There is also opportunity for consolidation of supply chains among Tier-1 players
Srivats Ram is a veteran in the vehicle and component industry with an experience of two decades. He was the immediate past president (2010-11) of the Automotive Component Manufacturers Association of India (ACMA). He is the Managing Director of Wheels India, a TVS group company. Srivats Ram is driving the company's growth into its next phase with stepped up focus on exports. Wheels India is a leading manufacturer of steel wheels for passenger cars, utility vehicles, trucks, buses, agricultural tractors and construction equipment. It has manufacturing plants across India. In an interaction with K. T. Jagannathan, he opens up his mind to many issues affecting the Indian component industry at the moment. Excerpts.
How is the year looking for the auto components sector?
Normally, you would always like to start the year with a wave of optimism. There is, however, a great big wall of pessimism facing you literally everywhere you turn. The way things are going people don't see a general change in terms of policy. The general expectation is that it will remain as it is. This means gross domestic product (GDP) growth this year would be in the range of 6.5-6.8 per cent. If you have an 8 per cent plus GDP growth, we are able to manage the industry and organisations to overcome the inflation barrier that is there. While there may not be de-growth, one may have to be prepared for a single-digit growth in all segments except may be the two-wheeler, which may see a double-digit growth. The last two years have changed things dramatically when inflation has been at the double-digit. There is a huge gap in inflation rates in almost all the peer-countries vis-à-vis India. That could result in narrowing of the supposed competitive advantage that has been there.
What is the scenario in the domestic market?
In the passenger car segment, it is more a sentiment factor. If you look at the trends in disposable income over the last couple of years, there may have been an increase in salary. But if you look at the expenses, say for a vehicle-owner, there has been a 2-3 per cent increase in vehicle price, a substantial increase in petrol costs and interest rates have also increased. So, the cost of owning and operating a car has increased substantially. Hence, the buying decision gets affected. If you look at the commercial vehicle (CV) segment, however, a truck owner's buying decision is based on the returns he gets. If freight rates start dropping, then he has the choice to make decisions — whether to replace the CV at the end of three years or should he wait for one more year? The challenge on the CV side is that with industrial production slowing down, the demand for goods carriage comes down. With supply being the same, the rates will then drop. That is a concern, especially given successive quarters of slowdown. However, the one- and sub-one-tonne segments are growing. Since this segment is in a nascent stage, this will continue to witness growth. This kind of skews the numbers in the CV segment.
The depreciation of the rupee must be good news for your exports?
Yes. The recent depreciation of the Indian rupee has partly negated the bad news and has given some amount of breathing room. I don't think the rupee will necessarily appreciate and may remain at around the current levels. From an exporter's perspective, this will be a relatively attractive proposition in the coming year. I do expect companies pushing exports a little more aggressively this year. If you look at capacity additions, companies earlier would have assumed much higher rate of growth in the auto industry both for this year and next year. Hence, there would be some amount of spare capacity now. Domestic growth constraints could lead Indian companies to increasingly tap into the export market with this additional capacity.
But aren't Europe and the U.S. facing growth challenges themselves?
If you look at Europe, it has always a low-cost country sourcing basket. India is one of the players in that basket. It is not as if suddenly the low cost sourcing percentage will go up. India's percentage within that basket could improve if our cost structure makes us more competitive. The U.S. is actually on a growth mode because it cut cost and capacity dramatically during the recession. It took a big cut in production from the 17 million cars to 11 million cars. This year, it will do 12.5 million cars. And next year, they could go up to 13-odd million cars. Because the base has been reduced, they are actually seeing growth. My sense is that they could increasingly look at vendors from low cost countries. That could present an opportunity for India. If you are already tied into one of these customers, the opportunity for you to grow that business is more and you can get up your volumes from the current base. Hence, I do believe that there is an export opportunity that could come our way.
What are the current challenges for the auto component industry?
There are essentially two big challenges. One is on the cost front. When we are running high inflation as a country, we typically need a certain percentage of growth to be able to overcome our costs. And if there is a slowdown as well, we need to take efforts to reduce the costs. Earlier, when there was volume growth, you were able to ride over because of the volumes. Now that there is no volume growth, you really need to tighten your belt. The other issue for some of the companies could be on the capacity utilisation. One has to take a slightly longer term view and bet a bit on the future. In India, what we have found is that no growth or slow growth is typically followed by dramatic growth when the economy recovers.
Do you foresee a slowdown in investments in the sector?
We are a supply industry. So if there is a demand slowdown, it would be rationale to expect suppliers to slowdown the investments. Interest rates have been at highs in the recent past. So for a lot of companies, there is a decision to be made as to whether the money should be in the bank or should it be invested. In the auto component industry, the rate of return you are able to earn on captive is not much more than the interest rate you have at the moment. So it becomes a big challenge to decide whether to keep it in the bank or to put it into productive use. High interest rates affect our industry specifically because the automotive industry is a capital-intensive one and the finance part of the entire project becomes a significant cost, especially given the fact that margins are also bad at the moment.
So what then are the solutions?
The solution really lies in looking more long term. You would need to have more public works. There is a crying need in the country for a much better infrastructure. This will have multiplier effect on various segments and will actually result in a revival. This will, however, not happen overnight.
What are the interesting trends that you are seeing in this space?
Auto companies have been looking at common adaptable platform that allows for larger runs, which brings in certain amount of economies. It also feeds into the component industry. When you have common platforms across models, then the product development cost comes down to a certain extent. While co-sharing in terms of engine and transmission may take place in auto manufacturing, I can't see that happening in the auto components sector.
While Tier-1 companies have grown and become reasonably big in size, the Tier-2 and Tier-3 players are struggling for funds. The key for the development of the sector is to grow the smaller players. I call them ‘tomorrow's champions'. We need to bring them to a certain scale and size and also build their management structure. There is potential for growth there but they require infusion of funds. There is also opportunity for consolidation of supply chains among Tier-1 players. If you look at the vehicle industry, there is a large supply base. A lot of traditional Indian companies have plans to consolidate their supply base. While this is happening at the OEM (original equipment manufacturer) level, it also probably needs to happen at the Tier-1 level. There are also opportunities for companies to acquire and build scale through that. Consolidation of Tier-2 and Tier-3 supply base is probably warranted. The financial sector is not so friendly to smaller players. This is an issue. They need to look at the smaller players as tomorrow's champions. If they do that, then funding will flow into these companies.
What is the long-term outlook for the sector?
While this year will be one of slowdown, beginning 2013 we will see growth happening in this industry. We are a young country. Youth always have aspirations, and they have prospects. Those things will ensure that the personal transportation industry will grow. We are also seeing a lot of urban migration — shift from Tier-2 and Tier-3 towns to the metro to improve their livelihood. So we have a lot of things going for our country. At present, we are going through a period of slower implementation of projects and some kind of stagnation. Probably, by the middle of 2013, we will see a revival of activities here. By which time, the global economy is also likely to be on a recovery path.