Big retailers switch import focus from China to India

United States retailers, including Wal-Mart Stores, Gap and Chico's FAS, are increasing purchases of cheap clothing and jewellery from India as they brace for rising costs when China, their biggest overseas supplier, revalues its currency.

Wal-Mart, the world's largest retailer, is boosting purchases from India by 30 per cent to US$1.5 billion ($2.2 billion) this year.

The chain has an 86-employee purchasing office in Bangalore, India, from which "we could export a lot more", said Wal-Mart International chief executive John Menzer last month.

Retailers who bought about US$65 billion in Chinese goods last year are turning to India because the expected yuan revaluation may increase their costs by 10 per cent over two years, said Ken Mark, managing director of Martello Group in Ontario, a consultant who has co-written Harvard Business School case studies on Wal-Mart. His figure is based on estimates of the yuan's rise against the dollar.

"Retailers could shift the fall season to India," said Norbert Ore, committee chairman of the Tempe Institute for Supply Management, the world's largest association of purchasing managers.

"We've got into a virtual world where buyers can quickly move to the lower-cost country," he said. "If you see a shift in the yuan, you are going to have some impact."

The US is pressing China to change its decade-old policy of fixing the yuan at about 8.3 to the dollar to reduce the flood of low-price goods into the US.

Federal Reserve chairman Alan Greenspan said a month ago a revaluation of the Chinese yuan was "something that I'm certain they will take on reasonably soon".

On June 23, he said such a currency change would not increase US manufacturing "significantly" and would "likely redirect trade within Asia".

Chinese Premier Wen Jiabao said on June 26 that his country needed more time before it could free the yuan from the dollar.

"A great deal of preparation is still needed until we have favourable conditions," Wen said in his opening speech at the Asia-Europe meeting of European Union and Asian finance ministers in the Chinese coastal city of Tianjin.

Retailers including Wal-Mart are also expanding purchases in China this year, in part to support an expansion of retail stores.

Wal-Mart, which in April operated 45 stores in China, plans to add 15 locations this year.

Wal-Mart bought US$18 billion in apparel and other goods from China last year, an increase from US$10 billion in 2001, making it the country's seventh largest export trading partner ahead of Britain.

A yuan revaluation may be "more burdensome for Wal-Mart than other retailers", said Jon Jacobs, fixed-income analyst at Cantor Fitzgerald LP in New York. "Wal-Mart has based its positioning on being the lowest-price vendor."

Indian factories may gear up to produce as much as US$5 billion in goods for Wal-Mart over the next three years, said Nirav Sheth, deputy head of research at Brics Securities in Mumbai.

"India has a strong manufacturing base, particularly in textiles, mainly because of cheap labour costs," Sheth said. "The quality of textiles from India is comparable to the best in the world."

India's costs for producing clothing are about 1 per cent lower than China's, says a Bain & Co report.

Gap, the largest US clothing chain, has increased purchases in India, said Vivek Hinduja, chief operating officer for marketing for Gokaldas Exports, an apparel supplier in Bangalore.

The company's sales rose 34 per cent to US$165 million in the year ended March 31. Gap, its largest customer, makes up more than a third of sales.

"India is an important market for us and will continue to be," said Kris Marubio, a spokeswoman for Gap.

"Diversification of our sourcing base is important. It helps reduce the risk of local disruptions and it increases your speed to market."

Chico's, which operates 700 women's clothing stores, has been increasing its purchases from India, said spokesman Michael Smith. Chico's gets about 12 per cent of its goods from India and almost half from China.

"We like to diversify our sourcing portfolio to protect ourselves," he said.

Cherma's Exquisite, an apparel-maker in India, landed its first contract with Wal-Mart this year to supply 100,000 floral Jordache blouses and is bidding on an extra 15 clothing styles for Wal-Mart.

"We're trying to get as much business as possible" from Wal-Mart, said marketing director Maniza Pestonji at Cherma's Exquisite. Its sales to the retailer may jump 50 per cent next year.

India, which has the fourth largest economy in Asia, does not have China's capacity to make a broad range of consumer products including toys, shoes and ceiling fans.

"India has underdeveloped industries, though they are ramping up rapidly," said Kenneth Harris, partner with Cannondale Associates, a consumer-products consultant in Illinois.

Some Indian exports are more expensive than their Chinese counterparts, said Chiquan Guo, international business professor at the University of Texas-Pan American.

"One thing that pulls India back in global competition is their extensive labour laws that are believed to be biased toward employees," Guo said.

"Overprotection, red tape and bureaucracy make India's work force less manageable, less disciplined and thus less competitive than it could be."

Wal-Mart last year bought US$1.2 billion in Indian goods, mostly clothing.

"We've had a great experience with our India suppliers and are continuing to identify new opportunities," Wal-Mart's Menzer said in an e-mail interview. "We would anticipate both expanding the volume and product lines this year.

- BLOOMBERG