The State of Business 2013

Slow and unsteady

Hosur is grappling with 14-16 hours of daily power outage, global slowdown and labour shortage

Tamil Nadu’s third highest revenue-earning industrial cluster, after Oragadam-Sriperumbudur, and Coimbatore, is just 40 km away from Bengaluru. In fact, the balmy weather belongs more to Karnataka’s capital than to Tamil Nadu’s sweltering plains, even though there’s no discernable ascent in the terrain, or it’s so gradual that it feels unnoticeable. But the transformative effects of mechanisation are almost immediately apparent in Hosur, 35-year-old industrial cluster, and one that rose from a sleepy countryside of rocky terrain and small temples perched atop scattered hills.

Today, a six-lane highway cuts through the town that still seems at odds with the marquee names appearing on discreet signages: Titan Industries, TVS Motors, Ashok Leyland, Exide, Carborundum Universal. These massive shrines to modern production share boundaries amiably with more than 1,500 more modest small and medium enterprises. Everywhere, the bustle of middle India gives way to tidy, expansive and tranquil industrial addresses, their irreproachable compounds maintained to withstand international scrutiny and much pride. 

“When we first came here, there were barely one or two trees to be seen — it was barren land,” says Rajesh Khanna, chief executive of the ₹100-crore Wendt (India), and also the head of Carborundum Universal’s ₹156-crore Industrial Ceramics division (CUMI has a 40% stake in Wendt). “Now, we have one of the greenest campuses in Hosur.” Wendt is one of the bigger companies in Hosur, and a leading manufacturer of highly specialised products like diamond and CBN (cubic boron nitride) grinding wheels and tools, and electroplated, vitrified and brazed bonds, 25% of which are exported.  Indeed, Wendt today is a “factory that looks like a resort”, with 4,500 trees and a stress-busting walking track. Most things, though, have changed for worse. If it used to take Khanna 40 mins to commute to Bengaluru (where he still lives) on a single lane road, back when he joined the company as a management trainee in 1982, these days he feels lucky if he can beat the traffic in 75-90 minutes, despite multi-lane highways.

That’s the least of it. Hosur’s throbbing hum is, in fact, ailing. Its rambunctious energy has been replaced with bewildered resignation. What happened? Where did Hosur’s verve go? Outlook Business was here last year and this coverage establishes the continuum in crises, each feeding off the other. Tamil Nadu’s unprecedented power blackouts — 14 to 16 hours daily over the last 15 months — are strangling the Hosur economy. “Reports are saying exports are flat but I think they must be negative; I don’t think data has been collated fully yet,” says LKM Adhi, managing director of the ₹65-crore Elkayem Auto Ancillaries and the ₹5-crore Knitvel Needles, and former president of the Hosur Industries Association.

Elkayem is a supplier to TVS Motors, Ashok Leyland and TAFE. Adhi expects its topline to decline by 10-11% in 2013, and bottomline to be negative. Knitvel manufactures specialised hosiery needles and remains stable, though Adhi has dropped plans of investing in welding robots, and says of the bigger picture, “Others may be afraid to say it aloud, or indulge in wishful thinking, but I personally believe we are in recession.”

The ground-up view of Hosur is brutal. Business is down 30-50% in some segments. Enterprises supplying to the auto industries are the worst hit; segments represented by fewer companies in the Hosur cluster (pharma, aluminium dye casting, precision components) are in better shape; only large industries and some export units have been spared production setbacks, and nobody is expanding. “This is a year in which most of the industry segments are witnessing a downtrend,” Khanna says. “Business is down, especially in the auto and engineering segments, where Wendt has a major customer base and is also affected. These two sectors are among the main drivers of the Indian economy and everything cascades down from them.”

Wendt, which is relatively low power-intensive, is less affected than CUMI’s Industrial Ceramics Division, a high power-intensive unit. CUMI's furnaces and kilns run round the clock at lower capacities, and the long hours of power shutdown and rise in fuel costs have severely impacted margins.

India appeared to recover quickly after the 2008 meltdown in the US but the decline that became evident in the second half of 2012 is here to stay, industrialists say — they do not foresee any improvement at least for the next 18 months, and are not sure what will change things afterward. “Sectors like pharma will stay inelastic or even be positively skewed because their demand can only increase in times of stress but, everywhere else, from now on, growth is going to be very selective and difficult,” feels S Nadimuthu, vice-president of the Hosur-based R&D centre for the ₹350-crore Puducherry-headquartered Snam Alloys, which supplies highly customised and value-added ferro alloys to foundries.

Where’s the government?

Hosur’s growth has been unregulated and haphazard, the town’s infrastructure (roads, public transport, healthcare) is in shambles, the police force numbers half its sanctioned strength, and industrial pollution and violent trade unionism in the early days forced Hosur’s industrial pioneers to learn about the flip side of industry the hard way. ESI membership is well-established now but groundwater tables have fallen below 500 ft, there is no power to pump what water there is, and cost per 1,000 litres of water delivered by private tankers has gone up from ₹25 to ₹40 (within the Sipcot industrial estate) and ₹60 (outside). 

“What the government owns, it should maintain but it does not,” observes B Senthilnathan, chief financial officer, First Steps Babywear, a ₹250-crore export unit with three factories in Hosur and three in Bengaluru, supplying fine baby clothes to predominantly European buyers, including some large-format retailers. Here, too, orders have slowed down, there’s pressure on pricing and margins are down a couple of percentage points — from 11% to 9-9.5%.

First Steps is a niche player more affected by volatile forex and cotton prices but Senthilnathan makes a pertinent point, “A facilitating environment is missing. Government schemes are well-meant but their execution is shoddy and cumbersome, and the paperwork endless. Data is captured but not used. No government interface works without money. Corruption is rampant. In fact, corruption is a cost and a major reason for delays, which also adds to costs.” Shipping bills, for example, can be paid online but they still have to be assessed and inspected. In any case, Senthilnathan feels, business will have to pay the price for the volatility that comes with globalisation. 

All these tangles appear manageable compared with the monster power cuts that haunt Hosur 14-16 hours daily. Outside Vijayap Enterprise, a somewhat grimy single-room tiny company manufacturing steel scrap and wire for orders from the UK, the grandest thing in sight is a huge green-and-white diesel genset by the entrance. “That genset cost ₹5 lakh for a ₹50 lakh enterprise, and then there is the cost of diesel,” says K Sampath, immediate past president, Hosur Small and Tiny Industries Association (Hostia). “It upsets all the margin calculations.

Contracts have to be signed and honoured without knowing how the costs will play out.” Industry all over Tamil Nadu shut down to express “anguish over the unfair treatment” meted out to them vis-à-vis Chennai on January 9, because the industry-rich state capital has been spared power outages of more than two hours a day. There was zero response from the administration. The days of state governments listening to industrialists are long over, older owners say. They feel governments don’t care anymore.        

Goliath versus David

Meanwhile, big companies arm-twist smaller players to keep their margins in these difficult times. “They pass on the cost by reducing the component cost, and they do it every year,” says DV Ramessh, owner of the ₹1.5 crore-Srimaan Engineering Works, an industrial fabrication and machining enterprise. “At every level of size, survival is achieved by hitting the level below. Micro industries are treated worse than coolies. Tell us, how can we face the power problem on margins of 1%-3%?” 

Desperate bidders for scarce contracts engage in fierce face-offs. Hostia says more than 500 units have shut down in the past nine months, and others are being advised planned closure to avoid liability. The association is appealing to banks for postponement of repayment schedules, or interest write-offs, because the power cuts have led to cash losses and many companies are not able to pay.

Sampath also points out that the very definitions of ‘micro’ (plant and machinery worth less than ₹25 lakh) is redundant when basic computers and numerical control machines required for high-precision jobs in a global market cost about ₹35 lakh, quite apart from the automation required for the company’s core work. He adds, “Blanket schemes covering MSMEs are not effective since different categories of entrepreneurs need different kinds of support.” 

Hosur, like many other parts of Tamil Nadu, faces labour shortages, and government schemes like the MNREGA have exacerbated the problem. “I am not complaining against the scheme but workers don’t have to earn their wage anymore — they get minimum wages plus food for doing nothing and you can see alcoholism among men on the rise in the surrounding villages,” says Sampath, who also owns Esjay Engineering Works, an ₹80 lakh-industrial fabrications unit. “Ironically, small enterprises such as ours don’t get paid for 90-120 days.” Companies like First Steps have buses ferrying labour from villages 50-60 km away. 

Is Hosur still a good place to do business? Yes, everybody agrees with the loyalty born of commitment. In fact, “Hosur has potential to attract huge investment in the IT sector,” says SN Eisenhower, chairman, CII Chennai zone, and director, operations, Saint Gobain Glass. Hosur remains a big success for the government, and its proximity to Bengaluru will continue to be an impetus. But with economic growth at a 10-year-low of 5%, the heartbeat of this industrial hotspot is skipping a beat every now and then before pulling itself together to march again. Not because it feels fit enough but because it’s the only way to survive.