The Hindu Business Line : Now, small-time manufacturing units join outsourcing party

A small workshop like place, a few metal presses and a mass of men moving about — all leading to an annual business of around Rs 80 lakh. In other words, a typical `tiny' unit.

So, imagine the excitement when an order from an American company landed at its doorstep.

The order came through Autopartsasia Pvt Ltd, a company that helps (mainly US) companies source engineering products from India.

The order was for a sheet metal-formed component of an agricultural implement, and looks like a college convocation hat.

The American company first bought "a year's stock", but came back with a repeat order after three months — it had achieved its targeted annual sales in one quarter.

Thanks to the order, Mr K. Ravi, Managing Director, KRVR Industries, is confident of doubling the company's turnover in the current year.

"The margins are much better," he told Business Line, "we profit 40 paise to a rupee on exports, against 15 paise on domestic sales."

Big prospects

Today, the Indian engineering industry abounds with examples of overseas successes such as KRVR's, perhaps indicating a certain maturing of the country's small and tiny sector.

"We procure a lot of castings from small units in Coimbatore," says Mr K. Vaidyanathan, Director & CEO, Autopartsasia Pvt Ltd, which expects to facilitate Rs 100 crore of exports this year. "Opportunities are so big that they are not just exciting, they are frightening," he said.

The outsourcing boom is spawning a breed of first-time exporters. To give another example, Vibgyor Automotive Pvt Ltd, a Rs 12-crore company which supplies machine parts to Lucas, Rane and Pricol, had never looked at exports in its decade-long existence, until this year.

Last month, it received an order worth $20,000 from a US-based company, with promise for more. Mr S. Parthasarathy, Vibgyor's Managing Director, is confident that exports would exceed Rs 3 crore in the current year — about 25 per cent of last year's turnover.

While the big-ticket exports are happening from the likes of Bharat Forge and TVS group, companies which never had customers outside the borders even on their radar screens are now getting opportunities to participate in the export boom — albeit in their own small way.

Cost factor at play

The pressures on cost will only spur Western companies to buy from countries like India, notes Mr Suresh Krishna, Chairman and Managing Director, Sundram Fasteners.

Outsourcing is all about value-buying. Mr Vaidyanathan believes that the buyers easily save around 40 per cent in costs. His company, Autopartsasia has devised a fresh strategy for business. While big companies such as Delphi, Visteon and TRW have their own purchase offices in India, `small companies' — of sales between $ 50 million and $ 250 million — find exclusive purchase offices costly. Nevertheless, they need to look for cheaper sources.

To plug this gap, Autopartsasia has shortlisted some 20 such companies and has started working with six of them. Their requirements are relatively smaller, which small-scale units in India can take up.

Funds, a stumbling block

However, when business grows, the small-scale units may expect to encounter a stumbling block — funds for capacity expansion. The opportunities from outsourcing is huge, but unlike IT or BPO industries, engineering units have to invest heavily upfront in scaling up capacities.

Mr Suresh Krishna notes that in the engineering industry, small units find it difficult to invest because of uncertainties in getting business. Even if one invests on the basis of promised orders, there are uncertainties over the orders actually kicking-in.

Even if companies are prepared to invest, today is it not all that easy for small units to access institutional funds.

Take the case of Econo Valves Pvt Ltd, a Rs 8-crore company that produces valves for oil and gas industry. The company has got its products approved by Saudi Aramco, Petronas and Shell International. Roughly, a fourth of its turnover comes from exports.

Says Mr V.L. Sridharan, Managing Director, Econo Valves, "I can take up large export orders, but I do not have capacity."

Saudi Aramco buys about $50 million worth of valves and Econo could get a share of the pie. "The problem is funds," he says, adding that Econo is looking for financial collaborators.

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