The Hindu Business Line : ‘A vote of confidence in the Indian operations’

“We are all very pumped up about the investment and with what is going on,” says Mr Arvind Mathew, Managing Director and President, Ford India Pvt Ltd, as you sit down for an appointment with him. Ford Motor Company recently announced its decision to invest another $500 million (about Rs 2,000 crore) in its Indian operations, expanding it substantially — car manufacturing capacity of 200,000 units a year and an engine plant with an ultimate capacity of 250,000 units.

It is a definite vote of confidence, not just in the Indian operations but also for the Indian market and the economy, says Mr Mathew, a Masters in mechanical engineering and in business administration. He has been with Ford since 1990 and took over his present position in 2005. Ford India made a net profit for the first time in 2006-07, although, according to Mr Mathew, it has been making profits by US accounting standards for two years. In an interview, he answers a range of questions on the fresh investment and what it means for the company.

Excerpts from the interview:

What prompted this additional investment? Is it because of confidence at last in the Indian operations or in the market?

Ford has decided to invest $1.5 billion in the region — China, Thailand and India. The investment is driven by the trajectories of the three economies. Ford looked at them and wanted to make sure that it was not just a flash in the pan, that it was stable and that growth was guaranteed. They said the Indian economy is growing and how can Ford take advantage of that, recognising that there is a proliferation of free trade agreements also. Thailand has done a great job with FTAs. China has got a big enough market by itself. India has got a big enough market by itself and is also developing its own FTAs. The engine plant will export at least 50 per cent of its capacity. Then, we will start expanding the supply base.

How much of the engine would you still import?

The engine plant comes in three phases. In the first phase, I start using locally-assembled diesel engines from April. It will satisfy my Fiesta and Fusion requirements. At that point in time, my localisation in the Fiesta jumps, because that was the most expensive component I was importing. Then, I put in my machining lines for crankshaft, head block and morph it into a 250,000 units engine plant. By that time, my small car will also be there. The plant will have flexibility to make diesel or petrol engines. If there is a significant shift between gasoline and diesel or displacements, I can do it. This will be the first Ford-owned diesel engine plant outside Europe.

What kind of cost-advantage does this engine plant offer you?

With the engine plant, I get out of the problem of a long supply chain. People keep saying aren’t you going to become a hub, but you have got to make sure that you are in total cost control, which includes freight, carrying cost for having a part on the waterfront for six weeks… (From a customer’s point), only getting scale there will be benefit. With 50,000 units, you don’t get that scale. You really get scale when you do 200,000 units…

You will see serious change not just at our operations, but also in our supplier base and at the dealerships. You will see a lot more automation come in (at the assembly line).

Would the critical components for the diesel engine still be imported?

Pretty much. But the rest of it will come locally. Over time we will push for more localisation. Those components are built in such high volume. This 250,000 is gas and diesel, I won’t be doing all diesel. You really need about 250,000-300,000 all diesel to justify the injection systems.

Diesel engine cars account for close to 70 per cent of your sales. Could we assume that it would be at the same level once you expand capacity?

I don’t think so. That was one of the reasons why we went in for a flexible plant. If you hardwire for 70 per cent diesel, and if there is a change then you are in trouble. Today, it is 70 per cent, but there is enough discussion at different levels about renewable fuels and emissions and all that, today most renewable fuels are gasoline based. You might see a change in that mix as time goes by.

There is always the perception that Ford has been rather slow in either launching products or reacting to market developments. Is this just a perception or reality?

This is just a perception because I think other companies such as Honda have never been asked this question. If you look at Honda’s line up and my line up, they are similar. But the perception is, Hyundai and Ford came into Chennai at the same time.

Hyundai went into the small car segment, look at their volumes. Ford didn’t get into the small segment, something must be wrong. But you are basing your assumption that to be able to say you are competing in the Indian market, you must be in the small car segment. That is not entirely true. There are enough manufacturers — Toyota, Honda — who are not in that segment. Yet, I don’t hear the same comments being made about those manufacturers.

Our approach is whichever segment you go in, you better win it and win it robustly. We didn’t think that until now, it was worth to go into this segment. We changed our mind in terms of our priorities, may be it is worth it, that the growth is there, that more customers are going to come in and it is going to be a fairly big segment. In terms of priorities, we have decided to go into the small car.

How do you think the Nano is going to impact the industry?

I think they (Tata Motors) did an outstanding job. I always said they will do it. Do you know that Tata is a household world in the US after the Delhi auto show. How does it impact me? What they have done is create a new pool of customers. I don’t think any of my customers are going to migrate to him. The expectations of a car owner/user today are not satisfied in a Nano and that is okay. That was their target.

My car buyer would not step back. But we would see a fairly significant shift up. There has been a lot of noise about pollution. With every motorcycle that is replaced with a Nano, the emissions will reduce. Traffic, however, is going to be a disaster. That could have a knock-on effect on the total industry because if you get into a serious congestion issue, you are going to say, I don’t need to buy a car. But in terms of hitting their objective, bulls eye. Huge respect. You now have others saying they will come with a cheap car. All the same guys who said it could not be done.

As you get ready for a major expansion, what do you think will be the biggest speed breakers?

The biggest speed breaker continues to be people. You are seeing tremendous growth in Chennai and Tamil Nadu. I have not been able to find the kind of people to do the kind of jobs we have.

The job market is so hot that they keep coming and going. But the amount of time and money I invest on training because I can’t put a guy on the line straightaway, it takes six months. Externally, I think electricity would become an issue. Infrastructure continues to be an issue. Those things all add to cost on doing business.

I am going to start exporting engines and I have to be globally competitive. I have got to compete with Thailand and China and all the other factories, and I have got to compete with input costs, cost of logistics, cost of steel and still be globally competitive. That is an area of worry that India is not looking at all these things. We have some people talking about it, but we don’t have anybody looking at it from a total manufacturing cost perspective.

Our biggest cost is electricity. The cost of transporting material is another major issue. I can’t put a number on that because I can’t project the delays in the system. I can get a container out of Thailand quicker than I can get a car shipped from here to Delhi.

Salaries have increased by 15 per cent year on year, which is not sustainable. We are quickly pricing ourselves out of the market and if we don’t stop and slow down, I think all the business will move somewhere else. IT jobs will be first ones to go and they have already started going. That was actually the warning shot across industry. It won’t happen that easily in manufacturing.

My attrition rates are — in the IT business, BPO or manufacturing — much lower and would be running at about 8-9 per cent for salaried employees, 5-6 per cent for the workforce and 15 per cent for the IT business.

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