BOOM TIMES FOR SOUTH INDIAN COTTON MILLS

UNCLAS SECTION 01 OF 02 CHENNAI 000846

SIPDIS

SENSITIVE

SIPDIS

DEPT FOR EB
USDOC FOR MAC/ANESA/OSE/ASTREN/LDROCKER
USDOC FOR TD/AS/AC/BLOPP
USDA FOR FAS/LBLUM

E.O. 12958: N/A
TAGS: ECON EINV ETRD EAGR EIND IN
SUBJECT: BOOM TIMES FOR SOUTH INDIAN COTTON MILLS



1. SUMMARY: (U) The cotton textile industry in south
India is in the midst of a boom as international demand
continues to grow for all categories of Indian cotton
products. The spurt in demand, attributed to low
production costs, internationally acceptable levels of
quality and the removal of quotas, has spurred feverish
expansion of capacity. Cotton cultivation in south India
has kept pace with the increase in production, causing a
drop in imports of U.S. cotton. Knowledge and experience
in brand development is currently lacking among Indian
companies in this industry, and presents opportunities
for U.S. businesses with these skills. END SUMMARY

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REMOVAL OF QUOTA RESTRICTIONS CONTRIBUTES TO THE BOOM
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2. (U) The cotton industry in South India is in the midst
of a boom thanks to the removal of WTO quota restrictions
that had been established during the Uruguay round of
trade negotiations in 1994, relatively low production
costs and improved quality standards that now meet global
market requirements. The South India Mills Association
(SIMA) reports that production of yarn in the region
increased by 60 percent in the first quarter of 2006
compared with the previous year. Vasantha Kumar, the
Joint Director of the Apparel Export Promotion Council,
told Post that the value of garment exports from the
Coimbatore region in west-central Tamil Nadu had
increased from $2 million in the first quarter of 2005
to $36 million during the same period in 2006.

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SCALING UP TO SURVIVE
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3. (U) Expanding capacity has been the common theme in
all textile industry segments. The Government of India
sponsored Technology Upgradation Fund Scheme (TUFS),has
enabled producers to secure loans at an interest rate of
3 percent compared with prevailing rates of 7 to 12
percent, which has facilitated expansion significantly.
SIMA former Chairman Vijay Venkataswamy told Post that he
expected 1.5 million spindles to be added in 2006-07.
Almost all of the additional capacity will be of the
shuttle-less variety, which produces a higher quality
product. P.V. Ramaswamy, Chief Executive, SIMA says that
mill owners with access to capital now invest in mills
with over 25,000 spindles rather than those with 10,000
spindles as was the case five years ago when industrial
policy favored small producers. Ramaswamy said small
operations were no longer viable in the new environment.

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CHINESE TEXTILE MACHINERY MANUFACTURERS CASH IN
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4. (U) Local producers of textile machinery have been
unable to meet demand for new equipment. Lakshmi Machine
Works, one of the largest local manufacturers of textile
machinery, reports a two year backlog of orders. South
Indian textile entrepreneurs have turned to manufacturers
in China and Taiwan to source machinery. China Texmatech
Company, in particular, has benefited and reportedly
secured orders for 50,000 spindles in the Coimbatore area
alone during the International Technology and Machinery
Expo held in March 2006. The company has now set up a
liaison office in Coimbatore to provide after-sales
services to its customers.

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INCREASED PRODUCTIVITY SHRINKS US COTTON EXPORTS
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5. (U) Cotton farmers in Tamil Nadu have kept pace with
the increase in textile production. Use of genetically
modified seeds and adoption of better post-harvest
practices have been the main factors in increasing cotton
production, K.N. Viswanathan, Secretary, The South India
Cotton Association, told Post. The crop year 2004-2005

CHENNAI 00000846 002 OF 002


saw a bumper cotton crop in India with production 10 to
15 percent above historical levels. As a result, imports
of the upland variety of cotton from the U.S. dropped
sharply since Indian cotton had a 7 cents per bale price
advantage over the U.S. product. Viswanathan said that
long-stapled cotton continues to be imported from the
U.S. but in much smaller quantities when compared to
imports from Egypt. Purchases of long-stapled U.S.
cotton, he said, were made only when the importer of a
finished product specified that the U.S. variety be used.

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BUILDING GLOBAL BRANDS - OPPORTUNITY FOR US BUSINESS
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6. COMMENT: (SBU) At this point, the Indian cotton
industry lacks the knowledge and skills to establish and
maintain brands in the global market. This presents
opportunities for U.S. businesses that possess such
skills. South Indian textile companies are currently
seeking western talent that can conceptualize, launch and
build brands that will enable Indian cotton products to
move up the value chain, K.G. Balakrishnan of K.G. Denim
told Post. His company launched its own "Trigger" brand
of jeans that did well in the Indian market but made
little headway in the West. His company continues to do
job work for international brands like Wrangler and J.C.
Penny. But having a global brand of his own is his
dream, Balakrishnan told Post, and it is something that
he plans to invest in. END COMMENT.

HOPPER