playing catch up | Outlook Business
Home  /  Specials  /  State Of The Economy 2014  / Playing catch up | MAR 29 , 2014

Photographs by Bhupinder Singh

State Of The Economy 2014

Playing catch up
The worst year in a decade for the auto sector has cast a shadow on units in Pithampur

Himanshu Kakkar

Auto-bots: Pithampur first found fame as an automobile cluster, with five big auto firms setting up shop here in 1984

It’s a scene straight out of a Transformers movie. Lined up outside an office building is a row of massive, bright yellow vibratory compactors and backhoe loaders with their huge black jaw buckets extended, as if an Autobot-Decepticon battle of epic proportions is about to commence. But these are just simple road rollers and excavators and Pithampur is actually very peaceful, a smiling Sunil Kalyankar assures us. “I have worked in Gurgaon-Manesar in the past. This is a much calmer place — unrest is unimaginable here,” says the head of manufacturing HR, Case Construction, which makes these beasts here at Pithampur, in the heart of Madhya Pradesh.

Case, the construction equipment arm of Fiat, came to India and Pithampur in 1999 through a joint venture with L&T. This plant, spread over 40 acres, belonged to L&T until 2011, when the Indian company withdrew from the partnership and the city. Case, though, has no intention of going anywhere. “We plan to increase capacity from 450 to 700 units a day. And it’s going to happen right here,” says Kalyankar. 

That’s quite an endorsement for an auto and industrial cluster that’s never become as famous as Manesar and Pimpri. 30 km from Indore, Pithampur came into being in the middle of the Licence Raj when five companies — Eicher (now Volvo Eicher), Kinetic Honda (under Mahindra Two Wheelers today), Hindustan Motors, Bajaj Tempo (now under Force Motors) and L&T (now Case) — were issued licences in 1984 to set up industrial units here. Digvijay Singh, the then MP chief minister, is said to have been instrumental in pushing for the area’s development and bringing those companies to the region. In the same breath, he is now blamed by many for the state’s and the region’s industrial stagnation since. 

Since 1984, roughly ₹80,000 crore has been invested in the region. Auto and pharma are the key industries and there are 700 industrial units here, of which 150 are large and medium sized. The Indore SEZ is also located in Pithampur and includes 42 companies, of which 32 are operational. Ask Manish Singh, managing director of the Madhya Pradesh Audhyogik Kendra Vikas Nigam (MPAKVN), the state government’s industrial body for facilitating industrial development, and he believes that things are looking a lot better now. “In nearby Gujarat and Maharashtra, land and labour is becoming costlier and there are other issues, such as power and water. So, in the near future, many companies will head towards MP.” 

Already, says Singh, his office gets regular enquiries about industrial plots. The Delhi-Mumbai Industrial Corridor also proposes to develop Pithampur-Dhar-Mhow as an investment region, creating a multi-modal logistics hub at Pithampur. Of course, all that is still on paper, and nobody is really counting on it just yet. 

Still, anticipating an increased demand, MPAKVN is developing two industrial areas near Pithampur, 145 hectares at Ujjaini and 180 hectares at Sardarpur. Land has been acquired at both places, Singh adds. And, certainly, it will be much cheaper than many other industrial clusters. Industrial land at Pithampur proper is currently at around ₹1,500 per sq m, while the new developments at Ujjaini and Sardarpur are available at just ₹950 per sq m. Compare that with the Chakan region in Maharashtra, where the current rate for industrial land is ₹3,325 per sq m. Sounds too good to be true? Well, there is a problem. Or two. 

Derailed 

Power, water and industrial relations don’t bother businesses here much. But connectivity does, especially rail linkage. Sitting in his office at Indore, Gautam Kothari, president of local industrial association Pithampur Audhyogik Sangathan (PAS), has a valid grouse. “At least give the state the national average of 19.46 km of rail line per 1,000 sq km. Despite being in the centre of the country, we have just 16.07 km per 1,000 sq km,” he points out. A more pressing concern is the lack of a direct rail link with Mumbai. Currently, consignments from Indore and Pithampur have to be moved 123 km by road to Ratlam before they can reach the financial capital. Thankfully, road connections are good. Pithampur falls on NH79 and is close to NH3 (the Agra-Mumbai highway). 

In September 2008, the prime minister laid the foundation stone for a rail link between Indore and Dahod for a direct connection with Mumbai; the project was then supposed to be completed in five years. “In six years, there’s been only 7% progress on that line,” says Kothari.

Concurrently, the railways is also to develop feeder rail linkages in the area, convert the Indore-Khandwa link from metre gauge to broad gauge for connectivity with Mumbai and construct a link between Dhar and Chhota Udepur, for connectivity with south Gujarat’s ports (Hazira, Dahej and Maroli). Also on the anvil is the augmentation of Indore airport as a modern, international airport. But all these are some time away. 

Bridging gaps

“We have concentrated in one geography and not on spread. That is one reason that our financial performance is better,” says Vinod Aggarwal, CEO, Volvo Eicher Commercial Vehicles (VE). VE is the largest auto major in the region, with seven units already operational in and around Pithampur. The company makes trucks and buses and even supplies parts to Volvo International from here.  

Aggarwal may sound content with the cluster but other auto players point out the situation is far from perfect. Says Nirmal Matharu, senior vice-president and plant head, Mahindra Two Wheelers, “There aren’t too many OEMs here. So, the problem is in terms of getting component suppliers here. They don’t come here for the lack of viability in terms of volumes.” Mahindra sources 60-70% of its components from outside Pithampur, which is the case for most other companies in the region. Why is Aggarwal so satisfied, then? “We have 50-60 dedicated suppliers and we assure them volumes.” 

PAS’s Kothari has spent his life in Pithampur, so he gets straight to the heart of the matter. “For decades, our tax policies were faulty. We imposed 13.8% tax (12% sales tax and 1.8% surcharge), which deterred industry from coming to Madhya Pradesh. As a result, the vendor base was not created. That tax regime was changed only five years ago.” Now, though, it seems that Pithampur is busy playing catch-up. “Most of the enquiries I am getting are for 1-15 acre size plots, and are from component makers,” says MPAKVN’s Singh. Already, some big investment plans have been finalised: ₹700 crore by Mittal Corp; ₹100 crore by auto ancillary Caveo Pinnacle; and ₹65 crore by Shakti Pumps. 

Deep impact

This has been the worst year in a decade for the automotive sector, so weak numbers by auto companies in Pithampur (more on that in a bit) don’t come as a surprise. But even others are complaining. 

Raminder Chadha makes corrugated cardboard boxes for multinationals such as Hindustan Unilever, Cargill and Wilmar. His company, Worth Peripherals, sold ₹100 crore worth of such boxes last year, an improvement over the previous FY12’s ₹90 crore. But, says Chadha, “The growth in turnover can be attributed to rising inflation. Packaging material costs have gone up by 25% in the past three years.” In March 2012, an optimistic Chadha doubled capacity at his Pithampur plant from 15,000 tonne a year by adding another unit. But of his installed capacity of 30,000 tpa, he has been able to utilise just 20,000-22,000 tpa. That’s not his only complaint. “The cost of funds for multinationals, against which companies like mine are pitted, is very low, whereas we get money at high interest rates.”

Sitting at his small pharma plant, Darshan Kataria, founder of Vindas & Torino group of companies, voices similar concerns. “If Vijay Mallya buys Yuvraj Singh for ₹15 crore for his IPL team, there are no questions asked. But if a small scale unit end up defaulting, the banks bay for its assets.” Apart from big pharma players such as Cipla and Lupin, which have operations inside the SEZ, there are also about 75 small and medium pharma companies in the area. Kataria’s business, for instance, is now worth about ₹6 crore — 95% of its production of formulations (nearly 30 million injections and 75 million tablets per year) is exported, mostly to Africa. But business isn’t doing too well — Kataria is closing FY14 with a 10% drop in turnover. “Ten years ago, there used to be 400 pharma units in the state. Around 100 have now shut down due to crippling regulations and conditions that encourage the growth of bigger players,” he says. 

Coming back to the auto sector, matters aren’t as bad, but they’re nothing to write home about, either. Against a capacity of 1 million two-wheelers, Mahindra Two Wheelers churned out just 110,000 units in FY13 and 225,000 in FY14. “Motorcycle growth is almost flat, but the scooter segment is giving us 10-12% growth,” says Matharu. VE’s Aggarwal also admits to being off peak. “We are still producing 40,000 units [of trucks and buses] per year, but down from a peak of 48,000. Still, we are relatively better off than others. If industry declined by 50%, we declined by 25%.” Case, too, is reporting lower numbers compared with FY13. “We are making 250 backhoes per month against 350 per month in FY13,” admits Kalyankar. 

But even the sluggish market is not preventing some of them from expanding. “We would have invested around ₹1,900 crore in Pithampur and surrounding areas in the past five years,” says Aggarwal. “There was the temptation to move to Pantnagar. But we have not missed any opportunity by sticking to this cluster. We have been able to produce the right quality at the right price here.” The ‘temptation’ at Pantnagar was the 10-year tax holiday offered by the Uttarakhand government, but Pithampur’s attractions — adequate power and water and cheap land for future expansion — proved stronger, he explains. 

The right fit

But those pluses aren’t enough to attract the right talent to Pithampur. And the shortage of skilled labour is a complaint across the board. “Being a B class city, we are not able to attract the best talent,” says Matharu. There is no dearth of engineering colleges in and around Indore — rather, the problem can be traced to a shortage of ITIs and polytechnics. “Industry needs one engineer behind 60 factory workers. But ironically, there are more than 50 engineering colleges here and only two or three ITIs,” points out Kothari. 

As in every other industrial cluster, here, too, the MGNREGA is frequently blamed for the shortage of unskilled workers. “We are resorting to more and more automation to compensate for the lack of labour,” says Chadha. If Worth Peripherals has turned to machines, Kalyankar feels internal training can still solve the problem. Case has 350 permanent and 350 temporary workers. “We do internal training and skilling for all of them. Also, we have improved compensation by 10-15% over what they were drawing under L&T to retain them,” he says. 

Unreal estate

On the way from Indore, one comes across quite a few new townships. Fancy gates, with fancier names such as New York City and California Apartments, dot both sides of the bypass leading to Pithampur. Take a closer look, and you would realise occupancy in these apartment complexes is very poor: executives at Pithampur industries prefer to stay in Indore with access to schools, hospitals and modern amenities. 

Still, the potential for growth in this area is unmistakable. “It is centrally located in India. We can source and distribute across the country, which means logistic optimisation advantage,” points out Aggarwal. The MP government seems to agree. It is already working on developing the Indore-Pithampur belt by creating a readymade garment cluster, pharma and herbal cluster and a namkeen cluster here. “We have already acquired land for all three clusters. Tenders are out for the garment and pharma clusters. The namkeen cluster will be developed on 12 acres in Indore,” says MPAKVN’s Singh. If all goes to plan, those investor flats may soon find potential tenants queueing up.

Here's your chance to read the latest issue of Outlook Business for free! Download the Outlook ​Magazines app now. Available on Play Store and App Store
On Stands Now