Braving Adversity

A metallic thudding reverberates through the shop floor as we enter Autocomp Corporation’s plant in Chakan, Pune. Workers, dressed in blue uniforms and helmets, go about their task with rhythmic precision, as the assembly lines chug along. Amid the cacophony, Rajeev Panse, managing director, tells us with a tinge of pride that their business grew by 28% in FY18 — operating income for FY17 was Rs.3.46 billion. The company, established in 1983, makes ancillaries including metal body parts, assemblies, chassis and seating structures for big automakers such as Tata Motors, Eicher Motors and Ashok Leyland. “We are growing faster than the industry,” adds an upbeat Panse. 

Autocomp is just one of the many ancillary firms housed in Chakan. Located about 30 km from Pune, this town has one of the biggest auto clusters in India. Spread across 8,500 acres, the cluster houses about 650 micro, small and medium-sized enterprises. Further, business here is bolstered by the presence of larger auto ancillaries, including Lumax Industries, Spark Minda and Varroc Group, as well as auto giants such as Ashok Leyland, Bajaj Auto, Mercedes Benz and Mahindra & Mahindra.

Take for instance Mercedes-Benz, which has had a plant in Chakan since 2009. “We have an aggressive localisation strategy, and we locally produce nine key models including the Mercedes Maybach S 560, S-Class, Long Wheelbase E-Class, C-Class, CLA sedans and the GLA, GLE, GLS and GLC SUV from our Chakan plant,” says Martin Schwenk, MD & CEO, Mercedes-Benz India.  The production facility has seen an investment of Rs.22 billion and has the largest installed production capacity for any luxury carmaker in India.

“Presence of larger automakers means that their knowledge and expertise are transferred to their supplier base,” states Amit Dhole, director of United Gaskets and Components (UGC). The company, which has a turnover of Rs.400 million has been operating out of Chakan since 1994. 

Ancillaries from the adjoining cluster, too, agree that Chakan’s business environment is conducive. Kakasaheb Sakhare, promoter of Aarti Engineering located in Bhosari, says “Bhosari and Chakan are very helpful for business. There is availability of skilled labour and our clients are also close, thereby reducing transportation cost. We have been witnessing growth each year,” says Sakhare. His firm is a supplier of toolroom works for Tier-1 clients in the four-wheeler and manufacturing segment in Bhosari, Chakan and Talegaon areas, and has a turnover of Rs.1.5 million.

However, much like the tepid winter sun during our visit to Chakan, business in the country’s auto sector has been lukewarm too. Despite the 42-day festive season, sales of automakers in India have remained flat owing to a range of issues such as higher fuel price, introduction of a new insurance policy and liquidity crunch. The country’s top five carmakers — Maruti Suzuki, Hyundai Motor, Tata Motors, Mahindra and Mahindra, and Honda Cars — sold a total of 219,722 vehicles in November, as compared to 219,746 units in the same period last year. 

And the symbiotic relationship between automakers and their ancillaries means that sales have declined for the latter as well. Sakhare acknowledges that while they had strong sales growth in the first eight months of the year, there has been a slight slowdown in demand, and the next four months will be difficult. However, he isn’t pessimistic yet and is banking on the second half of 2019 for rebound in sales.

Interestingly, Sakhare is among the few SME’s who chose to speak on-record. Most SME’s that Outlook Business reached out to, refused to admit any adverse impact on their order book and declined to speak. Anant Sardeshmukh, former Director General and Member of the Board of Mahratta Chamber of Commerce Industries and Agriculture (MCCIA), explains that it is difficult to stay insulated when you are connected to OEMs. The product cannot be sold directly to market, so the “prospects of the segment (auto makers) become prospects of these (auto ancillaries) companies too,” he says. But the “cyclical slowdown”, he adds, hasn’t dampened the spirit of SMEs in the cluster as they have seen several such up-cycles and down-cycles over the years. 

Self-sustaining Ecosystem 

Chakan’s evolution as an auto hub began somewhere in the early 2000s, owing to saturation at Bhosari MIDC and the unrealistic octroi charged by the Pune and Pimpri-Chinchwad municipal corporations, explains Lokendra Singh, MD of Chakan-based Ross Process Equipment, which supplies to industries like paints and coatings, adhesives and sealants, pharmaceuticals and battery makers. Chakan’s proximity to Mumbai, Nashik and Pune is also touted to be its USP. 

“We expect the situation to improve further, with the state government’s decision to green light an airport at Purandar tehsil of Pune district,” says Tarang Jain, MD, Varroc Group, which supplies auto parts to Tesla and has an impressive client base comprising two-wheeler majors such as Bajaj Auto, Honda and KTM. It has two plants in Chakan, with around 6% of consolidated sales coming from these units. 

Vineet Sahni of Lumax Industries states that the presence of Lumax in Chakan goes back to 1980s. The company is a leading supplier of lighting solutions for automobile manufacturers. “For both Lumax Industries as well as Lumax Auto Technologies, we have several vendors and Tier-2 suppliers with whom we closely work to not only meet quality and zero-defect parameters, but also to improve operational standards,” he says. 

Another ancillary major here is the Rs.9.7 billion Spark Minda which produces about 4 million units per year at Chakan. It supplies instrument clusters and sensors for clients such as Ashok Leyland, Tata Motors, Volvo, Eicher, Bajaj, Honda, Yamaha and Escorts. Suresh D, group chief technology officer, Spark Minda, says that the advantage of operating out of Chakan is proximity to customers. “We leverage the presence of suppliers and have about 100 suppliers in and around Chakan who supply casting mould products and plastic products. When we deal with smaller suppliers, it is more about capability building for them. That enables us to develop the product as per our processes,” he explains. 

Similarly, Bosch has about 2,000 suppliers, which it refers to as ‘business partners’, supplying to its manufacturing plant in Chakan. “We are all in the same boat. If we succeed, our suppliers also succeed. That is the mindset,” says Andreas Wolf, joint MD, Bosch. 

Local Woes

While there might be support stemming from larger players, SMEs have to deal with a whole range of issues on the ground. SMEs who chose to speak off the record revealed that implementation of Goods and Services Tax (GST) wasn’t smooth and hampered sales in the initial eight to ten months. Dhole says that compliance for GST is also quite tough. “If all that wasn’t there, it would have been easier for business,” he says. 

Even as the ease of doing business hasn’t improved, infrastructure also remains a major concern. Sardeshmukh laments that infrastructure is not keeping pace with expansion of industries in the cluster. “The commute from Pune to Chakan and Bhosari is tough, as people often get caught in huge traffic jams,” says Sardeshmukh. Panse concurs and states that, while industrial areas are well-developed, “arterial roads connectivity is a challenge. Also, while power supply has stabilised, the cost has more than doubled.” 

The high cost of power only further adds to SMEs expenditure. “Power cost in Maharashtra is very high compared to other states. Hence people have started moving out of this belt to Andhra Pradesh and other belts,” says Dileep Batwal, president, Chakan Industries Association. The current average billing rate (ABR) of power for big industries is Rs.8.63/unit in Maharashtra. Reportedly, the Maharashtra State Electricity Distribution Company Limited wants to increase it to Rs.10/unit. Meanwhile, the ABR in Karnataka is Rs.7.4/unit, Chhattisgarh is Rs.7.3/unit and Telangana is Rs.7.5/unit. 

A high crime rate, illegal encroachment of land and absence of support (in terms of loans and exemption from taxation) from the government in tough times are some of the other issues that Batwal highlights. “Profit margin is so low that people have started shutting shop. The government promotes ‘Make in India’. The policy is good at macro level. But ground support is missing,” he says, adding that the number of SMEs in Chakan have reduced by 15% in the past two-three years. 

In his conversation with SMEs, Batwal says that the unanimous demand is for reduction of taxes on Maharashtra Industrial Development Corporation’s (MIDC) plots, development of infrastructure and a cap on power tariffs. “In the absence of government aid, the situation is such that only if larger companies give business, SMEs will survive. Otherwise they will have to shut shop,” states an agitated Batwal. 

Tough Ride

Even as local issues impact business of SMEs adversely, macro conditions are far from improving for small as well as big auto players. The numbers from September bare the woes of passenger as well as commercial vehicle segment. Sales hit a three month low of 197,124 units in September. The 5% drop on year-on-year basis was attributed to rise in crude price, liquidity crunch and a high base. Introduction of a new insurance policy mandating buyers of new cars and two-wheelers to purchase upfront insurance cover for at least three and five years, respectively, also impacted demand. 

Commercial vehicles, too, were impacted by global headwinds. While commercial vehicle sales continued to grow in September and October, sales of top four manufacturers — Tata Motors, Ashok Leyland, Volvo Eicher, and Mahindra and Mahindra — dropped 20% to 20,324 units in November.

Despite driving against domestic and global headwinds, Tata Motors maintain that better days lie ahead for the commercial vehicle segment. In November and December this year, they cut down production at the Chakan plant by 10% and 20% respectively. “At the moment, there is a drop in demand owing to various reasons. But we are bullish about the next quarter and are gearing up for that demand,” says Satish Borwankar, ED & COO, Tata Motors. The company’s Pune plant is capable of producing 1,000 cars per day on a 2-shift basis and over 250 engines per day in one shift. Passenger vehicles such as the Indica, Vista, Manza and Nexon and commercial vehicles such as Intermediate and Light Trucks (including the Ultra range) and buses, Pick Ups and Wingers are manufactured at the Chakan plant. 

Borwankar states that despite the slowdown, Tata Motors has been able to clock growth of 5% in the first two quarters of FY19 compared to the same period last year. While the third quarter witnessed a drop, the company expects demand to increase in January with rise in number of infrastructure projects in the country. Minda’s Suresh also admits that some impact of domestic and global headwinds is inevitable. “We are playing safer in terms of expenses and doing some balancing out,” he says. 

But the two-wheeler segment has managed to buck the trend and registered decent growth on back of new launches and price cuts. While Bajaj Auto saw a growth of 45% year-on-year in its domestic sales, TVS posted a healthy rise of 27% year-on-year for overall two-wheelers in November.  As a result, auto-ancillaries are putting their trust in two-wheelers to drive growth.  “The two-wheeler sector can be a major growth driver for us,” says Jain. Even in the past, Varroc has focused on two-wheeler segment, setting up an additional unit in Chakan for polymer products primarily to cater to Bajaj, one of their major customers. Along with two-wheeler segment, Jain believes that new emission norms, which will be effective from April 2020, will open up more opportunities to cater to OEM’s requirements.

Beating Cyclicality

Macro conditions aren’t something which the SMEs can control. Instead, to expand business and sustain growth, SMEs have adopted an agile business model. For instance, UGC has adopted a multi-segment business model and has Tier-1 OEM clients across Kolhapur, Mumbai, Bengaluru, Chakan and Aurangabad. 

“The business was started by my grandfather. We started with manufacturing gaskets and then went on adding capabilities such as logistics, sheet metal components, fuel transmission pipes and fabrication parts. We have to be pragmatic and move to newer territories if existing territories start showing slow growth,” says Dhole. He explains that while there is a slowdown in the auto sector, UGC could sustain its growth owing to its diverse portfolio. The company also makes use of automation in proofing systems to improve efficiency and reduce cost of production. 

Similarly, a worker at CK Engineering, maker of machining components, says that the promoter invested in buying M1TR Milling machine. Typically, drilling in centre of shaft is difficult. M1TR helps on that front as a monitor shows the distance at which the drilling needs to be done. While the machine may be an expensive buy for an SME, in the long-term, it reduces wastage, improves precision and reduces cycle time. 

Meanwhile, to beat high power tariffs, few companies have turned to solar. “We plan to be 100% solar reliant by March 2019,” says Panse, adding that they are also focusing on automation for an activity like welding. “Our target is to have zero welders by 2020. We are maximising welding by robotics,” he states.

Such upgradation and innovation, most companies agree, is the way forward for the sector. Case in point Sedemac, which supplies to top two-wheeler OEMs. “Overall automobile industry is growing slowly, but powertrain controls is growing very rapidly. Our market share for smart ignition is 35% in India and year-on-year revenue growth has been 50-70% for past two years. So our sentiment is very optimistic,” says Amit Dixit, CTO, Sedemac. The powertrain controls firm, based out of Bhosari, supplies auto components to top two-wheeler OEMs in India.

Minda is also investing heavily in E-Mobility, which is growing at a CAGR of 37%. “We foresee electronic content per vehicle to increase from 10% to 30-40% in the coming years. In electric vehicles, the content will be even more and can constitute about 70%. We are trying to see if we can come up with an affordable solution,” says Suresh. Wolf agrees and states that by 2020, all Bosch products must be IoT compatible. “Connectivity and mobility are also big growth drivers,” he points out. 

Though he expects growth to be moderate due to the slowdown, Sahni states that the current slowdown is a temporary phenomenon. “The industry is geared to handle it through internal efficiencies and cost optimisation. Aftermarket is also an area where new strategies are being implemented to enhance market share,” he adds. Sakhare says that as their business is dependent on the market, they do get tense in the months when demand fluctuates. “But we have to factor in that kind of cyclicality in the business. And we haven’t faced any loss because the bigger automakers are never going to stop making cars,” he adds. Panse states that the last quarter of FY19 is expected to be good because of the anticipated pre-buying by customers before the BS-VI norms become effective in April 2020 (BS-VI-compliant vehicles will be more expensive). Dhole has a more restrained view when he says that the demand might not revive this year but growth in market share will help them survive the down-cycle. 

It is evident that, in the face of macro and local challenges, engineering and ancillary units in Chakan are readying for both a spike in volume and a slowdown. As Wolf puts it, “We are optimistic in our internal planning. But the biggest challenge for the coming months is to be prepared for this roller coaster ride.”