Costs, culture force L&T to pull plug on China switchgear unit

Written by MG Arun | Mumbai | Updated: Jul 25 2011, 09:06am hrs
Engineering and construction giant Larsen and Toubro (L&T) has decided to close its Chinese subsidiary L&T Wuxi (LTW) Electric, which makes high-end switchgear at its facility in Wuxi New District. Six years after it stepped into the Middle Kingdom tempted by its R42,000-crore switchgear market, the company has found itself hobbled by falling volumes and rising wages, besides cultural and language differences, said a senior L&T official.

Against the original target to earn $40-50 million by the fifth year of its operations, LTW has been able to generate only $10-12 million annually. LTW was set up as a wholly-owned subsidiary to make circuit-breakers at a cost of $11 million in 2005.

The L&T decision underlines the increasing difficulty for Indian firms to do business in China owing to regulatory, cultural and language hurdles, despite the huge potential that the country offers. The Chinese switchgear market is seven times the size of Indias, which L&T tried to tap with its greenfield plant. The company had also planned to use its Chinese beachhead to export to south east Asian markets like Taiwan and Malaysia.

The facility which employed 60 workers (close to 50 of them Chinese) at the peak of its operations has scaled down operations and reduced headcount by half. The entire process (of winding up) should be complete by the end of this year. LTW has clocked just $35 million overall in revenues so far, said SC Bhargava, senior vice-president and head of L&Ts electrical and automation (E&A) business. The E&A division, which fetched R3,850 crore revenues last financial year, contributes roughly 7% to L&Ts overall revenues. With China off its radar, the division will now focus on south east Asia and east Africa, apart from India, Bhargava added.

We underestimated the cultural and language differences that would crop up as we went ahead with our plans in China. While volumes were coming down, we found that wages were rising, Bhargava said. Whatever business volumes we were clocking in China were offset by the rising wages, he added.

In 2007, L&T bought the switchgear business of Malaysias Tamco for about $110 million. Bhargava feels the acquisition will help the company cater to the growing south east Asian market, without the risks of owning a facility in China. We expect the E&A business to grow at 10%-15% per annum, said Bhargava, adding that the division expects to garner around 25% of its revenues from overseas operations. L&T had posted a net profit of R3,958 crore in 2010-11.

The company has been reported to be looking for a partner for its E&A business to expand its product portfolio after hiving off the division. There were also reports that it is looking to sell off the division, although L&T chairman AM Naik denied this in May.

On Friday, the L&T scrip closed at R1825.50, up R35.45 or 1.98% from its previous close, while the benchmark 30-share Sensex rose 286.11 points or 1.55% to 18,722.30. The R45,000-crore company has a weightage of 6.68% in the Sensex.