Brandix adapts to Sri Lanka’s post-civil war world

Forbes.com: In the apparel trade, where buyers scour the globe for cost savings, nothing succeeds quite like duty-free market access. For Sri Lanka, an island nation that punches above its weight in clothing, the big prize was Europe, which bought $ 1.7 billion of its garments in 2009.

That year Sri Lanka’s 26-year civil war ended, raising hopes of a post-war takeoff in trade and investment. Yet the apparel industry was in for a rude shock. In August 2010 the European Union suspended duty-free privileges in protest of the Government’s human rights record.

At Brandix Lanka, the country’s largest apparel exporter and a supplier to Gap, Victoria’s Secret, Marks & Spencer and other large retailers, the alarm was sounded. “A lot of people felt that it would just be a meltdown,” recalls Ashroff Omar, the company’s CEO.

Reason to worry

Sri Lanka had reason to worry: Garments contribute 45% of exports, and the industry has 200,000 workers. Yet instead of experiencing disaster, Sri Lanka managed to increase its apparel exports to Europe and to make further inroads in the US, where shipments by volume rose 5% in the year to August.

Buoyed by this resilience, Brandix has continued to expand in Sri Lanka, adding five factories, including acquisitions, since mid-2010. It also has plants in Bangladesh and India, where it’s building an ambitious 1,000-acre industrial park in coastal Andhra Pradesh for apparel and textile producers. In Sri Lanka alone it employs 27,000, including in the island’s former rebel-held east, a manufacturing frontier.

To meet EU standards and woo image-conscious buyers, Sri Lanka’s garment industry has worked hard to raise its labour and environmental standards. Brandix touts its plants that cut down on water and energy usage.

But the industry has suffered from a diplomatic falling out between Sri Lanka’s Government and Europeans who are critical of its wartime conduct – even if, in Brandix’s case, it is offering jobs to the vanquished.

Brandix beginnings

Like its main Sri Lankan rivals, MAS Holdings and Hirdaramani, Brandix is a private, family-run company. Omar, 56, is its public face. Brandix has its roots in a trading outfit that his father founded in 1969. The Omars have separate investments in real estate and plastics, which are managed by Ashroff’s elder brother via Phoenix Ventures, a holding company. A third brother is a Brandix Director.

Last year the company beat $ 500 million in sales, and Ashroff is betting on rapid growth as new investments bear fruit. The Indian apparel park has attracted over $ 100 million in capital, most from Brandix. Ashroff has set a target of $ 1 billion in sales and talks of turning Brandix into a regional player in apparel production, using Sri Lanka as a base for South Asia.

He recognises that this would likely require outside capital. “For us holding on to 100% equity is not the mindset, but it must be the correct opportunity to dilute or merge.”

Investors got a taste of this in July when Brandix listed Textured Jersey, a 40-60 joint venture with Hong Kong’s Pacific Textile Holdings, a knitwear producer. The IPO valued the company, which made $ 6.2 million in profit last year, at 10 times earnings.

At its modern 690,000-square-foot plant outside Colombo, a mostly male workforce of 1,200 keeps the spinning, dyeing and knitting machinery humming around the clock. It churns out 2.5 million metres a month of knitted fabric, the stretchy material used for T-shirts, of which 70% goes to non-Brandix apparel makers. Inside the plant the intense heat from the machines is tempered by an efficient air-cooling system.

Launching pad for expansion

Textured Jersey plans to extend its operation onto an eight-acre site nearby. Ashroff sees the listing as a launching pad for expansion in India and other textile-producing countries in South Asia. He credits Pacific Textile, which mostly operates in mainland China, for nudging him in this direction.

“Pacific felt [that] if we listed and expand here [in Colombo] and expand in the region, we will create a currency with the shares that we can do share swaps for mergers. So many things become possible when you are listed,” he says.

Brandix isn’t giving up on its home base, says Ashroff. Yet he knows that Sri Lanka must compete with low-cost apparel factories in Vietnam and Bangladesh at a time of sluggish growth in Europe and the US. While last year’s exports held up, in part because rising labour costs in China led to a shift in orders to other countries, Sri Lankan producers were stung by the effective 10% duty hit in their biggest market.

Expectations unmet

For decades Sri Lanka’s garment industry laboured in the shadow of a civil war. Now that this shadow has lifted the industry should be on a roll, says Roshan Lyman, a trade official at the European Commission’s Colombo mission. Instead the suspension of trade privileges has clouded the outlook. “There’s been no gain. But there should have been gains,” he says.

Not all garment buyers are chasing rock-bottom prices. Jeff Streader, a former Senior Executive for VF Corp. and Guess who began sourcing from Sri Lanka in the 1980s, says apparel firms like Brandix offer quality, service and compliance with international labour and environmental standards.

“Sri Lankans aren’t the cheapest guys. It’s for people who are trying to differentiate their product,” says Streader, an advisor to Merlin Equity Partners in Manhattan Beach, California.

Indeed, Sri Lanka may have no choice but to focus more on higher-value products for brand owners who put a premium on supply-chain compliance. At the same time, apparel manufacturers must be ruthless in keeping down costs if they want to stay competitive in Europe. “They have to be even more efficient now,” says Lyman. He says Bangladesh enjoys duty-free access for its garments under a separate program for low-income countries.

Italian lingerie and beachwear producer Calzedonia, which operates two plants in Sri Lanka, recently agreed to invest $ 20 million in a third in the north of the country. When FORBES ASIA met Ashroff in his wood-panelled office that faces the Indian Ocean, he was due to attend the opening of a new sourcing office for Swedish fashion retailer H&M, a long-time customer.

Liberal investment rules in Sri Lanka allow companies like Calzedonia, which owns the racy Intimissimi brand, to open their own factories. Opening up new labour markets in pacified zones increases this allure. “There are a lot more [apparel] brands operating in the country now than there were before the war,” says Nirosh de Silva, of Orion Capital Partners, a consultancy and private-equity firm in Colombo.

Focus on South Asia

The Omars acquired their first apparel factory in 1972. Four years later Ashroff joined straight from high school and began building up the division. In 1981 he started supplying garments to Limited Brands, owner of Victoria’s Secret. Limited Brands’ sourcing arm later formed a joint venture with Brandix (as it did with MAS) that was unwound in 2004.

Like MAS, Brandix vaulted into places like Mauritius and Madagascar that had unfilled quotas for European and US apparel markets. Today both companies have narrowed their focus to South Asia: MAS has a plant outside Chennai and claims to be the largest lingerie maker in the region.

Friendly rivalry

The rivalry with MAS is cordial, says Ashroff, who attended school with Mahesh Amalean, his counterpart at MAS and also one of three brothers. “We have a similar DNA,” he says. “As competitors we are hard-nosed, but it’s not that we would ignore each other at a party.”

Nirosh de Silva, who knows the two CEOs, says Mahesh is less showy than Ashroff, who has several Harley-Davidson motorbikes. Ashroff says that he only rides his motorbikes to the gym in the morning (his Lexus is parked outside the office). “At my age I’m scared to open up [the Harley],” he confesses.

The name Brandix combines “brand” and Phoenix, the family’s holding company, which is owned jointly by Ashroff, his two brothers and their parents. He is cagey on how much profit Brandix made last year. (An equity shop values it close to $ 250 million.)

Time to raise equity capital?

Yet these figures are weighing on his mind as he tots up the proceeds from the Textured Jersey IPO and scans its daily share price. Having used bank loans and JVs to leverage its growth, is it time for Brandix to raise equity capital for its next phase?

Not so fast, says Ashroff. “Until we think that we have reached a position where we can be a really huge powerful player, I think we will be holding [our equity],” he says. Building out the Indian apparel park, which he calls a “big bite,” is a priority.

Politicians in Andhra Pradesh have complained that the project hasn’t created as many jobs as promised. Ashroff says output is starting to ramp up with exports of underwear and T-shirts from Brandix-owned factories and other producers. “We’re building a supply chain,” he says.

The future may belong to garment producers that can produce on the scale required by global retailers. Think Li & Fung. If so, the days of family-run firms scattered among low-wage countries could be numbered.

“We’ll continue to see consolidation in the apparel industry, with companies expanding to offer multiple capabilities,” predicts Streader. This new era would favour public companies that can raise big equity. Brandix may yet join their ranks.

Peaceful plant

Inside a low-slung building on a rural highway, rows of young women sit at sewing machines, stitching brightly dyed fabric into garments for export. It’s a familiar scene in much of Asia. But the 500-strong workforce, and the location in eastern Sri Lanka, represents a gamble on stability in a former war zone.

Visitors must pass through a metal detector at the gated entrance, where buses drop off workers and trucks pick up garments for shipment from Colombo, a seven-hour road trip.

During the civil war the Tamil Tigers here battled security forces recruited from the Sinhalese majority. In 2007 the military regained control of the Eastern Province after a rebel commander switched sides.

The following year Brandix decided to build a factory in Punani and began hiring workers from across the ethnic divide. Many were living in refugee camps and had never held a paid job. The army cleared the land and dug up weapons caches.

Today Tamils make up 59% of the mostly female workforce, along with 40% Sinhalese and 1% Muslims. Among the Tamil seamstresses are former child soldiers who were taught to hate Sinhalese. In turn some Sinhalese workers had lost family members and were driven off their land during the bitter conflict. All that ends at the front gate, says Theodore Gunasekara, the Factory Manager.

“When you come in here you’re a Brandix employee from day one,” he says. Workers are trained in ethnically mixed batches with an emphasis on teamwork and sharing ideas.

New frontier

The factory is part of Sri Lanka’s peace dividend. For Brandix it’s a new frontier in the hunt for low-wage labour outside its base of operations in wealthier Western districts.

“It’s very difficult to get workers. There’s a limit to how much you can expand” in the West, says Gunasekara. Base pay starts at $ 70 a month. The factory enjoys a five-year tax holiday and has also received training grants from the US Agency for International Development.

A rival garment factory recently set up next door. Brandix plans to open a second plant nearby. Other manufacturers are moving north into other war-torn areas where more land, labour and tax breaks are available.

A 21-year-old machine operator and grade-school dropout, whose family name is Veenuga, is a three-year Brandix veteran. She socks away $ 18 a month, while also supporting her parents and six siblings. Her dream is to own a house. “I’ve come a long way,” she says.