Location, location, location — this key USP that has helped seal many a real estate deal was also the motivating factor for many investors to back companies in the south Indian town of Sriperumbudur. Conveniently located 40 km from Chennai, the town enjoys easy access to the nearest port and airport, making it the ideal destination to export from. More popularly known as the birthplace of Hindu saint Sri Ramanuja and the place where former prime minister Rajiv Gandhi was assassinated, Sriperumbudur — and its industrial belt Oragadam — has turned into a hotbed of commercial activity of late.
The cluster has managed to attract a host of big names from the global automotive and electronics space, with the engineering colleges and technical institutes nearby providing them with a ready talent pool. But the mood in this cluster is hopeful but cautious, as the automotive industry that it services recovers from one of its worst slumps. Case in point: the past year saw marquee investor Nokia — which had led the slow march of electronic majors to Sriperumbudur — finally shut its unit here and moved operations to Vietnam over tax concerns.
During our visit, it is clear that as a cluster, Sriperumbudur is distinctly made up of the Davids (SMEs) and Goliaths (large corporates), with the latter being more content with their lot in life thanks to an assured supply of power, water and access to the government. The Davids, on the other hand, have to contend with 11-14-hour power cuts, rising labour costs and customers driving hard bargains.
Necessity has bred innovation in SMEs, which remain hopeful of a profitable FY16
“In a bid to attract investment, the government assured large corporates and MNCs of easy land acquisition and uninterrupted power and water supply. But the trade-off is that we have to bear the brunt of this arrangement,” says an auto component manufacturer, who didn’t want to named as some of the large corporates are his customers. Manufacturing is a hard enough business to crack in India, more so if you are a small player. The good thing is that this struggle for survival often brings out the best in people.
First among equals
It was actually Hyundai — and not Nokia — that first put Sriperumbudur on the global map. Its combined investment of over $2.7 billion (not to forget the $1.2 billion invested by its vendors) makes Hyundai the single-largest investor in Tamil Nadu so far. “We have seen the roads go from a single lane to six lanes,” says T Sarangarajan, vice-president, production, Hyundai Motor India. “The government has been very supportive and the only thing we really need is rail connectivity, which would take some of the heat off the road network.”
The company is counting on 2015 to be marginally better than last year, even as it plans to hike production from 6.1 lakh vehicles to 6.35 lakh units this year. Spread over 535 acre of land, Hyundai’s twin plants employ around 9,500 workers. Nearly 70% of the company’s vehicle parts supply comes from 77 Indian vendors, while 42 vendors in Korea supply the rest. “We have managed to localise most of our sourcing, which gives us better control over inventory and production planning,” says Sarangarajan.
French glass manufacturer Saint-Gobain was the next company to set up shop in Sriperumbudur, pumping in over ₹500 crore into operations here at the turn of the millennium. Over the years, the company has cumulatively invested around ₹1,600 crore — the largest investment Saint-Gobain has made in a single location globally — to set up two float glass plants that together manufacture 1,500 tonne of float glass each day.
“We wanted a location that is 35-40 minutes away from the city and Sriperumbudur fit the bill. Also, nearly 30% of the glass consumption in the country happens in south India,” says B Santhanam, managing director, Saint-Gobain India. “We have invested much more than we initially envisaged, which shows how happy we are with Sriperumbudur. We only wish that the road connectivity would improve.” Santhanam expects business to be better this year as the automotive and the construction sector starts to pick up and expects revenue to grow 8-10% in CY15.
Nokia, in fact, is one of the few sore spots in this region. After making a cumulative investment of $300 million over the past eight years, the company finally pulled the plug on its Sriperumbudur unit in November 2014. While it once had 8,000 employees working at the unit in three shifts, churning out more than 15 million handsets a month, Nokia’s staff count was down to 1,000 when shutters were downed one last time at the plant. Tax disputes to the tune of ₹21,500 crore with the Indian authorities ruined any prospects the plant had in the company’s deal with Microsoft.
After the closure of the unit, vendors like Taiwanese electronics major Foxconn also suspended operations after making an initial investment of $100 million, leaving nearly 1,700 employees jobless. Ironically, Nokia had paved the way for electronics majors such as Flextronics, Samsung, Dell and Motorola to move to sunny Sriperumbudur.
Dell had pumped in almost $30 million all the way back in 2005 to set up a facility at the Sriperumbudur SEZ. Its plant has the capacity to manufacture 3 million pieces each year and churns out laptops, tablets and accessories. “Since most of our hardware is imported and we assemble the components here, proximity to the port was very important. Being in the SEZ also has its own benefits. We chose Sriperumbudur since it was closer to our customer markets,” says Navneet Kejriwal, plant manager, Dell India. With space at the SEZ filling up fast, the government opened up the Oragadam area — which is located in the same belt — for industrial development, attracting investments from marquee auto majors such as Renault-Nissan, BMW, Daimler, Yamaha, Ashok Leyland and Royal Enfield, among others.
In fact, Apollo Tyres set up one of its largest plants in the country here, investing ₹2,300 crore in Oragadam. Spread over 150 acre, the plant manufactures 16,000 passenger radial tyres and 6,000 truck-bus tyres each year. “We are looking to increase our truck-bus tyre capacity by 50% as we are running at full capacity now. The ramp-up in production has been much faster than we anticipated,” says Satish Sharma, president, Asia Pacific, Middle East and North Africa, Apollo Tyres.
While he is quick to point out that Apollo Tyres is very happy with the support it receives from the government, Sharma says he wishes the Tamil Nadu government were as entrepreneurial as its counterpart in Gujarat, where the company has another plant. However, infrastructure is definitely improving here, albeit a little slowly. To ease congestion at the port — a common complaint here — authorities have set up a privately managed inland container depot at Sriperumbudur that handles customs clearances for both imports and exports, resulting in significant time saving for companies. Most large corporates also agree that along with rising labour costs, availability of labour is also becoming a real challenge in the area, which is why many of them have to go looking for labour in villages 40-50 km away. In fact, most companies ferry workers to and from their homes.
Innovating to survive
It is facilities like these that many of the smaller players can’t afford, though even the ones who do say it has pushed up already escalating input costs. “The salary levels are set by the big guys in Sriperumbudur and we can’t afford to pay those wages. So, we are forced to go looking for people in villages nearby,” says VS Karunakaran, MD, Integral Component Manufacturers. “Unless we provide transportation, there is little motivation for these people to come to work, given the government employment schemes and high agricultural incomes.” Karunakaran is also the president of the SIPCOT Irungattukottai Manufacturers Association, which represents companies inside the SIPCOT industrial estate. His company makes transmission and engine parts for Hyundai, Ford, Caterpillar, the Renault-Nissan alliance and Harley Davidson. The company will start supplying to Renault-Nissan from April 2015, marking the successful culmination of a one-and-a-half-year-long courtship.
“Since we supply critical parts to these companies, our order cycle begins nearly a year-and-a-half before we start production, as our products go through a significant amount of testing,” says Karunakaran. He expects to see a 20% growth in the current year thanks to exports and new clients like Renault-Nissan. Employing over 100 people, his firm clocked revenue of ₹20 crore in 2013-14. Exports form one-third of the business and helped the company tide over the recent slump in domestic markets. Experts say the key to success in export markets is to collaborate with the manufacturer to bring the cost of the product down. In Karunakaran’s case, his company worked with GM in Italy, where he worked with the supplier to bring costs down by 30%. An initial order of 50,000 pieces quickly went up to 600,000 pieces after the collaboration.
Often, the best way to jumpstart growth is to look beyond the industry one is currently operating in —KL Nataraj, director, Nikita Containers, can vouch for this. The company, which was started in 1993, makes tin containers for talcum powder, confectionery, candles and ghee and came under a lot of pressure a few years ago, after FMCG majors started to switch to plastic containers to save on costs and lead times. With revenue at risk, the solution to Nataraj’s problem came from a totally unrelated business. At the time, Nikita Containers was also supplying tins to Chennai-based sweets maker Sri Krishna Sweets. After a request for single-piece tins for special occasions like Diwali, the company realised that there was an opportunity for it to create smaller decorative tins for other buyers.
“We saw an unfulfilled opportunity in decorative tins and came up with an entire range of relevant products,” says Nataraj. Soon after, Indigo Airlines contacted the company for tins to hold its in-flight snacks and Nikita Containers became the sole supplier for the airline. Now, it supplies tins to souvenir company Chumbak and is in talks with another airline for a similar range and with Starbucks for its breath mint boxes. The 60-strong company now hopes its new customers will help it improve on its current turnover of ₹25 crore.
Much like Nikita Containers, the Indian subsidiary of UK-based Severn Glocon, which makes control valves and offers specialist services to the oil and gas industry, came up with an innovative use of its staff to counter the seasonality of its business. The company, which started its operations in Sriperumbudur in 2004, currently employs around 320 people, many of whom are engineers. It takes freshers and trains them in multiple skills, so that when a project is underway, they focus their attention on contract management and use lean periods to design better or new products.
“Our business is seasonal, so we train our employees in all departments to ensure optimal use of resources. This way, they have a better understanding of the business,” says G Kalaiselvan, director, Severn Glocon India. The company, which clocked revenue of around ₹200 crore last year, believes its performance in the current year could be muted given that the oil and gas industry is going slow on projects and hopes to focus on new industries like fertilisers.
In the same neighbourhood in the SIPCOT industrial estate works B Karthik, a second-generation entrepreneur and director of Precision Machine & Auto Components, who has come up with some interesting options to meet his funding requirements. His company supplies machined components for industrial valves, earth-moving vehicles, farm equipment and the elevator industry. When Karthik invests in new machinery for a particular component, he negotiates a 5-year agreement with his customers to help fund a minimum of 15% of the machine cost.
“While the investment is paid back during the agreement, it ensures that the customer sticks with us for a while and doesn’t move to the competition at the slightest price fluctuation,” he says. And the more critical the component, the more likely that customers will be open to such agreements, which is why he chooses segments that require higher investments but feature less competition.
Karthik also points out that most entrepreneurs are not aware of financing options available overseas and end up paying banks interest of 10-11% on working capital. For instance, to encourage the export of certain machinery, the Bank of Japan offers financing loans at 3% under a special scheme to companies who import. Since the payment to the bank is at the end of the loan term period, you can park the amount with the bank’s local partner as a deposit at 9% during that period, thereby making a net gain of 6%. “Many entrepreneurs don’t know how to read balance sheets and leave everything to their auditors. So, when they get into a financial mess, most of them struggle to find a way out,” says Karthik. Thanks to his innovations, Karthik’s 120-strong firm has a ₹60-crore turnover, which he expects to grow by 10-15% by FY16.
Manufacturing is not an easy game and not every entrepreneur in the business is as well versed with its complexities as Karthik. There are no fancy valuations like those in new-age tech businesses and the competition is so intense that there is little margin for error. Almost all the SMEs we meet have taken at least a decade-and-a-half to reach a certain scale (₹20 crore and above), unlike e-commerce companies that race to billion-dollar valuations before you can say Jack Robinson. Which is why we leave the Sriperumbudur cluster admiring the passion and the ingenuity of these entrepreneurs, who haven’t given up despite all the challenges they face. For now, they are hopeful that the coming year will treat them better. If not, you can be sure that they have an ace or two up their sleeves.