December was a busy and difficult month for most corporate heads in Chennai. It is still not possible to discuss anything serious without going into the after-effects of the devastation that took place early last month. The city, known as the Detroit of India, has seen three major auto manufacturers—Renault, Hyundai and Ford—suspend operations briefly. Ford, in fact, has advanced its yearly shut down. Many small Chennai-based component companies remained submerged in water for days.
The president of the Automotive Component Manufacturers Association of India (ACMA) and the joint managing director of Lucas-TVS Ltd—Arvind Balaji—has had a particularly stressful time. He has been travelling, working on assessing the damage in the Chennai units and trying to get things back to normal. I have been wanting to talk to him how much the auto component sector has changed post-Liberalisation. Now, of course, I want to know how the industry around Chennai is coping.
We meet early morning at Balaji’s office in Padi—a Chennai neighbourhood—where the first factory of Lucas-TVS was established. He is leaving the country the next day. He suggests we have breakfast at the factory. We talk over cups of coffee, and idli and vadas from the canteen. I ask him if his premises faced any damage. “Water did not enter any of our large factories. The floods, however, have had a huge impact in various ways,” he says.
All industrial estates in the city, including Guindy and Ambattur, have been badly affected. “Tier-2 and tier-3 industrial units in these estates have taken a major blow. They have lost machinery and their electrical connections have been cut off for days. Small companies have no insurance. Almost 80% of ACMA members are SMEs. They supply to tier-1 manufacturers. When any one part gets derailed, it affects the entire production process.”
SMEs are a very strong sector in Tamil Nadu. The auto component industry employs 6 lakh people. It is the largest sector contributing to manufacturing GDP. “This disaster has hit us after four years of downturn in the automobile industry. The industry has been suffering from serious overcapacity. It looked as though things were looking up finally. Then we face flash floods!”
Many workers had to go back to their villages as they lost their homes. So, there has been a shortage of employees as well. Power cables have been submerged. Parts and spares are in short supply. There is a long line of customers waiting to buy simple electric motors to get their machines going. But people are finding their way back and are busy rebuilding. We still don’t have a full estimate of the losses,” says Balaji.
Customers have shown a lot of understanding. However, one must remember that 25% of auto components come from the South and a large part of it from Tamil Nadu. “How long can we make them wait?”
The supply chain has been revived after a gap of two weeks. Things have been getting back to normal. “Today, the auto component industry is global and we cannot make any compromise on quality, which is a major factor.” ACMA is reaching out to governments at both the Centre and states to ease cash flow problems. “To start with, states can help by postponing sales tax. The Centre has sent a study mission to assess the impact.”
The components industry has been sustaining itself because of exports and not because of domestic demand. ACMA figures have shown 11% year-on-year growth for components. “That is mainly due to exports. We are now promoting the concept of quality and technology in India. Our exports have mostly consisted of build-to-print parts. To sustain exports and grow, we have to change this. We export very few fully-developed products from India.”
Balaji is a fourth-generation member of the TVS family. His father, TK Balaji, has been running the company for more than four decades and has spearheaded its expansion and diversification to move with the times. Lucas-TVS, a TVS company, is one of India’s leading manufacturers of auto electrical components.
Balaji, after earning a degree in mechanical engineering from BITS Pilani, did his Masters in manufacturing systems engineering from Stanford University and also has an MBA from the Wharton School. Before returning to India in 2008 to join Lucas-TVS, he was an investment banker in the US. He also worked at the Oracle Corporation in their consulting division.
At one time, Lucas-TVS and Mico Bosch were the two leading electrical component manufacturers in the country.
“Things have changed a great deal since then. We have tremendous competition in the industry. Every global player is here. There are many strong Indian players as well. It is really a free-for-all scenario. However, we still don’t have global volumes. Everybody is hoping for growth,” says Balaji.
In the 2000s, Lucas UK was bought out by TVS. “Now we have got into technical arrangements with various global majors.” Balaji says his company has built up its R&D strengths over the past 30 years. “We have done it step by step. We have spend 3-4% of turnover on R&D. We have gone into green energy products. We have developed products like brushless motors and actuators locally and are supplying them to the non-automotive sector as well. An increasing number of global car companies are buying our products. Initially it was tough, but it is getting better now.”
He says for the auto component industry to do better, there has to be a level-playing field, which is absent right now.
“We are plagued by overcapacity. Return on cost of capital is negligible. The inverted duty structure does not help the industry. Raw material cost is higher than the import cost of components. This makes products uncompetitive. In most countries, component industry is globalised. Automobile manufacturers will import products based on cost. You can’t ask a guy to grow by kneecapping him. To invest in technology, we have to start making more money.” In spite of all these problems, Balaji says that he is cautiously optimistic—both for his company and the country. “China is slowing down. We are the next big hope. We cannot have screwdriver technology and become a consumer market. We are in a good position to move up in the quality chain. The Mars Orbiter Mission (Mangalyaan) is a benchmark. We provide value for money by our frugal innovation.
As we finish breakfast, I leave him on a cautiously optimistic note. I still have to negotiate roads full of craters created by heavy onrush of waters to get back to the city.