The current slowdown is the longest in the recent history of Indian auto industry with almost all the segments going down. This is certainly a cause for concern. Harish Lakshman tells T Murrali that though no green shoots are visible in the economy, there seems to be some for the auto component industry. Edited excerpts:
Q: What do you have to say on the current slowdown? Do you see opportunities in this crisis?
HL: We are yet to see the light at the end of the tunnel; it will take some more time before the market picks up. A crisis always presents a company with an opportunity to introspect, to find avenues to save costs. At Rane, for example, we had always felt that fixed cost is fixed but it was only in the downturn that we found the same could be broken into two categories – discretionary and non-discretionary. There are many things in discretionary costs, which when controlled can end up in savings. Secondly, it gives options to look out for avenues of growth, like exports to both OEMs and aftermarkets.
Generally, in the last 10 to 15 years most auto component manufacturers have focused on the OEM who has grown tremendously. About 15 years ago 80 percent of exports were to the aftermarkets and rest to the OEMs; today it is reversed. There is a clear revival in the aftermarket with the US estimated at $450 billion where India’s participation is very low compared to China’s and others. Therefore, we have to look at new markets, new segments, and new geographies. There are companies that have achieved this in the last one year, going into non-traditional markets.
Q: While there is a commitment taken by the OEMs from every supplier on the cost reduction roadmap, it is not reflected in the price revision to match increasing raw material prices? As ACMA Chief, what do you have to say on this issue? How can the industry mitigate eroding profits?
HL: It’s a challenge because of complexities and is difficult to generalise since vehicle manufacturers follow different policies. Most multinationals have very rigid contracts and once the supplier signs it, they identify the risks the supplier has to bear. Take for example, the fluctuation in the dollar price. Some vehicle manufacturers allow for forex adjustments. Then certain raw materials including steel, iron, copper, nickel or aluminium commoditised and linked together. Many manufacturers have these kinds of contracts which are transparent, though not necessarily fair, but with annual built-in price reductions. However, the problem arises when it comes to volumes. Very few vehicle manufacturers link it to volume. There are definitely give and take between the manufacturers and the suppliers.
“We have very good engineering capabilities in the country, in many ways low cost too.”
Q: Is there a way for ACMA to formalise a template for the vendors to get their due in volatile conditions?
HL: I don’t think it will be possible for ACMA to do it. The new Competition Act restricts industry associations from anything that is anti-competitive to the end customer. Also it is very difficult to have one standard formula that will work across all vehicle manufacturers. The only thing that ACMA can do is to wear the flag of the industry and inform it of the difficult times, price escalation, forex besides, creating general awareness.
Q: Encouraging R&D seems to be confined only with forums; how can this benefit in the long run?
HL: You are right; if you actually get into the nitty-gritty of it, there isn’t much happening in R&D and innovation. We lived in a closed market till 1990 and nothing much was happening as there was no demand. There was pressure to be competitive and to bring in more technologies when the markets suddenly opened up. Also, multinationals have come in with amazing technologies against whom we have to compete, though there was no fundamental engineering done in India. According to SIAM only ten percent of the vehicles are designed in India and that too commercial vehicles.
Q: Then how can multinational companies rely on Indian component manufacturers?
HL:Ultimately, it is the market. After 2020 or 2025, according to all OEMs’ forecasts, India will be the third largest market after China and America. Because of the sheer size a lot more value in terms of engineering and manufacturing could be added. We have very good engineering capability in the country, in many ways low cost too.
Q: Is the relationship between OEMs and vendors transactional or is the collaborative approach opening up?
HL: It’s definitely going to be more collaborative. Difficult to generalise because some tend to be transactional especially in difficult times when everybody is trying to save their bottom lines but I would say it’s more collaborative. The western OEMs have found that transactional relationship does not really work.
Q: Is there a stimulus or support from the government to the vendor industry that will help it grow?
HL: We are working with SIAM for stimulus to the auto industry. Whatever SIAM is asking for will directly help us. We have also been asking the government for a few things. One is export benefits, since we are not exporting enough. The government introduced two schemes in the last two years – market product focus linked scheme and the product linked scheme. These are good initiatives due to export benefits and it depends on the country exported to and the products exported. The value could be anywhere between one to four percent, but not all products and markets are covered. ACMA has been successful in adding more products and more countries.
Another major area we are working on is the technology accreditation fund on the similar lines that the textile industry was given. Third is in the area of taxation; there are some rules that are unfair and bureaucratic. The government must step in and amend certain rules including depreciation for capital goods. Also, VAT and GST will stabilise prices across the country and put a stop to all the bad practices in the industry.
Q: To what extent the Indian component industry is affected by FTAs?
HL: FTA is again a controversial subject and the key is how well we negotiate our position. Specifically commenting on Japan and Thailand the auto-component industry has had a negative impact. It has allowed more imports of auto-components. At the same time we have not been able to utilise the vehicle exports to these countries vis-a-vis our components. Brazil is still under way and the EU is going on. We have signed with ASEAN. There is also Regional Cooperative Economic Agreement that includes ASEAN, China and Korea. It is a regional agreement at large scale, however, it will take time. The target is 2016 to reach an understanding. This is a major initiative when the Indian government is involved and we are working to ensure our interests are protected especially because of China with whom we have refused to sign a FTA.
