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Teetering US Economy Casting Spell on Indian Garment Exports
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Teetering US Economy Casting Spell on Indian Garment Exports
A very recent study by Assocham brought out more clearly the impact of global meltdown than what has been admitted by even a more recent interview of Kamal Nath, on BBC. It is certainly far more than "ripple effect" or "indirect effect" as being made out by the Government. Even the Prime Minister did acknowledge the "indirect" impact of the global meltdown on Indian economy, though its severity has not been spelt out by him, for obvious reasons. He has, however, cautioned to be prepared for a temporary slowdown".
The Study, undertaken by Assocham, as referred to above, states "Due to meltdown in Indian economy and its after-effects leading to higher input costs and credit access virtually getting out of hands of large corporates (with) turnover of over Rs.5,000 crore, have brought 68% of CEOs a complete restlessness in fulfilling their commitments in the last 9-10 months." The survey adds, " 68% CEOs continue to reel under tremendous stress and fatigue as a result of current meltdown and slog to deliver desired results in limited time at their disposal and make adjustments both on margins of their top line and bottom line profitability." The Survey, captioned "Current Business Scenario Causing Stress to CEOs" further adds, "Only a minor lot of 32% of CEOs of domestic business within the given turnover bracket succeed(ed) in countering their resistiveness and fatigue in a bid to achieve their yearly targets in the context of current severe business constraints."
This state of mind of India Inc. is reflective of the seriousness of the impact of the US crisis on Indian scenario. Any exercise to demystify the present tangle, it is necessary to at least know what is generally unknown and is unfathomed. We need to understand the dimensions that await unfolding.
Unfathomed US Crisis Overtakes Europe
I had stated in one of my recent articles that the full ramification of the US sub-prime crisis is unknown and it continues to be so. There are certain broad indicators that point out the future scenario, as it is likely to unfold. I would rather like to confine myself to our domain of interest i.e. US consumers and retailers. The US consumers had, as a culture, relied heavily on what were unsecured credit-worthy instruments to maintain their lifestyles. The banks secured their interests by collateral security of whatever any consumer offered and they financed heavily and aggressively even on the basis of sub-prime properties, which they deemed were valuable enough to ensure their financial security, which was not the case. Once the US consumers started defaulting, the banks discovered that the securities they held were certainly not worth the loans, advanced by them. The consumers also did not mind paying higher interest rates on their credit to maintain their lifestyles but that could not continue for long. Once they started defaulting on their re-payments, the turmoil began and the domino effect of US financial crisis took over. This was quickly followed by serious slackness in demand and the discomfort of the US retailers which only exacerbated the crisis.
The crisis was not confined only to the US, it extended beyond the US frontiers and spilled over to the Europe, because of financial linkage that the US and European financial institutions have within themselves. The signs of slowdown appeared fast and picked up soon in Europe too, particularly in so far as the apparel companies are concerned. This could not be brought out better than what Daniel Gates, Managing Director at Moody`s Investors Service said, "Spending by overleveraged US consumers was surprisingly resilient until recent months, but we are seeing signs that household consumption is beginning to buckle. Consumers in some European countries, particularly in the UK and Spain, share some of the same vulnerable characteristics as households in the US: high debt burdens, declining home prices, stagnant or falling disposable incomes and rising debt delinquencies."
Impact on Apparel Companies
Globally, 43 per cent of the apparel companies tracked by Moody`s had a negative outlook or were under review for a possible downgrade during the third quarter this year, up from 23 per cent from the end of the last year. It is well known that a credit downgrade, particularly if it pushes debt into the non-investment or "junk" category, can even in the best of times make it more expensive to refinance. With the bankruptcy of Lehman Brothers and the rapid fire sales of Wachovia and Merrill Lynch, credit got tightened considerably and the number of banks available to extend credit shrank.
Apparently, some retailers with lower debt ratings and greater need of cash, found the pool of money they could borrow under their credit facilities withering, as the bank loans shrank. Tiffany Co, the debt analyst at Fitch Ratings, said, "For the ones that are not generating the cash flow and they cannot access capital from the outside resource, we could see another spate of bankruptcies. I actually do not think the bankruptcy cycle is anywhere close to the end. It is still ongoing for the rest of this year and probably into next year." He added that in the specialty store sector, apparel was probably the weakest, in part because fashion is more of a discretionary purchased compared with home improvement goods or office supplies."
Retailers often tap several banks that together extend lines of credit that are used to keep their operations chugging along. In addition to the cash flowing through their registers and their bank credit facilities, retailers finance their operations by tapping into the so-called paper markets for short-term loans and by selling bonds. Bonds amount to a loan from the bond-holder to the company, which makes regular payments on the debt and promises to repay the principal amount on a certain date. Companies often issue new bonds to repay the old ones, but firms with fast-approaching maturity dates might not be able to find the public debt markets all that receptive to their needs. This can led to a further break-down.
Retail Scene in US
The current retail scene in the US is anything, but happy. Most of the retailers have seen their sales scaling down to new levels. Then there is a spate of announcements for closure of stores by some of the leading players. These include Eddie Bauer, which has already closed 27 shops in the first quarter and plans to close a few more by the end of 2008. Similarly owner of Lane Bryant, Fashion Bug, Catherines Plus Sizes will close about 150 under-performing stores this year. The Talbots group has announced that it would close Talbots Kids and Talbots Mens Concepts. Walt Disney said it has also obtained the right to close about 98 Disney Stores in the US. Gap Inc., whose brands include Old Navy and Banana Republic, has announced plans to close 85 stores as it continues to struggle to attract customers. The list is long and scary.
As was brought out in the last issue of The Stitch Times, even the European Union too has its own share of worries and the European governments coming out in open support of their banking institutions does reflect and confirm that the US crisis has indeed traveled far beyond the US frontiers. This has similarly impacted the retail sales in the European countries, particularly in comparatively bigger European markets like the UK and Germany.
Impact on Indian textile and garment sector
There has been a marked decline in the textile and garment sector, which is further extended to exports. According to Sajjan Jindal, "from the sunrise sector, textile sector is at the verge of slipping back to the stagnant phase. While the Eleventh Five Year Plan targets 22 per cent growth in Indian textile exports, the growth has decelerated from 16.6 per cent in 2005-06 to 13.50 per cent in 2007-08. The orders for textile products from India have come down drastically from the largest importer, the US, (due to) financial crisis." He adds, "The growth rate in the production of cloth by the mill sector decelerated from 4% in 2006-07 (April-March) to 1% in the same period of FY08... The cascading effect is that the textile mills are likely to cut production further by 20-25 per cent, while some units have been closed down with millions getting unemployed."
The performance on garment export front has been even worse. Our total garment exports stood at $9,400 million in 2007-08 as against $8,901 million in the previous year, registering a growth of 5.6%. According to Rakesh Vaid, Chairman, Apparel Export Promotion Council, "Our exports to the US stagnated in 2007-08 and the growth of Indian garment exporters by 5.6% was largely possible because of growth of Indian garment exports to the EU to the extent of almost 11%". He adds on "More recently, India`s exports have recorded a decline of about 1.79% in May this year, which is a matter of concern... There is yet another matter of concern i.e. each of the important export products from India to the US like knit and woven shirts for men and women, cotton trousers, cotton dresses, cotton undergarments and baby garments have all registered a negative growth in May, 2008."
Source:
http://www.fibre2fashion.com/industry-article/16/1502/teetering-us-economy-casti
The Study, undertaken by Assocham, as referred to above, states "Due to meltdown in Indian economy and its after-effects leading to higher input costs and credit access virtually getting out of hands of large corporates (with) turnover of over Rs.5,000 crore, have brought 68% of CEOs a complete restlessness in fulfilling their commitments in the last 9-10 months." The survey adds, " 68% CEOs continue to reel under tremendous stress and fatigue as a result of current meltdown and slog to deliver desired results in limited time at their disposal and make adjustments both on margins of their top line and bottom line profitability." The Survey, captioned "Current Business Scenario Causing Stress to CEOs" further adds, "Only a minor lot of 32% of CEOs of domestic business within the given turnover bracket succeed(ed) in countering their resistiveness and fatigue in a bid to achieve their yearly targets in the context of current severe business constraints."
This state of mind of India Inc. is reflective of the seriousness of the impact of the US crisis on Indian scenario. Any exercise to demystify the present tangle, it is necessary to at least know what is generally unknown and is unfathomed. We need to understand the dimensions that await unfolding.
Unfathomed US Crisis Overtakes Europe
I had stated in one of my recent articles that the full ramification of the US sub-prime crisis is unknown and it continues to be so. There are certain broad indicators that point out the future scenario, as it is likely to unfold. I would rather like to confine myself to our domain of interest i.e. US consumers and retailers. The US consumers had, as a culture, relied heavily on what were unsecured credit-worthy instruments to maintain their lifestyles. The banks secured their interests by collateral security of whatever any consumer offered and they financed heavily and aggressively even on the basis of sub-prime properties, which they deemed were valuable enough to ensure their financial security, which was not the case. Once the US consumers started defaulting, the banks discovered that the securities they held were certainly not worth the loans, advanced by them. The consumers also did not mind paying higher interest rates on their credit to maintain their lifestyles but that could not continue for long. Once they started defaulting on their re-payments, the turmoil began and the domino effect of US financial crisis took over. This was quickly followed by serious slackness in demand and the discomfort of the US retailers which only exacerbated the crisis.
The crisis was not confined only to the US, it extended beyond the US frontiers and spilled over to the Europe, because of financial linkage that the US and European financial institutions have within themselves. The signs of slowdown appeared fast and picked up soon in Europe too, particularly in so far as the apparel companies are concerned. This could not be brought out better than what Daniel Gates, Managing Director at Moody`s Investors Service said, "Spending by overleveraged US consumers was surprisingly resilient until recent months, but we are seeing signs that household consumption is beginning to buckle. Consumers in some European countries, particularly in the UK and Spain, share some of the same vulnerable characteristics as households in the US: high debt burdens, declining home prices, stagnant or falling disposable incomes and rising debt delinquencies."
Impact on Apparel Companies
Globally, 43 per cent of the apparel companies tracked by Moody`s had a negative outlook or were under review for a possible downgrade during the third quarter this year, up from 23 per cent from the end of the last year. It is well known that a credit downgrade, particularly if it pushes debt into the non-investment or "junk" category, can even in the best of times make it more expensive to refinance. With the bankruptcy of Lehman Brothers and the rapid fire sales of Wachovia and Merrill Lynch, credit got tightened considerably and the number of banks available to extend credit shrank.
Apparently, some retailers with lower debt ratings and greater need of cash, found the pool of money they could borrow under their credit facilities withering, as the bank loans shrank. Tiffany Co, the debt analyst at Fitch Ratings, said, "For the ones that are not generating the cash flow and they cannot access capital from the outside resource, we could see another spate of bankruptcies. I actually do not think the bankruptcy cycle is anywhere close to the end. It is still ongoing for the rest of this year and probably into next year." He added that in the specialty store sector, apparel was probably the weakest, in part because fashion is more of a discretionary purchased compared with home improvement goods or office supplies."
Retailers often tap several banks that together extend lines of credit that are used to keep their operations chugging along. In addition to the cash flowing through their registers and their bank credit facilities, retailers finance their operations by tapping into the so-called paper markets for short-term loans and by selling bonds. Bonds amount to a loan from the bond-holder to the company, which makes regular payments on the debt and promises to repay the principal amount on a certain date. Companies often issue new bonds to repay the old ones, but firms with fast-approaching maturity dates might not be able to find the public debt markets all that receptive to their needs. This can led to a further break-down.
Retail Scene in US
The current retail scene in the US is anything, but happy. Most of the retailers have seen their sales scaling down to new levels. Then there is a spate of announcements for closure of stores by some of the leading players. These include Eddie Bauer, which has already closed 27 shops in the first quarter and plans to close a few more by the end of 2008. Similarly owner of Lane Bryant, Fashion Bug, Catherines Plus Sizes will close about 150 under-performing stores this year. The Talbots group has announced that it would close Talbots Kids and Talbots Mens Concepts. Walt Disney said it has also obtained the right to close about 98 Disney Stores in the US. Gap Inc., whose brands include Old Navy and Banana Republic, has announced plans to close 85 stores as it continues to struggle to attract customers. The list is long and scary.
As was brought out in the last issue of The Stitch Times, even the European Union too has its own share of worries and the European governments coming out in open support of their banking institutions does reflect and confirm that the US crisis has indeed traveled far beyond the US frontiers. This has similarly impacted the retail sales in the European countries, particularly in comparatively bigger European markets like the UK and Germany.
Impact on Indian textile and garment sector
There has been a marked decline in the textile and garment sector, which is further extended to exports. According to Sajjan Jindal, "from the sunrise sector, textile sector is at the verge of slipping back to the stagnant phase. While the Eleventh Five Year Plan targets 22 per cent growth in Indian textile exports, the growth has decelerated from 16.6 per cent in 2005-06 to 13.50 per cent in 2007-08. The orders for textile products from India have come down drastically from the largest importer, the US, (due to) financial crisis." He adds, "The growth rate in the production of cloth by the mill sector decelerated from 4% in 2006-07 (April-March) to 1% in the same period of FY08... The cascading effect is that the textile mills are likely to cut production further by 20-25 per cent, while some units have been closed down with millions getting unemployed."
The performance on garment export front has been even worse. Our total garment exports stood at $9,400 million in 2007-08 as against $8,901 million in the previous year, registering a growth of 5.6%. According to Rakesh Vaid, Chairman, Apparel Export Promotion Council, "Our exports to the US stagnated in 2007-08 and the growth of Indian garment exporters by 5.6% was largely possible because of growth of Indian garment exports to the EU to the extent of almost 11%". He adds on "More recently, India`s exports have recorded a decline of about 1.79% in May this year, which is a matter of concern... There is yet another matter of concern i.e. each of the important export products from India to the US like knit and woven shirts for men and women, cotton trousers, cotton dresses, cotton undergarments and baby garments have all registered a negative growth in May, 2008."
Source:
http://www.fibre2fashion.com/industry-article/16/1502/teetering-us-economy-casti
