TEEJAY LANKA IS BUSTING MYTHS ABOUT INVESTING IN INDIA

The listed fabric maker is proving nationalists wrong by investing $30 million in India to triple revenue over five years

Six middle-aged men smiled down contemptuously from the head table set on a slightly raised platform at the small, motley audience below them. Their smile and contempt can be explained: They were either chairmen or chief executives of firms making biscuits, milk powder, floor tiles, shampoo, shoes or liquid detergents—they were representing an industry body that included a few likeminded companies. They have poor regard for the people in their audience, the press. But today, these captains of industry had to smile and make the press feel welcome. They had a statement to make.

“We are here to oppose the impending marriage of the ogre India to the virgin damsel Lanka,” one of them announced officiously to laughter all around, even the press. The marriage in question was the proposed trade agreement the government was finalising with India in 2008, which includes services, investments and movement of people, deepening an existing free trade agreement in goods.

The firms represented at the head table were privately held and owned, well-known brands. They were small businesses, successful in their own right.

One by one, the six took turns demonstrating their adept skills in agnotology, the science of producing ignorance and doubt to take the shine out of facts because human beings are hardly rational creatures.

Agnotology is a word created by Stanford University Professor Robert Proctor in a 1995 book explaining how the cancer-causing tobacco industry successfully used the complaisant media to deflect public attention away from itself; the term has been rediscovered in the wake of Brexit and Trump.

The six argued how the free trade agreement widened the trade deficit in India’s favour at the expense of Sri Lankan exports, and fear mongered about Indian barbers and tailors invading the job market here, followed by a wave of Indian industry. Sri Lankan businesses would be forced to shutter and thousands would lose their livelihoods. Of course, none of what the six said was true or grounded in fact, but most people don’t dispute their views: that’s Agnotology.

To achieve this goal, the management of Teejay realised it would have to grow the business in two ways

Each of them recounted their personal experiences investing and failing in India. This wrongly bolstered their credibility, because of course they would invest there, so everything else they say must be true as well. The Indian bureaucracy is bent on making sure no Sri Lankan venture succeeds there, they said. One of them applied for a license and got the runaround. Another invested in a production plant and did well for a while, but had to shutter it, absorb his losses and come home.

Their message was clear: India is an impossible place to do business. Their mantra gained traction. Even companies that had successful ventures in India did not want to talk about them at public forums or to the press. One entrepreneur managing a successful business exporting fruits to India was shocked to even be asked to do so. “You know the mood, right? Let’s not talk about it for now,” he said. So the success stories never got covered.

Almost a decade later, many Sri Lankan companies believe investing in India is near impossible, despite the success of many Sri Lankan firms investing there like apparel giants Brandix and MAS, employing thousands of people—what Robert Proctor tries to show about agnotology, facts are boring and impotent. Facts don’t matter anymore, and the more doubts and half-truths are perpetuated in the media, the more people tend to believe them, even if they do know the facts. Brandix invested in a 1,000-acre industrial park in Andhra Pradesh, which employs 18,000 people, nearly 90% of them women. MAS’s Indian investments include three plants in South India and a 735-acre fabric park in Nellore, Andhra Pradesh.

For many companies with visionary leadership, India is the land of opportunity propelling them to faster growth by scaling their businesses to levels they could never achieve in Sri Lanka. For Teejay Lanka, an Rs18 billion revenue listed weft knit fabric maker supplying global clothing brands and local apparel makers, investing in India was the next natural step towards faster growth, says its Chief Executive Sriyan de S. Wijeyeratne. “We earlier wanted to be the biggest and best in Sri Lanka— this was our aspiration. Now, we want to play on a wider landscape,” Wijeyeratne says.

The fabric maker was incorporated in 2000 as Textured Jersey Lanka, a joint venture between Textured Jersey UK and Linea Clothing. In 2004, Pacific Textile Holdings acquired Textured Jersey’s shares to become the company’s new partner in the venture. In 2007, a change in the shareholder structure gave Brandix 40% in Textured Jersey Lanka and Pacific Textiles 60%. The company listed on the Colombo Stock Exchange in 2011. By December 2016, the company had a 38% public float, with Brandix holding 33% and Pacific Textiles 28%. Its mill in the Seethawaka Export Processing Zone knits around 35-40MT of fabric a day, supplying to apparel makers Brandix, MAS, Hirdaramani, Omega Line and Hela Clothing, among others. They also work directly on innovation and strategy with global fashion brands like Victoria’s Secret, Intimissimi, Decathlon, Levis, Marks and Spencer, LIDL and Calvin Klein.

In the five years to end-March 2016, revenue has grown 44% to Rs18 billion and earnings grew 245% to Rs2.1 billion. The sharp rise in profits was a result of acquiring two companies in 2015, high-margin orders, innovation, and relentless process improvements and cost controls. “We are hungry for growth,” Wijeyeratne says. “We set a target to triple revenue over five years to $300 million by 2020, even though we know we will face some cyclical impacts along the way.”

To achieve this goal, the management of Teejay realised it would have to grow the business in two ways. First, was growing organically by investing in additional capacity, acquiring new customers and rising up the value chain by manufacturing high-margin fabrics. The second was acquiring fabric mills and related businesses in Sri Lanka and the region for inorganic growth.

The company is debt-free, and had accumulated a sizable war chest to fund acquisitions with a cash surplus of Rs3 billion at end-March 2016, and opted for both options because there’s limited opportunity to expand capacity here.

Organic expansion would be slow. Navigating the bureaucracy for various approvals is time consuming. Finding land and water is difficult. Even road access to its plant in Seethawaka is narrow and often traffic-clogged.

“Although we talk about one-stop shops to facilitate investors, things may not get off the ground fast enough for large manufacturers,” Wijeyeratne says. Energy costs, water and waste discharge are other challenges we need to address as a country to attract more FDI, he says.

“Thanks to the major investment made by Brandix in their park in Visakhapatnam, we found that this particular location in India doesn’t have these challenges, or they have better solutions to them,” he says. Energy, discharge, water and land were easily available. “So, it’s no surprise that we chose to invest there, because growth will be accelerated.”

Myths about doing business in India are hard to bust. Psychological studies show that repeating a false claim, even in the context of debunking that claim, can make it stick. Busting myths with facts works for a while. People’s memories fade and they remember only the myth because it was the most repeated.

In 2008, the government proposed signing the Comprehensive Economic Partnership Agreement (CEPA) with India. Companies fearing competition were vocal in their opposition, their leadership speaking at many public forums and getting plenty of press coverage. The government was forced to back down, and not because of nationalistic businessmen. Opposition had spilled on to Colombo’s streets, with several protest marches holding up rush-hour traffic: the public believed India was an ogre. South Asia’s distrust and nationalism is well known, making it the least integrated region in the world; public perception in one county about their South Asian neighbours is rarely positive, and investors in the region are cautious going in.

Brandix had already navigated the challenges of setting up the industrial park in India – even dealing with striking workers – but Teejay’s management, although confident, couldn’t help feeling a bit nervous venturing across the Palk Strait, Wijeyeratne recalls. In 2015, Teejay acquired 100% in Ocean India, a weft knit cotton fabric mill, for nearly $15 million. It was located in Brandix’s Apparel City Park in Andhra Pradesh. Brandix had invested there to benefit from cheap labour—the state’s population is more than double that of Sri Lanka, but earns half its per capita income, with 30% of the people living below the poverty line.

“We were naturally anxious going in, wondering what unseen elements and surprises awaited us, and how the Indian workers and management there would react to a Sri Lankan management team and our style of management,” Wijeyeratne says.

Ocean India was a loss-making manufacturing firm Teejay knew well, having being contracted in 2013 to provide technical and managerial services to the plant’s operations. This experience gave Teejay vital insights into the company’s operations, psychology and culture.

Teejay’s main challenge concerned Ocean India’s workers and how to integrate three companies into a single group The company had also acquired Quenby Lanka, a fabric printing business, for $3.5 million in 2015.

Teejay is busting myths about investing in India, but its ability to succeed there is driven by its own enterprising spirit

The mill was making losses, and struggling with high rates of attrition and absenteeism. The performance culture Teejay was trying to infuse appeared alien and daunting to a 650 workforce of mostly poor people. Without their support, Teejay could never turnaround the business.

“Investing in people was the most important thing we did,” Wijeyeratne says. Teejay introduced healthcare and welfare benefits, and performance incentives. Safety standards were enforced, and this made people feel important. The plant upgraded with new machinery, and gained new products and customers.

“All this made the people feel a sense of purpose, importance and a part of a greater journey. That gained their trust,” Wijeyeratne says.

Within two years, Ocean India’s high attrition and absenteeism rates were significantly reduced, and in 2015, the mill made a profit, prompting Teejay to acquire the company that September, renaming it Teejay India.

In the first financial year since the acquisition, ending March 2016, Teejay’s group revenue grew 30% from a year earlier to Rs18 billion, the Indian operations contributing 18%: excluding the Indian operations, Teejay Lanka’s Rs14 billion revenue grew just 3%. The investment in India opened up other opportunities as well.

At the acquisition, Teejay India’s operations were confined to half its 400,000 sq.ft. plant space. Teejay is investing $15 million, nearly as much as it did on the acquisition, on machinery for new production lines that will double output to nearly 40MT a day by mid-2017, equal to Teejay’s plant in Sri Lanka. Teejay India’s 76-acre facility has enough land for another production facility. Indian rules restrict the company from supplying fabrics for export and the domestic market from a single plant. A new plant can supply India’s growing domestic clothing market and booming fast fashion industry. Sales of western-style clothing in India have doubled to $22 billion in five years, and fast fashion brands like H&M, Forever 21 and Zara are increasing their retail presence there, according to Jones Lang LaSalle, a global real estate and investment management firm.

The global apparel industry is highly competitive and margins driven. Lead times are crashing daily as brands rush to fill their stores in pace with ever-changing fashion trends. Teejay imports all its yarns and raw materials in fabric making. Mills in China, India, Bangladesh and Vietnam can often source yarns domestically, giving them a crucial price advantage, so Teejay has to make for it in speed and agility, and understand customers with the same intimacy that clothing evokes. It’s one of the few successful manufacturers in Sri Lanka after the fabric industry crashed, unable to compete with cheaper imports, when the economy was liberalised in 1970, and the Indian investment will deepen its relationships.

Clothing brands usually source from several locations to avoid risks of overexposure. Teejay, with multiple plants in India and Sri Lanka, can give brands that comfort. There are cost benefits too. “India’s operating costs are a little bit lower, giving us an edge to compete with regional lower-cost locations in this margins game,” Wijeyeratne says. The company is also investing in data analytics to preempt seasonal sales and fashion trends. Based on projections, it prepares fabric samples that are presented to global brands. Usually, a fair portion of Teejay’s ideas are picked up for further development.

“Our customers are apparel makers in the strictest definition. However, our business structure is brand related. We don’t work on a structure that caters to Brandix or MAS; we work on a structure that delivers fabrics according to the demands of the respective brands, but in close partnership with apparel companies,” Wijeyeratne says.

The company invests in R&D, proactively innovating on behalf of its customers. With the Indian plant specialising in cotton weft knit fabrics, Teejay Lanka can focus on growing high-margin synthetic fabrics. The global apparel industry is moving more towards synthetics, and 90% of the requirement is imported at present. The company has invested $5 million to install a few tonnes of synthetic capacity a month at its Sri Lankan plant and may increase the investment to $20-30 million over the next few years. It’s a difficult fabric to master, but Teejay is in no rush. Getting it wrong will dent the company’s reputation.

“We’re not chasing after customers with this. We need to understand it and perfect it before we push the button on further expansion,” he says. By 2020, synthetics will hopefully contribute about 25% to group revenue and, because margins are higher, account for around 35-40% of the bottomline.

The nature of the fabric, its elasticity and lightness create challenges around manufacturing, dying and printing. From the outside, the process does not look drastically different from knitting cotton fabrics. “There is a certain finish that is needed, a gentle touch I would say,” he adds. The company has to run several production tests, which can be costly, and engages overseas and local resources for this purpose. Several of its synthetic products are already in the market through several brands. The company is also investing in some R&D into conductive fibers and electronics, anticipating an IOT (Internet of Things)-driven smart clothing boom.

These technologies are first infused with the raw materials, yarns and filaments. “While the core material doesn’t change drastically, you can still do a lot with it. Crumble-free clothing or denims requiring less washes and enhanced moisture management are examples of features that are embedded at this stage,” Wijeyeratne says.

If we didn’t have an option of investing in India, we would have looked elsewhere

The next phase of innovation is in the fabrics themselves: In the interaction between different yarns, the dye, chemicals and moisture. Fabrics will soon have electronics merged into them so clothing will have several functions like reading bio matrices, controlling moisture, fragrance and anti-bacterium. “It’s not a question of if, but when. The medical and leisure industries will be impacted by clothing in ways not comprehensible today,” he says.

“We are not doing anything groundbreaking that requires a huge amount of investment and resources, but we are taking small incremental steps; this is what brands are looking for. With this fast fashion rapid cycle, it’s not about waiting five years for the next big thing, but periodical innovations with some extra features added,” he says.

Teejay is busting myths about investing in India, but its ability to succeed there is largely driven by its own enterprising spirit. It finds investing there easy because it already competes in difficult conditions here and is relentlessly pushing itself to gain an edge over competitor fabric makers in China, Bangladesh and Vietnam who enjoy advantages of scale.

It’s constantly tweaking processes so it can find an edge delivering faster turnaround times, sometimes with impressive results. There are multiple mills in the country and the region, with more or less the same machinery. A mill can gain an edge by arranging production lines and designing processes for faster turnaround times. “That’s the trick,” Wijeyeratne says.

He doesn’t give specific examples to protect Teejay’s advantage over competitor’s mills—it’s not uncommon for apparel companies to patent their processors—but says processes that earlier took three to four days are now completed in hours, and different functionalities that also took days now take minutes.

Teejay Lanka is the clothing industry’s largest publicly-held company. In 2015, readymade clothing, earning $5 billion, made up 45% of Sri Lanka’s export earnings. Three closely-held family firms dominate the industry. The Amaleans control MAS Holdings, the Omars manage Brandix and the Hirdaramani family controls a group with the family name as its brand. MAS claims annual group revenue at over $2 billion from facilities in Bangladesh, India, Indonesia and Jordan, as well as 30 factories in Sri Lanka.

Teejay gave shareholders average returns of 21.3% annually in three years to March 2016, and Wijeyeratne is confident that the company will reach its $300 million revenue target by 2020, but cautious about a volatile global economy and yarn prices, and says sustaining and growing profitability will be of greater focus than top-line growth.

“If we didn’t have an option of investing in India, we would have looked elsewhere. We could’ve grown the domestic business, but it would’ve taken longer to reach such numbers,” he says.