With Tirupur in throes of decline, manufacturers eye Ethiopia for revival

Sewn up: Employees sew clothes at the Estee garment factory in Tirupur, in Tamil Nadu. Relatively high labour cost is costing the textile town its competitive advantage. Photo: Reuters
Over the years many celebratory labels have come to be attached to Tirupur such as dollar city, textile valley and the Manchester of India to describe its rise as a hub for textile manufacturing and exports. Now, the city is ripe for another kind of epithet: one that describes its slow decline.

Tirupur is increasingly losing its sheen for entrepreneurs, thanks to the growing cost of doing business in the state that is making its exports uncompetitive against those from emerging textile hubs in Bangladesh, Cambodia and Vietnam.  

To edge out these competitors, many are looking to set up manufacturing facilities in Ethiopia to serve the markets in the US and Europe, while others are making a shorter journey to neighbouring states, drawn by the promise of incentives. Many states have been prompted to roll out the red carpet for manufacturers in the hope of boosting job creation, given the labour-intensive nature of the textile industry; it is the second largest employer in the country after agriculture.

Of the companies that are looking at Ethiopia, the prominent ones are Raymond, Arvind, Best Corporation and JJ Mills. Africa in general offers the promise of lower labour cost, duty savings and shorter shipment time to the US markets and Ethiopia in particular has become an important aspect of their integrated strategy. They are hoping their Africa investments would bring about a new wave of growth for the industry.

“We need to be competitive to stay in this business, for which we need a lot of support from the local government and tax advantages, which Ethiopia is providing,” says R Rajkumar, managing director, Best Corporation, which manufactures garments for US-based brands including Hanes.

A key attraction Ethiopia offers is duty-free exports to the US and Europe, unlike India. This is one reason why Indian manufacturers are not able to compete with Bangladesh, Sri Lanka and other countries.

Other attractions include good infrastructure and availability of labour at low cost. At the same time, companies can invest in Ethiopia without getting into the hassle of buying land and leasing out buildings. The Ethiopian government has developed industrial estates that come with ready-to-use sheds for potential investors where the only need to invest in machinery. Since labour is a big part of the total cost, these units tend to be closer to where the workers are available in large numbers and at a competitive rate. 

The advantages are legion, especially on key costs like labour and power. To compare the two places, in Tirupur, labour cost per worker comes to $150. In Ethiopia, it is around $60. Also, in clusters like Tirupur, attrition is around six per cent per month, while in competing countries, it is six per cent per year, which means investing abroad also comes with potential savings on training and hiring labour.

The cost of power is below Rs 2 per unit, against Rs 7 in India. And to top it all, there are duty advantages when exporting to Europe and the US, making Ethiopian made products competitive in global markets.

Several internal and external factors have combined to alter the growth dynamics for the textile industry in Tirupur. For one, cotton price was at Rs 40,000 per candy in January; today, it is hovering at around Rs 48,500 per candy. And while the prices have increased, the duty drawback rates have fallen with the implementation of the goods and services tax (GST). 

Indeed, the math does not work out in the favour of exporters. GST has increased costs, not only of compliance but also of materials, services and working capital. Prior to GST implementation, the sum total of export incentives amounted to 13.41 per cent of FOB (freight on board) value. Subsequent to GST, this dropped to 11.70 per cent, down by 2 per cent. The low margin of the textile industry (less than 1-2 per cent) makes this drop unbearable for the industry. 

All this has resulted in ‘Make-in-India’ products being 10-15 per cent costlier than those of competing nations. With the raw material prices and other expenses only rising, textile industry is considering increasing prices even at the risk of becoming even more uncompetitive globally.

Tirupur exporters have decided at an additional mark-up of 10 per cent after nearly six years. This will make their fabric 15-20 per cent costlier than that of competing nations.

Rajkumar of Best Corporation says moving to Ethiopia would lead to a 10 per cent saving on cotton fabric and 20-30 per cent on synthetic fabric. Which makes a big difference, he notes.

The company plans to start production in six months from its Ethiopia plant that has been built at a cost of Rs 300 million to cater to the US market.

Of the other companies, Raymond has invested around Rs 1.30 billion in Ethiopia on a plant with a capacity to make 2 million jackets annually. Besides providing duty-free access to the US and Europe over the next decade, the Ethiopian facility at its peak capacity will make Raymond one of the top five suit manufacturers in the world.

Arvind Ltd, which is investing Rs 1 billion in Ethiopia, too, is looking at the country as a tax-free gateway into US, Europe and China. India, on the other hand, does not have any treaties with any major consuming nation to which it can sell goods at a zero duty. In the absence of direct benefits to help the industry, Tirupur is fraying at its seams.