In For A Rough Ride

Omkar Singh Pahwa is not a very happy man and certainly not a big advocate of demonetisation. The MD of Avon Cycles has seen his sales plunge in the rural markets and take a significant knock in the urban space. “Retail sales have been badly affected. The demand for bicycles from small cities and rural markets is down by 85%, and in urban markets it is down by 25%,” says the worried-looking industry veteran who has been in business for more than five decades. He attributes the slump in demand to demonetisation directly. India produces 18 million bicycles each year, with Punjab accounting for 75% of bicycle production. 

Ludhiana is the bicycle capital of India with over 4,000 manufacturers including Hero Cycles, which makes around 20,000 cycles a day. With most of its buyers paying cash, it was an industry that would be impacted by such a drastic policy shift. “The high-end bicycles, which are mainly used by city dwellers, hardly form about 1% of our sales. The medium and low-end variety of cycles form our bread and butter,” says Pahwa. The Rs.450 crore company depends on small cities and hinterland for 70% of its sales and sadly for them, consumers are postponing purchases till the demonetisation dust settles. 

While Pahwa feels that the long-term effect of demonetisation could be good, he is an immediate bearer of the cash crunch’s pain. “Earlier, we produced 10,000 bikes a day, but currently we are down to 8,000 units per day and that too because we have government orders. We will be able to fulfil that order very soon,” he says. Pahwa indicates that while big companies like Avon have been able to absorb the cash crunch shock, some of their small vendors have offloaded 70% of their workforce. The bicycle industry in Ludhania employs nearly 80,000 people.

The effect of demonetisation seems to have spilled on the entire industry in all the wrong ways. Maninder Singh of KS Munjal Industries that is a supplier to Hero Cycles, Avon Cycles, Safari and Neelam believes that demonetisation has shaken the backbone of the industry. But to what extent? “The impact is at two levels. Firstly, there has been a flight of employees; we lost 20% of them. Secondly, we have to deal with the demand slump. There exist certain pockets in rural India where bicycles are presented as a dowry item. Our buyer typically spends Rs.2,500 and pays in cash. They are not in a position to buy now,” explains Singh. And rightly so, about 70% of the workers in the industry in the unorganised sector are paid in cash and are often not on the rolls of the companies. Coughing up cash for such workers and getting them to open bank accounts is something that companies are finding difficult to do. 

To add to their woes, companies also have to battle the impact of higher input prices in the coming year. Steel ingot prices (at Mandi Gobindgarh in Punjab) have already moved up from Rs.25,300 per tonne on 8^th November 2016 to Rs.28,000 on 2^nd January 2017. Due to this jump, manufacturers also have raised prices by 5-8% to absorb the higher prices of raw materials. Apart from rising input prices, the cycle industry has to face intense competition from China, which is the largest manufacturer of cycles and enjoys the benefits of large-scale manufacturing. China gains from a low cost structure and that, in India, will be difficult considering the higher cost of labour, thanks to the flight of migrant labourers and higher cost of raw materials.      

Spinning yarn
Ludhiana is also well known for its woollen garments and hosiery. The city is home to well-known homegrown brands such Vardhman, Monte Carlo, Duke, Shingora and many others. The textile industry employs a staggering 4 lakh workers behind the looms across 6,900 textile units. The textile cluster has a combined annual turnover estimated to be Rs.14,000 crore owing to domestic sales and exports.

A short 20-minute drive away from Pahwa’s massive plant on GT road is the Rs.300-crore Ganga Acrowools plant. Inside, on the shop floor, long woolly strands travel from one machine to other. Amit Thapar is its commercial president and his office looks like a knitter’s paradise. There are wool spools of different colours, with sweaters and gloves arranged neatly. “We manufacture yarn for different purposes,” starts off Thapar. While they have been doing it for 60 years, the plant is just 18-years-old. The company exports 50% of the yarn to countries like Europe, Middle East and Australia and depends on Ludhiana’s domestic market for about for 35-40% of their sales. “We have put our eggs in different baskets; we export to 60 countries,” he says. And that has helped Thapar overcome the dip in local demand dip. “Our business was down by 10% in November. I was expecting far worse,” he says. 

Thapar believes that the slump due to demonetisation is a temporary phase. His business is one of the few that have seen modest yet consistent growth over the years. For instance, summer clothing grew by 4-5% while winter clothing grew 5-7% over the last 8-10 years. His company employs 2,400 workers and the measures he undertook to retain his employees have helped him overcome labour shortages. “We also faced huge problems five years back, but we realised we were not looking hard enough to find a solution,” he explains. Hence, the company has set up a colony for the employees, opened a nursery school in the vicinity and has arranged for LPG allocations to families to create suitable living conditions for them. 

Thapar feels that while the objective of demonetisation may be credible, the implementation has been poor. “If the industry is trying to absorb the fallouts of cash crunch, it is expecting a payback on the other side of it too. We are expecting the interest rates to come down. Since more people will come under tax net, corporate taxes should be lowered. We will be very disappointed if none of these happens at the end of it,” he says.

Sandeep Jain, executive director of Ludhiana’s well-known Monte Carlo brand, is also hopeful that near-term pain will give way to a better time in the future. Monte Carlo, which derives most of its sales from the domestic market, clocked revenue of Rs.620 crore last year. Jain admits to have incurred a 20% loss in business in November, but is hopeful of things improving. “We had to cut down on production and there have been loss of man hours. However, since almost 90% of the money has come back in the system, bank rates might come down in the future,” feels Jain. 

Interestingly Ludhiana was ranked as the number one city (amongst 17 Indian cities) in 2016 when it comes to ease of doing business by the World Bank. But the infrastructure in Ludhiana’s industrial areas is in dire straits with roads full of potholes. Thapar doesn’t take the rating too seriously but feels that they have been lucky. “While the government has been supportive, urban infrastructure is pathetic in Ludhiana. You need 45 minutes to travel six to seven kms and when it rains, the situation worsens,” he says. 

It seems like almost everyone in the industry brings up the issue of poor connectivity and patchy infrastructure, when asked about cluster’s issues. Anuj Jain, director, Shingora Textiles who counts Zara, Tommy Hilfiger, Zara, Mango, Massimo Dutti, Biba and Lola amongst others as the top buyers of their scarves, shawls, stoles and home décor range, says his international buyers often avoid coming to Ludhiana. “We have to go to Delhi because there is no airport here,” says Jain. It has been a long-standing demand for almost 40 years now. Industrialists say that even cities like Adampur and Bathinda, where industrial activity is nowhere close to that of Ludhiana, have got airports. When they approach authorities, the answer is usual — “the Chandigarh airport is barely two hours away.” 

While Jain finds connectivity an irritant, his firm, which employs 900 people with 70% of the business coming from exports, hasn’t really felt the pinch of demonetisation and the cash crunch. While he sits in his office, with one of his scarves wrapped around his neck, he says, “Our absenteeism has been 15-30%, but we had automated our processes eight years before. About 95% of our payments are through electronic channels. So, we didn’t feel the pinch,” he says. 

Labouring towards quality 
If one travelled across Ludhiana’s industrial areas five years back, most businesses would invariably highlight two issues as major irritants — labour shortage and power outages. But the situation seems to have improved due to the addition of thermal and solar plants that have improved the power situation in the state. The Punjab government has actively promoted Punjab as a power surplus state. However, most industrialists say that though the availability of power has improved, it is not cheap. 

While labour shortage, too, isn’t a massive problem anymore, some like Rahul Ahuja, MD, Rajnish Industries, which is into making auto components, is now working on improving the quality of labour. His firm manufactures diesel injection systems, electronics parts and a host of other components. About 40% of his products are exported, 20% are supplied to OEMs in India and the remaining makes its way to the aftermarket. Ahuja tied up with an Italian company and later re-engineered their products to increase its range of offerings. “Significant development in Bihar and employment schemes like MNREGA had led to a flight of migrant labourers; so there was a labour shortage earlier. But now, we are facing a different problem. It is increasingly difficult to get qualified people. The quality of migratory labour (in terms of skills) has deteriorated,” says Ahuja. To solve this problem, Ahuja has resorted to what global manufacturing giants have done — invested in automation. “It’s a costly affair but we are going to downsize our labour by 10-12%. One person’s automation costs us anywhere between Rs.2 lakh-Rs.5 lakh,” he says. His firm currently has 800 employees.

While Ludhiana isn’t on the same level as Gurgaon when it comes to auto components, there are about 200 large units with more than 500 workers and 500 small units with 100 to 500 workers supplying to the auto industry. Ahuja says some of the new customers are sometimes not even aware of their capabilities due to the lack of presence of large OEMs.  “For the specific products I manufacture, my competitor is only in Bangalore, but when I pitch to new customers, they say, ‘You are from Ludhiana, aap bana paaoge parts?” he shares. 

The auto parts industry has been urging successive governments to bring a big OEM to the region. “Government policy can be the catalyst. The bicycle industry developed here because of the steel mills and cheap power, back then,” recalls Ahuja. So, a big OEM can lead to a well-developed ecosystem. While Mahindra had shown some interest in setting up a plant, the government couldn’t allocate the land Mahindra wanted and Ludhiana still awaits the arrival of its first major OEM. 2016 has been a challenging year for the auto component industry here with exports being stagnant and lackluster demand from the domestic market. The companies are waiting for some more clarity on GST before they make investments.

The state will go to the polls in 2017. While it’s anybody’s guess as to who will form the government, all businessmen want official discretion to be eliminated. “What we have realised is that even hand-knitting traders, who are our suppliers, are not averse to paying taxes. But what scares them is the scenario of a taxman visiting their premise and the resultant harassment. So, in that context, GST will be a great reform for unorganised sector,” says Thapar. Avon’s Pahwa is hoping that his sector would attract lowest rates under the GST regime. “We are waiting for GST. Cycles should be put in the lowest tax slab as it is a need-based product,” he says. 

The textiles businesses, at least those that have an exposure to overseas markets, handled demonetisation blues better than the cycle and auto-component manufacturing sector, which were already battling intensive competitive pressure and declining demand. So it is not surprising that they are little more optimistic about the next year. For the bicycle and auto-components industry, dark clouds still hover.