Inside Tiruppur’s fight to survive the tariff storm

The American entertainment giant placed its first order with this Tiruppur-based company earlier this year.

For Alexander Job Neroth, N.C. John Garments’ director, the joy was short-lived.

On 27 August, US President Donald Trump punished India for buying Russian oil, slapping additional tariffs on textile imports and taking the rate up to 50%. The high tariffs made Indian textile exports uncompetitive compared to other Asian economies such as Bangladesh, Vietnam, Cambodia and Sri Lanka.

“We did not anticipate such high tariffs,” said Neroth. But he couldn’t let the Walt Disney order slip through as well. “I renegotiated with the buyer, offered a large discount, and continued to supply at wafer thin margins,” he added.

This narrative runs across all companies in the town, known as India’s knitwear capital. As much as 34% of Tiruppur’s ₹44,747 crore in exports are generated from the US.

While Indian exporters do not want to lose their customers, the buyers cannot switch suppliers right away. In the minimum, it takes at least 90 days for buyers to vet new suppliers and then place orders. So, both the sides, in many cases, have re-negotiated, keeping supplies intact, said A. Sakthivel, honorary chairman, Tiruppur Exporters Association, an industry body. Some buyers have even agreed to share the losses.

That explains why there is no visible sign of gloom and doom in the town. Small trucks zig-zag the cluster carrying materials for processing. And scores of workers remain busy stitching t-shirts and other garments. Elsewhere, malls and shopping centres brim with people; theatres appear to be running full with hundreds of people queuing up for films like Kantara: Chapter 1 and Idly Kadai. Hotels reported no significant fall in occupancy rates—all underlining the fact that economic activity still remains robust in Tiruppur as of October first week.

But this normalcy masks a problem. The ability of the town’s exporters, mostly small companies like N.C. John Garments, to bear the loss is limited. Banks, some say, have already begun to pile on the pressure. Also, buyers would not share the loss for too long—they could shift to other countries if tariffs don’t change.

While the impact appears manageable now, things could turn for the worse, going ahead, industrialists warn. Industry associations, particularly, appear more alarmed.

“The pain started when the first 25% tariff was imposed by the US. With the additional 25%, we are today in the intensive care unit (ICU) but fighting,” said Kumar Duraiswamy, joint secretary, Tiruppur Exporters Association. “If this continues for some more time without any government support, we will slip into a coma.”

On 27 August, US President Donald Trump punished India for buying Russian oil, slapping additional tariffs on textile imports and taking the rate up to 50%.

Job losses so far have been minimal. But that could change post-Diwali, when existing orders are exhausted. Many units have cut down the number of days they operate. Migrant workers who go home for Diwali may be asked to not return till companies have more visibility.

Tiruppur is a spectacularly resilient cluster—the town has seen through many headwinds, be it the covid-19 pandemic, the Russia-Ukraine war, or even the Red Sea crisis in recent years. But the tariff blow is a different, possibly harder test. If companies here can hold on, for a few months more, there could be light at the end of the tunnel. More on this later.

20% discount

Indian manufacturers simply can’t ignore the US market when it comes to textiles. Any exporter who wants to grow eyes it, said V. Dinesh Kumar, a first generation entrepreneur. The US imports more than what the 27 European Union (EU) member states buy together. “Volumes are huge and products are basic items, not fashionable ones that Europe typically orders,” he added.

Orders from the US are typically large as well—as much as 100,000 pieces at a time. This means higher yarn procurement, more work for spinning, knitting and dyeing units. “Though shipments to the US are 34% of Tiruppur’s exports in value terms, the economic impact through job creation is much more,” Kumar said.

In April this year, he bagged a US customer. He bought the raw materials in June and the samples were approved by July. Production was about to begin when the news of tariff hikes broke, in August.

“Goods worth ₹50 lakh are lying idle now,” Kumar said. Meanwhile, his vendors, who supply on credit, want their payment. He is now negotiating with the US buyer for a way out.

US exports follow three cycles a year. In each cycle, orders worth ₹5,000 crore are executed. “In the current cycle, exporters are giving a 20% discount. This implies a ₹1,000 crore impact. Micro, small and medium enterprises (MSMEs) can’t take such a hit and survive,” said Raja M. Shanmugham, chairman, Warsaw group of companies, a major exporter.

Needed: Steroids

The Tiruppur Exporters Association is trying to pile up pressure on the government, demanding sops.

In early September, the association submitted a memorandum to Nirmala Sitharaman, India’s finance minister, seeking policy support. Demands include extension of non-performing asset classification period from 90 days to 180 days, two-year moratorium on term loans, a special emergency credit line, interest equalization scheme and enhancement of export credit limits.

The government, though, is yet to announce any package.

The delay is irking the exporters. “Any medicine has to be given at the right time. That time has passed,” added N.C. John Garments’ Neroth.

Some large US-focused players, meanwhile, are looking to shift production to other countries in a bid to keep the orders going. They are scouting for capacities in Sri Lanka, Ethiopia and Kenya—without much success just as yet.

Sell in India

With the US turning cold, exporters in Tiruppur have begun to explore other geographies. The EU is the next big market, aggregating ₹14,000 crore. Indian companies desperate to break in are reportedly undercutting existing players in the continent. But demand remains sluggish as of now.

That brings us to the domestic market. Can Tiruppur’s factories sell their garments to Indians in India?

Companies in the region have studiously avoided that so far. There are two options—sell to a big brand, or launch your own brand. To be a contract supplier to the retail arms of Reliance, Aditya Birla, the Tata group or multi-national players such a H&M, they have to compete with supplies from Bangladesh which are at least 7% to 8% cheaper. Exporters in Bangladesh import fabric from China duty free, convert it into garments, and send it into India duty free, thanks to a bilateral trade agreement.

“We cannot compete unless a countervailing duty is imposed on apparel imports from Bangladesh. Such a duty will open up a ₹6,000 crore market for Indian players at a time when the US market is out of bounds,” said Duraiswamy.

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The second option, starting a domestic brand, isn’t easy. It involves time, effort and money. Also, distribution and marketing is a challenge; so is the lengthy credit period. In the past, some exporters have tried and failed.

Nonetheless, some companies have started supplying to the organized retail industry in India. Till a couple of years ago, J.C. John Garments supplied very little to the domestic market. Now, the domestic share has shot up to 22% in overall revenue.

“Organized retail has evolved a lot and exporters who are well tuned to compliance and quality standards are well placed to supply,” Neroth said. “By sharpening our pencil we can become more efficient and compete with low-priced imports.”

The hope

So, what is the light at the end of the tunnel we mentioned earlier?

The answer is trade agreements.

Free trade deals have been signed, or are being negotiated, with Tiruppur’s top three export destinations that account for over two-thirds of its export share.

India recently signed a free trade agreement with the United Kingdom (UK). At over ₹3,000 crore, the UK is the third biggest export destination for Tiruppur. Once the free trade agreement (FTA) comes into effect, volumes from the town are expected to jump.

Once the tariff crisis blows over, there’s an urgent need for the industry to increase capacity. The biggest challenge we’ll face in doing that is people.
—A. Sakthivel

Trade negotiations are also ongoing with the EU—a deal could be in place before the end of this calendar year, the media has reported. That agreement could make Indian exports more competitive versus Bangladesh, Vietnam, China and Sri Lanka.

Meanwhile, a bilateral trade agreement with the US is also a possibility but no one knows by when.

If they come through as expected, demand could skyrocket. But another problem could surface, needling Tiruppur’s industrialists.

The coming battle

Even before the US hit India with 50% tariffs, Tiruppur was facing serious structural challenges. The cluster, over the years, has become increasingly dependent on migrant workers. The shortage of hands flares up when order flow increases. The region’s challenge, going ahead, would be more supply-side related.

Migrant workers account for 70% of the workforce today. Once, workers from states such as Odisha were cheaper than the local workforce. Not any longer. Over the last few years, they have demanded, and secured higher pay and facilities such as housing and healthcare without commensurate increase in productivity, industrialists say.

Mint had earlier reported that states such as Odisha, Bihar and Madhya Pradesh are trying to attract textile investments. Once these investments work out, and reach a certain scale, workers from these regions are unlikely to migrate to Tiruppur, leaving factories here high and dry.

“Once the tariff crisis blows over, there is an urgent need for the industry to increase capacity. The biggest challenge we will face in doing that is people,” admitted Sakthivel.

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The other big bottleneck is Tiruppur’s excessive focus on cotton. The world is fast moving away from cotton to man-made fibres (MMF) such as polyester or viscose. Today, MMF accounts for over 75% of global consumption. But India’s MMF exports was merely 14% of its overall volumes and Tiruppur’s share in it is miniscule.

“Consumers, world over, have moved to functional clothing for use in office, sports or gym and cotton is not able to meet their expectations. MMF offers the versatility they seek,” said Sunil Jhunjhunwala, managing director of Techno Sportswear Pvt. Ltd, India’s largest homegrown activewear textile brand.

If the town has to tap the opportunities that FTAs with the UK, and possibly with the EU and the US would present, it needs to up its game in MMF.

The Tiruppur Exporters Association says it is trying to prepare its members, but the pace of change has been frustratingly slow. For now, everyone appears to be focussed on meeting the immediate demand, and staving off the tariff impact—by renegotiating contracts, absorbing losses, and scouting for alternative markets. Everything else remains a battle for another day.