The auto component industry is passing through challenging times. On the one hand, it is faced with a slowdown in the domestic auto industry coupled with issues such as cost management. On the other is the eroding competitiveness of export s due to a rising rupee. Business Line caught up with Mr L Ganesh, Chairman of the Chennai-based Rane Group and a former President of the Automotive Component Manufacturers Association (ACMA) of India, for his views on the industry scene.

Excerpts from the interview:

What is your view of the current slowdown in the auto industry? When do you expect a change in fortunes?

The signs of a slowdown were seen in January-February in the two-wheeler segment. From April, it was even more evident as sales of commercial vehicles also slowed. Sales of tractors too fell, although not by a large percentage.

The reasons cited are interest rate hikes, tightening by financiers, two-wheeler loans going bad and NPAs (non-performing assets) going up.

The first half-year has not been so good for the auto component companies, the exception being those companies focused on the passenger car segment. In the short run, we have to take the beating, as we cannot divert capacities that quickly.

But, so far, this doesn’t look like a recession. We need to wait and watch in the second half as to whether it will go down further or whether it has seen the bottom and will level off. My own concern is that GDP growth should not start coming down because exports are being hit. Already sectors such as IT and textiles are slowing down. …As of now, there is a lot of uncertainty as to how things will pan out for the year.

What is the outlook on exports?

On the export front, it has been a rude shock. China, which is also a major player in low-cost manufacturing, is maintaining its exchange rate or allowing it to strengthen by a marginal 2 per cent, but the rupee has appreciated by 10-12 per cent since April. This has two implications. One, it has affected profitability in the short-term. Two, it has brought the ambitious Automotive Mission Plan rolled out last year into serious questioning now, as, in the OE (original equipment) segment, we quote for long-term contracts.

Today, if we have to pitch for a contract that will come in two years from now, the industry will probably start quoting at Rs 35-36 (to a dollar). How competitive we will be at this rate is a concern. This is going to have long-term implications. As we have not planned for it, it cannot be offset by improving efficiency either.

We seem to export products that don’t require much of technology or R&D. Are Indian component makers making progress in moving up the value chain?

It will happen very gradually and in my view, the move will not be very significant. With our having opened up the country without any mandating on the lines that China has done, MNCs are not going to pass on highly advanced technologies to Indian companies. If you look at history, they first give technology; but once exports start picking up, they become very wary.

Unlike China, which has mandated that MNCs should involve a Chinese partner and that they must conduct R&D activity locally, India has rolled out the red carpet without such stipulations — so high-end technology is not going to be permitted easily…I think we’ll saturate with medium-level technology, the exceptions being companies that are trying to do their own R&D.

Bulk of our exports will involve only low- to medium-level technology, that is , labour-intensive products.

What are the challenges that small cars, such as the Rs 1-lakh car from the Tatas, pose on the cost management front?

Our market is predominantly a small car market; 70 per cent of the cars sold are in the A and B segments. Because of Maruti and Hyundai, there has been a competence developed in our country to develop components at a low cost. That’s why India has become a good hub for manufacturing small cars. But whether these small car makers are going to be hurt by exporting from here — can they be as competitive as they were one year ago? — I am not so sure. Otherwise, the issue for the auto component industry here, as it is across the world, is that it is becoming more and more a volume game. Margins are under pressure and only volumes can make profits. We have to judiciously manage capital expenditure in such a way that we are flexible and hope that the volumes will happen.

What are the advantages Chinese component makers have over their Indian counterparts?

We did a study last year to see if we could locate one of our export-focused units in China. We found that we may have a 3-4 per cent cost advantage. Nothing more. Besides, we also did an analysis on a product that we make that is also being dumped by the Chinese in India at 30 per cent cheaper rates.

We got quotes to get the components from China and assemble the product here. If we did that, it worked out to be costlier than what we sell domestically. Clearly, the SOEs (State-Owned Enterprises) in China are not so focussed on profits…. they get budgetary allocations from the government and a huge subsidy on exports. There is also no great labour cost advantage.

How do you think the component industry can balance out the risk associated with the slowdown, and also risk associated with excessive reliance on one manufacturer?

Wherever feasible, one tries to diversify in terms of products and market segments. These serve as a natural hedge. Like today, passenger cars are doing well, commercial vehicles are down and people serving both segments are able to keep their heads above water. At some stages of growth of the company, you might be dependent on one customer. So, it is not always available as a choice. But whenever available, it is good to diversify in terms of segments and geographies.

After the Bajaj-TVS spat, there is renewed focus on IPR. There is also the unorganised sector manufacturing duplicate components. How can a clean-up happen?

Companies need to put in place a structure for IPR (Intellectual Property Rights) management and awareness. But the IPR regime will not have an impact on the counterfeit product regime. This sector prevails because — one, manufacturing fake products is not a criminal offence but a civil case; two, the enforcement of law in India is weak.

So, IPR will affect only the big companies. Issues with the small guys won’t be resolved by IPR.

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