Welspun a wake-up call for textile firms

Don't want to miss the best from Business Standard?

In the aftermath of the Welspun controversy, Business Standard gets deeper into the issue of global scrutiny facing Indian businesses across key sectors, in a three-part series. Today, we look at the textiles sector, in the first part

Weeks after the Welspun controversy broke and prominent US retailer Target Corporation severed ties for selling it something other than what was contracted, Walmart, the biggest chain in the world, has for the same reason ended its partnership with the Mumbai-based textile giant on selling Egyptian cotton sheets.

This has set off alarm bells for the entire exporting community, especially in textiles and apparel, where unorganised businesses have flourished over the years, with many of them serving as essential building blocks in the value chain of big companies.

Welspun India, for which the product in question is six per cent of total business, has appointed EY (earlier Ernst & Young) to review supply chain systems and processes. This was after Target alleged Welspun had for two years been passing off cheaper sheets as premium Egyptian cotton. That a past employee leaked the information on the Egyptian cotton issue, as reports suggest, has highlighted that insiders knew quality standards were ignored. EY will investigate internal checks and processes as part of its audit.

The issue goes much beyond Welspun. Global legal and regulatory frameworks are clamping down. The US, UK and European Union are in the forefront, insisting any product that is imported be compliant with their laws and regulations - on quality standards, labour laws, environmental guidelines and anti-money laundering. Adherence with rules that prevent bribery and corruption is part of the list.

Some recent developments show how the scrutiny is being stepped up. The US in March passed a Trade Enforcement Act, giving wide powers to the Customs to stop any goods from entering if found violating the regulations. In May, it reformed the anti-money laundering and anti-corruption guidelines; the European Union, UK and many others have been doing that as well. This resulted in many companies from various countries being subjected to heavy penalties.

Says an international trade expert and forensic auditor, "All these are aimed at ensuring trade mechanisms are not used to finance terrorism, which has now taken the shape of organised financial crime." Such activities, he said, were being executed via multiple transactions.

Welspun, as reports indicate, fell short of the needed compliance in this changing global regulatory and legal landscape of the export universe.

Rahul Mehta, president, Clothing Manufacturers Association of India, said: "International laws are getting more and more stringent, and difficult to follow. Large buyers from the developed world, of which the US and EU are the biggest markets, will eventually move to big and integrated players in India.'' Small and mid-size importers from the developed world might still prefer to deal with small and medium companies in India. That division of the market seemed an emerging trend, he said, and could lead to consolidation in the manufacturing and exporting space.

How will the exporting community change itself? "Indian exporters will gradually start taking more and more care in ensuring efficiency and insisting compliance from their suppliers as awareness spreads,'' according to Mehta. He believes they might soon insist on a legal undertaking from their vendors and suppliers, seeking assurance on compliance with all legal provisions and fair business practises.

The compliance cost for exporters will increase, affecting the competitiveness of our exports, said experts. On the other hand, Bangladesh, China and other competing countries are being made to go through the same regulatory drill.

Global risk management gurus agree. Anurag Jain, who leads market development for risk business at Thomson Reuters, said: "The impact of third-party risk and the associated relationship cannot be underestimated. Organisations need trusted risk intelligence that can help them improve overall transparency and monitoring of suppliers at regular intervals.'' Developing risk intelligence in the supply chain will help navigate through today's complexities, ensuring existing customers are served more effectively, he added.