An Industry That's Fraying Fast
In the basement of the white-and-blue-painted factory, frail, sari-clad G Sivakami is checking track pants for flaws before they are shipped. The 40-year-old Sivakami works for Stallion Group, a $20 million garment manufacturer in Tirupur, a town of 800,000 that is a center of India'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 are down to six. Her current $70 monthly income has shrunk 25%, and she has been struggling to feed her unemployed husband and college-going son. It's grim, but Sivakami is staying put. "I have no choice," she whispers.
The rest of the world is transfixed by the fast rise of India's info tech industry. But the tech companies spawned in Bangalore employ only 2 million. The textile and apparel industry employs 88 million, and its strength is key to India's economy. Right now those companies are being squeezed hard by the rupee, which appreciated 11% against the dollar in 2007. That has driven up the cost of Indian apparel—and driven U.S. and European retailers to switch orders to Pakistan, Bangladesh, and Sri Lanka, whose currencies are cheaper. "If we don't get the right price in India, we will move elsewhere," says Rajan Naik, a buyer for J.C. Penney (JCP).
Indian textile companies are scrambling to shore up their businesses, even turning to U.S. private equity firms. Others are laying off factory hands. Some half a million textile workers have lost their jobs in the past six months. That could rise to 1 million by March, says the Federation of Indian Exporters.
`JUST THE BEGINNING'
Stallion Group is typical. The company, which makes apparel for clients such as Fruit of the Loom (BRK) and Jones Apparel Group (JNY) (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 rising rupee. But Stallion still has lost four U.S. clients, and sales are down 40% in the last six months. The company's head count has fallen from 2,000 to 900. "We are now fighting just to cover our overhead," says K A S Thierumurthi, Stallion's managing partner.
Bigger companies are exploring other options. In August, Gokaldas Exports, India's largest apparel exporter, sold out to private equity player Blackstone Group (BX) for $165 million. The reasons: falling profitability and rising global competition. "We wanted to leverage Blackstone's financial muscle and contacts," says Rajendra J. Hinduja, executive director. Gokaldas now plans to team up with Blackstone's textile companies in Europe. Other Indian mill operators are going offshore. Welspun India, for example, a $240 million maker of towels and sheets, has built a factory in Mexico from scratch. Now it can sell to U.S. customers without worrying about the rupee.
Such ambitious efforts, says Hemant B. Patel, a textile analyst at Mumbai-based Enam Securities, are only possible for the big players. Smaller outfits such as Stallion face the painful choice of whether to struggle on alone or merge with others. Meanwhile, job losses are mounting. Says Patel: "This is just the beginning of the textile crisis."