May 11, 2008

life in general & financial markets: tirupur and coimbatore

I visited Tirupur and Coimbatore (in the southern Indian state of Tamil Nadu) during 22-25 April to report on an industrial slowdown story in the magazine I write for. This was not the first time I was visiting these two cities (Tirupur in particular, Coimbatore I had not seen the main city and had just travelled from its airport to Tirupur that is 60 kms away). See here and here
for two blog posts on my earlier visit to Tirupur.

This time around I split the three days I was there equally between Tirupur and Coimbatore. Landing at Coimbatore airport very early in the morning (8 am) I headed straight for Tirupur. On the way, when I was 4-5 kms near Tirupur, I had tender coconut water at a lonely streetside vendor (see photo alongside). He said he stocks the tender coconuts from the nearby orchards itself. The coconut water was sweet and the most delicious I have ever had.

Tirupur is the larges
t knitwear textile industrial hub in India (see the photo alongside of the inside of a garment company where beyond a display room a woman and her fellow colleagues are sewing or applying other final touches to a textile garment). But lets not talk about work -- at least not yet.

The one thing I love the most as a traveller to Tirupur is its food. The
dosas, the sambhar, and the mint chutney are yummy. If you happen to visit this small city do not fail to go to Annapoorna restaurant near Kumaran Road to have its south Indian fare. The thing I hate the most about Tirupur is its maddeningly crowded arterial roads, particularly the Kumaran Road where I stayed at a hotel. You can not cross the road at all unless you take a risk and make a dash for it. Worse than Bombay because there are no traffic signals at the key junctions and hardly any traffic discipline. Also, the rickshaw drivers fleece you, charging a fare that is 2-3 times what you would pay for a similar dis
tance in Bombay.

The rickshaw driver problem was only worse at Coimbatore (se
e the photo alongside of a Coimbatore rickshaw driver with whom I had a major fight because he was quoting outrageous fare for a small distance ride). But the roads are wide and traffic is less chaotic here than in Tirupur. I had some spare time one evening and went for a giantwheel ride at an annual summer fair going on at a place not too far from the hotel where I was staying.

Now, back to work-related matter. I present below the two write-ups I contributed based on the visit to Tirupur and Coimbatore.

1) Tirupur - doshas afflicting the land of dosas

The statistic was all that everyone was waiting for in Tirupur in the first and second week of April – the approximate figure of Tirupur's exports during the 2007-08 financial year. As soon as Tirupur Exporters Association (TEA) got an estimated figure from the banks and released it there was a headline in southern India's business daily soberly stating a fact 'Tirupur knitwear exports show 10% dip in growth'.

From Rs 11,000 crore in 2006-07 the exports of knitwear ready-made textiles from Tirupur came down to about Rs 9,950 crore in 2007-08. The net effect was more than 10 per cent because the annual growth rate was 30 per cent for two consecutive years—2005-06 and 2006-07. If the momentum had to sustain then the 2007-08 figure ought to have been Rs 14,300 crore. The Rs 9,950 crore, therefore, reflected a fall of 30 per cent. The slowdown had arrived.

You do not see it on its heavy traffic arterial roads nor do you see any decline in the exorbitant rates charged by its auto-rickshaw drivers but Tirupur has taken a breather from being a 24x7x365 throbbing industrial city. And it is not just due to the one-day-a-week electricity holiday imposed by the power-deficit Tamil Nadu State Electricity Board on all the industries in the state. The rupee appreciation of 2007, the tough competition with Chinese, Bangladeshi and Pakistani companies and the slowdown in the US consumers demand has rattled the over 5,000 textile unit strong Tirupur hub like never before in its 30-year old history.

"Tirupur's entrepreneurs have had to face a lot of challenges right from inception," says Raja Shanmugham, partner in Warsaw International, an Rs 60 crore turnover textile export company in Tirupur. "But the sudden attack on dollar last year made us very vulnerable." Shanmugham is referring to what more than one-third of the 3,000-odd exporter companies experienced from July-August last year lasting till recently.

Orders from international buyers were committed to by many of Tirupur's exporters in late 2006 and early 2007 when the rupee-dollar rate was over Rs 44 started getting processed in the months following May when the rupee-dollar rate had crashed below Rs 40.

More than two-thirds of all Tirupur's exports were invoiced in dollars even though only about 30 per cent, the largest proportion though, went to the US. "Buyers told us that if we increase the purchase price they will take their orders to textile companies in Bangladesh, PakistanChina," says P. Vidhyaprakash, director of Styleman Textiles, a medium-sized exporter. "The price of a T-shirt that is fixed at $2 could not even be raised to $2.20 because other countries are able to deliver at $2." and

Exporters had little choice but to comply and take a hit on their bottom line. Says Shanmugham, "We could not refuse as relationship with international buyers takes much time to establish and so we went ahead and executed the orders at a loss to retain the customer."

Small-sized companies, however, could not keep doing this beyond a couple of weeks. With the economics becoming unviable they stopped taking new orders. "Committed orders are also going down because of the downtrend in the US economy," points out Shanmughan.

"Around 10 per cent of all textile and ancillary units have shut shop and 10-15,000 textile workers lost their jobs," says S. Sakthivel, executive secretary of TEA. "Of these 6 per cent will be ready-made garment companies and 4 per cent will be the companies doing job work such as knitting, dyeing and bleaching, fabric printing, and embroidering for them," says Dinesh Kumar, partner in Thirumalai Knit Designs, a medium-sized that deploys imported knitting machines in its design job work for Tirupur's garment exporters.

Sakthivel points out that increasing global competition had already made the going tough for every one. "In the last one year Vietnam has joined the global market as a textile garments supplier."

But the real run for exporters' money is coming from Bangladesh and China. "Under the Free Trade Agreement that Bangladesh has with the US and European countries and in its capacity as an under-developed country it can claim to a waiver of 12-13 per cent import duty imposed on its supplies to them," says Shanmugham.

In fact, Bangladesh's textile companies imports the raw material cotton entirely from India. "It also has the cheapest labour," says R. Gopalakrishnan, chairman of Tirupur-based Royal Classic Mills that sells half it wares to the world and the other half to the consumers here in India.

As per estimates, India's share in global knitwear market is about 3 per cent, Bangladesh's is 4-5 per cent, China's is 25-30 per cent and the rest is taken by other countries such as Greece, Italy, Turkey, Thailand, Singapore and Cambodia.

China too scores over India on its infrastructure. Shanmugham says that it takes 11-12 hours for him to just transport his stock from Tirupur to the port at Madras or Tuticorin. The same distance in China would be covered in just 3 hours at an average 100 km per hour. The roads there are so much better. "I pay the trucker Rs 5,000 but in China the same trucker would charge about Rs 2,000 because he can make twice the trip in the same time as my trucker does," says Shanmugham.

Exporters in Tirupur are quick to point out that the textile industry works on wafer-thin margins unlike the software services industry where the mark-ups are high. They also claim that textiles is the only industry after agriculture that employs the most labour in the country. And they are facing internal competition with regard to manpower too. "You don't need big educational qualifications here but BPO companies are enticing those educated youth from the villages who would otherwise work in our units," says R. Sivaram, executive director of Royal Classic Mills.

Royal Classic has escaped the wrath of the exporters' turmoil because it consciously decided to target the domestic market as far back as 20001. Today its sales to domestic are a little over 50 per cent of its total sales. It has 56 shops all over the country—some owned and many franchised—that sell their Polo T-shirts, trousers and other ready-made garments for the youth. As a result, it managed to increase its sales turnover from Rs 30 crore in 2006-07 to Rs 50 crore in 2007-08.

All the banks, public or private, have their branches in Tirupur. But Tirupur's textile units are having a tough time negotiating with the banks for working capital requirements in the face of decline in sales and hit on margins. As such the interest rates charged by banks to businesses have shot up in the last two years from 7-8 per cent to 12-13 per cent.

A recent move by the government has helped them in getting government assistance in the bearing of that amount of interest that is over 7 per cent base. Some are seeking rescheduling of long-term loans as well. "We have got our loans rescheduled from five years to eight years," says Gopalakrishnan.

But Tirupur exporters, who are expecting another fall of 10 per cent in sales in the current financial year, are braving it out. They are cutting costs wherever they can and even if they can save 2-5 per cent they are going for it. "In cutting the cloth if the earlier wastage was 18-20 per cent then we are bringing it down to 16-18 per cent by prudently applying automated machines," says Shanmugham.

Royal Classic management claims the quality was already there and they are currently focussing on improving efficiency. "For instance, we want to bring down the turnaround time in converting yarn to ready-made garment from 90 days to 45 days," says Gopalakrishnan.

Tirupur lives and breathes on its textile units even if the air and water has gotten polluted in the process. You can even smell the chemicals in the air at times if you are out there roaming the city and its outskirts. Mansoor Ali, an owner of a medium-sized footwear shop at the heavy traffic density Kumaran Road in Tirupur was seeing his business grow rapidly till last year. "But my two children—one six years old and one just six months old—have developed respiratory trouble and the doctor tells me to take them out of Tirupur," says Ali.

His business this year has not fallen but he has had to sell his stock at discounts because the customers are bargaining for lower prices of late. This sentiment is echoed by G. Ananda Kumar, branch manager of a large retail shop 'Bharath Electronics & Appliances', "I give more discounts and only then am I able to sell." His sales are down 5-10 per cent this year compared to last year.

Risk-taking entrepreneurs, hard working labour, zealous commitment to quality and international customers' deadlines, lack of governmental interference at the state level and governmental financial subsidies at the centre level, and a magnetic attraction for all types of units connected to textile industry, have been behind Tirupur's success story in the last two decades. That will perhaps see it ride the choppy waves.

2) Coimbatore - dharnas on wide roads against narrow margins

It was an unprecedented sight. On 12 April the presidents and senior officials of 16 industry and manufacturers' associations came out on the streets of Coimbatore in the hot April sun. Normally it is the labourers who come to the streets. But industrialists doing a dharna on the streets?

Coimbatore is famous for its high-technology finished engineering products such as machine tools, printing presses, pump sets, castings for automotive sector. But the current state of affairs with the small and medium industries in Coimbatore is such that their representative associations came out on the street.

Exporters among them were hit by the rupee appreciation last year. But what was the last straw for all of them was the sudden price in their raw materials, particularly the prices of iron and steel products. These have shot up by 25-40 per cent in the first three months of this year itself.

In a 5 March 2008 letter sent to Bangalore-based Kudremukh Iron & Steel Company, the Coimbatore chapter of The Institute of Indian Foundrymen (IIF) wrote "you have increased the prices very often which uprooted the viability of the foundry units and had a devastating effect on them." The letter gave instances of how Kudremukh had revised the prices of pig iron it was selling to Coimbatore's steel foundries from Rs 15,600 per ton in April 2007 to Rs 19,650 per ton in January this year, and then again to Rs 21,150 per ton in February and once more to Rs 23,400 per ton.

In Coimbatore city and at its outskirts there are 150 steel foundries. In a good year they produce 100-250 tons a month. There are additional 350 units that are into production of engineering goods such auto components, and castings. Of these, 150 units are directly or indirectly into exports producing 500-1,000 tons in a good year. The balance 200 units are small catering to the domestic market and producing around 100 tons a month.

"In the last three months there has been a slump in production to the extent of 25 per cent across all the sectors in the engineering industry here," says S.V. Jagadesan, IIF chairman and managing director of Indo Shell Cast that manufactures for export and domestic end-products such as market automobile levers, yokes, shafts, piston ring cylinder castings and brake application parts. "Pig iron apart, we use raw materials like manganese and other chemicals and their costs have also shot up by 50-100 per cent in the last one year."

Copper prices of LME are also quoted by a section of Coimbatore's companies. It was $2,600 in mid-2006 and presently it is around $8,200. Says C.R. Shanmughasundaram, president of Southern India Engineering Manufacturers' Association whose 250 members comprise of a large number of pump set manufactures, "Companies who started exporting in last 2-3 years have stopped now."

Coimbatore's non-textile industries are saved from one threat – that of intense global competition from China and other countries that Tirupur's textile units encounter on a daily basis. "In engineering products the Chinese are not a major threat yet," says D. Balasundaram, chairman and MD of CPC that is into exports of gray iron, castings and other components. "The Indian engineer understands the world standards and conventions used in engineering language far more better than his Chinese counterpart." His company's turnover has been affected by 3-5 per cent due to the recent price hikes in raw materials and last year's rupee-dollar fluctuation.

Coimbatore's exporters highlight the fact that the dollar depreciation affected even the Chinese companies. "Somewhere along the line the difference was neutralised," says K Ilango, joint MD of RSM Autokast that exports and sells domestically components such as brake drums, hubs, spring and equaliser brackets and clutch pressure plates for heavy duty trucks and trailers. RSM Autokast that had 40 per cent of its production exported has managed to survive the dollar-rupee turmoil due to the 60 per cent sales to domestic market.

Unlike Tirupur's exporters, Coimbatore's engineering companies are not greatly in favour of exporting at a loss. Ilango points out to his company's strategy, "whatever we are able to sell at least at a zero profit we are going ahead; but we won't sell at a loss as otherwise our financial health will be ruined."

Most companies in Coimbatore incur raw material cost of 50-60 per cent and the recent past price hike has dented their profitability. As in Tirupur, therefore, they fear going to the banks for loans. "Now we have to stock minimum two months of raw material stock as we do not how the prices will move," says Shanmughasundaram.

Companies with sales above Rs 8 crore ($2 million) are doing a smart thing though to bring down their borrowing costs. "I have taken dollar loans through SIDBI's assistance and the interest rate was LIBOR (around 2.75 per cent) plus 3 per cent," says Ilango. This is also designed to protect the company from dollar-rupee fluctuations.

Some others peg their non-American buyers to base the orders in Euros. "We have pushed European, African and European customers to convert to Euro," says C.N. Ashok, director-commercial in Autoprint Machinery Manufacturers. "To American customers I am trying to quote the prices in rupees directly though they will remit the equivalent of rupees in dollars on the day of remittance."

The slowdown in Coimbatore is going to be felt more acutely in this financial year. "How we handle this year will be a litmus test," says Ilango. "We opened the champagne bottle too soon; we had seen growth stories for only 2-3 years."

Outside the factories, on the streets, the effect of slowdown is not visible to the eyes. But big retail shops are finding it in their sales. "TVs and other appliances' sales is down by 30-40 per cent," says K. Balakrishna Shetty, partner in a large electronic appliances shop 'KS Shetty & Company' at a prime locality Gandhipuram in Coimbatore. "The new year sales on 30-31 December last year flopped for the first time."

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