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State Of The Economy 2014

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Lower quantum of orders from OEMs is taking a toll on automobile ancillary companies in the Pimpri-Chinchwad belt

Rajesh Padmashali

One at a time: Most OEMs in Pimpri-Chinchwad have reduced production to deal with the current slowdown

As one cruises towards Pune on the Mumbai-Pune expressway, one cannot help but notice that most hoardings — Samrat Publicity, Kohinoor Advertising, Asha Publicity, Satej Advertising and Shubham Outdoor, among others — are blank. The filled up ones either have banks offering loans or developers hawking villas or apartments. While one extremely aggressive developer promises access to ₹1,000 crore of annual income of 8,000 families on a 1.2-km road, conspicuous by their absence are automobile manufacturers. What could be a better place than the expressway to boast about a new car’s aesthetics, speed or fuel efficiency? Noticeably, it is not so and the prevailing sentiment among automobile manufacturers or their suppliers isn’t any better, as one discovers on reaching Pimpri-Chinchwad, India’s biggest automotive hub outside of Tamil Nadu. For most OEMs here, such as Tata Motors, Force Motors, Mercedes Benz, Volkswagen and Fiat, most of their suppliers are within a 50-km radius.  

Current affairs

Pimpri-Chinchwad and adjoining areas such as Chakan and Ranjangaon are largely dependent on automobiles and FY14 has seen the industry being affected by lower demand and piling inventory. To cope, most companies have cut down production. When we meet Lumax Automotive Technologies’ operations head, Rajesh Dubbewar, he is looking forward to the visit of Kawasaki officials to his Chakan unit for a customer audit. Among his company’s many clients include Honda Scooters, Bajaj Auto, Maruti and Dubbewar quips, “We have had 18 customer-related audits so far in the last 12 months. When there is a boom everybody is busy taking delivery and in a slowdown, customers visit our facility to conduct audits.” That light-hearted observation aside, left unsaid is that during a slowdown all the ‘deep-diving’ done by the customer has a single intent: price reduction. 

Dubbewar is a past master and has been working on process improvements to optimise output. But in a slowdown like this, it doesn’t seem to be enough. “Two-wheelers have been stable; it is the four-wheelers that are causing pain. We are particularly dependent on Tata Motors and General Motors. They are in bad shape.” 

The shopfloor at the Bhosari factory is unusually warm, having just finished a shift. Originally set up to support Bajaj Scooters, it was reconfigured in 2010 to produce passenger car seat frames after Bajaj decided to exit scooters. It now has an annual capacity of 200,000 seat frames and runs a single shift. The plant did work two shifts when the Chevrolet Sail U-VA was launched. “The projection for Chevrolet Sail was 60,000 cars per year, now they are doing 15,000. For Tata Aria, it was around 2,000 per month, now it is 2,000 per year,” says Dubbewar.

It is not just Indian companies that are facing the heat; even a established multinational such as Lear Automotive has found the going tough. With facilities in Chennai, Pune, Halol, Nashik and Haridwar, Lear commands a 40% market share of the 3.1 million passenger vehicle seats market. Unlike local manufacturers such as Krishna Maruti or Bharat Seats, which caters only to Suzuki, Lear supplies to OEMs such as Mahindra, Hyundai, Volkswagen, BMW, Ford, GM, Nissan etc. While it has had some business momentum through the success of XUV and EcoSport, slowing demand coupled with the rupee depreciation has decimated its revenue and profit. In 2013, the seats major lost about $34 million in topline -— it reports in USD). Says Amar Arepalli, managing director, Lear Automotive India, “In 2012, we logged $272 million and were supposed to close at $310 million in 2013. Instead we closed at $264 million. A 2% fluctuation can be managed, but a 12-13% move is a challenge. We also import a lot of fabric and metal components to maintain desired client quality.” As an afterthought, he adds, “After all expenses, if you are not even making 1%, there is no point staying in the business.” 

While Lear’s net margin is certainly above 1%, Arepalli’s remark brings to the fore the various hoops most auto ancillary companies have been jumping through the past year. Power and water costs have jumped by 30%. Inputs costs, be it raw material, labour or consumables, have ballooned. All this would have been bearable if there was a pass through to the OEM, but that is certainly not the case.

Nitin Pendse at Nitin Pressings, a supplier of air and fuel tanks to truck makers such as Tata Motors, Ashok Leyland, AMW and Bharat Benz, says he could bear the margin squeeze in FY13 because of a rise in volume, but in FY14, volume, too, has fallen. “The OEMs have told us there will be a pass-on but the contracts are not in place and our purchase orders have not been amended. The increase, if at all, will only be on steel and not on labour or cost of consumables.” 

Though Lear is also being squeezed by the rise in inputs costs, Arepalli is philosophical. “We can’t blame our customers. They are also dependent on the market, which has slowed down.” Indeed, all OEMs are facing a demand challenge. Prasan Firodia, managing director, Force Motors, says, “Our numbers have dipped; we would have wanted to grow at least 25-30% y-o-y, which we were doing earlier. It is not going to happen this year. If anything, we may end up flat, which in the current situation is not bad.”

Caught smack in the middle of this demand slack is a logistics aggregator such as Peninsular Trucking. In a downturn, a squeeze runs all the way through the supply chain and this time it is no different. Says Faisal Ali, managing director, Peninsular Trucking, “There is over capacity in the car haulage market and the slowdown is being used by OEMs to squeeze the operators. The transporter today is running his truck to pay the bank.” Ali also has seen volume at his container freight station fall from nearly 1,200 boxes a month to the current 800 boxes on the back of falling imports. 

State disinterest

Amidst all this chaos operates DivgiWarner, which has averaged a 12% CAGR in sales and profits over the last five years. The drivetrain systems supplier is mostly influenced by global markets, which aren’t doing that badly, helping it escape the ravages of the current domestic downturn. Needless to say, this niche focus did not happen by accident. The company has developed distinctive technology that ensures it doesn’t buckle under negotiating pressure from OEMs that other commodity suppliers succumb to. The typical net margin for a commodity supplier is 5-6% while for companies with a technology edge, it is 15-16%. “It is our luck and the result of certain strategic steps that we took seven-eight years earlier, but there is no reason why the others should have suffered. India’s bureaucracy is completely disconnected from global markets. If they had a clue, even a hint, they would have acted differently,” says an exasperated Jitendra Divgi, managing director, DivgiWarner. 

Despite export containers leaving Divgi’s plant on schedule, his company has had to frequently deal with late shipments at Nhava Sheva port due to customs strike or congestion. As a safeguard, DivgiWarner maintains a warehouse in the US with some safety stock to avoid any delivery delay. “Pune is Stuttgart (Mercedes), Wolfsburg (Volkswagen), Turin (Fiat) and Detroit (General Motors) combined. There are very few places globally that bring solutions to the automotive industry like Pune, but look at the state of its airport,” he fumes.

Divgi is not the only one agitated about the state of abysmal infrastructure in the region. Anant Sardeshmukh, director general, MCCIA, points out that even the most basic facilities are lacking in and around the Pune industrial belt. “Even well-developed areas like Talegaon and Chakan lack a primary health centre, a fire station and a police station. If there is a major fire at Pimpri, Chinchwad or Bhosari, fire engines from Bajaj Auto, Force Motors or Tata Motors rush to the site.” 

Arepalli feels this abysmal infrastructure also plays a role in curtailing demand. “When you are going down the road, you don’t see an infrastructure that fits into 2020, we are catching up with what we have lost,” he bemoans. We did experience what Arepalli is referring to. As we headed out to Pimpri-Chinchwad after meeting Sardeshmukh, clearing a less-than-half-a-kilometre stretch took us about 40 minutes due to the congestion on Senapati Bapat Road. And this was noon, not even peak morning or evening rush hour. 

The administration’s apathy extends beyond infrastructure to non-refund of monies owed to small and medium enterprises. Sardeshmukh says for the past many years, a substantial amount of VAT refunds have been pending with the government. “I know an SME with a pending tax refund of ₹7 crore. He is not able to use his legitimate money and is borrowing for working capital and paying interest on that.” The grouse is that the government can sit on your money without any penalty whereas when you owe the government there is heavy penalty for untimely payment. Given that the coffers are empty, industry’s demand for a set-off against its refunds have also fallen on deaf ears. 

Then, particularly in the state of Maharashtra, a major hindrance faced by the industry is the Mathadi Act, which makes it obligatory to employ Mathadi workers (load labourers) for any manual work. But, says Sardeshmukh, “The Act is more relevant to workers in market yards, railways and docks engaged in pure manual work and cannot be implemented in an automated factory setting. The Act does not clearly define an unprotected workman and worker unions backed by political parties use this as a front for extortion.”

Coping mechanism

While DivgiWarner seems to be coasting in this downturn, the others have taken their own mitigating steps. Lumax has steadfastly refrained from any staff reduction, but has invested ₹6 crore in a robotics arm at its Aurangabad unit. Dubbewar says not only has the rejection rate fallen, there have also been accompanying savings through lower consumables. At Lear, along with product reengineering, a cost identification exercise was undertaken to narrow down big-ticket items where spending could be curtailed. Arepalli says, “Rental was the foremost high-cost item and then we had excessive salaried headcount. I call it the toll gate theory. If you go to a toll gate, you will always see five people at each gate; do you really need them? We removed all the non-value-add in the system.” After consolidating its facilities, opting for backward integration and cutting down on business spends, Lear is now actively exploring diversifying into electrical and power systems, which contributes a third of its parent’s turnover. Arepalli and his team have also geared up to deal with a worst case scenario and cut additional costs if need be.

Peninsular’s Ali has been grappling with delayed receivables. His standard credit period is 65-70 days and some clients have taken as long as 180 days to pay up. To encourage clients to pay faster, he now dishes out a discount for paying before due date. Late payments have become a fixture even at the OEM level. Says Firodia, “Along with some delays in payments, shutdowns have become a regular practice. We have taken about two to three shutdowns in the last few months.” Force Motors has also put on hold all capex unless necessary and reduced headcount. One unprecedented cost reduction step was the company’s decision to skip the Auto Expo earlier this year. “This is the first year we were not present at the Auto Expo. Even for a company of our size, the cost is substantial. We end up spending minimum ₹7-8 crore.” 

Collateral damage

The biggest dichotomy in this downturn has been that ancillary companies with a higher export contribution have done better. For once, the dependence on a time-tested domestic market is biting hard. The other much bigger fallout is that several weak operators are being forced out of the market. Many suppliers dependent on Tata Motors (market share down from 15% to 6% in passenger cars, FY14 car sales down 40%) are in deep trouble and some of them have shut down. 

Arepalli says if the market does not turn in the next 12 months, the situation could turn dire. “Several small companies that are struggling don’t have enough runway or surplus. They are at a tipping point.” Some of this anticipated collateral damage is already seeping in. At Force Motors, the last couple of months have been relatively better as it has bagged several government and export orders but the ancillary units are struggling as they are not geared to run at full capacity at present. “As a major OEM in Pune has slowed down dramatically, its suppliers who also support me have reduced their staff and working days. Even if we are doing okay, we get affected because the suppliers say, ‘The big OEM is 60% of my capacity, you are 40%, so I have slowed down’,” explains Firodia. 

Going forward, the broad expectation at the Pimpri-Chinchwad cluster seems to be that there will not be much action in the first half of FY15 and any constructive steps will only be announced post the central and state elections later this year. The stock market is counting in good tidings driven by a wide-pervasive belief that post the election, demand will revive. Whether it really will is a tough question to lockdown. As Firodia puts it aptly, “We can only manage our supply chain and product rollouts. As an OEM, we cannot generate 8% GDP growth.”

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