The West-side story for cheap manufacturing

For 39-year-old Ramkumar Varadarajan, the dilemma was whether to expand in India or go to foreign shores. His problem was solved when Rieter, a Swiss textile machinery-maker, came up with a study whose findings surprised him.

Rieter’s study covered a range of textile products — from yarn to garments — to find out which country was the most competitive to make that product in. “I was surprised to see they had indicated the US as the cheapest place to manufacture. That was how the whole thought process came about. That was in 2012,” says Varadarajan, Managing Director, Shri Govindaraja Textiles (P) Ltd, during an interaction at the company’s Chennai office.

Varadarajan was undergoing training with Rieter in Switzerland when he came across the study. Shri Govindaraja Textiles was thinking of expanding and looking at Andhra Pradesh and Gujarat. The Rieter study prompted Shri Govindaraja Textiles, part of the Jayavilas group based in Arupukkotai, Tamil Nadu, to seriously look at the US.

The Jayavilas group, with interests in textiles, logistics and bus transportation, has a capacity of 11 lakh spindles, with Shri Govindaraja Textiles accounting for four lakh — 2.75 lakh in Arupukkotai and 1.25 lakh in Pulivendla, Andhra Pradesh.

With Rieter’s study in hand, Varadarajan, a commerce graduate from Chennai and an MBA from the US, got in touch with the SelectUSA office at the American consulate in Chennai, and told them about his plans and his requirements. SelectUSA, an agency that facilitates business and investment in the US, put him on to nine States where spinning could be competitive.

After evaluating the options, Shri Govindaraja Textiles chose Eden in Rockingham county, North Carolina. Other options were South Carolina, Georgia, Texas, Oklahoma, Louisiana, Mississippi, Tennessee and Arkansas.

The North Carolina Governor’s office announced in May that the company will invest more than $40 million to make yarn and create 84 jobs over the next two years.

It also said that the North Carolina Department of Commerce’s Rural Infrastructure Authority Board had awarded a $750,000 community development block grant to the city of Eden to assist Shri Govindaraja Textiles with up to 50 per cent of the building up fit costs. The company would be located in an 180,000 sq ft building that was owned by Karastan Inc, a rugs and carpets manufacturer.

The Governor’s office press release said salaries would vary by job function, but average annual payroll was estimated to be $2 million plus benefits.

“It was a combination of various input costs that were tabulated before we made a decision and zeroed in on North Carolina. But if you ask me what is the single biggest reason behind choosing North Carolina, it is the cost of power. North Carolina is serviced by Duke Power which offered us the best rate among all other States,” he said.

The main inputs for making yarn are cotton, power, wages and cost of capital. Except wages, all other inputs will be cheaper in the US, says Varadarajan.

Power accounts for 12-15 per cent of the input costs for a mill that is into ring spinning and 8-12 per cent for open end spinning, according to him. “In the US, we are looking at anywhere between 3-4 per cent in terms of energy cost.”

In North Carolina, Shri Govindaraja Textiles’s subsidiary, SGRTEX LLC, will get electricity at the equivalent of ₹3 a unit; more importantly, power will be consistent and uninterrupted. In India, the company pays ₹6.75-6.90 for a unit and at least a rupee more when it buys from merchant power producers whenever grid power fails.

The company will get contamination-free cotton with guaranteed homogeneity as North Carolina is a leading cotton-growing State. In India, extensive human handling leaves cotton with impurities such as human hair, strands from polypropylene bags that are used to pack cotton and plastic packets. Hence, Shri Govindaraja Textiles can only guarantee contamination-controlled yarn. For those who need contamination-free yarn, as some of its Italian customers do, the company imports cotton from the US. These buyers are prepared to pay a premium for the imported cotton.

Checking for contamination adds to the cost. It is easy to separate dark contaminants such as plastic packets, but white human hair and strands of polypropylene are harder to detect.

Labour in the US, according to Varadarajan, is costlier than in India. In the US, the company will have to pay a worker $12 (₹720) an hour. In India, it pays about half that for a day. Once fully operational, the North Carolina plant will employ 84 workers; in India, Shri Govindaraja Textiles has 6,500 on rolls.

The US plant will be highly automated, employ eight workers a shift and will make 35 tonnes of yarn a day. The Indian plants cannot be automated to such an extent because of the higher cost and poorer quality of electricity.

According to Varadarajan, the US plant will be funded through a mix of equity and debt, in the ratio of 1:3. Interest rates in the US are around 3 per cent against about 15 per cent in India.

How does the US stack up against India in terms of actual cost of manufacturing? “Net-net, cost of manufacturing is 15-20 per cent cheaper in the US for one kg of open-end yarn. I will not say the same for 40s ring spun yarn. You cannot automate it to such an extent,” says Varadarajan. What will be the cost of manufacture in absolute terms? “Here it would be ₹23-24 to make a kg of 20s yarn, just the conversion cost. There it would be ₹20.”

Better still, if the company plans to export yarn to China, the shipping costs are lower and delivery faster compared to shipping from India. For instance, Shri Govindaraja Textiles’ mill in Arupukkotai is 100 km from the Tuticorin port.

From there, the containers are moved to Colombo, where they get transhipped on vessels to Singapore and then to China; shipping could cost up to $300 a container and it may take up to 31 days to reach China. In contrast, thanks to the huge volume of Chinese exports to the US and limited cargo in the return direction, there is a large number of empties. The shipping cost is less and vessels take about 20 days to reach China.

According to Varadarajan, the company has placed orders for machinery and the US plant will start operating by December-January. How long did it take for him to obtain all clearances? “That absolutely is not an issue at all. There is this economic development authority whose only job is to get investments,” says Varadarajan. For instance, when he got in touch with the nine States through SelectUSA and told them his requirement, officials from the economic development authority from the nine states came over to where he was and made detailed presentations on the facilities available and incentives they would offer.

“We covered nine States in four days.” After choosing North Carolina, he only had to hire an attorney and a certified public accountant to complete the formalities. The attorney handled the legal issues, obtained all the necessary clearances and registered the company, while the CPA took care of the corporate side. It was done in a matter of days, he says. In India, it could have taken him at least a year before he got all the details from the States that were in the race for the investment. It just goes to prove that Make in India may be the flavour for the Narendra Modi Government, but achieving that is still a long way off.

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