The Hindu Business Line : `Our aim is to become a Rs 400-cr company in 2-3 years'

THE Chennai-based Super Auto Forge is the first Indian engineering company to set up a manufacturing unit in Russia. The Russian plant is expected to start commercial production by April. In fact, the plant should have come up much earlier, but apparently it had to change the location twice.

According to Mr Sankaranarayanan Seetharaman, Managing Director of Super Auto Forge, it was well worth going through all that. The advantages Russia offers, according to him, are immense. Land, material, energy and labour are all so cheap that the costs outweigh the challenge of having to organise a privately-owned mass production unit in a former Communist country. The company bought about 40,000 sq. ft of factory space at the industrial town of Koloma, some 100 km from Moscow, for $1,40,000 (about Rs 160 per sq. ft.) Power costs about Rs 2.5 a unit, petrol sells for less than Rs 20 a litre. The Russian unit is being set up with an eye on the European markets — delivery by road would take less than a day.

In an interview to Business Line, Mr Seetharaman spoke about the Russian advantage and also about the performance of Super Auto Forge. Excerpts:

What considerations led you to set up a plant in Russia and how was your experience in doing that?

After the break-up of the erstwhile USSR, followed by the liberalisation and opening up of economy, a lot of `heavy industries' in Russia previously manufacturing military hardware were wound up. Many forging presses from these factories were sold at rock-bottom prices. We bought some 20 such presses for our expansion. Stanko Indo, a firm located at Moscow and owned by two Indian engineers, Amit and Akhil Prakash, acted as the agent for all these purchases. That gave us the first feel of Russia. We found that setting up a manufacturing base at Russia can help in providing competitive supplies to OEMs in Europe, and we formed a joint venture in Russia with Stanko Indo as our partner.

The advantages are many. Steel and aluminium prices in Russia are almost 30 per cent cheaper than in India. The costs of power and petroleum products are also considerably lower there. The work culture of factory workers is good and they cost only marginally more than here. The Russians are good at material sciences, particularly metallurgy, and as such good engineers are available.

The Russian economy is doing well now. Russia is a major oil exporting country. It has also vast reserves of rare minerals and its exports are far more than imports and the economy is on the rise. During the year 2004, Russia had a surplus budget with oil price reckoned at $20 a barrel. As you know, the average price of crude oil throughout the year was over $30. As a result, the Russian economy is growing fast. To give you an instance, this year Russia would be building over 2.5 million cars only for their internal consumption.

When you began work on setting up the plant two years ago, you said the plant would be production-ready in a year's time. What caused the delay?

Yes, we should have started production at least by October 2004. But we had to shift the factory's location to Koloma from Kimry and considerable time was wasted in one more registration for the new site. First, we thought of putting up the plant at Tagenrog on the Black Sea coast, but decided against it for reasons of logistics. Then we considered locating the plant at Kimry and took some land on lease. But even as we were moving our presses there, the owner of the land became bankrupt and the title changed hands. The new owner had different ideas for the land. So we decided that it would be better if we bought land, instead of leasing it. After carefully examining different sites — which took time — we decided on Koloma. Koloma is connected to Moscow by a superhighway and it would be easy for our customers to visit us there. But the problem was that we had to register the company afresh. In Russia until a few years ago everything was State-owned and there was no concept of individuals employing others and running a business. Only now people are understanding how to start or run an enterprise. The situation inevitably causes delays.

One hears of problems with `mafia' and arm-twisting by gangs?

Yes. That is there to some extent, but over the last two years, we have seen such problems coming down by each passing day.

How do your Indian employees find living in Koloma?

Our employees find no difficulty in living there. It is not surprising because, due to the closeness of the two Governments for over 40 years, the average Russian has a good feeling for Indians. Many of them are familiar with Indian culture and some theatres even show Hindi movies. A number of Indian TV channels like Sun and Zee are available there. For many years now a lot of Indian students have been attending engineering and medical courses in Russia. If I am correct, next to the US most Indian students go only to Russia. Often many of them have stayed back and set up good businesses there.

What can you say of Super Auto Forge's financial performance and projections for, say, the next three years?

We are likely to finish the year with total sales of Rs 160 crore of which little over Rs 100 crore will come from exports. A satisfying achievement is that we have been able to improve upon our direct exports to OEMs in Japan. The typical Japanese OEM customer is very demanding in quality & on time delivery.

We are looking at a growth rate of around 35 per cent per year over the next four years. We expect to be a Rs 400-crore company by 2007-08. Towards that end, we have been consistently investing between Rs 12 crore and Rs 15 crore each year during the past three years in increasing production capacity and upgrading our facilities to international levels.

How are you managing steel price increases?

This is the biggest challenge that we face today. The Indian steel manufacturers are increasing their prices ruthlessly in a blatant opportunistic trend. While `special steel' prices world over has gone up by anywhere between 50 and 60 per cent, the same in India has increased between 100 and 120 per cent. Unfortunately, though good quality steel material is available from many overseas sources at around $550 a tonne, which is about Rs 8,000 a tonne cheaper than in India, we are not able to import that for our use. This is because of OEMs' restrictions in switching over to new steel sources. They have to approve any new source of steel, which typically takes a long time.

Do you have plans to acquire units abroad or in India?

We are interested in acquiring overseas plant only if we will be permitted to shift them here. There is hardly any sense in running a manufacturing operation in Germany or in the UK, when shops there are closing due to high costs there.

The reason sometimes quoted is that the acquisition would lead to immediate introduction to OEM customers of the acquired company. I can only say that a reputed Indian company today does not require such introduction. The overseas OEMs require good Indian sources than we need them. They are under tremendous pressure to reduce costs. We don't need to acquire an overseas company to get some business introduction.

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