. These choices would lower the cost for a firm irrespective of its scale of operation, cost of productive input, technological advantage.


This model would help to ascertain the source of low cost of Chinese and Indian mills, especially in examining the case study. With removal of quota, large scale production is being carried out bringing economies of scale which would lower the cost of production. China and Indian mills also have a low cost access to product inputs like labour, land and raw material which would further help them to bring the cost. Besides this import of modern technology and focus on new product development could also be seen a source to low cost for textile and garment industry in these countries. Thus, this theory would provide an insight while probing the case studies.

Theory of Comparative Advantage

The basic theory of the comparative advantage theory was coined by David Ricardo (1817). According to him, “a nation will have a comparative advantage over other countries, if it is superior in the production of a good or service in comparison to other.” In other words, where the opportunity cost of the production is lower and it also explain the free trade relationship between advanced western world and less developed countries. Prior to Ricardo, the comparative advantage theory was based on absolute advantage in production. According to Adam Smith in his book Wealth of Nation, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” However Ricardo’s theory does not contradict this old classical thought but it furthers explain it. According to this theory the price of each good in country with a comparative advantage will be lower than the price of the same good in any other country. The country which has such absolute advantage in a good will have higher real wages in that industry than the other industries in other countries. In other words, industrial advanced countries have higher wages and workers generally enjoy a higher standard of living than the less developed countries. The main reasons of this wages are based on productivity, higher the productivity more the wages.

This theory further explain that the profit-seeking companies in the country with comparative advantage in a particular industry would recognise that their good is cheaper in their native country and could be sold at a higher price in the foreign country, assuming there is no transportation cost involved, thereby they have an incentive to sell their product in the foreign market than domestic market. Therefore, each country would export the goods in which it has the comparative advantage (Ricardo 1817). Also, the theory explains that a country should not only have an absolute advantage but also comparative advantage in production of goods so as to ensure continuous supply in free trade.

Another striking result of the theory was, even though a country has lower wages, but an industrially advanced country’s comparative advantage industry would always survive even with high labour cost. Thus, lower wages in a country is alone not sufficient to predict whether a industry will flourish under free trade. In other words free trade will not affect the domestic industry in the advanced country just because of lower wages in other countries. But it does not imply that less developed countries with inferior technology cannot compete with developed countries.


The major criticism of the theory was its unrealistic assumption. For example, the model assumed the country produced only two goods without the use factors of production like capital and land. Perfect competition, full employment, ignoring labour productivity etc were some other unrealistic assumption. Thus the application of the theory that is free trade pattern in the real world was doubted by many.

It also failed to justify growing intra industry exports taking place from the less developed countries to developed countries. For example, in the automobile industry many of its manufacturing parts are made in labour rich countries and are then exported to technically advance countries. Similarly this theory does not change in the trade patterns in the textile industry. As it (need a referencing line)

Comparative vs. competitive advantage

According to Gao (2002) the nation must have a comparative advantage while a firm need not have one as it can go out of a business while a nation cannot. Therefore comparative advantage is more country specific rather than firm specific.The competitiveness of a nation depends upon its productivity. The competitive advantage of nation (1990) explains the sources of sustained prosperity in the modern global economy. Comparative advantage of nation depends mainly upon the endowments of inputs such as labor, natural resources, and financial capital (Porter, 1998). According to Porter (1988) the source of standard of living and prosperity of the nation are determined by theproductivity with which it uses its human, capital, and natural resources. Therefore, the appropriate definition of competitiveness is the productivity where it depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency. The competitiveness is determined by how firms compete in the industries, not what industries a nation or region competes in that matter for prosperity. Productivity in a nation or region is a reflection of what both domestic and foreign firms choose to do in that location. The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries (Porter 2000).

Theory of competitiveness

There were two schools of thought for the theory on competitiveness. One include economist like Adam smith, Ricardo and Porter had stressed on aspect like low cost, product quality as main source of competitiveness where other school of thought gave emphasis to modern technology and innovation as a source of Competitiveness (Ayub 2002). But the textile and garment industry in India and China is more production factor based where unskilled and low qualified cheap labour and nation’s natural resource is used to determine its competitive advantage (Verma, 2002). The industry is manufacturing the basic goods and consumer product by importing technology from abroad. Therefore for such an industry only old school of thought will be taken into consideration.

The Diamond Model

According to Porter, 1998 competitiveness of an industry is somewhat related to upgrading of an economy. Macroeconomic factors like sound macro policy, stable political and legal context are necessary for the competitiveness of an industry but not sufficient enough. The competitiveness majorly depends upon improving various micro economic foundation of competition (Porter 2000). The relationship between the productivity and these micro- economic foundations which bring out the national advantage of a country, which is explained by Porter (1998) in the following ‘diamond’ shape model:

Various determinants of national advantage (Porter, 1998) or the micro-economics foundation responsible for bringing productivity in the economy (Gao 2002) are explained below:

Factor conditions: Factor condition refer to factor of production which are necessary in the production of goods in any industry such as land, labour, capital, natural resource etc that are also necessary to compete in any industry. These can be grouped into number of border categories:

Demand condition

The second determinant of competitive advantage is the demand condition in the industry. It is broadly classified into three sub attributes which are summed up as follow:

Home Demand Composition: the main determinant of it is through the character and mix of home buyer needs. Home demand should give the local firm an earlier or clearer picture of the buyer needs than the foreign rival can have. Home buyer should also pressurize local firms to innovate faster and achieve better competitive advantage than the foreign rivals. The home demand composition is further divided into following three characteristics necessary for achieving the competitive advantage:

Segment structure of demand: if, there is high demand for a home product or services which is less significant in other nation, then the home country is likely to have competitive advantage in that segment globally. Thus if there are economies of scale or learning then the size of segment becomes important for that nation.

Sophisticated and Demanding Buyers: this aspect discusses the nature of home buyers. If, the home buyers are sophisticated and demanding then the nation is likely to have competitive advantage. This is because demanding and sophisticated buyer pressure the local firm to innovate faster, meet their high standards and demand in terms of product quality, service, and feature etc. Thus sophisticated and demanding buyers are likely to bring competitive national advantage.

Anticipatory Buyer Needs: if home demand provide a kind of early warning of buyer needs that will become widespread in near future than the nation’s firm gain competitive advantage. This is important as it provide information for not only building new products but also helps the local firm on an ongoing basis as it continuously upgrade the product over time and it ability to compete in new segment. If the home demand is idiosyncratic, slow to reflect needs, than a nation’s firm are at a competitive disadvantage.

Demand Size and Pattern of Growth: the size and pattern of growth of home demand also influence the nation’s competitive advantage provided its composition anticipates the international and home demand and is sophisticated. Also, the existence of a large demand will bring the necessary economies of scale in industry. This sub divided into following characteristic :

Size of home demand: the bigger the size of home demand, the more will be the competitiveness in the industry as it will allow the firms to carry out their operation on large scale thereby getting economies of scale, scope and learning. This would encourage the firm to invest aggressively in a large-scale facilities, productivity improvements and technological developments. Home market size is an advantage if it encourages dynamism and investment. However, high local demand may not be an advantage, unless it is for segments that are demanded in other nations.

Number of Independent buyer: when there are number of buyers in a market, each with its own ideas for a service or product utility enlarge the pool of market information and motivates progress due to competitive pressure itself. Thus this creates a better environment for innovation within a nation.

Rate of Growth of Home Demand: the rate of investment in an industry is directly proportional to rate of growth of home demand. This because high growth of home demand motivates the nation’s firms to adopt new technology and carry on production on large scale with the confidence that they will be utilized. This is utterly important when there is technological change in the economy and the firms need the conviction to invest in new facilities or product.

Early Home Demand: an early home demand enable the local firms to move quickly than foreign rivals to become establish in an industry provided that it anticipates the buyer needs in other nations.

Early saturation: early saturation of home market demand also act an incentive for nation’s firm to be more innovate and develop a new product meet the home market needs. The saturated market put a pressure on the firms to cut down the prices, improve the product performance, introduce new feature and provide other incentive to buyer to replace old products with new version. Like early penetration, early saturation is an advantage to a nation if it anticipates the buyer needs in other nation.

Internationalization of Domestic Demand: when the nation’s domestic demand internationalizes and pulls the nation services and products abroad, it bring national comparative advantage to the nation. This could be broadly classified into following two aspects:

Multinational Local Buyer: an advantage is created for the nation’s firms when home product’s buyers are multinational companies as the domestic buyer are also foreign buyers. Also the advantage exists when the nation’s buyer for product are multinationals, with subsidiaries or operation in many other nations.

Influence on Foreign Needs: when the domestic needs and aspiration get inculcated in or transmitted to foreign buyers. These needs could be transmitted training foreigners in the home country, demonstration effect, exports of goods, political alliances, historical ties etc.

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Related and Supporting Industries

The third board determinant is the presence of internationally competitive suppliers or related industries which bring national advantage in an industry. The presence of competitive suppliers makes sure that inputs are readily available to a variety of other industries for their own use and the presence of competitive related industries ensure better supporting facilities to the Industry

Competitive Advantage in Supplier Industries: an advantage in the downstream industries is created in many ways by the presences of internationally competitive suppliers in a nation. This is mainly because of easy, early, efficient and preferential access to most low-cost inputs. These home based internationally competitive suppliers provide an advantage in terms of ongoing competition and also in the process of innovation and up gradation. This happens because the firms generally get quick and easy access to supplier innovations, new ideas and information. There is a joint problem solving and exchange of R&D leading to efficient and faster solution. But this happen better if suppliers are in proximity to firms. The downstream industries will also get an advantage if suppliers are strong by the world standards even though they are not in industries that compete globally.

Competitive Advantage in Related Industries: related industries are those which involve complementary products or in which firms can share or coordinate activities in the value chain. Sharing of the activities can occur in manufacturing, distribution, marketing, technology development etc. Thus, the presence of an internationally competitive related industry in a nation provides opportunities for technical exchange and information inflow, just like the home based suppliers.

Firm Strategy, Structure, and Rivalry

The fourth broad determinant of national competitive advantage in an industry is the way in which firms are created, managed and organised along with nature of domestic rivalry. The firm strategies and management vary widely among the nation. National advantage is created when there is a good match between the sources and choices of the competitive advantage in a particular industry. The firm strategies may include its goal, objectives and policies for cost, quality, internationalization, research, technology, managerial personal etc and these policies should be in accordance to sources of competitive advantage. The firm structure includes it size, ownership structure, capital structure, works division, etc. For example in Germany all firms are debt financed so a firm strategy and structure should in accordance to it so that the nation achieves competitive advantage in that industry. Also, the company goals generally reflect the characteristics of a national capital markets. For example, in America there is widespread trading of a public company due to which the American industries perform better in relative new industry where high equity funding is required.

Domestic rivalry:

The domestic rivalry is another factor for the bringing the competitiveness in the industry. Initially the domestic rivalry was considered to be wasteful, but the empirical findings by Porter (1998) showed strong relationship between the rivalry and the competitive advantage in the industry. The domestic rivalry becomes more important than the foreign rivalry when innovation and improvement are treated as essential ingredients for competitive advantage in an industry rather than static efficiency. Domestic rivalry is important because it creates pressure on the local firms to improve and innovate. Moreover it brings the cost down, create new products and process and improve the quality and services. Therefore excessive local competition not bring advantage at home but also compel the local firms to sell abroad in order to grow. Geographical concentration is another element that magnifies the power of domestic rivalry as it magnifies and elevates the interaction between these four separate influences.

The nations are most likely to succeed in industries or industry segments where the national “diamond” is more favourable (Porter 1991) where each of these four attributes affects the state of other and vice-versa and domestic rivalry gives the much needed edge to the Porter’s diamond model to become a system.


However there are few criticisms of porter’s diamond model on competitiveness. Some complaint that Porter was producing a laundry lists of ‘forces’ and ‘factors’ and passing them off as explanations which are always not original (Cho 2000) and the principle of the diamond may still hold good but its geographical constituency has to be established on very different criteria (Dunning 1991). It was also, argued that any attempt to define which geographically sectors are clustered together is inevitably judgemental and subjective (Ryan 1990). Another major drawback was the model did not apply to the multinational from small open economies, which meant nearly ninety percent of the world cannot be potentially modelled by Porter’s diamond. Rugman (1991) and Moon and Rugman (1995) also showed that this model did not apply to large economies like US also. Rugman and D’cruz (1993) developed a double diamond model where managers focused on both foreign and domestic factors to become globally competitive in terms of survival, growth and profitability etc.

The Nine-Factor Model

This model is an extension of Porter’s diamond model (1998) and is developed by Cho, 2000. According to this model different types of physical factors like endowed resources, domestic demand, related and supporting industries, and other business environment and human factors include politician, bureaucrats, entrepreneurs, and professionals etc. an extra factor, chance is added to these eight internal factor to make a new paradigm, the nine-factor model. The main differences between Porter’s diamond model and nine-factor model are the addition of new factors and in the division of factors. The nine-factor model by Cho (2000) is described in details below:

Endowed resources include agricultural, mineral, energy resources etc of a nation. All these resources are capable of becoming an input into economic activities. Business environment includes road, transportation, market mechanisms, competition, legal policies, economic policies etc of the nation. Related industries include horizontally related industries and vertically related industries. Supported industries include insurance, information, and transportation. Domestic demand consists of size and stability of demand in home market.

The workers form the first part of human factor. It is related to the wage level of the worker. The country will have a comparative advantage if its labour is cheap. The second aspects is how much efficient and non-corrupt are the politicians and bureaucrats in a country and the commitment they have in the creation of international competitiveness. The third attribute the risk taking ability, credit worthiness, innovate capacity of the entrepreneur of the nation. The fourth aspect is the hard working, efficient, risk-taking professional manger and engineers determine the competitiveness of industry. The last attribute is the chance events which includes unforeseen and unexpected breakthroughs in new product, technology, capital markets, policies of government, foreign exchange rates etc.

Researcher’s Own Model

The textile industry competiveness in developing countries like China and India is generally depending upon natural endowment and cheap labor etc. Therefore factors like innovation, system innovation, technological development and acquisition, and structure adjustment etc are excluded from the research. Focus is kept on above basic factors. This model is adapted from the works like ‘diamond model’, nine factor model and a Chinese textile Industry promotion model’ given by Jia (2006).

Textile industry system is a part of national economic system which further is a part of global economic system and these systems are influenced by each other. There are two types of variables which exist in these systems.

First one is the internal variable which includes all the controllable factors like technology, supply chain, availability of raw material, supply chain, infrastructure, national government policies and taxes, unfair trade practices and interest cost etc. These are the factor affecting the competitiveness of textile industry which could be easily changed and adjusted by the intervention of the government. While other one is the external factors which are difficult to control such as market demand, relative labor cost, international trade policy, the textile development of other countries. This model will be used to analysis the competitiveness of textile and garment industry in India and China. Some of other noted features of the model are:

Equal Weights

All arbitrary used will have equal weights as different weights might understate or overstate the variable effects and could be misleading. Also, reports of IMD and WEF give equal weights to the attributes. However, the relative importance of the factor depends upon the stage of economic development and national environment of a nation and thus could vary accordingly.

Quantitative data

Besides case studies and interviews, the report has only used the quantitative data only, not the survey data due to its subjective nature. All the quantitative data has been obtained from various newspaper, articles, journals, publication by NGO’s and government organisation all over the world.


What is Competitiveness?

Competitiveness can be directly related to the productivity, which is the function of various factors such as costs, quality, various non-price factor such as reliability of producers, intangible factor like image of the country, brand equity etc. The nation’s competitiveness is defined as a country’s relative competitive position in the international market among the nation’s of a similar economic development (Porter. 1998).

Factors Affecting the Competitiveness

The Indian textile and clothing industry, owing to a significant contribution, occupies a unique and strong place in the Indian economy. It contributes about 14% of industrial output and 4 % of GDP. It is the second largest employer in India after agriculture and provides employment to more than 35 million people. The textile sector is not only self-sufficient but also produce almost everything from cotton and man-made fibres to the highest value added finished product of garment. Therefore the need for growth of this sector becomes critical for the Indian economy at large (Verma 2002). To assess the competitiveness, the research’s own model has been used which divided all factors into following two variables:

Internal Factors

These are the factors which can be easily changed and controlled by the intervention of government. These factors are very important for the growth and development of the textile Industry in a country. These are


According to the world competitiveness report, the rank of India was 42 out of 49 countries in 2002 and in 2008 it was 37 out of 57 countries. Infrastructure in general includes transportation, communication and power etc which are discussed below:


The transportation in India could be considered too costly than its other Asian competitors. For instance the shipping cost of garment from china (Shanghai) to the east coast of US is 13 % cheaper than from India (Mumbai). Long delays and inefficiency at Indian ports are the main reasons for the competitive disadvantage in transport t against other Asian countries. Due to these inefficiency the Asian countries like China enjoys a staggering 37% overall cost advantage over India (Verma 2002)

Road transportation

Some other infrastructure bottlenecks in road transportation are absence of expressway, large number of octori, high interstate road tax, and inefficient local transport unions etc. These factors are detrimental to productivity and increase the unit cost. The rising fuel prices have made the situation more problematic and complex. (Verma 2002)


Energy is another prime input especially in textile sector is in real bad shape primarily in states like Punjab, Haryana, and Maharashtra where majority of SSI are facing closure due to power shortage. Huge transmission and distribution (T&D) losses and cross-subsidisation in different states are few major reasons for the power shortage and high energy price. This is yet another competitive disadvantage affecting the industries overall productivity in India (Lall 2004)

Interest cost

The borrowing rates in India are one of the highest among its international competitors. The interest cost to a manufacturing unit in India as a percentage of sales is as high as 5.5%, which is less than 4% in many other Asian countries like China, Malaysia, and Indonesia (World Bank 2002). Also, this interest cost as percentage of sale in textile sector in India is as high as 8%. This high interest cost prohibits Indian entrepreneur to undertake large scale production.

Factor Input Cost

Product specific cost

The typical cost structure of a garment manufacturing would have been materials, fabrication, overheads and finishing contributing in ratio of 55%, 22%, 15%, and 9% respectively of total cost (Khanna 1991). The cost of fabrication and overheads are mainly because of fragment and highly decentralized garment sector which is reserved for SSI in India. This restriction prevented the firms to undertake operation on a large scale, quality investment and modernization which affected the firm’s and industries overall productivity.

Delivery and reliability

The non-price factors such as quality, design, styling, fabric, fashion etc have become increasingly important with the shift in emphasis in the Indian textile and garment industry from production to marketing (Chatterjee & Mohan 1993). The Indian garment manufacturing is known all over the world for their customised high quality products providing competitive advantage to the industry.

Raw Material

Indian cotton is world famous for its high quality, large variety and cheap prices. In fact, Indian prices for each varieties of cotton were lower than any other international counterpart in 1980’s (Chatterjee and Mohan 1993). The easy availability of cheap cotton is the prime reason for growth of textile and garment industry in India, providing it a great competitive advantage over its international counterparts

The Supply Chain

Level of Modernization/ Technology

The technology used in Indian garment sector specially in weaving is very old and outdated. Out of 2.7 million power looms installed, only 1% is the shuttle less looms. In 1997-98 the rate of modernization of weaving sector, in terms of new shuttle less looms installed as a percentage of total installed capacity, was1.6% whereas rate of modernization in countries like Mexico was about 41% (Verma 2002). However, India’s spinning sector is witnessing high level of modernization with most of sophisticated high tech machines are being imported from the advanced countries of the world. This could be said as it is world’s leading buyer of spinning equipments

Management Practices and Organisational Skills

Competitiveness of the firms is also largely dependent on manufacturing management. The study by Chandra (1999) for evaluating manufacturing management developed a frame work to compare the textile industry of India, China and Canada which showed that India possesses competitive advantage over China in aspects like quality of managerial workforce, home market demand and managerial practices.

Government policies and Taxes

Indian textile and garment industry today also, after two decades of liberalisation and deregulation, is controlled and regulated by more than 15 control order/ notifications. Some of them having a great impact on competitiveness of Indian industry are discussed below:-

Excise Policy

The excise duty on cotton yarn and man-made yarn in 2009 was about 4% and 8% respectively. The excise duty structure is highly biased as there different rates of duties are levied on the different segment of textile and garment industry. Also the textile industries which contribute to 4% to GDP pay 10% of total excise duty in 1997-98. The disproportionate duty incidence, exemption available to few segment and broken links are some of the key feature of the excise duty which has lead to a creation of unhealthy competition and distorted market structure (Verma 2002)

Technology up Gradation Funds Scheme (TUFs)

TUFs proved to be a great initiative taken by the Indian government to modernize textile and garment sector. Under it, the industry is given an interest subsidy of 4% (2009-10) on the import of machinery for long and medium term loan. In 2009-10 projects worth of Rs 55,707 crore (about $ 12.5 billion) has been guaranteed subsidised loan under this scheme (TUFs, 2010).


For staring a new manufacturing, a large number of government approvals have to be taken from different departments such as excise number, sale tax number, electricity approval, labour certificate, pollution certificate etc. These departments are inefficient and take lot of time to approve a project due to which adds to time and cost of the project (Tewari 2005). During some interview it was also brought to notice that most of government officials at both low and higher level are generally corrupt and demand a commission based bribe.

Cotton Technology Mission (CTM)

India is one of the largest producers of raw cotton in the world but its productivity is still one of the lowest. The yield of Indian cotton is about 300 kg/ha against 1064 kg/ha in low cotton producing country like China. Also, reportedly Indian cotton is argued to be most contaminated in world (ITMF Surveys). This poor quality and contaminated cotton is affecting the global competitiveness of the end users of cotton. Therefore to upgrade the quality of Indian cotton and improve its productivity CTM was launched by the central government but not much information is available about its implementation and utilisation of fund.

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External Factors

These are the factors which are not fully controlled by the state or government. The degree of control over these factors may vary accordingly depending up on the factors, economic structure, Government system etc. some of important external factors affecting the Indian Textile Industry are:


The textile and clothing industries is highly labour- intensive industry providing jobs to about 35 million people in India. This labour-intensive nature of industry could be a major reason for its shifting from developed countries to developing countries, even though they are less productivity. India is considered to quite favourably in terms of low labour cost s across various developing countries like Bangladesh, Sri Lanka etc. but according to Ricardo’s comparative advantage low wages is counter-productive and cannot lead to competitiveness (Ricardo (1817), Tendulkar (2000), Kell & Richtering (1991) ). A recent study has shown that one of the main reasons of better exports performance of Indian garments is because of the higher wages paid to skilled labour (Lall 1999)

Market Demand

Indian economy is growing at 7-8% per annum and so the disposable income of consumer especially the middle income class in India which is one of largest in the world. The rising purchasing power of the people and increase in spending of the people on clothing is a good sign for the native textile and garment industry. This increasing market demand could see as a great opportunity for the present Indian textile Industry (Verma 2002). However, the present retail industry is poor developed in India which is affecting the productivity and growth of the entire textile manufacturing chain. The main reasons for poor retail industry are high land price in big cities, lack of investment and restriction on entry of a foreign player in the retail sector which are detrimental for growth of large Shopping complex’s and big malls etc in high income Indian cities like Delhi, Mumbai, Bangalore, Kolkata etc which is in turn is affecting the home demand in entire textile and garment sector (Lall 1999).

International Trade policy

The relaxation of MFA could be seen as favourable international trade policy for the Indian textile industry. After the relaxation of quota, the Indian textile and garment industry showed a double digit growth rate per year. According to ICRIER report export of many of apparel categories such as cotton dress, W&G woven shirts and cotton skirts etc to US showed an increase of 43% from 2005 onwards. Such international trade policies provide competitive advantage to industries in a country over other countries (Hashim 2004)

Related and Supporting Industries

The supplier industries for the textile in India are the MNC like Reliance Ltd, Bombay Dyeing producing manmade fibres like polyester oriented fibre (POF), polyester spun fibre (PSF), acrylic fibre etc. These home based internationally competitive suppliers provide an advantage in terms of ongoing competition and also in the process of innovation and up gradation. This happens because these firms generally get quick and easy access to new ideas and insight, information and to supplier innovations (Porter 1998). Similarly, for the garment sector there is international competitive textile mills in the form of cheap labour, better delivery and reliability and less lead time. However the related industry like transports, shipping, information technology, management consultancy, marketing etc are not properly developed and lack international competitiveness (Khanna 1991).

Vardhman Group – The Case Study

Company Profile

The Vardhman group was incorporated in 1965 with Vardhman holding ltd, an investment and financing company under the leadership of Mr S Oswal who is currently the chairman of the group. After that it had diversified both horizontally and vertically in textile business. It is by far the largest textile conglomerate in India with the core competency in spinning of yarn. It has a total turnover over $700 million and a workforce of more than 23000 employees (Vardhman 2010). It has the spindle capacity of about 800000, which is one of the largest in the country. It is largest producer and exporter of cotton yarn and second larger producer of sewing thread. The unique selling proposition of the company lies is its flexibility in downturn sectors of value chain right from fibre to fabric. The company’s headquarter is located in Ludhiana, Punjab which is the textile hub of the country. Majority of stake in the company is in the hand of SP Oswal, who is the promoter as well as sitting chairman (Note 2003 and Vardhman 2010). The company’s shareholder pattern could be better understood from the following snapshot:

This indicates that the majority of control of the company is in hand of promoter, so it is more of family business than a public company.

Vardhman Group Structure

Vardhman is highly diversified company with its product ranging from fibre, yarn, thread, fabric, garment etc complimenting and competing each other in vertical and horizontal industries respectively. The following snapshot provides a better picture of the company:-

From above, we can see that group has five subsidiaries with Vardhman holding ltd as the parent company itself. The parent company has major stake in each of five companies which specialised in manufacturing one of the textile product. This product division of the company allows it to gain strategic direction and focus on each of the segment and product individually. The brief description about the company’s subsidiary is given below:-

Vardhman textile limited (VTEX) is one of major subsidiary of the company, contributing about 80% to its revenue. Its major business are yarn (cotton, spun, acrylic, melange etc), fabric (supplying to major brands like Tommy Hilfiger, GAP, Next, Espirit etc) manufacturing and also has steel production capacity of about 100000 metric ton per annum.

Vardhman Yarns & Threads Ltd (VYTL) is the second largest brand of specialised thread in India with the production capacity of 33 TPD. It has entered into 51:49 ratio joint venture with a US based company American and Efird Inc. (A&E) to manufacture and distribute their branded sewing thread in the country. It product range includes apparel sewing thread, speciality thread, kite flying thread, textile craft, tea bags, industrial thread etc.

VMT Spinning Company Ltd (VMT) manufactures 100% cotton yarn for export in partnership with Marubeni and Toho Rayon, Japan from where it imports the world class technology.

Vardhman Acrylic Limited (VAL) manufacture acrylic staple fibre which in used for the production of acrylic yarn. This backward integration provide a competitive edge to the company in local acrylic market

VTL Investment Ltd is 100% percent owned subsidiary of VHL involved in the business of non-banking financial operations.

Vardhman Group Financial Performance Post Multi-Fibre Agreement

After the relaxation of MFA, a tremendous increase could be seen in turnover, and capital employed of the company. Capital employed increased from $400 million in 2004-05 to $900 million in 2009-10 which shows that the group was expanding and increasing its production capacity. This was well reflected in their increase sale at an average of 10% per annum and the group witnessed a dramatic increase in FOB value of exports which grew about 50% in the span of four years. This dramatic increase in exports could be seen as outcome of relaxation of MFA where there were no restrictions on the company to export its good. The profit also increased at an average of 4% per annum.

Business-Wise Financial Performance

Yarn manufacturing is one of the major businesses of the company contributing about 55% to the total revenue mix while profit percentage is highest in fabric business. The group has also made an investment in an unrelated steel business generating marginal revenue for the group. The following snapshot provides a better business-wise picture of group:

(Source: Vardhman 2010)

Yarn business grew at 12.5% at average per annum and now, has a production capacity of 0.9 million producing 1, 26,146 metric tonne annually. It contributes about 55 % to total revenue mix. This include all the business related to cotton yarn, polyester, yarn, acrylic yarn, spun yarn and all threads

Fabric business is growing at a tremendous rate of 20% per year, though its turnover is comparatively less than yarn business. However it could be viewed as cash cow for the Vardhman group. During 2009-10 the production capacity of processed fabric was 61 million, showing an increase of 18.36 % over previous year. The sale is also growing at an average of 15% per year. Most its fabric is sold to buying house under label of international brands, which usually result in higher margin for fabric supplier and 35 % of fabric it sold through distributors in the local market. Also, about 66% of fabric is piece dyed, i.e. fabric is manufactured first and then dyed.

Steel business generally caters and is dependent on demand for auto and other related industry. This business is an attempt by company to de- risks its investment portfolio by investing in an unrelated industry. This business has not shown much growth after 2005 and is generating a stable profit of $9 million every year. It has production capacity of 62,110 metric tonne.

Factors Affecting the Competitiveness of Vardhman Group

For evaluating Vardhman competitiveness, various interviews of its manager and references from some secondary interviews were conducted. Mainly following factors were found out responsible for bringing export competitiveness to the firm which are broadly classified into four categories, the business environment in which the firm operates, firm- level strategy, home demand and government policies

Internal factors

These are competitive advantage available to VTL which are fully controllable by government. These are summed up as follow:

Easy availability of cotton

Another reason for growth of textile sector was easy availability of different variety and grades of cotton at very competitive prices. The most of company’s purchase is J-34 DR SPL cotton from the Bathinda branch of Cotton Corporation of India (CCI), which is one of finest in world. Beside Bathinda Branch, company also make part of it purchase from Sirsa ensuring them adequate supply of cotton at competitive prices through the year. The close proximity of these two cotton branch to the factory location helps them to save on logistic cost.

De risking Revenue Model (Differentiation)

In analysing the company revenue model, it was also noticed that the company’s unique feature was its product differentiation within its different business segment. For example with in yarn business the company is producing about 15 different value added products such as compact yarn, cotton lycra, melange yarn, pc yarn dyed, cotton dyed, acyclic yarn, slub yarn etc and some specialised yarn like cotton bamboo, cotton silk, cotton viscose, cotton modal etc. Beside these, as initiative to become an eco-friendly company, it also make environment friendly yarn products such as organic cotton, fair trade yarn etc. Thus, this product differentiation enables them to de-risk its revenue model


Company another competitive advantage comes from it continuous focus on capacity utilisation, producing value added product, diversifying customer base, spending on R&D. These focuses have help the company in channelizing its entire effort and workforce in one single direction thereby reducing wastage and ensuring optimal utilisation of resources.

Vertical integration

Vardhman Company is a well integrated textile mill, almost producing everything in the value chain ranging from fibre, yarn, fabrics and garment etc. According to Neeraj Jain head of yarn department of Vardhman textile, “The group’s unique selling proposition is its presence in almost each sector of the value chain, which enables us to produce a low cost customize garment, thereby providing us a competitive advantage both locally and globally”. Thus vertical integration is another major reason for better performance of Vardhman in recent years.

Government Policy

There are some below listed government policies and measures that manager think are responsible for enhancing their competitiveness globally. These are:

Technology up Gradation Fund scheme (TUFs)

The interest subsidy provide by the GOI in the form of TUFs, according to respondents have encourage them to use expensive modern technology. Till now, the projects worth about $400 million have been sanctioned under TUFs and the group is claiming an interest subsidy of approximately $25 million annually.

De-Reserving of Garment Sector

GOI of India has De-reserved knitting sector thereby encourage large scale production and modernization. According to SP Oswal in an interview, de-reserving the knitting sector is another important policy decision announced, which will go a long way in improving the outlook of the knitting sector, and increasing the knitwear exports from India in sync with the global trends.” This initiative by the government encouraged VTL to enter into the garment sector and now the group has a produces 90 million meters of cloth annually.

Rationalising of excise duty

GOI is also periodically reducing excise duty on cotton yarn and man-made fibre. The excise duty which was 36% in 2004 has been scaled down to 4% in 2008-09. Incidence of excise duty on export of yarn and fabric also has also been abolished. The rationalising of excise structure and lower of the duty has promoted the export from the country. But this process of rationalization still needs to be carried forward as there are still few disparity in tax structure on the basis of enterprise and fibre.

Joint Venture with Foreign Players

VTL has forayed into yarn and garment business with a joint venture with foreign player like Nisshinbo Textile Inc, Japan; A&E, US etc whereby the company uses the foreign partner highly sophisticated world class technology to manufacture the products for export. This technical tie-up with foreign players helps them to produce a high quality garment at low cost which is because of its manufacturing in India.

Relaxation of multi fibre agreement

As discussed in the report also, the company also felt that the relaxation of MFA from 1995 played an important role in the growth of exports from textile and clothing sector in developing countries. According to Mr. SP Oswal in an interview to a textile journal, “the present performance is likely to continue as cotton yield is expected to increase further and demand would grow due to quota phase out.In the past, the quotas resulted into fragmentation of the investment in non-competitive countries and survival of small suppliers. With phasing out of quota, this trend would discontinue.”

Low labour cost

It was found out low labour cost was one of the primary reason for competitiveness of Vardhman group. Average salary of a semi- skilled operator is currently about $1 per day against $40 per day in US. However, this reason was not alone sufficient for the competitiveness of the firm, as other things like technology; quality etc also played an important role.

Home Demand

One of another reason for the growth of company was due to great increase in home demand for yarn and fabric. This was mainly because of growing Indian economy and middle class group. The retail garment industry witnessed a dramatic increase in purchase of high quality branded clothes among the middle class of India. This increase in retail sector brought the requisite growth in backward value chain also.

Problems faced by industry

However During the course of interview many respondent also highlighted various problem faced as VTL as a part of Indian textile industry which brought various competitive disadvantage to them as against Asian giants like China. Some of main problems that were highlighted are:

One of the major competitive disadvantages that VTL faced is lack of infrastructure in the country. The Indian ports were inefficient and poor maintained to handle huge traffic for which company is paying extra transaction cost as against China. Some also emphasised the need of direct shipping line from east and west cost.

Few respondents also highlighted the shortage and costs of power are major concern for the industry. In the state like Punjab, Haryana where most of the VTL operated as facing the problems of power crisis. Long power cuts and higher power costs are the talks of town in India.

Disparity in tax structure on the basis of fibre and enterprise is another competitive disadvantage that disallows inter-sectoral competition on market demand condition in local Indian market.

Shortage of well trained and skilled labour is another problem faced by the VTL. Low productivity among worker and outdated labour laws are hampering the productivity of the company.

Another major concern shown by managers is the low productivity of cotton in India. Indian productivity was found to be one-third of that of china. However, VTL has started Village Cluster Adoption Program (VCAP) in Punjab to improve the yield of cotton per hectare, which has also showed some following fruitful result.

But still the size of this programme continues to remain small on national scale and cotton productivity is still a major concern.

Findings from the case

The following case of Vardhman group has thrown great light on the research question. What are other factors that brought international competitiveness for Indian textile and garment industry?

According to Virmani 2004 relaxation of quota would result in an increased market for the developing nation. The same was found out in analysing the above case. The group production capacity increased at average of 15 % per annum after 2005; however in further examining the case it was found out that many other factors were also responsible for the growth of the group’s business beside the relaxation of MFA. Most of the factors, which brought the competitiveness, were in accordance to Porter, 1998 ‘diamond model’ such as increase in home demand, low cost of productive inputs, firm strategies and policies, government policies etc.

Porter, 1998 three generic competitive strategies namely cost leadership, product differentiation and focus was found out to be most significant factors contributing to the competitiveness of the Vardhman group. The group’s presence in each sector of its value chain led to economies of scale, reduced its final unit cost, de-risked its revenue model and brought overall efficiency in its operations. Highly qualified and specialised inputs such as cheap human resources, capital resources, and easy import of sophisticated technology and domestic availability of cotton were some other contributing factors. However poor infrastructure facilities, disparity in tax structure, highly decentralised fragmented industry, low productivity, rigid labour laws etc were some major areas of concern that brought competitive disadvantage to textile garment industry. China is perceived to be a major threat and competition scoring over India in aspects like price, cost, economies, technology, and infrastructure etc.


Factors Affecting the Competitiveness

China is the largest producer and exporter of textile and garment in the world and provides employment to about 19 million people. The total industrial output of china in 2005 was $217.6 billion and China’s total export of textile and garment amounted to $115 billion in 2005. Major exports markets of Chinese textile and garment industry are US, EU, Japan, Hong Kong, Russia, Korea etc. Most of textile and garment enterprise are privately owned but still state owned and foreign enterprise has considerable share in the industry. (Ramasay and Yeung 2006). Similarly, to assess the competitiveness, researcher’s own model would be used internal factors are discussed in detail below:

Internal Factors


The infrastructure facilities include the following:

Raw material


Supply Chain Management

Government policies and Taxes

External factors

Just like India, external factors affecting the competitiveness of Chinese textile and garment industry are discussed in detail below:

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Jiangsu Sunshine Group- Case Study

Company profile

Jiangsu Sunshine group was established in 1986 and now has annual production capacity of 35 million meters of worsted wool Fabrics and 3.5 million sets of high grade women wear’s and men suits. Sunshine is one the famous trademark in the Chinese worst wool textile industry. The total turnover of the group in 2008 was 3.4 billion dollar out of which $399 million were exported. The total profit of group in the same year was $314 million (approx) with total workforce of 15000 people (Jiangsu 2010). The group’s core competence is wool textile and garment with main focus on the brand building and diversification. As result along with this major wool business, Sunshine group as it is known across China has also invested in business like real estate, bio-medicine and power generation etc. Jiangsu’s group holding subsidiary Jiangsu sunshine ltd was listed on the Shanghai stock exchange in 1999. ‘Sunshine’ group was awarded the title of china’s top brand in 2003 and in 2006 it became China’s world brand. It is largest worsted fabric manufacturer of the world and for past three year has been listed in China top 500.

Jiangsu group structure

Jiangsu sunshine group’s core business is worsted wool manufacturing and the group has divested it portfolio and interest in other business such as real estate, bio-medicine and power generation etc. the group structure is primarily the Jiangyin Sunshine Company Limited is financing and investment company wholly owning Jiangsu sunshine group company limited which in turn have a stake of 37.20 % in the Jiangsu Sunshine company limited, a subsidiary of the company who manufactures textile and garment products, bio-medicines, generate thermal power and buy and sell properties which is sub divided into nine subsidiaries which are discussed as follow (Jiangsu 2010):

Jiangsu Sunshine Woollen Clothing Sales Company and Jiangsu Shiwetie Wool Textile Company Limited are involved in the business of manufacturing of worsted wool and together produces 35 million metre of worsted fabric annually. The former is a 100% owned subsidiary of the group while the group has 75% stake in the latter.

Jiangsu Sunshine Export and Import Company Limited is involved in international operation of the group specially in the sale of worsted fabric abroad. The total export by the subsidiary in 2008 was $399 million.

Jiangsu Jiasili Fashion Company Limited and Jiangsu Sunshine Fashion Limited Company sells high grade men’s suiting and women wear in about 200 showrooms across China. The main focus of these companies is to establish a brand image of the company and various brand names like ‘Sunshine’, ‘Venetia’ and ‘POMPEI’ operate under them.

Jiangsu Yenssen Biotech Company Limited engaged in the manufacturing of skin wound dressing of inorganic activity and has acquired quality management system certification ISO9001/S013485. Most of it equipments are imported from Italy, Germany and France.

Jiangsu Sunshine Real Estate Development Company Limited is involved in developing real estates, colonies and apartment in the cities like Jiangsu, Wuxi, and Zhenjiang. Until now it has developed about nine estates in Jiangsu, a colony in Wuxi and Zhenjiang respectively.

Jiangsu Sunshine Xinqiao Thermal Power Co., Ltd is engaged in the business of the thermal power generation supplying power to Xinqiao town. While Jiangsu Sunshine Yunting Thermal Power Co., Ltd is a communal heat and thermal power plant, supplying central heating to Yunting industrial zone belonging to sunshine group.

Ningxia Sunshine Silicon Industry Co., Ltd is involved in the manufacturing of poly-silicon and related chemical products. It is a joint venture between the Sunshine group and Ningxia orient group and has an annual production capacity of 1500 ton. The Sunshine group has a major stake in the joint venture.

Financial performance Post MFA

Just like the Indian textile company, a dramatic increase could be seen in turnover and capital investment of Jiangsu Sunshine Group. A substantial increase can also be seen in export of the company which valued at $399 million in 2008. As a matter of fact, the sales grew at average of 37.5% annually from 2001 and the asset investment increase at rate of 43.75%.

However a downfall is seen in the sales, capital employed and profit etc in 2008-09. The global economic crisis in the world especially in US, to whom most of the Chinese textiles products are exported, could be a major reason for it. Also, declining profit margins is another interesting thing to look. The low price policy adopted by Chinese manufacturer and increasing global completion could be the main reason for declining profit margin. However, the group has witnessed a major growth during the phase of MFA or quotas.

Factors affecting the competitiveness of Jiangsu Sunshine Group

Just like the VTL, similar factors will be used to evaluate the competitiveness of Jiangsu Sunshine Group Based on some primary and secondary interviews of its managers. The internal and external factors along with firm’s own strategy and policies are considered together to analyse their competitiveness.

Internal Factors

Logistics and delivery

Chinese ports are much efficient than their counterparts in handing huge traffic volumes. According to a study, the efficiency of Chinese ports helps them to save time and money which reduces their overall cost by 37% when compared with India (Verma, 2002). Also, Jiangsu Sunshine group is located in a coastal province which helps them to save their logistic cost and efficient ports ensure timely delivery of the product.

Cheap availability of electricity

It was also found out during the interview that Jiangsu group receive 24 hour power supply at very competitive prices. This uninterrupted power supply ensure smooth running of the production process and avoid breaking or tripping of yarn of fabric. Some of the plants of company like that in Xinqiao have their inbuilt thermal station which further reduces their cost and provide them competitive advantages against other locals.

Product differentiation

Jiangsu Company producing various kinds worsted wool fabric, high grade men’s suite, women wears and other dyed yarn products. Three famous clothing brands of China namely, Sunshine, Venetia and POMPEI are operating under its belt. This offering of different varieties of garment to different groups of customers reduces the risk and diversifies the product portfolio.

De risking model

Jiangsu group has a diversified investment portfolio by undertaking various unrelated business. Besides worsted wool manufacturing, it has also invested in real estate, power generation, bio-medicine and IT sector etc. This diversified investment has ensuring the requisite de risking of revenue of the group. Also, during the interviews it was found out that the company uses its thermal plants to supply electricity to its wool textile mills. This in-house production of a factor input enable them to lower their per unit cost and thereby having an competitive advantage over others.


A major source of competitive advantage of the group is its focus on modern technology, personnel, management and product quality. According to Lu Keping “Those enterprises that have reached international standards in terms of equipment, technology and product quality will have an edge on global competition,". Thus the constant focus of group on modern technology and improving product quality has ensured its competiveness in international market.

Brand Recognition

Another major advantage available to the group is its brand recognition within and outside China. For example in 2000 “Sunshine” was regarded as first famous trade mark of China in Chinese wool textile industry. In 2003, it was awarded the title of China’s top brand and in 2006 “Sunshine” fabric was awarded with the title of China’s World brand.

Foreign Expansion

Fastening their step in joining the process of free trade and globalisation, the China largest worsted wool manufacturer is busy opening showrooms abroad. According to Mr Lu, “Under an ambitious plan, the company is trying to have half of its annual sales from the domestic market and the other half from the foreign market in three to five years.” (Website unpan)

Government policies and aid

During the interview it was also found out that the company received an export subsidy of 12% every quarter. So, the group received substantial help from government and its office in allocation and consolidation of land for their industrial parks. Besides this group, like other in China received electricity and freight subsidy for exports. These benefit by the government helped the Sunshine Company in increasing their exports.

The respondent didn’t agree with allegation of currency manipulation, however agree the current currency arrangements provide benefits to manufacturer in China especially exporter.

External factors

Relaxation of MFA

According to the respondents, relaxation of quota brought a dramatic increase in the company’s export as they received large number of international order indicating the shift in industry. But some also argued that phase out of quota increased the competition in the global market and therefore the price of commodity plunged sharply.

Low labour cost

Low labour cost in China was found out to another contributing factor to competitiveness of industry. However, the increasing labour cost in coastal provinces of china was a major concern for many respondents but largely according to the international standard China still enjoys the low labour cost advantage.

Problems faced by the industry

However during the course of interviews various problem faced by the sunshine group under present Chinese textile Chinese structure were brought to notice. They are summed up as follow:

Increasing labour cost was seen as major concern for the group. This was the main reason of shifting of company’s production activities to inland provinces where they were cheap and skilled labour. However the shifting of production plant increased their logistic cost.

Poor productivity of labour as compared to international standard was another concern. According to Lu Keping, “Chinese textile enterprises are striving to catch up with the international standards in personnel, capital, information and management.”

Excessive dependence on other countries for import of wool (raw material) increased their cost of production and was a great source of competitive disadvantage.

Highly decentralised and fragmented low end garment market lead to increase in distribution cost and generally increase the lead time. This type of market avoided huge investment and use of highly sophisticated modern machines.

Also inadequate home demand and huge dependence on exports is a major threat to Chinese textile industry in general. For example due to 2008 financial crises, the export and prices of textile product felt by 20% due to which the profit margin of the Sunshine group plunge to lowest in two decades.


Findings of the Research

After critically analysing the Indian and Chinese textile industry along with the case study, it was clearly found out that there was a dramatic increase in exports of textile and garment products from these countries to other developed countries of the world especially US after the relaxation of MFA in 2005. According to ATMI, 2007 after the relaxation of quota China’s share of the US textile and apparel market has increased to over two-third of the U.S. market within 24 months. This paper perceived China as the biggest threat to US textile and apparel industry after the removal of quota. According to NCTO, 2006 India could be the prime alternative for the US as a safeguard measure to protect its excessive reliance on China.

It was also found out that price of textile products in China dropped sharply by 48% after relaxation of quota. Following table shows the price drop in the textile industry in China after 2005.

Many argued it was due to excessive competition under the free trade framework while some blamed the Chinese government unfair trade policy of currency manipulation a main reason for this sharp price drop that made other developed countries in the world non-competitive. In simple words, with removal of quota, there was supposedly a shift in the production of textile goods to the developing country of the world, with China a major gainer’s and biggest threat to developed world. However this wasn’t the essence of dissertation which focuses on analysing the competitive advantage of China and India.

After critically analysing the factors, as per the model coined, and the case study of the Vardhman group it can concluded that major factors that bring competitive advantage to Indian textile industry are the low labour cost, easy availability of cotton, cheap bank finance, high domestic demand and capability to fulfil small and customised order. The following SWOT analysis presents a better picture of the industry:

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The main factors bringing competitive disadvantage to industry were low productivity of labour, highly decentralised and fragmented market, poor infrastructure facilities leading to extra costs, use of outdated and old technology in low-end garment sector and unequal incidence of tax. While elimination of quota and increasing disposable income of the middle class in India are considered to be an opportunity for the industry whereas low cost competition from China and growing concerns for labour laws and environmental issues among the international community of the world are some of the major threats to the industry.

A critical analysis of factors affecting the competitiveness of Chinese textile and case of Jiangsu group bring us to the following SWOT analysis of the Chinese textile and garment industry.

In the light of above it could be clearly seen that China main competitive lies in low labour cost, good infrastructure facilities in the form of efficient ports, cheap electricity and various government policies giving incentive to exporter. Also, there are some controversial unfair trade practices by the government like currency manipulation, export subsidizes, free loans etc which also gives a competitive edge to the Chinese textile industry over others. However, it was also found out during analysis that factors like inadequate home demand, insufficient raw material and huge dependency on import of raw material and highly fragmented garment industry brought competitive disadvantage to the Chinese industry. While elimination of quota and increasing FDI in the country were considered to be opportunity for the industry whereas increasing labour cost, pressure from the international community especially from US by imposing of ‘China special textile safeguard’ would again impose quota on China in case of market disruption by its export (CITA, 2008) and growing environmental concerns among expert are perceived to be long term threat to the Chinese textile industry.

Comparison between India and China Textile and Garment Industry

It could be clearly seen from the above analysis that China score over Indian textile industry. The following table summarize the China’s comparative advantage over India textile industry:

Table 8.2: Factor comparison of Indian and Chinese textile industry




Factors Input Advantage ( labour etc)

Home Demand


Government policies


Infrastructure (Port, Electricity)


Availability of Raw material


Currency Valuation


Productivity (labour, Land)




Investment (Economies of Scale)


(Source: Research’s Own)

From above it could be said that China clearly have an advantage over Indian textile and garment industry in many ways. The main advantage that Chinese has is its government policies which are favourable for the exporter and manufacturers. This could be a major reason for the China being an idle destination for the foreign company to invest and shift their production. However, according to porter, 1998 government do not create a competitive advantage a firm do. The government at most influence the business environment of industry and the factor inputs drawn by a firm. Thus along with government policies, good infrastructure facilities is another factor that makes China more cost competitive than India. Also the labour productivity and cotton productivity is higher in China than India. According to ATMI, 2007 the two main reasons of China’s dominance in the world is the Currency manipulation and various unfair subsidies and rebates give by ht e government to the exporter. In Such as circumstance China growing efficiency and competitiveness poses a serious threat to Indian textile industry especially in low and medium grade products.

Policy Recommendation

In the light of above threat by China’s low cost efficient textile industry many structural and institutional changes are required in Indian textile Industry. Following policies are recommended to GOI:

Home Demand Creation

Steps should be taken by government to encourage and prompt foreign investment in garment retailing. Presence of these word class retailers would create a demand for garment manufacturer within home market itself.

Reduce Import Duty

Incidence of duty on import of raw material and machineries for textile should be rationalised which would encourage competition in the domestic market thereby making it more competitive (Verma, 2002).

Eliminate Tax Disparity

Incidence of Excise duty and VAT on the basis of enterprise, operation and fabric should be completely abolished so as ensure and prompt fair competition in the market.


Learning from china, building world class infrastructure that is port, power and communication etc should be a priority of the government. However, developing such world infrastructure throughout the country might take a decade, so priority should given be to industries in Special Economic Zones and then extended to other parts of country.

Outmoded labour laws

One of the prime reasons of small and fragmented garment industry is outmoded labour laws regarding transfer, dismissals and retrenchment etc which are detrimental for organised sector. This has made the industry structure such that it prevents modernization and economies (Ahluwalia, 2002).

Effective Supply Chain System

Plans should be formulated to develop Special Economic where right from the raw material, to spinning, weaving, and knitting and at last garment manufacturing are at single compact geographical area thereby reducing cost and lead-time.

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Improve productivity

The government should take step to improve the productivity of labour as well as of productivity of cotton which are currently some major concern for the industry. For example project like Village Cluster Adaption Programme (VCAP) by the Vardhman group to improve the yield of cotton per hectare could be some of the innovated steps adopted by the government on a larger scale to improve productivity (Vardhman 2010).

Limitation and Suggestions for Future Research

As far as the limitations of the thesis are concerned, it must be noted that the research fails to answer the degree or extend of competitiveness of textile and garment industry in India and China. This only answer to question which factor contributes to competitiveness of industry and because of which factor Chinese have a comparative advantage over India. It does answer which is most contributing factor or which factor is mainly bringing the competitive disadvantage to the nation’s industry and by what extent.

Also, due to inability of the researcher to understand Chinese, various interviews with Chinese manager couldn’t be conducted. Also, there was limited secondary data on Chinese textile and garment industry in English which again limited the scope of investigation.

At last, one of major limitation of the research was biased opinion of the respondent of the interview. It was noticed that most of the respondent discussed the good of their company and were bit reluctant to tell the competitive disadvantage the company faces. This biased view might have again limited the scope of investigation.

Nevertheless, after the conduction of thesis, there are still some areas that can be investigated in the future. The research model to evaluate competitiveness could be used to factor analysis the industry performances, showing how much is a factor superior or inferior to other both inter and intra industry wise. Perhaps, this could give a better recommendation to policy maker to revise the existing policy bringing disadvantage to the textile industry.