Yet another blot on India’s manufacturing industry.
Welspun India Ltd.’s Egyptian cotton scandal which has seen its market value plummet and put a question mark on India’s manufacturing quality standards, has wide repercussions for the industry.
Welspun India Ltd., the Indian textile company accused of selling fake Egyptian-cotton sheets to Target Corp. and other U.S. retailers, said after the expose it was modifying its supply chain and reviewing its practices to address the accusations, reported the Wall Street Journal.
Target has severed ties with Welspun, accusing it of passing off cheaper sheets as premium Egyptian cotton for two years.
Welspun on Thursday released a transcript of its conference call with investors through the Mumbai stock exchange. Welspun was addressing investor concern after Target said Friday it was cutting ties with the company. The discount-retailer said an investigation into Welspun’s practices concluded the Mumbai-based company had sold it phony Egyptian-cotton sheets.
Welspun responded on Saturday saying it had commissioned an accounting firm “to investigate the root cause,” of the problem. The company has refrained from making other public statements this week, even as other large clients including Wal-Mart Stores Inc., J.C. Penney Co. and Bed Bath & Beyond said they would conduct their own investigations.
In the call with investors held on Monday, Welspun’s Managing Director Rajesh Mandawewala took responsibility for the mishap.
“Without any ambiguity the fault is on our side and so it is, let’s say, the error is from our side so I guess we have to take responsibility for it,” Mandawewala told investors, according to the transcript.
He declined to say what, specifically, had gone wrong, saying only that “in the manufacturing process you source a lot of materials at various stages.”
The dispute exposes the complexities of a global supply chain in which each stage of production, from sourcing to stitching to selling, can happen in different continents.
“The idea is to actually look at the entire supply chain and our supply processes so that we can bring about robustness in the whole process,” Mandawewala said. The company said the accounting firm would conclude its investigation in six to eight weeks.
Welspun’s share price has more than halved since the Target allegations surfaced Friday. Two-thirds of Welspun’s sales come from American retailers.
Fortune reported questions over the exact provenance of bedsheets sold by Welspun India to America’s middle classes have not only wiped $740 million off the firm’s market value, but also revived one of Indian manufacturing’s enduring headaches: quality.
India’s government, desperate to accelerate growth and create more jobs, has backed a “Make in India” manufacturing push. India already makes everything from car parts to t-shirts, but is trying to move up the chain to make higher-end products, like Apple’s iPhone, the report said.
“One major hurdle, however, has been product quality, often blighted by low salaries, poor training and sketchy suppliers. As India manufactures more, cheap is not always cheerful,” the report said.
Other Indian manufacturers distanced themselves from Welspun, but many fretted over the broader impact as the country tries to bet on quality, not just cheap workers, where it faces constant competition from regional rivals.
“It’s high time exporters improve the quality of their products,” said S.C. Ralhan, president of the Federation of Indian Export Organisations, set up by the government and industry to promote exports. He said the group would take up the issue of quality with its members.
Arvind Sinha, national president of the Textile Association of India, said India’s image as a manufacturing destination for textiles could be tarnished, reported Fortune.
“This is another blot on the Indian exports resume,” said an analyst at a local brokerage, who asked not to be named as it would violate his firm’s policies. “The Welspun fiasco could have ripple effects and force companies to scout for options in other regions in Asia that have unscathed records.”
Government officials say the Welspun case is an exception, and don’t expect much damage to India’s reputation as a manufacturing hub.
“We hope it will be one of the stray incidents that will not have much impact on our near $42 billion textile exports,” said a senior textile ministry official, who declined to be named.
A senior official at the Ministry of Commerce and Industry said more such incidents could dent efforts to promote India as a manufacturing export hub.
“If Indian industry is to survive and thrive, it has to adopt global standards,” he said, adding the ministry has raised the issue of standards with exporters through export promotion councils, and has stressed third-party auditing and self-regulation.
Its $15 billion pharmaceutical industry, a global supplier of cheaper generic medicines, has been dogged by quality concerns, with health regulators in the United States, Britain and Europe barring some plants from producing drugs for their markets because of inadequate standards.
Highlighting weak official checks and under-resourced testing facilities, Nestle India had to pull its popular Maggi instant noodles off the shelves last year after local regulators found some samples contained unsafe levels of lead. Subsequent tests at government-accredited laboratories showed the noodles were safe for consumption.
The $108 billion textile industry accounts for a tenth of India’s manufacturing production, 5% of GDP and 13% of export earnings, according to government data. It is the country’s second-largest employer after agriculture.