INDIA AS A MANUFACTURING HUB FOR

GLOBAL FASHION AND LUXURY GOODS

A knowledge initiative by FICCI and YES BANK
The objective of the YES BANK - FICCI knowledge report on the occasion of the launch of the
FICCI LIFETYLE
FORUM is to trigger a thought process among key players in luxury and fashion and promote
India as a future
manufacturing hub for global fashion and luxury goods. Given India's strengths in old arts
and crafts since centuries, the
country can emerge as an exporter and hub of Indigenous Indian global lifestyle brands.
The report encapsulates the rise of luxury brands retailing in India, the potential of India as a
manufacturing hub, the
opportunities and challenges and the potential of developing Indian Indigenous brands for
the world market. This report

provides a framework and direction

for the development of the luxury
brands market in future.
Introduction
As the Indian economy has opened
and the growth accelerated, the quest
for good things in life has also
witnessed similar
upward progression, and as the
demand for luxe rises, a host of
foreign luxury brands are making a
beeline to India. The
High Networth Individuals (HNI)
population in India stood at 123,000 in
2007, making India the fastest HNI
growing
population in the world. As India
shines and Indians increasingly
achieve meteoric success, they no
longer shy away
from spending money to acquire
luxury. The rich in India believe every
word of the maxim, 'If you have it,
flaunt it.’
However, as Indians lap up luxury, the
reality is that the market is still very
nascent and a lot more effort is
needed to tap
the full potential. Regulatory frame work and Government policies need to be fine tuned
further to facilitate a smooth
entry of foreign luxury brands in India. At the same time, luxury brands foraying into India
have to keep the long term
potential in mind and move accordingly, which means investing in concerted marketing
efforts and creating awareness
amongst the target audience. Once that is achieved, the market will only explode as Indians
become more and more
refined in their tastes and preferences even when it comes to luxury.
While there is enormous potential for inbound luxury brands, concerted effort is needed to
also project India as an
exporter of luxury brands to the world. The 'Made in India' tag has inherent strengths which
can be tapped to sell ethnic
indigenous luxury brands across the globe. We only have to draw inspiration from our
culture and traditions and the vast
talent pool of traditional expertise which still exists to make the 'Made in India' tag possible.
- Go Away Guilt, Over to Luxe
While India has always had a thin slice of the old rich comprising the royalties and business
families, the last decade has
seen the emergence of a new class of wealth makers. These wealth makers, nouveau rich,
are typically the first generation
businessmen and entrepreneurs, who have tapped various opportunities emerging out of
the liberalization wave which
swept the country. Add to that the rise of the middle class population, estimated to the
around 120-150 million strong,
who fuelled by increasing disposable income are striving to achieve their aspirations. Which
apart from acquiring home,
car, credit cards, foreign trips also includes possessions which celebrate their achievement,
like a Tag Heur watch or a
Gucci belt.
Market Potential for Luxury Products
1
If India keeps the last three years average growth at 9%, the income levels of consumers is
expected to almost triple by
2025. By 2025, it is estimated that India will become the fifth largest consumer market,
rising from 12th largest today.
High disposable income and a largely young population will drive consumption patterns
upwards.
With a huge youth populace below 25 years and having a 17% share of the world working
population, India presents a
huge market for brands across the spectrum. It is estimated that 52% of luxury customers
are in the age bracket of 25-34
years old. By 2033, the active age group 25-45 years is expected to be around one third of
the population. With the
average age of potential luxury consumers decreasing, the country is a goldmine waiting to
be tapped.
Key issues facing the industry include;
Lack of high-caliber workforce- The demand for skilled workforce for the luxury
sector is increasing, however
the supply is limited. The luxury industry is likely to face a man power shortage of 133,000
by 2010.
Lack of Suitable Infrastructure- The rentals are steep and choices limited for
luxury stores which are typically
limited to five star hotels. The high rentals are not offset by the spending power of the
consumers and therefore it will be a
few years before retailing bears fruit.
Limitations of the Government framework
The luxury sector needs to be treated in isolation with other retail sectors as the dynamics
governing it are significantly
different in nature. To reach its potential, the Indian retail sector requires significant capital,
technology and best
practices to bridge the existing productivity gap and achieve scale in operations, which are
critical to the sector's success.
One of the key steps towards facilitating the development of the retail sector and in
accelerating its growth would be to
further ease foreign direct investment in the sector. The constant back and forth on policy
decision on retail at the centre
also acts as a dampner for luxury brands.
The Indian tariff structure is high and that in itself is a huge deterrent. India has one of the
highest duties/taxes on
imported luxury goods, which drive the grey market and duty free purchases, while the
stringent regulatory environment
impedes investment by foreign brands.
The need of the hour is to open up the opaque structure which has been put in place.
Transparency at all levels needs to be
provided for duties and taxes. Government rules and regulations need a thorough revision
with due consideration to the
sensitivities to the sector.
Indigenous Skills-Go Bespoke
The cultural rhythm of India reverberates through its signature skills and products. Each of
its states has signature skills
that speak of the highest level of craftsmanship and creativity. Bespoke Luxury forms the
essence of India made luxury.
The Indian handicrafts sector is economically important from the point of low capital
investment, high ratio of value
addition and high potential for export and foreign exchange earnings for the country.
Brands such as Hidesign, Ravissant and Fab India are modifying products and techniques
which are Indian in nature to
appeal to global tastes. They are cleverly converting an ignored class of artisans and master
craftsmen into an asset base.
Benchmark with the Best: Darzi to Ateliers
The preliminary steps towards luxury brand building are taking place by Indian fashion
designers, multi-brand luxury
shops and select companies. Our homegrown talent has received much acclaim in the
international arena with their
creations being featured on global fashion magazines and donned by international fashion
queens. While Indian artists
Potential for India Indigenous Brands -
2
and fashion designers are making their mark globally, the truth is that a country where art
and craftsmanship has been
ingrained and become part of the culture has not yet been able to produce a single Indian
luxury brand of repute.
This sector needs an ample dose of corporatisation to achieve its true potential. Corporate
governance and access to the
potential market will provide the requisite support for the trade to flourish. The creation of
craft pockets will consolidate
a highly decentralized sector and provide an edge over foreign competitors like China, Korea
and Thailand. Indian
indigenous luxury brands need to stick to its heritage, maintain a high quality in production,
preserve and develop artisan
knowhow and use selective distribution.
Given the core strengths of the manufacturing sector, India can well become a
manufacturing hub for global luxury
brands. Already brands like Louis Vuitton and Frette are looking at India as a manufacturing
base for their products, but
there are others who simply source their requirements from India. It is estimated that the
manufacturing of luxury items
in India can grow to US $500 million13. This manufacturing capability if harnessed properly
can propel India as one of
the leading destinations for manufacture. The cost advantages, particularly in labour
intensive sectors like leather and
accessories add to the advantage of the country.
Despite the bullishness on India as a luxury market destination, there are many barriers yet
to overcome before the full
potential can be realised. Sector leader envisage a delay of 4-5 years before India develops
the skills and capability to be
an outsourcing destination for the luxury industry. This can be traced to a few obvious
reasons like, Quality control,
Customer perceptions about made in India and cultural conquest of minds, Global
brands Sharing propriety
know-how, Counterfeiting Issues and Unfavorable Government policies in the areas like
FDI, taxes and trade.
In the pursuit to create a true Indian luxury brand, a story is needed. A story, that entices
and creates an aura around the
brand making it aspirational. A strong brand is created when there is trust weaved around it.
For faith in the brand, the
product has to consistently deliver the brand promise. Indian brands need to invest
considerable time in developing a
unique identity for a brand and maintaining the ethics and aesthetics of the brand.
Government and private organisations should consider implementing following initiatives:
1) Corporatisation of Luxury sector will bring along with it concepts of organised and
innovative marketing,
leading to large investments, employments and generating additional revenue streams.
2) Forming a standardization and branding/packaging organisation which can provide a seal
of approval for all the
luxury goods produced in India.
3) Forming partnership with International Fashion/Luxury councils or association or trade
organisation to
encourage, promote and facilitate cooperation in the high-end luxury market.
Developing India’s Luxury trade will undoubtedly benefit the country’s macro environment.
Leveraging India's rich
cultural heritage by creating and trading in novel and culturally distinct goods and services
will boost national pride and
sentiments among its citizens. Providing Indian artisans with a strong platform that would
acknowledge their skill and
offer opportunities for growth will encourage reverse migration.
The in flow of foreign luxury brands on the other hand have helped cement India's status as
a market for luxury goods.
Luxury malls like DLF Emporio in Delhi and UB City in Bangalore will help define the luxury
retail space in India.
India as a Manufacturing Hub for Global Luxury Brands
Framework & Policies for the Outbound Luxury Sector
Macro-Economic Impact of Luxury Trade
3
Developing India's luxury trade by promoting its brands abroad and welcoming foreign
luxury brands will also act as a
factor in promoting the travel and tourism sector in the country.
The experience of other developing countries indicates that the presence of foreign retail
and consumer companies
contributes to building a new middle class, which drives economic success, prosperity and
social progress for all and
results in creating both direct and indirect employment opportunities.
Luxury brands looking to invest in the country have to brace for a long gestation period. The
growth of the luxury market
has to be accentuated with dedicated investments to build the mark.
Investments: One of the conventionally preferred modes of investment followed by global
brands is the franchisee
system. The franchisee route allows brands an entry into a new market and the franchisee
helps in seeding and ramping up
the business. There is ample evidence of the trend in the Indian market place.
Financing: When it comes to financing, Indian retailers and manufacturers are dependent
on cash credit and term loan
from the banks. However, new sources of financing have also become popular. The key
opportunities for private equity
players are investing at the growth stage. Financial resources are necessary to fund
underexposed or emerging brands into
international brands. Such money has helped companies achieve brand expansion, increase
product range as well as
reach out to newer markets and distribution channels.
Besides sector agnostic private equity players, the Indian market is now witnessing the entry
of dedicated luxury focused
funds which strongly reiterates the underlying high margin high growth Indian luxury story.
CONCLUSION
The advent of foreign luxury brands is in a way an indicator of the promising India growth
story. Looking to reap early
mover advantages, these brands have set up shop in our country The Indian luxury market,
currently in its nascent stage
needs to address key concerns like the lack of adequate retail infrastructure and limited
availability of trained workforce
for the trade if it wishes to promote luxury retail in the country.
Bespoke Luxury forms the essence of India made luxury. The world today is looking at India,
and the products coming
out of it. Our skills pool speaks of the highest level of craftsmanship and creativity as it has
evolved and been refined by
the many generations that carry on the trade.
India is also well poised to be an outsourcing destination for foreign luxury brands. The
obvious benefits that India has to
offer such as low labour costs, superiority of fabrics and customization, gives it an
advantage over other mass producing
countries.
To achieve the objective of promoting indigenous brands and positioning India as a future
manufacturing hub for luxury
goods, consolidation in the industry is imperative. The need of the hour is for the industry
players to create a sophisticated
business model supported by financial and legal footings, and for the government to develop
the requisite infrastructure
and offer the right incentives. A concerted effort now needs to be made to harness the
capabilities of Indian skills to
generate tradable luxury goods in the world market.
India's luxury sector has gained significant speed. It has the potential and resources, to
outshine other developing
economies. Thus the route is chalked out and the objective is known. If the road can be
cleared of challenges and
impediments, luxury retailing in India will have a smooth drive ahead.
Investment & Financing for the Outbound Sector
4