Hanging by a thread

As we enter Tirupur after a 90-minute journey from Coimbatore, the first thing that strikes us is how unremarkable the town is. Tirupur is the nerve centre of the garment export trade in India and the town supplies to leading fashion labels, including to Tommy Hilfiger, Levi’s, Diesel, Reebok, as well as for retailers such as Walmart, Target and Mothercare. But it’s so, well, nondescript. There are no large buildings, no flashy hoardings and certainly no one dressed to the nines in the latest fashion. Even the marketplace is just a small row of garment shops, where you can pick up Ralph Lauren Polo shirts at a tenth of the original price.

You can’t walk more than a few steps on any street without bumping into a company that is connected with the garments trade in some way. But not much seems to happen these days. For a weekday, Tirupur is more a ghost town than a bustling commercial hub. There are few people around and godowns are filled more with empty cartons.

Getting locals to talk about the obvious slowdown, though, is far from easy. They’re suspicious of anyone from the media—the industry got some bad press after an NGO posing as journalists uncovered cases of child labour and exploitation. When we finally coax entrepreneurs to speak, the sense of despair is palpable. Tirupur is the largest knitwear exporter in India, accounting for almost 80% of total exports. 

“I have been in business since 1973 and the current slowdown is the worst I have seen,” says A Sakthivel, President of the Tirupur Exporters Association. Orders from Europe, which account for 65% of the ₹12,500-crore  revenues that Tirupur earns from garment exports, are down to a trickle as retailers see their sales plummet by 70% while most still trying to offload last season’s inventory. “Clients who used to buy 10,000 pieces are now ordering only 6,000,” says S Krishna Kumar, who runs Kiwi Fashions, a mid-size export firm in Tirupur.

His firm supplies European garment manufacturers such as Norprotex, Chantal SAS and lingerie manufacturer Bonneterie DeGroote. Kumar has seen his revenues come down 30% since 2009 to ₹35 crore. He doesn’t expect FY12 to be any better. Kumar isn’t alone. Most exporters in Tirupur fear business will be lower by 25-30% this year. While Tirupur has about 1,500 knitting units and 2,500 garment-making units, only 50 do business of over #100 crore. Since Diwali, 25 units have closed down. Over the past year, almost 250 units have stopped production. 

Watershed moment

The problem didn’t start in 2011; sales have been nearly flat for close to three years. The exporters’ troubles were aggravated in January 2011, when the Madras High Court ordered the closure of close to 700 bleaching and dyeing units in Tirupur after they failed to stop releasing effluents into the Noyyal River. 

Only a handful of units that met pollution norms are now functioning while almost 90% of the units remain closed. Garment manufacturers who don’t have integrated facilities have now been sending fabric to dyeing units across India. Not only has that increased costs by at least 15-20%, the delay has impacted deadlines. 

The uncertainty over orders prompted some clients to take their business to Bangladesh until things settled down.  “Happy with the terms offered by exporters there, they have chosen to stay with Bangladesh,” says Yogesh Kumar, Managing Partner of Soundra Exports. Bangladesh’s exports are almost 10% cheaper as it enjoys a duty-free status in Europe. Lower labour costs and higher productivity add another 5-10% in terms of cost advantage. Indian exporters find it difficult—if not impossible—to compete at those rates. “Globalisation will drive business out of Tirupur. Customers will move to low-cost destinations that offer a better value proposition,” says Yoga Prakash. His company, Soundra Exports, has shrunk from ₹50-55 crore in 2008 to ₹30-35 crore.

As if the delays and price differentials weren’t enough, the European crisis came to a head in July-August. Orders were cancelled and several clients asked exporters to hold on to the finished goods for five or six months. The total loss so far, according to Sakthivel, is well over ₹1,200 crore. Worse, the gap between fixed costs and income
is widening. 

“During the boom, suppliers used to extend credit to garment manufacturers. But now everyone insists on upfront payments. Those who are unable to fund their working capital needs are either scaling down business or shutting shop,” says Senthil Kumar, CEO, Premier Export, a small-sized firm that supplies brands such as Billabong, Quick Silver and Land Rover in Europe and South Africa. The slowdown in demand and the closure of dyeing units in Tirupur wiped off two-thirds of his firm’s revenues over the past three years reducing it to #5 crore. Senthil has let go of over 300 employees since 2008 and is down to just 100 workers now.

With business drying up, the local economy, that so far thrived on the exports, has taken a beating. Real estate prices have crashed 35-40% in the last three years. “Almost 30% of Tirupur’s workforce has left town. They didn’t get regular work and the cost of living is so high, they had no choice but to go elsewhere,” says Senthil Kumar. People are heading to Coimbatore and Salem, where there are better chances of employment. Exporters are exploring other businesses including hotels and hospitals. Krishna Kumar has invested #7 crore in a hotel near Coimbatore to meet the needs of industries in Suzlon SEZ.

Is the falling rupee helping at all? It does bring some relief, say exporters, but a conservative hedging strategy does away with much of the potential gain. Haunted by the losses they suffered in 2007-08, exporters are now sticking to vanilla hedges and almost 70% of the exports have been hedged around ₹ 48 levels as no one anticipated the rupee would go any lower. That means only a third of all dollar realisations will see real benefits from the rupee depreciation. Besides, say exporters, cash-strapped clients are demanding higher discounts, which means any gains are being shared. “These are very scary times. Tirupur got its business when European countries became uncompetitive. Since we are becoming uncompetitive in our pricing structure, business will move to other places. If the trend continues, the industry here will cease to exist,” says Senthil Kumar glumly.

Day two: Coimbatore

If Tirupur’s exporters are coming apart at the seams, how are their suppliers in Coimbatore faring? Not too well. Many of the textile mills that supply yarn to garment exporters in Tirupur and also export yarn are running up huge losses. Textile mills were the pride of Coimbatore but now they are slowly losing out to industries such as software, engineering and auto-ancillaries that are generating better employment opportunities.  

The textile industry is reeling under heavy losses from soaring cotton prices and the export ban on yarn; lacklustre demand in the export markets could well be the last straw. There was a time when textile mills were running all through the year. Given the lack of demand, many mills are running at 50-60% capacity. Demand and currency fluctuations are nothing new but exporters and mill owners complain that, this time, their pain has been exacerbated by policy decisions. 

The ban on yarn exports, couldn’t have been more ill-timed. The government halted the export of cotton yarn from December 1, 2010, until March 2011 to help meet domestic demand. Mirroring the rise in cotton prices, which increased by 66% in 2010, yarn prices were up 62%. The ban led to a glut in the domestic market and pulled realisations down, at a time when global demand was on the rise. Also, it disrupted clients’ supply chains. “Work stopped at many factories in Europe and Japan due to non-availability of yarn and they were forced to source from other destinations. Indian exporters lost their credibility in the global market,” says Dr K Selvaraj, Secretary General, South Indian Mills Association (Sima).

And what followed was every textile mill owner’s nightmare. “By the time, exports were allowed in April 2011, the demand landscape had changed. Things had worsened in Europe and demand evaporated. Both cotton and yarn prices crashed,” says R Elango of Sangeeth Mills, which manufactures yarn for both the export and the domestic market. While cotton prices came off the high of ₹63,000 per candy (one candy is 356 kg) to ₹30,000 per candy, yarn prices followed suit, falling from ₹270 per kg to ₹150 a kg leaving the mills holding a load of high cost inventory of raw materials and finished goods. While both cotton (₹38,000 per candy) and yarn prices (₹180 a kg) recovered, the losses on account of high-cost inventory and falling realisations are huge. “Textile mills have lost ₹11,000 crore between April and September this year,” says Sima’s Selvaraj. Now, given the increasing volatility in raw material prices and product realisations, the mills are keeping their inventory to the bare minimum. Most mills keep a raw material inventory of only a month now, compared to four months’ worth earlier. 

However, with the slump in revenues and profits, many mills will find it difficult to service loans taken under the Technology Upgradation Fund (TUF). Textile mills in Coimbatore have taken loans of over ₹1.5 lakh crore. Sima has asked for a two-year moratorium on repayment of term loans and has asked that the working capital loans taken in the past year be converted into five-year term loans.

Mounting interest costs, pressure to repay loans and power shortage leading to higher fuel costs add to a list of problems. The falling rupee is of little comfort. “Who would have predicted the rupee at 52 levels? It is a problem if you hedge and a problem if you don’t,” says B Sriramulu, MD, KG Denim, leading suppliers to Lee and Levi’s.

Coimbatore’s mill owners fear that smaller mills may close if the slowdown continues. And there is no saying what the impact of the next policy decision will be. “It is like driving a car without a steering wheel,” says Sangeeth’s Elango. This uncertainty comes at a time when competition is intensifying from Bangladesh, Cambodia, Vietnam, China and Pakistan, among others. But, there is some hope that Christmas sales in the US and Europe could help retailers clear their inventory and thereafter look to restock. “The brands are waiting for Christmas before re-stocking. But we believe that the second half should be better.” says B Sriramulu. For now, that’s more an item on Santa’s list than confirmed export orders.