location-analysis Feb2020

Where to Establish your Next Garment Manufacturing Unit?

Overview

Textile & apparel manufacturing industry in India covers almost the entirety of the country, with each region traditionally manufacturing unique products. From the Knitwear Capital “Tiruppur” in the South to the sweater hub “Ludhiana” in the North and the Denim hub of Ahmedabad in the West, these clusters have been manufacturing these products for decades now. However, the recent years have seen a dispersal of the manufacturing clusters across the country due to organic and inorganic factors. On one hand, clusters such as Surat have grown organically for textiles, on the other hand, some clusters such as Jharkhand are growing because of the continued efforts and support by the state government. An investor who wishes to setup a modern garment factory in India needs to critically examine manufacturing location, since a variety of factors contribute to the profitability of the business with location being one of the most important ones.

To state an example, an investor may find a state lucrative to establish a garment manufacturing unit because of the low wages or wage subsidy being provided by the government, however, after thorough analysis, he may find that due to dominance of other manufacturing industries in the region, the sustainability of the business may be in question. This article highlights some of the important factors that must be evaluated while selecting the location for establishing garment factory in India.

1. Land cost

Cost of the land, generally has a significant share in the total establishment cost of a garment manufacturing unit. Ranging between 10% to 20% of the project cost, land cost affects the capital investment largely and hence should be one of the priority factors for consideration. Further, it is not only important to shortlist a state for its land cost and availability, a detailed taluka-level assessment should be undertaken. For instance, the land costs within Surat, India’s largest synthetic manufacturing hub differ by 8 to 10 times depending on exact location. On one hand, the land in Olpad taluka of Surat costs Rs. 500-600/ Sq. m., the land cost in the neighboring Ichhapore taluka ranges from Rs. 5,000 to 6,000/ Sq. m. As the range of land cost varies noticeably from one taluka to another, selecting the right land at the right cost is of paramount importance to establish a profitable garment manufacturing unit.

2. Logistics & connectivity

In-line with most of the manufacturing businesses, garment industry is dependent on various ancillary industries and businesses for raw material, value addition activities such as washing, embroidery, etc. Connectivity with sourcing hubs is a major aspect that needs to be considered while shortlisting the investment location. For example, a garment manufacturing factory established in Gujarat will have an easier and faster fabric sourcing process as a result of the well-established weaving industry within Gujarat, when compared to a garment unit set-up in Jharkhand, where the sources of fabric are limited. As the garment manufactured in these factories need to travel to various parts of the country as well as the world, the proximity to transportation facilities such as roadways, railways, airways, and seaways becomes an important deciding factor while selecting a location for a garment manufacturing unit. The manufacturers need to balance the logistic costs of raw material & trims and the finished goods to arrive upon a suitable location for setting up their manufacturing units.

3. Labor availability and cost

Garment manufacturing is a labor-intensive industry with manpower cost forming 25-30% of the total operating expenses. While deciding any location, it is important that both availability and cost of labor are considered. For an instance, for two garment manufacturing units with same product mix and similar operational costs, a minor difference of Rs. 3,000 – 4,000 per person in monthly wages will have a direct impact of as much as 2-3% on the profits of the entire operations. Considering an ideal profit margin of 15%, this 3% additional profitability is actually a 20% increase on the base profitability. Thus, making it one of the key reasons that state governments emphasize on wage subsidies in their textile & apparel polices.

4. Government support

To attract new investments and support existing units, several key Indian states offer fiscal and non-fiscal benefits to their state’s T&A industry. However, the quantum of support and the conditions applied on these incentives & subsidies largely differ among various manufacturing state. The table below summarizes the impact of incentives offered by few key states for a standard garment manufacturing unit of 500 sewing machines.

It is evident from the below table that government support is one of the most influential parameters in location analysis as few states are offering incentives worth or more than total project cost.

quantum-of-assistance

5. Business Ecosystem and Future sustainability

There are several textile & manufacturing clusters present across the country that have evolved to become well-established clusters. These clusters are a great fit for any new investor considering easy access to buyers & suppliers, developed infrastructure, dormitory, ETP, etc. However, investors largely focus on the existing scenario of these clusters and locations and often overlook the future sustainability of the area. It is important an investor is vigilant about the changes that may influence the business in the near future. For an instance, a state is selected through careful analysis of present scenario prioritizing the large labor pool and low labor cost offered by state, however, projected water scarcity in the future may negatively affect the possibility of backward or forward integration. Therefore, understanding the sustainability of business in that location should be given as much importance as the present scenario.

The above article highlights some of the key parameters that should be considered while evaluating a location. Though these are the most important ones, there are several other factors such as availability of training institutes, environmental norms, availability of middle management, etc. that may be considered too. As garment factory consultants, we at Wastra offer customized services to take care of all the above-explained factors to help investors select the most attractive destination for establishing a garment manufacturing unit.

This article has been authored by Vijay Gupta, Associate Consultant and and Priyam Pandit, Associate Consultant.