In the basement of a white-and-blue painted factory, frail, sari-clad G. Sivakami is checking track pants for flaws before they get shipped. The 40-year-old Sivakami works for the Stallion Group, a $20 million garment manufacturer in Tirupur, a city of 800,000 in the southern Indian state of Tamil Nadu that is a center of the country's apparel industry and a focal point for a gathering crisis in Indian manufacturing. For the past six months, Sivakami's eight work shifts a week have shrunk to six. Her $70 monthly income has dropped 25%, and she has been struggling to feed her unemployed husband and college-bound son. The other factories in Tirupur have cut back, too, so Sivakami plans to stay put. "I have no choice," she whispers.
The rest of the world is focused on the fast rise and global reach of India's information-technology services. But the tech companies spawned in Bangalore employ only 2 million Indians. The textile and apparel sector employs 88 million, and the strength of its 15,000 companies is central to India's economy and exports. Right now those companies are being squeezed hard by the rupee, which has appreciated 11% against the dollar this year. That has driven up the cost of Indian apparel and prompted U.S. and European retailers to switch their orders to mills in Pakistan, Bangladesh, Sri Lanka, and Vietnam, whose currencies are weaker. "If we don't get the right price in India, we will move elsewhere," says Rajan Naik, a buyer for J.C. Penney (JCP) in India.
Indian textile companies are scrambling to shore up their businesses and some are even calling on U.S. private equity firms for help. Others are laying off factory hands to cut costs. Some half million textile workers have lost their jobs in the past six months. The figure could rise to 1 million by March, says Arumugam Sakthivel, vice-president of the Federation of Indian Exporters, who also heads Poppy's Knitwear in Tirupur. In that city the industry's jobless ranks are soon expected to swell from 10,000 to 40,000.
Cutting Prices to Keep Orders
Stallion's story is typical. The company, which makes inner- and outerwear for clients such as Fruit of the Loom and Jones Apparel Group (JNY), is a small operation that gets 70% of its business from the U.S. In the past year it has cut prices by one-fourth to counter the effect of the rising rupee. But Stallion has still lost four U.S. clients, including Levis, and sales are down 40% in the last six months. Its head count has dropped from 2,000 six months ago to 900. An additional 100 jobs could vanish by February. "We are now fighting just to cover our overhead," says K. A. S. Thierumurthi, Stallion's managing partner.
The sharp rise of the rupee has exposed serious flaws in government policy as well. The government in New Delhi imposes rigid labor laws on large factories with more than 100 workers. To avoid these restrictions, most Indian textile and apparel companies run small factories, where it's easier to lay off workers. But such plants lack the scale and efficiency of their rivals in China, where a textile plant can easily employ more than 50,000 workers.
The strong rupee is forcing the mills to restructure and reduce their reliance on U.S. exports. At India's largest apparel exporter, the $253 million Bangalore-based Gokaldas Exports, net operating margin declined to 4% in fiscal 2007 ended Mar. 31 from 7% in fiscal 2006. With Nike (NKE), Reebok (ADDDY), Puma, Levi Strauss, Gap (GPS), and Tommy Hilfiger as clients, Gokaldas exports 95% of its garments, which include high-value items like sportswear and winter wear. In August, Gokaldas sold out to American private equity player Blackstone Group (BX) for $165 million. The reason: dwindling profitability and growing global competition. "We wanted to leverage Blackstone's financial muscle and contacts," says Rajendra J. Hinduja, executive director. Gokaldas now plans to increase its purchase of raw materials from cheaper suppliers in China, Korea, and Taiwan and team up with Blackstone's textile companies in Europe.
Other Indian mill operators are following the lead of India's steelmakers and auto parts companies, which have been moving offshore. Mumbai-based Welspun India, a maker of towels and sheets that earns 90% of its $240 million revenues by exporting bed and bath linen, recently set up a factory in Mexico from scratch. Now, Welspun can sell to U.S. customers without worrying about the rupee. The company is diversifying into quilts and comforters and has plans to make rugs as well.
But the tougher part is negotiating for better prices and a conversion to euro invoices. Today 35% of Indian textile exports are to the U.S., but 75% of the exports, including those to Europe, are denominated in dollars.
The players are also looking at their own domestic market, where high disposable income is seeing middle-class Indians chase branded products. Gokaldas, for example, is looking at the Indian market, and is in talks with leading retailers like Pantaloon and Reliance Retail, a subsidiary of Reliance Industries. Bombay Dyeing, a maker of bed linen, saw exports slide from 50% to 40% in the past year. With 70% of its exports going to to U.S. clients like Wal-Mart (WMT) and Target (TGT), Bombay Dyeing plans to set up 100 company-owned stores in shopping districts and malls in India, adding to 400 franchised outlets. And New Delhi-based Orient Craft is exporting its apparel to a joint-venture company in Germany. After branding, the apparel is then imported back to India to be sold in the domestic market.
Such ambitious expansion efforts, says Hemant B. Patel, textile analyst at Mumbai-based Enam Securities, are only possible for big textile companies with deep pockets. Smaller outfits such as Stallion face the painful choice of whether to struggle on alone or merge with others. Meanwhile, with the rupee still strong, job losses are mounting. Says Patel: "This is just the beginning of the textile crisis."