Why India’s knitwear capital is in doldrums

A worker readies machinery at a knitwear factory in Tiruppur. Rumours of attacks on north Indians has caused fear among migrant workers and threatens operations of mid- and small-size units in the textile town. madhavan/mint
A worker readies machinery at a knitwear factory in Tiruppur. Rumours of attacks on north Indians has caused fear among migrant workers and threatens operations of mid- and small-size units in the textile town. madhavan/mint

Summary

Tiruppur is being weighed down by multiple challenges. Will the latest crisis force the industry to change?

Until a fortnight ago, 27-year-old D. Balaji was the production in-charge of a medium-sized hosiery unit in Tiruppur, earning 23,000 a month. He is now driving a taxi. The hosiery unit had to let him go after its business plummeted in recent months. “I am looking for another job but not sure when I will find one," says Balaji.

A keen observer will notice that Tiruppur, the knitwear capital of India, is in distress—the signs are very visible. Traffic in the once-busy town is unusually light. The trucks carting textile materials around the town are conspicuous by their absence. Most are parked at the town’s large truck stand in the Royapuram area, where the drivers pass time watching movies on their phones.

“When things were good, we barely had time to grab food. Today the problem we face is that we do not have enough movies to watch," said one truck driver wryly. He was not willing to reveal his name.

Shopkeepers, meanwhile, say footfall has plunged as uncertainty over the future has forced customers to tighten the purse strings. Hundreds like Balaji have been laid off, and are forced to seek other forms of employment to make ends meet. The mood is palpably grim.

The reason for the despondency is the state of the knitwear sector, which is the lifeline of the town. Tiruppur accounts for 55% of India’s 60,950 crore knitwear exports (typically T-shirts and vests). However, a sharp contraction in export orders in the wake of the Russia-Ukraine war, the impact of imports on domestic demand, and volatile cotton prices have left the industry struggling.

Capacity utilization has dropped by as much as 60% and this has hit Tiruppur’s micro, small and medium enterprises (MSMEs), which comprise 90% of the units in the sector. “Demand has been dull in the last few months. Inflation in buyer countries has forced people to prioritize spending on fuel, food and meeting loan obligations. Clothes are not a priority right now," explains K.M. Subramanian, president, Tiruppur Exporters’ Association (TEA).

Thousands of micro entrepreneurs have, consequently, shut their businesses. Small units have either closed for want of orders or have leased their facilities to bravehearts who wanted additional capacity. Medium-sized businesses, meanwhile, have downsized their operations and are struggling to meet repayment obligations. On top of all this is a labour management challenge—rumours of attacks on north Indians have caused fear among migrant workers. An exodus of migrants will bring the industry to its knees.

Crisis-prone sector

Tiruppur is no stranger to economic distress. In the last 15 years alone, the textile town has endured seven major crises. “The 2008 global financial crisis was a double whammy. We faced demand contraction as well as a sharp appreciation in the value of the rupee against the dollar. That hurt our revenues badly," recalls Raja M. Shanmugham, chairman, Warsaw Group of Companies and former President, TEA.

As the sector recovered, in January 2011 a Madras high court order overnight shut all the 752 dyeing units in the town due to large-scale pollution of the Noyyal river, which flows through the town. The court stipulated that only units with a zero liquid discharge (ZLD) facility could operate. “It was a body blow and many thought it would be the end of Tiruppur, but we managed to recover," says Atul P. Gandhirajan, president, Dyers Association of Tirupur. Only 360 units opted to have a ZLD facility and they took 18 months to set it up. During this period, knitwear makers had to send their fabrics as far away as Surat, Kolkata, New Delhi and Ahmedabad to be dyed. “This significantly added to our cost and production time," says S. Sakthivel, executive secretary, TEA.

Then came demonetisation in 2016, which proved to be disastrous for Tiruppur’s cash-dependent units and brought them to their knees.

The following year, more distress followed with the introduction of the Goods and Service Tax (GST). Scores of tiny, informal, cash-based units saw their revenues dry up, while others struggled to formalize their businesses to comply with the new levy. “We understand that structural changes are important for an emerging economy such as India, but it is important that these changes are implemented in a manner that does not increase the cost significantly," says Kumar Duraiswamy, an MSME entrepreneur, who runs Eastern Global Clothing, noting that patchy implementation added to the pain.

Covid, and the nationwide lockdown that was imposed almost overnight, were another huge blow. It created simultaneous supply-side and demand-side challenges. Knitwear units were shut for months as migrant workers left for their homes. Even before the sector could recover fully from the impact of the pandemic, prices of cotton, the industry’s core raw material, spiked to over 1 lakh a candy (356 kg) before moderating to a reasonable 65,000.

Unique structure

But after every crisis, Tiruppur has managed to bounce back. Shanmugham attributes this to the town’s unique cluster model. It has very few integrated units and lots of clusters focusing on particular activities. According to TEA data, there are 1,150 knitting, 360 dyeing, 50 bleaching and 900 units in printing operations. In addition, there are 600 embroidery units, 790 involved in compacting and calendering and 7,300 making garments. “The advantage of this cluster model is that you do not have to invest heavily to set up an integrated unit and you can outsource most operations," says TEA’s Sakthivel. Low capital costs help the units weather crises better.

This model also fuels entrepreneurship. “In Tiruppur, yesterday’s labour is today’s owner," says Shanmugham. With a little investment, anyone can become an entrepreneur here, he explains. In a way, he is speaking about himself. Hailing from a farming family, Shanmugham is a first-generation entrepreneur who started off in 1989 with an investment of 5 lakh in a 16-machine garment stitching unit. Today, his Warsaw Group is a fully integrated setup with 350 crore in revenue. TEA president Subramanian’s story is not very different. It is not surprising then, that old money—traditionally rich families—does not have much of a presence in the town.

Even as a few entrepreneurs exit the business every year due to difficult market conditions, many more enter and it in the spirit of entrepreneurship that has kept the town going, says Subramanian. Many also attribute the town’s growth to this model. Five decades ago, Tiruppur was just a small village in Coimbatore district; it did not even have a panchayat. Today, it is the headquarters of an eponymous district whose exports of 35,834 crore in FY22 exceeded Coimbatore district’s 23,654 crore, according to ministry of commerce and industry data.

However, the model has its disadvantages as well. As the clusters are made up of MSME units, their ability to face a crisis is limited. They are often at the mercy of the banking system, which has changed for the worse over time. “Earlier, the bank manager had discretionary powers to allow additional limits when things got tough. The manager allowed it based on past performance. Today, systems run everything and local managers have no say, complains S. Govindappan, vice-president, South India Hosiery Manufacturers’ Association. As a result, MSMEs are in financial stress. His angst stems from experience. Caught in a similar situation a few years ago, he shut Gitanjali Knit Garments, his business, sold his assets, and paid off his debts to avoid being “named and shamed" by the banking system.

Unprecedented crisis

Events triggered by the Russia-Ukraine war have left Tiruppur’s knitwear sector facing a series of challenges today. First of all, the fall in market appetite has been unprecedented. “Massive pent-up demand post covid suddenly dropped and the pendulum has swung the other way. Orders have evaporated," laments Shanmugham.

Supply chain disruptions during covid meant brands were low on stocks. Once economies reopened, they placed large orders to replenish their stocks. The Russia-Ukraine war ended that dream run. The war sent inflation soaring. The cost of fuel, food, and loans rose and people began to keep expenses on a tight leash, with clothes taking a back seat. Brands, thus, were suddenly left with an inventory pile-up and drastically cut fresh orders. According to TEA data, between August and December 2022, the month-on-month decline in exports was between 6% and 38%. This is a far cry from June, when overseas shipments surged 194%.

There is more. In an unprecedented development, domestic demand has also taken a beating. Manufacturers blame this on imports from Bangladesh. “The landed cost of a banian (vest) from Bangladesh is 10 lower than those sold by domestic manufacturers," says Govindappan. Exporters from the neighbouring country import fabric from India at zero import duty and then send finished goods, he adds. Post the free trade agreement with Bangladesh, a countervailing duty of 12% was levied on import of finished textiles. “This was removed when GST was implemented, and in the last five years, imports have surged 600%," says Duraiswamy, who is also a joint secretary of the TEA.

Also, competition in the export market is intensifying. Bangladesh, Vietnam, Cambodia, Myanmar and Pakistan benefit from lower import duties in developed markets. China has a huge economies-of-scale advantage. In difficult times, buyers prefer to source at the lowest cost and Indian exporters find it difficult to match that.

As if these challenges are not enough, knitwear players are suddenly fighting to prevent an exodus of migrants from Tiruppur. This follows the viral spread of fake news on social media about large-scale attacks on north Indians by locals for stealing their jobs. Quick action by the Tamil Nadu government and industry appears to have calmed nerves. The textile sector in Tiruppur employs over 200,000 migrants and they are critical to keep operations running. “Social compliance among big brands is very strict and such reports hurt our reputation," says a worried Sakthivel.

Data on garments' business in Tiruppur
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Data on garments' business in Tiruppur

Belated change?

Will the latest crisis, force the knitwear sector to undergo a catharsis and emerge stronger? The good news is exporters are taking a belated but hard look at their future. “We want to focus more on man-made fibres (MMF) and technical textiles," says Subramanian, adding, “We want MMF to account for 30% of our exports by 2025 from the current 5%." Almost 70% of the world’s export basket already comprises MMF-based garments. A shift to MMF—using polyester or viscose staple fibre as raw material—would also require modernising machinery, and this calls for a significant investment. TEA has sought a new textile upgradation fund scheme from the government.

Exporters would also like to offer value-added services. “What we are running today is a glorified tailoring shop. China and Vietnam have set up design studios and offer buyers design options that buyers pick up from. By doing so they have become preferred suppliers," says Duraiswamy.

While Tiruppur’s unique cluster model has delivered, there is an increasing realization that setting up composite units (with all the processes under one roof) can reduce costs and help exporters compete globally. “We cannot shy away from this option anymore," says Ahill S. Rathinasamy, president, Knit Cloth Manufacturers’ Association, and a 50-year veteran of the industry. “We can look at a co-operative or a cluster integration option to ensure that existing clusters do not suffer," he adds.

Green labelling is another focus area. “Gone are the days when the knitwear sector in Tiruppur was a polluter. Today, our operations are entirely sustainable," says Dyers Association’s Gandhirajan. The dyeing units save 130 million litres of water every day as 98% of the water is reused. “We have repented for our mistakes and invested to ensure sustainable operations," he adds.

That apart, the entrepreneurs have bet big on wind and solar power. They cumulatively generate 2,250 MW of renewable power. This is far more than the entire district’s power needs of 650 MW. A green tag will give units in Tiruppur a competitive advantage and help them get a better price from ESG conscious buyers.

In the meantime, the government of India has made a grand announcement that it would like to create 75 Tiruppurs across the country. Perhaps its energies would be better spent helping India’s knitwear capital transform itself to face today’s economic realities and achieve its full potential.

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