Indian Cotton Textile Consumption in the Post-MFA Era

Indian Cotton Textile Consumption in the Post-MFA Era 2005 Agricultural Outlook Forum Cotton and Fibers Outlook 25/February 2005 by David B. Collins Assistant Executive Director - CCI

Expectations for the Indian Cotton Textile Industry Raw Cotton Production and Mill Consumption Competitiveness of Indian Industry Tendencies for Consumption of Cotton by Consumers at Retail Challenge to Cotton from MMF and a Solution to that Challenge

Indian Mill Consumption to Outpace Production 20,000 18,000 16,000 1 m Bale Gap 13,640 17,771 Thousand Bales 14,000 12,000 10,000 8,000 6,000 12,556 2 m Bale Gap 15,423 4,000 2,000 Production (000 Bales) Mill Use (000 Bales) 0 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 Marketing Years CCI Export Promotion Committee Aug 04 & USDA

Indian Cotton Imports U.S. Exports Total Imports U.S. Mkt Share 2,500 60% 2,000 50% (000 Bales) 1,500 1,000 40% 30% 20% 500 10% 0 0% 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 CCI Export Promotion Committee Aug 04

Just a few key Cotton Production Factors Improvements in Yield ~290 kg/ha in 1998 up to ~340 in 2004 up 17% but how sustainable is it?? Rapid Growth in Use of Bt cotton Now accounting for over 13% of crop at 1.13 m ha but can the advantages be realized? Contract farming being implemented sparingly Government Technology Mission

Observations on Indian Mill Consumption The Indian textile complex will continue to be critical to the overall economy The Indian textile industry has made significant investments to prepare for post-mfa era Textile industry capacities have grown

Growth in Number of Mills Number of Spinning Mills Spindles Installed (In million) 1620 1600 1580 1560 1540 1520 1500 1480 1460 1440 1599 1565 1579 1565 1543 1504 1998 1999 2000 2001 2002 2003 36.5 36 35.5 35 34.5 34 33.5 33 32.5 36.1 35.75 35.53 35.1 34.72 33.88 1998 1999 2000 2001 2002 2003 Source : Compendium of textile 2003

Observations on Indian Mill Consumption The Indian textile complex will continue to be critical to the overall economy The Indian textile industry has made significant investments to prepare for post-mfa era Textile industry capacities have grown Policies are expected to remain favorable toward exports Consumption of cotton will grow more rapidly than production -- both domestic & export end-uses

Competitiveness In Spinning Manufacturing Costs 2001 : Spinning Ring Spinning Cost/kg in USD 2.50 2.00 1.50 1.00 0.50 0.00 1.9 1.5 1.6 1.8 1.6 1.3 1.2 Brazil India Indonesia Italy Korea Turkey USA India has state of the art spinning. Spinning cost especially for medium and finer counts is one of the lowest in the world. In last two years, competitiveness further enhanced Has over 25% of global trade in Cotton Yarn (7% in all Yarns) Source: ITMF Data

Competitiveness In Weaving Manufacturing Costs 2001 : Weaving Ring/ OE yarn Weaving Cost/ yd in USD 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 0.40 0.34 0.26 0.26 0.22 0.23 0.16 Brazil India Indonesia Italy Korea Turkey USA Weaving is globally cost competitive. However lacks modernization Presence of a large unorganized sector gives it the flexibility to produce smaller quantities, difficult to be produced cost effectively elsewhere Mill sector has the capability to produce international quality fabrics Source: ITMF Data

Competitiveness in Knitting Manufacturing Costs 2001 : Knitting Knitting cost / yd in USD 0.250 0.200 0.150 0.100 0.050 0.000 0.21 0.19 0.14 0.11 0.11 0.12 0.09 Brazil India Indonesia Italy Korea Turkey USA India is a large supplier of knit garments More companies becoming vertically integrated to reduce cost and time, and achieve better value Source: ITMF Data

Competitiveness in Garmenting Country M/c Cost/day Typical Efficiencies Cost/SAM Hrs. of Work In $/day/machine In % terms in Cents Per Week China 10 55 3.20 60 Sri Lanka 16 50 5.00 60 India 10 40 3.50 50 Dubai 30 65 6.00 70 Bahrain 36 65 7.00 70 Kenya 17 40 4.50 60 Madagascar 12 50 4.00 60 Bangladesh 9 45 2.50 60 Mexico 45 10.00 60 Guatemala 60 8.50 60 Honduras 60 8.50 60 Turkey 60 9.00 60 India has one of the lowest conversion cost for garments. Costs could be further reduced by Engineering the facilities to increase efficiency KSA Analysis based on KSA s projects

Characteristics of the Indian Consumer Market Tradition of Cotton consumption, production, lifestyle Strong economic growth Rapidly growing population of consumers - + 1 billion Large and rapidly growing middle class - ~ 200,000 mil. Developing retail sector and corresponding growth in media apertures Traditionally high percentage per capita cotton consumption but under threat from influx of MMF s

India s s Cotton Heritage A Culture of Cotton

Key Economic Indicators 12% 10% 8% 6% 4% 2% 0% 1999 2000 2001 2002 2003 GDP Growth Inflation Interest Rates Source: Synovate s Asia Pacific Market Handbook 2004

India s s Growing Middle Class Annual Income The Very Rich >Rs. 215000 The Consuming Class Rs. 45000-215000 The Climbers Rs. 22000-45000 The Aspirants Rs.16000-22000 The Destitute <Rs. 16000 1997 2007 1 33 54 44 33 Households (million) 5 75 82 20 17 Source : NCAER

Rapidly Developing Retail India is second most attractive retail destination, ahead of China India's market size offered tremendous promises as its population is expected to surpass China s s by 2050. This is further supported by improved living standards and continuing economic growth. Source: A.T. KEARNEY & India Business Line Source: A.T. KEARNEY & India Business Line

Crossroads: India s s First Shopping Mall Crossroads opened mid-1990 1990 s Now over 600 malls under construction or on the books

Retailing in India Today

What CCI s s Research Tells Us about the Indian market? Consumers overwhelmingly prefer natural fibers & specifically cotton over man- made fibers Source: Global Lifestyle Monitor & CGA Research

Natural fibers especially cotton are considered best What fiber is best suited for today s fashions? Natural Fiber (net) Cotton 69% 77% Silk Denim Linen 4% 3% 1% Blend of cotton & polyester 13% Synthetic Polyester/Dacron 4% 3% Source: Global Lifestyle Monitor III, Synovate, Mar. 2004

Indian Attitudes Toward Fibers Of Indians surveyed by BAI Global: 69% say It s important that my clothes are made from natural fibers such as wool and cotton 75% say I I think that better quality clothes are made from 100% natural fiber 71% say cotton is the best fiber for current styles Source: BAI Global

What have we learned about the Indian market? Consumers overwhelmingly prefer natural fibers & specifically cotton over man-made fibers Consumers increasingly demand quality and are willing and able to pay for it Source: Global Lifestyle Monitor & CGA Research

65% of Indians say they ll pay more for natural fibers Yes 65% No 30% Would you pay more for clothes made from natural fibers such as cotton than you would for clothes made from synthetics such as polyester? Source: Global Lifestyle Monitor III, Synovate, Mar. 2004

Indian Attitudes Toward Apparel Quality 100% 80% 60% 40% 20% Pay More for Better Quality Sacrifice Quality for Price 0% Colombia Hong Kong India Italy Germany Taiwan UK Brazil Korea Japan Source: Global Lifestyle Monitor III, Synovate, Mar. 2004

What have we learned about the Indian market? Consumers overwhelmingly prefer natural fibers & specifically cotton over man-made made fibers Consumers increasingly demand quality and are willing and able to pay for it Consumers are buying more cotton now than they were even two years ago. But they are buying even more polyester Source: Global Lifestyle Monitor & CGA Research

Indian Cotton Consumption SEC AB Cotton Consumption, India 2003 2004 5 4 Kg/capita 3 2 1 0 Men Women Kids Home Source: Global Lifestyle Monitor & CGA Research

Cotton Share of Indian Consumer Fiber Consumption 60% 50% Percentage Share of cotton 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2020 Year Source: PCI Supply/Demand Report, 2000

As Elsewhere, There Is a Shift From Cotton to MMF Market Forecast for India, 1995-2020 MMF Market share is expected to increase from 32% to 62% Overall volume growth of 13% per year Cotton Market share is expected to decrease from 68% to 38% Overall volume growth of only 2.5% per year

Historical Fiber Consumption, India Kg Per Capita 2.0 Cotton MMF 1.5 1.0 0.5 0.0 1980 1990 1995 2000 Source: PCI Supply/Demand Report, 2000

Projected Fiber Consumption, India Kg Per Capita 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Cotton MMF 2000 2005 2010 2015 2020 Source: PCI Supply/Demand Report, 2000

Without organized support, cotton will lose share to MMF Final Consumer Demand, India Cotton MMF Kg/capita 4 3.5 3 2.5 2 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2020 Source: PCI Fibres & Raw Materials Supply/Demand Report 2003

The Solution: CGA

The CGA Strategy Based on Cotton Inc. Strategy in the U.S. To provide product differentiation to quality, 100% cotton products via the Seal of Cotton, and To promote fiber awareness and cotton preference among India s s middle and upper class By sponsoring advertising, promotions, PR,, and technical assistance and builds demand for CGA partners and ultimately, cotton vs MMF s

Cotton Gold Alliance Background Cotton Incorporated, CCI, and USDA partnership with leaders of the Indian textile industry Three-year, two-million dollar Section 108-funded program began in 2002 Boost demand for cotton regardless of growth Goals: to increase consumption of cotton fiber among growing Indian middle class and thus to increase off-take of cotton in India as well as elsewhere

Cotton Gold Alliance in 2002 Established technical criteria for alliance membership; licensed first partners Employed local marketing and advertising agencies Developed The New Face of Cotton advertising campaign Program launched at trade level Oct. 25 in New Delhi

October 2002 Trade Launch

Cotton Gold Alliance in 2003 Development of advertising, media, PR, and direct marketing plans Licensing of leading Indian textile, apparel and retail firms as CGA partners Consumer advertising launch

May 2003 Consumer Launch Press conference in Mumbai attended by 75 journalists Fashion show featuring products licensed to carry the Seal of Cotton

May 2003 Consumer Launch

Core CGA Partners

The New Face of Cotton: 2003

Outdoor Campaign

In-store Activity Certificates/plaques given to partners for instore display Seal of Cotton stickers distributed, to be pasted on doors, panels etc. Information leaflets distributed to all partners

Seal of Cotton awareness doubled after 12 months Percentage of SEC A, B and C consumers aged 15-54 who recognize the Seal of Cotton 6% 6% 11% 2001 (baseline) 2003 2004 Source: Seal of Cotton logo tracking survey, TNS Mode, May 2004

Growth highest among SEC A Percentage of SEC A, B and C consumers aged 15-54 who recognize the Seal of Cotton All SEC A SEC B SEC C 15% 6% 5% 8% 6% 6% 9% 6% 11% 11% 10% 4% 2001 (baseline) 2003 2004 Source: Seal of Cotton logo tracking survey, TNS Mode, May 2004

Premium paid for 100% cotton products is increasing Difference in premium price paid for 100% cotton products vs. premium price paid for all products 2003 2004 15% 11% 4% 5% 6% 7% Men's T-shirts Men's Dress Shirts Men's Trousers Source: Consumer Index of Cotton Consumption, KSA Technopak, May 2004

100 Preference for 100% cotton products is high and growing Difference in the percentage of consumers who give a high rating to 100% cotton products vs. those who give a high rating to synthetic products 80 2003 2004 60 40 20 0-20 58 44 46 29 33 26 9 15 14-2 Comfort Style Reputed co. 43 27 Source: Seal of Cotton logo tracking survey, TNS Mode, May 2004

Why Do We Believe in the Program? Cotton s s share of U.S. market prior to Seal of Cotton advertising 70% 60% 50% Percent 40% 30% 20% 10% 0% 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Source: NPD and Trade Data 1982 * Excludes carpet

Cotton Share of Indian Consumer Fiber Consumption 60% 50% Percentage Share of cotton 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2020 Year Source: PCI Supply/Demand Report, 2000

Seal of Cotton Worked in the US Cotton s s share increased from a low of 33% in 1973 to its present 60% 80% 70% 60% Percent 50% 40% 30% 20% 10% 0% 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 Source: NPD and Trade Data * Excludes carpet

In Summary, India will 1. remain major producer of cotton and will grow 2. see growth in consumption of raw cotton, and at a faster rate than production and thus will import 3. should be a competitive player in the post-mfa era 4. see continued growth in size and sophistication of the domestic market 5. see a continued consumer trend toward MMF s s and away from cotton despite the innate preference for cotton 6. Unless a significant, coordinated demand-building effort is pursued to boost consumption of cotton at retail

Thank You!