On Valentine’s Day this year, the quiet, conservative town of Chakan, about 40-odd kilometres away from neighbouring university hub Pune, was abuzz with activity, with a barrage of vehicles choking key junctions. No, not because local political outfits were protesting the Hallmark-isation of a festival meant to commemorate lovers but because prime minister Modi himself had descended on the town to inaugurate General Electric’s (GE) brand new manufacturing facility there.
Spread over 67 acres and set up with a total investment of ₹1,200 crore, the facility will be utilised to fund GE’s exports. The company plans to dispatch 50% of the unit’s output to its global factories, where its products will be used in the power sector, oil and gas and transportation industries. The unit, which will create 1,500 jobs, will later be utilised to create new-generation aviation engine components and sub-assembly for rail locomotives.
For Modi, the St Valentine’s Day gala came close on the heels of US president Barack Obama’s second India visit, a diplomatic success. Further, it toed the prime minister’s Make in India line, a call for global players to invest in manufacturing facilities in the country. Ecstatic, Modi assured global investors of the support they needed to manufacture competitive products and invited them to tap into the vast Indian talent pool.
Despite a slump in auto sales, firms are looking forward to an improvement in FY16
This call to action was music to the ears of many in the beleaguered Chakan industrial area. The cluster covers an area of about 3,000 hectare and is home to key automotive OEMs such as utility major Mahindra & Mahindra, Bajaj Auto, Mercedes-Benz and Volkswagen, along with key auto ancillaries such as the Anand Group, Lumax Industries, the Minda Group and Autoline Industries.
Barring Mercedes-Benz, a key player in the luxury segment, most OEMs have had a low-key 2014 as consumers shied away from buying cars and commercial vehicles. While industry experts have predicted the market to have bottomed out many times over since the beginning of this fiscal year, the sector has shown no indications of a revival. Naturally, key players have been under immense pressure.
But, for now, OEMs are planning ahead and so are auto ancillaries, who have chosen to consolidate operations by investing in technology during the ongoing slowdown. “We have utilised this time to make quality improvements, manage costs and to plan for the future,” says Vineet Sahni, CEO, Lumax Industries.
“Despite the setbacks, sentiment is positive and we are waiting for the next phase of growth — which we believe will start towards the third quarter of this fiscal, around the festival season — to begin,” Sahni explains. Customers of companies like Sahni’s in the Chakan belt haven’t shown any growth last year, with capacity utilisations for suppliers falling to 70% in FY14 from 90% a year ago, though that drop could be attributed to the cyclical nature of the business.
Key lighting supplier Lumax Industries is focusing on investing in new technology and a design studio at Chakan. This step is in anticipation of new product launches by most of the OEMs in the area, supplying to which should keep the company above water over the next five years.
While most auto ancillaries and OEMs in Chakan are plodding along, German luxury carmaker Mercedes-Benz has bucked that trend. In 2014, the company managed to top its segment, selling the highest number of cars since its entry into the Indian market in 1994. Mercedes-Benz sold a record 10,201 vehicles in 2014 — a 13% y-o-y growth — and aims to double production in 2015, giving the company the distinction of having the largest installed production capacity for any luxury carmaker in India. “We are satisfied with the infrastructural development in Chakan. There still exists scope for improvement but the road infrastructure and power and water supply have improved significantly over the last few years,” says Eberhard Kern, MD and CEO, Mercedes-Benz India. “We have a ready pool of blue-collar employees at hand for our facility and 0% attrition. Many of our workers have been with us since inception,” he adds.
Not every company has had the good fortune of watching its growth numbers head north. By the end of FY14, the overall passenger vehicle segment had regressed by 6% to 2.5 lakh vehicles as compared with FY13. Passenger vehicle sales, which account for the largest chunk of the auto segment, declined 4.7% to 17 lakhs in FY14. Sales were muted in the commercial vehicle space as well, which is a clear barometer of economic activity, and commercial vehicle volumes declined 20% to 632, 738.
Two-wheeler sales were the only saving grace in this segment, growing 7.3% to 1.48 crore vehicles in FY14. The going has not been good for foreign carmakers either, with most of them — General Motors, Ford and Toyota among them — struggling to crack the success formula in India. According to filings with the Registrar of Companies, the ministry of corporate affairs, accumulated losses of the Indian units of foreign carmakers jumped 65% to ₹11,350 crore in FY14.
Chakan is not the only cluster that is bearing the brunt of the extended slowdown in the auto sector. As is the case with most auto component makers and ancillaries in the area, companies in the Aurangabad cluster are largely dependent on Bajaj Auto for their business. Around 70% of their revenue comes from Bajaj Auto and its second-tier dealers, Endurance Technologies and Varroc Engineering. The situation is such that Bajaj sneezes and Aurangabad catches a cold.
Over the past few months, Bajaj Auto has ceded market share to rivals such as Honda and this lacklustre performance spilled over to January 2015, with total sales declining 9% y-o-y to 288,746 units. Motorcycle sales faced the brunt of the slowdown, with sales dropping as much as 12% to 246,955 units in January 2015 from 281,390 units in January 2014.
To deal with such upheavals, companies have put in several safeguards at the shop-floor level. In the fluorescent lighting of her factory, Ragini Kandakure, MD, Dhananjay Enterprises, explains the specifics of a technique called total productive manufacturing that the company is using to enhance productivity. “This is just one way to keep our inventory in check. Our production depends on the fluctuating demand from Bajaj Auto. At the moment, 70% of our revenue comes from the company,” she says.
With the slowdown in the auto industry, smaller companies in the region serving Bajaj have to look beyond Aurangabad. Says Rajesh Mandhani, partner, Shree Pressings, a ₹28-crore company dealing in auto components, “We would do much better if we were less dependent on Bajaj. This is why we’re trying to diversify our business by entering the white goods segment and supplying to telcos.” Arjun Gaikwad of the ₹5-crore Jijai Industries has installed a 3D printing machine to put together some of the intricate clutch components the company makes. “We make the components when demand arises,” he adds.
We get a glimpse into the infrastructural challenges the town faces on the backbreaking ride to Waluj, 13 km from the city. Says Kandakure of the ₹65-crore Dhananjay Enterprises, which deals in clutch components and sheet metal parts for automobiles, “Though our company is growing at a 20% clip, there are several issues hampering growth prospects — the state of the roads here being the most contentious.”
Agrees Mandhani, “Nearly 70% of our revenue comes from outside Aurangabad and there have been instances when our products have been damaged on the way.” Last year, the Marathwada Association of Small Scale Industries and Agriculture wrote to MIDC about the state of the roads, however, no action was taken.
The tussle between the state-run MSEDCL and other private power players has left industrial units in Aurangabad reeling from the shock of frequent power tariff hikes. Currently, units in Waluj pay around ₹9-9.5 per unit to MSEDCL, while players in Chikalthana are paying ₹7.25 per unit. Several companies have had to shut down in the recent past due to their inability to keep up with the rising tariff. Says Milar Plastics founder Milind Pohnerkar, “In an industry that is so heavily dependent on power, we had to be on our toes to keep up with rising power costs. After running losses for two years in a row, I was forced to shut my unit down.”
The rise in power tariffs has taken its toll on the stipend given to blue-collar workers — and labour is a contentious issue. Local political outfit Shiv Sena’s interference with immigrant populations has led to workers from UP and Bihar leaving the region en masse. Says Shinde, “Local labourers don’t work as hard as those from UP or Bihar. We have brought in machines to reduce our dependence on labour as much as possible.” Kandakure adds, “It is not easy retaining labourers in this competitive environment. Our factories require skilled labour and indiscriminate poaching of workers is a common practice, which adds to our training costs.” Sridhar Navghare, MD, ASR Engineering, adds, “We have to pay workers about ₹12 lakh each month to generate turnover of ₹1.2 crore.”
Waiting for achche din
Rising costs, the slowdown in the auto industry and poor infrastructure have all taken their collective toll on the Aurangabad cluster, with most unit owners turning their eyes towards PM Modi’s promise of a manufacturing boost. “Hopefully, we will be able to increase margins when we start supplying to companies outside Aurangabad as part of Make in India,” says Mandhani. For now, everything is running on hope and faith. Shinde, adding, “The recession has continued with the change in government. While market sentiment is positive, there have been no physical signs of change.” Given the general gloom in the auto industry, for both Aurangabad and the PM’s very own Chakan, the road to success seems both steep and long-winding, at least for now.