The Denim War – will Arvind come out a winner?

Year 2005 is a watershed year for Textiles. With the multifibre agreement (MFA) getting phased out and disbanding of quotas, international trade is poised for a quantum leap. Will, Arvind Mills, after years of sweat and turmoil, use this opportunity to remain a leader in Denim clothing and Branded Jeans segment?

BACKGROUND

1930 was a year the world suffered a traumatic depression. Companies across the globe

began closing down. In UK and in India the textile industry in particular was in trouble.

During the Swadeshi Movement of boycotting fine and superfine fabrics, the Lalbhais

sensed an opportunity for Indian made fine and superfine fabrics. The three brothers,

Kasturbhai, Narottambhai and Chimanbhai decided to put up a mill to produce superfine

fabric. And a company called Arvind Mills was born in 1931.

With the aim of manufacturing the high-end superfine fabrics Arvind invested in very

sophisticated technology. With 52,560 ring spindles, 2552 doubling spindles and 1122

looms it was one of the few companies in those days to start along with spinning and

weaving facilities in addition to full-fledged facilities for dyeing, bleaching, finishing and

mercerizing. Steadily producing high quality fabrics, year after year, Arvind took its

place amongst the foremost textile units in the country.

In the mid 1980's the textile industry faced another major crisis. With the power loom

churning out vast quantities of inexpensive fabric, many large composite mills lost their

markets, and were on the verge of closure. Yet that period saw Arvind at its highest level

of profitability. There could be no better time, concluded the Management, for a rethink

on strategy. The Arvind management coined a new word for it new strategy -

Renovision. It simply meant a new way of looking at issues, of seeing more than the

obvious and that became the corporate philosophy.

The national focus paved way for international focus and Arvind's markets shifted from

domestic to global. People the world over were shifting from synthetic to natural fabrics.

Cottons were the largest growing segments.

Thus in 1987-88 Arvind entered the export market for two sections- Denim for leisure

and fashion wear and high quality fabric for cotton shirtings and trousers. By 1991

Arvind reached 100 million meters of Denim per year and it was the third largest

producer of denim in the world.

In 1997 Arvind set up a state-of-the-art shirting, gabardine and knits facility, the largest

of its kind in India, at Santej. With Arvind's concern for environment a most modern

affluent treatment facility with zero affluent discharge capability was also established.

Arvind in serious trouble:

In the mid 1990s, Arvind Mills undertook a massive expansion of its denim capacity in

spite of the fact that other cotton fabrics were slowly replacing the demand for denim.

The expansion plan was funded by loans from both Indian and overseas financial

institutions. With the demand for denim slowing down, Arvind Mills found it difficult to

repay the loans, and thus the interest burden on the loans shot up. In the late 1990s,

Arvind Mills ran into deep financial problems because of its debt burden. As a result, it

incurred huge losses in the late 1990s.

Arvind hives off its garments business

Arvind Mills Ltd., which was facing a downturn in its key denim business, and start-up

pressures at its newly commissioned textile complex, decided to clean up its act. The

company, in 1999, decided to spin off the garments business into separate subsidiary

company where outside investors will be invited.

The company had two licensing arrangements through separate subsidiaries - Arvind

Fashions for "Lee" and Arvind Clothing for "Arrow". The Garments division of the

company had several other brands such as Newport, Flying Machine, Ruf&Tuf and

Excalibur. All the brands (including Lee and Arrow) would be merged into a single

garments company.

As a result Arvind Brands limited was born as a subsidiary of Arvind mills to handle the

branded garments.

DEBT RESTRUCTURING

Arvind Mills, which went into financial distress due to downturn in denim industry, had

Over Rs 2,500 crore debts owed to about 85 lenders from all over the world. The

company began a complex and unprecedented debt restructuring exercise in February

2001 which involved more than several dozen domestic and international lenders.

The company defaulted in almost all the loans it took including instruments it had floated

earlier. The Crisil rated the company as “ Default” from prior excellent ratings.

Majority of lenders had supported Arvind Mill’s debt restructuring plan at a meeting

convened by the Gujarat High Court, even though they had to take a hit while bailing out

the loss-making company.

As per the polling, 89 per cent of secured lenders, 99 per cent of unsecured lenders and

96 per cent of working capital lenders (in value) voted in favour of the scheme, which

was more than the required 75 per cent as per the law. As per the scheme, the lenders

having outstanding debt about Rs 700 crore would take one time settlement by accepting

48 per cent of their outstanding debts. The other lenders would reduce interest with effect

from April 1, 2000, and accept repayment over 10 years..

The combined effect of the sacrifices by creditors would increase the current net worth of

Rs 550 crore by more than 100 per cent and the debt equity ratio would fall from current

very high 2.5 to 1.3.

Although Arvind Mills declared substantial loss of Rs 383 crore for 12 months ended

March 2001, most of the loss was on account of interest costs, which has provided

without taking into effect the debt restructuring. The loss for the past periods would

significantly be reversed when the effects of the plan are given in the book of accounts, it

added. It started making profits thereafter and 2004 happened to be their best year in a

decade of turmoil. The company has started looking up and would be making substantial

gains in the future.

The future

Denim production in India, the bulk of which comes from the mills of Ahmedabad, is set

to rise by 100 million metres to touch 500 million metres by the end of 2006 - making it a

significant chunk of the global production that is forecast at some 2.75 billion metres by

that time, according to industry estimates.

A major chunk of India's denim - which traces its roots to Nimes in France before it was

made popular by the cowboys of America - comes from two companies here, Arvind

Mills and Aarvee Denim and Exports, even though a host of other firms have entered the

business since the early 1990s.

With a turnover of $180 million and production capacity of 120 million metres per year,

Arvind exports denim to more than 70 countries.

Some of the leading brands worldwide have come to source fabrics and garments from

this company following the dismantling of the quota regime and in view of advantages of

lower labour costs.

"Over the past three-four years, the production base for denim has been shifting to Asian

countries, particularly India," said Vinod Arora, chairman and managing director of

Aarvee Denim and Exports.

"The production has come down significantly in the US and it has mostly closed down in

Europe. India is the biggest beneficiary of the process," Arora told IANS.

"During the quota regime, most of the garmenting and stitching activity was done in

countries of Africa, Bangladesh, Sri Lanka and the Middle East, as India had no quotas,"

said a senior official at Arvind Mills.

"So Arvind used to export the fabric to the garment makers/cutters located in these

countries for stitching, from where they were ultimately shipped to the US, Europe and

elsewhere," he said.

"But now, after the abolition of the Multi-Fibre Agreement (MFA), the garmenting

activity within India has increased considerably and most of the brands have appointed

their converters within India, too," he said.

"As a result, the dispatch of fabric from Arvind to these local converters will increase.

Though the ultimate sale is only to the big brands and international chains, the shipment

of fabric from Arvind will also increase within India."

Arvind recently commenced operations of its jeans manufacturing facility. "It will be

some time before we will be able to know the actual performance of that unit," said the

official.

Strategy to stay on top:

Arvind Mills is active in three basic product segments, namely, denim, shirting and knits.

In the denim division, internationally, they face competition from China, Indonesia, Hong

Kong, Turkey, Brazil, Italy and other countries, although comparable players are

primarily US-based. In India, they almost rule the market since small denim

manufacturers, who produce between eight to 16 million metres of denim annually, suffer

from financial and capacity limitations. They generally compete at the lower end of the

market.

At the strategic level, in the denim division, Arvind has altered not just the product mix

but also the customer profile mix. They are moving away from the trade industry, which

relies more on spot orders and bookings. Instead, we undertake maximum business with

big brands like Levi`s, GAP and Nautica in the US and NEXT, M&S, Diesel and

Mustang in Europe.

In the shirting division, domestically, Arvind faces competition from the lower segment

of the market that is operated basically by power looms or decentralized units, producing

different products. Internationally, Arvind compete with suppliers from China, Hong

Kong, Turkey, Taiwan, Austria, Italy and Portugal, which are equally placed with them.

In their knits division, from the Indian perspective, competition for the basic or

commodity products is from the unorganized sector based at Tirupur, Bangalore, Delhi

and Ludhiana.

In the international arena, their prime competitors are Hong Kong, Pakistan, Bangladesh

and China. Since these markets are in turmoil, Arvind certainly

See indications of a boost to India’s knitwear industry, in general, and theirs, in

particular.

For vertically integrated companies like Arvind Mills, which are in a position to offer

one-stop-shop garment package responses to brands, competition really becomes limited.

Because of our capability to produce the entire spectrum of differentiated products, we

are preferred not only by Indian buyers but also by big brands across the globe

Conclusion:

The Indian apparel market is witnessing a rapid growth in recent years. Large number of

malls, preference for brands even in mass markets the business is picking up fast.

As Mr. Mehta says “apparel buying is no more of utility buying but it is fun, emotional.

What was missing earlier was the ambience. With the malls, the whole retail initiative

would change.”

The future looks challenging for Arvind Brands. But it is a 360-degree challenge and

would require constant innovation with customer satisfaction, happiness and growth.

Year 2006 has started with high cotton prices and intense competition.

Will Arvind live up to the expectations?

Reference:

1. Indian express July 21, 2001.

2. Face to face channel interview with Mr. Sanjay Lalbhai Managing Director, Arvind

Mills

3. newsnmuse – Jan 4, 2000  

4. India's Manchester bids to become global denim capital- Indo-Asian News

Service

5. India infoline, feb 1, 2002

6. Wikipedia, the free encyclopedia.- Jan 1, 2006

Questions: 1. Draw a TOWS diagram for Arvind.

2. what are their strategies to be a leader in the market ?. Do you think

that these strategies will take them to the top of the ladder?

3. what is multifbre agreement and how did it affect the textile industry?

4. what is their present position in the jean industry ( 2010) – to be

Researched by the students.

This case was developed by Dr.R.Venkatesh for the course in Strategic Marketing

for the PGDM – as a capstone course

.

, from ans point of

fibre2fashion: In terms of cost advantage, does Arvind Mills see global leadership mantle falling on its shoulders? What value-adds are being done in the company's textile chain?

Mr. Lalbhai Forevision and Technology has brought Arvind to be one of the top three producers of Denim in the world, and on its way becoming the Global Textile Conglomerate. Arvind is already making its presence felt in Shirting's, Knits and Khakhis fabrics apart from being all set to create ripples in the ready to wear Garments world over. Today Arvind Mills is the largest integrated textile company and among the few in the world. With several cost advantages in cotton, labour, etc,With its presence across the textile value chain, the company endeavors to be a one-stop shop for leading garment brands. Arvind Mills is among the most competitive entities globally and is uniquely poised to take advantage of the global textile trade and also in domestic market.

 fibre2fashion: What innovations or products do you expect to hold sway over the global textiles

and apparel industries in the near future?

Mr. Lalbhai We produce more than 50 varieties of denim for our international customers. Arvind Mills has dedicated R&D team comprising of textile professionals including international consultants. The company produces over 4 million metres of denim in product development and R&D develops 50 new products each month.

Arvind Mills has been a quality supplier of fabrics in denim and shirtings to some of the well-known international brands. Over the years, Arvind has developed several value added and differential fabric range which has been well accepted by the clients. As a result, Arvind has been successful to associate with premium brands in international brands commanding higher realization besides receiving numerous accreditations. The company is Asia's first fabric manufacturing unit to receive an ISO 14001 certification and accreditations by leading apparel companies in the world.

We have dominant share in the domestic market (upwards of 60%) in denim and confidant of growing the same. The company has reaped good benefits from introduction of value added denim fabric in domestic and abroad. At the same time Arvind has derisked the geographical spread in supply of denim, whereby supplies are now to over 60 countries.

 fibre2fashion: Arvind Mills is an acknowledged leader in the denim world. Could you trace the roots

of its successes or failures that have endured so far, since its establishment almost 75 years ago?

Mr. Lalbhai 1930 was a year the world suffered a traumatic depression. Companies across the globe began closing down. In UK and in India the textile industry in particular was in trouble. During the Swadeshi Movement of boycotting fine and superfine fabrics, the Lalbhais sensed an opportunity for Indian made fine and superfine fabrics. The three brothers, Kasturbhai, Narottambhai and Chimanbhai decided to put up a mill to produce superfine fabric. And a company called Arvind Mills was born in 1931.

With the aim of manufacturing the high-end superfine fabrics Arvind invested in

very sophisticated technology. With 52,560 ring spindles, 2552 doubling spindles and 1122 looms it was one of the few companies in those days to start along with spinning and weaving facilities in addition to full-fledged facilities for dyeing, bleaching, finishing and mercerizing. Steadily producing high quality fabrics, year after year, Arvind took its place amongst the foremost textile units in the country.

In the mid 1980's the textile industry faced another major crisis. With the power loom churning out vast quantities of inexpensive fabric, many large composite mills lost their markets, and were on the verge of closure. Yet that period saw Arvind at its highest level of profitability. There could be no better time, concluded the Management, for a rethink on strategy. The Arvind management coined a new word for it new strategy - Renovision. It simply meant a new way of looking at issues, of seeing more than the obvious and that became the corporate philosophy. The national focus paved way for international focus and Arvind's markets shifted from domestic to global. People the world over were shifting from synthetic to natural fabrics. Cottons were the largest growing segments. Thus in 1987-88 Arvind entered the export market for two sections- Denim for leisure and fashion wear and high quality fabric for cotton shirtings and trousers. By 1991 Arvind reached 100 million meters of Denim per year and it was the third largest producer of denim in the world.

In 1997 Arvind set up a state-of-the-art shirting, gabardine and knits facility, the largest of its kind in India, at Santej. With Arvind's concern for environment a most modern affluent treatment facility with zero affluent discharge capability was also established.

Year 2005 is a watershed year for textiles. With the mulitifiber agreement getting phased out and the disbanding of quotas, international textile trade is poised for a quantum leap.

Arvind has carved out an aggressive strategy to verticalize its current operations by setting up world-scale garmenting facilities and offering a one-stop shop service, of offering garment packages, to its international and domestic customers.

With the Indian economy poised for rapid growth, Arvind brands with its international licenses of Lee, Wrangler, Arrow and Tommy Hilfiger and its own domestic brands of Flying Machine, Newport, Excalibur and Ruf & Tuf, is setting it's vision on becoming the largest apparel brands company in India.

This report features profiles of three of India’s leading textile and apparel export companies.

Each company has devised strategies to remain viable during a period of crisis in the Indian textile industry.Arvind Mills is the biggest denim fabric producer in Asia and the third largest in the world. In the 1990s the company over-expanded its denim fabric capacity and incurred substantial debt. But it has recently returned to profitability by cutting costs and focusing on products offering higher added value. These include innovative denimfabrics and premium quality shirtings for international brands.