In a bit of a tangle

There is a certain pride among the people of Tirupur on how it has emerged as India’s largest exporter of knitwear garments. It is a self-made cluster that can compete with the best-in-class garment manufacturers globally, raking in nearly Rs.250 billion in revenue from nothing just 30 years ago. Indeed, Tirupur has become a benchmark for other emerging clusters across the country. 

It had registered impressive growth since it emerged resilient from the global meltdown of 2008-09 and a Supreme Court ban on its dyeing units in 2011, which threatened to put many units out of business. But, this cluster met its nemesis in demonetisation and the new Goods and Services Tax (GST) regime. The two have crippled Tirupur’s growth over the past couple of years. Rising competition and increasing costs are making it tougher for exporters to hold on to their margins, even as they struggle to retain their share in the global market. Can the cluster emerge stronger once again?

Speed Breaker

Even as the cluster was recovering from demonetisation’s effect in 2016, GST came into force in July 2017. The government then slashed the duty drawback rates from 5% to 2.2%while the ROSL (remission of state levies) rates were reduced from 3.3%to 1.3%. While the government increased the incentives under the Merchandise Export from India Scheme (MEIS) from 2% to 4%, the average loss due to reduction in overall duty drawback was around 6.3%of export value.

The Tirupur Exporters Association (TEA) has been making several appeals to the government to increase the duty drawback from 2% to 4.5%, to give them a level playing field of sorts with other exporting nations. “We need the rates to be higher to compete with countries such as Bangladesh, Cambodia, Vietnam and Sri Lanka, who have free trade agreements and other agreements with European Union (EU), Russia and other countries,” says Raja Shanmugam, president, TEA. About five to six years ago, orders that were going to China and Bangladesh began finding their way to India over compliance concerns in workshop safety and labour rights. Multiple tragedies in Bangladesh, including a factory fire in 2012 and the collapse of Rana Plaza, meant that brands either cut down on exports or looked for alternate locations such as India, Vietnam and Cambodia.  But that advantage was a temporary one with Bangladesh recovering from that setback, and Vietnam and Cambodia increasing their share of global exports. 

For instance, while India holds just 3% of the global market, China commands 37%. Bangladesh, which procures raw materials from Tirupur has 12%. Even new entrants Vietnam and Cambodia have a higher market share at 4%. “We are the largest supplier of raw material to Bangladesh and it still manages to produce cheaper clothes than us,” says Shanmugam. While their requests have gone unheeded so far, in a bid to boost exports from MSMEs, the Reserve Bank of India (RBI) has increased the interest subsidy on post and pre-shipment export credit from 3% to 5% effective from November 2. But exporters from Tirupur say that it will only help manufacturers with revenue of less than Rs.100 million and will do little to improve their fortunes. 

What made things worse is that under the new GST regime, garment manufacturers have to pay integrated GST for their exports, which is then refunded. The delay in getting refunds has led to cash flow problems and an overall increase in their working capital needs.“When GST was implemented, there were a lot of chinks that had to be hammered out. Initially, it took about a couple of months to get the refund which impacted our cash flow. With banks tightening the screws on lending, managing cash flows were a challenge”, says N Thirukkumaran, CEO, Esstee Exports which supplies to GUESS in the US apart from brands in Germany and France and is now looking at supplying to brands in Portugal. According to him, the reduction in duty drawback has hit the exporters harder since clients are driving a hard bargain and moving business to Bangladesh, which is able to offer better prices thanks to a more favourable duty structure. “We don’t have any cushion anymore and there is no margin for error. Clients are moving business for a difference of 5-10 cents and that has never happened before. Given our duty structure and increasing input costs, we are unable to match them on prices,” he says. 

The market has also become more demanding now, and newer entrants such as Vietnam seem better at keeping up. “I am looking at sourcing from Vietnam because they offer better quality at competitive prices,” says DM Kumar, CEO, Eastern Global Clothing. The firm sources garments from Tirupur for Walmart, Target and Kohl’s in the US and for Lidl stores in Europe clocking revenue of over Rs.1.5 billion. He adds, “Their efficiency is also twice than India’s, which makes them more cost efficient. Though it is a new entrant, Vietnam’s exporters have invested in design capability compared with India where a majority still go by the designs given by the buyers.” In today’s age of fast fashion, buyers are always looking to reduce their time to market and having in-house design capability is a significant advantage.

Unspooling Growth

In FY18, exports declined to Rs.240 billion against Rs.260 billion in FY17. Domestic business also bore the brunt falling from Rs.160 billion to Rs.140 billion during the same period. While things were looking a little bleak during the first six months of FY19 with exports seeing a decline of 11%, things have looked up since with exports till date at Rs.163 billion. Given that growth in the cluster is mostly back-ended in terms of calendar, TEA is hopeful of closing the year with an export turnover of Rs.240 billion-250 billion. The domestic business is also expected to recover some lost ground and get back to Rs.180 billion in FY19. But the cluster is far from the scorching growth rates it saw over the past five to six years. Exports from Tirupur have grown from Rs.125 billion in FY12 to Rs.230 billion in FY16. Domestic sales during the same period increased from Rs.60 billion to Rs.150 billion. 

Almost half of Tirupur’s exports find their way to Europe with the US making up one-fourth and the rest of the world, the balance. The cluster comprises of over 8,000 units that are into knitting, dyeing, printing and embroidery, and a large majority – 40% of them – into garment manufacturing. Most firms specialise in one or two activities and outsource the rest of the work. About 35 exporters have fully integrated facilities that house the entire spectrum of production — spinning, weaving, dyeing and garment making — which helps them improve order lead times and manage costs better.

SRG Apparels is one such company with integrated facilities. The company started operations in 1989 with only six machines and now has about 1,700 machines with about 2,000 workers. The company has focused on four to five large clients, who have consistently given them business. The firm supplies to British retailer Mothercare, UK Next, Ralph Lauren and John Lewis among others. Its integrated facility, adherence to global compliance and ability to deliver on its timelines has helped the company increase its revenue. 

The company decided to become a fully-integrated player setting up its own spinning mill and knitting facilities and last year invested in a state-of-the-art dyeing facility becoming a complete yarn to garment manufacturer.“We had a steady supply of orders from our clients and wanted to ensure timely delivery. So we decided to develop the capability in-house instead of outsourcing our requirements,” says K Meganathan, managing director, SRG Apparels, which ships to nearly 12 countries including UK, US, China, Russia and the Middle East. He says the firm’s special focus on children’s wear has helped create a niche for itself with brands such as Mothercare contributing nearly 40% of its overall revenue. This year, it is hoping to clock revenue of Rs.3 billion from the current Rs.2.5 billion, much ahead of overall cluster growth.

Labour Travails

But finding people to execute their orders has been a huge challenge. Not just for SRG but for the whole of Tirupur. “Some of the workers go home for Diwali and Pongal which is the harvest season in Tamil Nadu. If it happens to be a good one, they don’t return to work soon enough. So we need to have a buffer of nearly 30% and that brings down our overall efficiency. Non-availability of labour is definitely limiting our growth potential,” says Meganathan.

Migrant workers form almost 40% of the workforce here. SRG is looking to raise capital via an IPO in 2019 if market sentiment remains positive. It plans to use some of the proceeds to build housing facilities for migrant workers. “We spend nearly Rs.100/worker every day on transporting our employees to our factories. Managing a large fleet takes your attention away from the core business.Also, with high real estate costs, it makes sense to set up integrated facilities with residential quarters away from the city,” explains Meganathan.

TR Vijaya Kumar, managing director, CBC Fashions, is moving his factories from Tirupur to the neighbouring town of Vadipatti in Madurai due to unavailability of labour. He earlier had four factories which housed 200 machines each. He moved about 400 machines to Madurai this year and is looking to add another 200 machines there. “In Madurai, I have twice the labour at half the cost. In Tirupur, due to unavailability of labour, my capacity utilisation was limited to 60%. Now at the new factories I will be able to run two shifts and that will help scale up my business.” The firm that supplies to UK retailer Primark, Women’s Secret and Indian retailers including Reliance and Lifestyle currently clocks a revenue of Rs.2.5 billion and with its expansion in Madurai (where he plans to add another 600 machines by 2022) hopes to double revenue by 2024 via multiple shifts and executing large volume orders.

V Sathyanarayanan of Ashwath Inc, which exports extensively to Germany and clocks revenue of Rs.1.7 billion, says while managing labour availability can be challenging, exporters should now up their game. “Labour costs are 12-15% of the overall cost of production in the garment business and even a 10% increase every year should be manageable. We should focus on the balance 85%. For instance, fabric makes up 60%. Better utilisation of raw material and fabric will lead to cost savings and investing in technology will help achieve that,” he says. Apart from investing in a state-of-the-art manufacturing plant, the firm has invested in a processing plant which uses 66% less water while processing fabric and saves about 30% on energy costs.  The investment in technology has helped the firm improve its overall efficiency and offer better timelines for delivery. 

“When we started exporting, our longest lead time was 180 days and shortest was 120 days and over the years we have managed to get our longest lead time down to 55 days and shortest lead time to 19 days. This ability, in today’s age of fast fashion, gives us a better competitive advantage than that flowing from low price. Brands prefer to work with vendors who can deliver on shorter lead times and we can bargain for better volume since we are able to deliver ahead of competition.”

There are others too who swear by the edge offered by new technology. Navin Todi of Lux Industries, India’s largest homegrown innerwear brand, says when it comes to investing in latest technology, no other cluster comes close. “Tirupur is definitely ahead of other garment manufacturing clusters when it comes to adopting the latest technology and can deliver on much shorter lead times making it a preferred manufacturing destination for  brands like us.” While it directly employs 500 workers in its factories here, majority of its manufacturing is outsourced to job workers. The company which rakes in revenue of Rs.18 billion employs about 150,000 workers in Tirupur through its job work contracts. Todi, senior vice president of the company which has a presence in Kolkata, Ludhania and Jharkhand, says a job work that takes a week to deliver in Kolkata takes about four days in Tirupur. The company, which retails across the country through over 950 distributors, is also planning to increase its presence in Tirupur by setting up two more factories.

The advent of GST has definitely seen business moving from smaller to bigger players since some of them were playing on the margins that duty drawbacks offered. With much of that cushion gone, higher yarn and labour costs meant they now had to deal with an unviable cost structure. The silver lining on the darkening clouds is that now exporters are starting to look inward to improve efficiency rather than ride the coattails of duty drawbacks and government sops. While the transformation may take a few years, there is nothing like a crisis to bring out the best in this resilient cluster.