The Hindu Business Line : `India has the advantage of low employee cost and best technology'

A manufacturer has to have the best of both (low staff cost and technology). Complete automation, as in Europe and America, is still not the best solution here. MR PRAVEEN KADLE, EXECUTIVE DIRECTOR, FINANCE, TATA MOTORS

Much has been written of prospects at the bottom of the pyramid. In automobiles, they have to be tapped amidst rising input costs, the car's evolution into a consumer durable, greater retail competition and keeping the business an EVA-creator. Talking to Business Line in June third week, Mr Praveen Kadle, Executive Director (Finance and Corporate Affairs), Tata Motors, provided a taste of the challenge.

Excerpts from the interview:

How has rising cost impacted the mode of manufacturing, particularly manpower versus automation? Traditionally, we have lauded India as a low-cost manufacturing base, does that hold good in this scenario?

India has the advantage of low employee cost and we can get the best technology. As a manufacturer, you have to have the best of both. Complete automation, as followed by some European and American manufacturers, is still not the best solution here. But you need to continuously increase employee productivity.

In the Ace and the small car, you are attempting to meet low retail cost despite high input costs. Would the manufacturing style at the proposed mother plants for both be the said mix? Or would there be a high level of automation?

We are still talking of such a mix.

There have been wild swings in the stock market and concerns of rising interest rates. Were such changes to the operating environment anticipated in the forecast for the countdown to the small car? All these changes are demand dampeners, some affecting fund-raising ability too.

Yes, these are new challenges. We had anticipated them but not perhaps the magnitude. But that does not deter us from implementing the small-car project. We have to try and solve the input cost issue; we have to raise the most efficient capital, which we have done so far. In no way will we deviate from the path we have chosen of implementing this small-car project.

In the last couple of months, there have been corrections to the rupee. While that is good for export, it hurts when global sourcing is cited as a route to optimise cost. How does it affect Tata Motors and, in particular, the small-car project? Does the small car involve such sourcing?

Tata Motors traditionally has depended on local components and even when the components are initially sourced from abroad, we quickly get them localised. We will follow the same practice even in the case of the small car so that the input cost is not impacted to that extent by currency fluctuations. That's what we have done in other products; it will be followed for this project too.

One of your remarkable achievements after that Rs 500-crore loss a few years ago was drastically lowering the break-even point across products. Can you give some idea of what the break-even point is in the Ace and the small car, the two major products that follow the restructuring?

We can talk openly about some of our matured products, where product lifecycles have been fairly long. So the break-even for medium/heavy trucks is around 40-41 per cent; in passenger cars it is around 50 per cent. The problem in giving that sort of number for the Ace is that it is a newly launched product. We started with 30,000; it did exceedingly well, it was profitable from the start and we are now talking of significantly increasing capacity.

I would not be in a position to give the exact break-even number as the larger volume is yet undecided. But, as I said, if we could be profitable at 30,000 and if we then go up to 100,000, one could say the break-even is 30 per cent. Without reaching maturity level however, we cannot pinpoint a break-even level.

Will the small-car project have a long gestation period and therefore count on strong cash flows from the rest of the company for support? Or, would it be positive within a short period?

We are still working on it. But the thought process is, how quickly can it be a positive-cash flow generating and how the break-even point can be brought down.

In terms of product trend, you have been moving down the price point but going up in volumes. How would you explain to a lay person the challenge involved in ensuring that projects are EVA-positive? Doesn't it get tougher with such a trend?

You are right. It will be a stiffer challenge to be EVA-positive in the small car as compared to a top-end product.

Tougher than in the Indica...

Yes, because the price-point we are looking at is meant for the bottom-of-the-pyramid customer segment. From that point of view, it is tougher than what we did in the case of the Indica.

Do you need any major change in tax policy to make this car sell at the cited price point or can the price be achieved without it?

If we get tax benefits, it would certainly be helpful. But we would be working to make the project financially and operationally viable through internal efficiencies.

Tax-breaks are always welcome and, to be frank, across the world, governments have supported such projects by either giving financial incentives or reducing applicable tax rates. It has happened in Europe, Korea and Japan.

The small car is slated for launch in 2008. But from just domestic auto companies alone, there appears to be a slew of product launches, straddling trucks to cars, scheduled for that period. By virtue of having the widest product range, Tata Motors will likely take a big share of that impact. How do you plan to tackle the situation and what will be your capital expenditure for the next 4-5 years?

We are looking at total capital expenditure of Rs 10,000 crore in the next 3-4 years.

It will cater to our entire product range, both commercial and passenger vehicles, expand capacity and enhance engineering and research capabilities.

You alluded to computers (see Part 1 of the interview on Business Line, July 4) as an indicator of sales trend for this industry. Does that drift bother you because though you have strict clauses to preserve the quality of your sales, consumer durable sales are typically driven by price cuts and discounts?

As market complexities have increased and the product becomes more like a consumer durable, retail selling has become important.

The company has also become more focussed on retail sales than before but I would not say that the only answer is discounts and price reductions.

Yes, to some extent that will happen. But to the extent you offer a value proposition and get into a retail kind of marketing, you can still keep your identity distinct from other companies.

Does it worry you that the company is into cars at a time when it is more and more just a consumer durable?

No, I would not agree with that. The auto industry in India is not yet at that end of the maturity cycle as in some Western countries. So, we haven't seen the complete maturity cycle; we have at least 15-20 years to go for that.

The level of car penetration in India is very low compared to even developing countries, the economy should do well and the shift that is happening in the economy should create demand for both commercial and passenger vehicles in a big way.

(Concluded)

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