The Hindu Business Line : `Even 10 pc of world auto-component business is lot for India'

"The auto-component business that is favourable for India totals to some $380 billion. What players like us from the developing world are trying to do is to get a part of that business. And that will never be more than 20 per cent. But that is big business." — MR BABA KALYANI, CHAIRMAN, BHARAT FORGE

Mr. Baba Kalyani, CMD, Bharat Forge Ltd. -- Picture by Kamal Narang

It is tough finding a dent in Mr Baba Kalyani's view of his company or the auto-components business. But, then, Bharat Forge's chairman is unique, not just for steering the company to the world's second biggest forgings outfit but also for straddling the entire raw material chain (through the larger Kalyani Group), something few Indian component suppliers do. He accepts the auto industry for what it is — relentless pursuit of low cost included — and tops it off with a realistic business horizon. Early June, he took time off to speak to Business Line.

Excerpts from the interview:

Given the flux in the global auto industry, have customer requirements changed any further in the last three-four years?

Customer requirements remain the same. Though the auto industry is in a restructuring phase due to a variety of well-known factors — cost pressures, legacy costs, pension costs, etc., — given the trend in the volumes, the requirements are still the same. It puts in sharper focus the point we made even in 2003 that most companies are being driven to find low-cost suppliers because of inherent pressures in their own systems, their margins, profits. There is an increased acceleration in making this happen. More and more people are looking towards a different supplier base, be it India, China or South America — wherever they can find lower cost.

How sustainable is this continuous drive for low cost without getting suppliers themselves jammed between high raw material cost and low finished product price? Is there actually an end game?

I don't think so. This has been going on for the last 30 years; it is nothing new. In this industry it is quite common to have cost reduction every year. Generally it is achieved by companies innovating new technologies, making new products/processes, improving productivity — a combination of all these. I don't think there is an end game here. I am also not worried about its sustainability because it is inherent in the auto industry. And, it has sustained. I am not worried at all.

At the last press briefing on Bharat Forge FY-06 results, you had mentioned the likely paradigm shift in the whole supplier business that could happen when large Tier 1 companies — Delphi, for example — restructure. Can you explain it?

When large companies in the auto-component business restructure, they are going to determine in the restructuring and post-restructuring phases what is the kind of business they can be competitive in, in the locations that they serve. What is the kind of business that they will not be competitive in, because nobody after restructuring is going to continue a non-competitive business. That's inherent to restructuring. And when this happens to very large companies, it sets a direction for the type of business that is found to be non-competitive in a region. It would be the norm to see in the next three-four years, these businesses migrating from there to other locations. That is the change you will see when this restructuring starts to happen. That will accelerate the orderly restructuring of the whole supplier base.

When large Tier 1 suppliers complete their restructuring will it not alter the existing cost efficiency in the industry to the point of that old mantra of growing on the strength of lower cost becoming tougher?

No, that is incorrect. The cost efficiency does not move on to any level. As a matter of fact, when you restructure you remove cost and get rid of them. How do they go away? They go away because you reduce your manpower, you downsize operations, you reduce the number of plants, you rationalise — at least in the Western world, it is predominantly because of people reduction. Those costs simply disappear and the businesses get restructured, that is the point I was making. Some part of these businesses will move to other locations; India could be one. We just have to be ready to receive them.

But for large suppliers from the developing world, competing with a restructured Tier 1 supplier would be quite different from competing with the same company today. You would be riding a shrunken cost difference, isn't it?

You are missing the point. At large companies operating in 15 different segments, it is impossible that all the 15 segments would restructure and become competitive. In seven-eight segments, they would simply find that it is not worth their while to restructure. So, they will get shed off or moved to some other part of the world. Now obviously there are businesses that would be competitive in any part of the world because they are driven by technology — it is not just manufacturing costs, there is also intellectual property, product development, proximity to customer, etc. Those businesses will continue to remain in those locations. But you are not competing with those businesses, so the theory you are putting forward is really not valid.

The auto-component business is huge and what players like us from the developing world are trying to do is to get a part of that business. And that part will never be more than 20 per cent. But that 20 per cent is big business. The auto-component business that is favourable for India totals to some $380 billion. Even if you get 10 per cent of that, it is $38 billion! It is a hell of a lot more than what we are doing as a whole country.

So, how would you look at all this restructuring — as opportunities for further inorganic growth?

No. We would look at this restructuring to set a direction. That is important strategically for us because it will clearly spell out the future direction of this business and tell you where the opportunities are.

How would you improve operating margins at your units abroad?

There are two main processes. First is innovation. If you can innovate new products, processes, which have intellectual property then, you are ahead of the game and you can have better margins on those products. Second is improving operational efficiency by reducing manpower, automation, using less people to do the same thing. Third is using collective synergies and scale to get better leverage on the raw materials you buy, the supply side that is.

What kind of concerns do you have on the raw material side? Costs have been rising there...

I really don't have any concerns. The materials industry is under major consolidation; it is an industry that has suffered from over-capacity for many years. As a result, it operated financially at poor levels for many years. The steel industry was in the dumps for several years. It is now reviving, consolidating. As industry starts to perform, more investments will come in, more capacities will be created. That will correct the cycle; that is how the market economy works. What is important is to have a transparent process with your customers on what cost and cost increases are in metals and create a mechanism to pass on the increases.

In a mature industry like automobiles, it is possible to carve out space on the strength of better cost. But given the fact that auto industry technologies are typically born elsewhere, which customer base should you try to tap if you were to seek technology leadership in forgings? Is it auto or something else?

I really don't know but I can tell you what we are doing. We are tapping into the automotive industry — both passenger cars and trucks. Our strategy is to de-risk our business by operating in all geographies and in each of those markets, operate in all the segments. That way we spread our risks because it is unlikely that all the markets, all over the world will go down at the same time. We have done that successfully. Further, we are already into the non-automotive segment and intend to increase its contribution to sales from 17 per cent to 25 per cent.

Does that betray worry over greater exposure to the automotive business, which is, a mature industry and not a sunrise sector?

No, it is not that. It is an opportunity.

In very small does, you are beginning to see non-IC engine technology finding commercial use in the auto industry. Does Bharat Forge, which has an IC-engine components business, require responding to this, or is it too far in the future?

Right now it is too far in the future; at least 15-20 years away. We are currently focusing on a five year-horizon. There are also a lot of competing technologies; it is not just hybrids or fuel cells. One of the competing technologies is the diesel engine. People are now able to build diesel engine with same level of emission — almost zero — as hybrid or anything else. So, one has to wait and see. In any case for the next 15-20 years, a large proportion of automobiles will still be built using IC engines.

By 2008, you hope to have the world's biggest forgings capacity built in India. For future growth, would you stay restricted to forged components or would that definition be changed?

Obviously, we will expand that definition. Honestly, we don't call ourselves a forging company any more; we call ourselves an automotive components supplier. A large part of what we supply are finished components; we supply very little as forged components.

We have also integrated backward into design engineering and providing solutions — we are now able to offer full service.

The next step would be to extend full service and get into more than just components. But we don't have any concrete plans yet on what exactly we are going to do. We have enough on our plate today.

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