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B. Santhanam has his pulse on two key sectors of the economy – automobiles and construction. While the slowdown in the former does worry him, he is more than happy at the developments in the latter.
The company he heads – Saint-Gobain Glass India – has a growing share in supplying windshields to the automobile industry. And, in the construction industry, the Indian subsidiary of the French multinational is the leading supplier of glass that is now extensively being used in buildings.
Santhanam, 56, Managing Director, says the slowdown in the automotive sector means that suppliers like Saint-Gobain, which had created the capacities and worked out costs based on schedules provided by vehicle manufacturers, will take longer to recover those investments.
“We commit to a huge amount of engineering, tooling and upfront costs. All of us amortise that over the assumed life of that car. When that changes, then the whole equation changes,” he says.
Rising dollar, a worry
Also, the lifecycle of models are getting shortened. The company plans for a three-year lifecycle for any model, but when this gets reduced, it upsets the calculations even more.
A more serious issue for him is that the dollar linkage on Saint-Gobain’s cost is more than 80 per cent. So, every time the rupee depreciates to the dollar, the cost of production goes up. Component makers are not able to visualise this dollar impact on their manufacturing costs.
This, coupled with the unpredictability of the volumes, will make it even more difficult for component manufacturers to sustain their business in the long run. “In an extremely soft market, how to obtain the legitimate pass-through which cannot be corrected by efficiencies is a big challenge,” says Santhanam.
He seeks to differentiate this from a price increase that component suppliers ask of vehicle manufacturers, citing increase in input costs. This is a price correction, he asserts. The deleterious effect of the inability to pass through completely pure costs is enormous. “I will be very careful in any future investments in the automotive part of the business, because neither there is value innovation nor is there price correction,” he adds.
Export focus
Saint-Gobain Glass India has a capacity to supply to about 3 million cars, including for the after-market, at Chennai and Pune put together. It now works at 65-70 per cent of capacity. Saint-Gobain has a 27 per cent market share of the domestic automobile business and bags 40 per cent share of all new models. Exports account for less than 5 per cent, but the company plans to increase it to 15 per cent in the next three years.
Saint-Gobain spends 4 per cent on research and development and another 8 per cent capital expenditure. It needs to recover at least this cost every year, if not more. Finding itself between a rock and a hard place, Saint-Gobain Glass India does not intend to create capacities for the domestic market as far as the automotive business is concerned. It is exporting windshields to Brazil from India, at a better margin than what it gets selling in the domestic market.
Dollar pricing
On the construction industry, Santhanam says Saint-Gobain is “dollarising” its pricing – pegging the price of glass to the value of the dollar. “We are telling our customers, which is a large number of distributors and builders, that we are indexing head-on with dollar and oil,” he says.
He is simultaneously asking his staff to think in dollar terms. “Don’t link your pricing to the rupee. Link contracts to this (dollar). It is not easy, but we are making a small beginning. We are quoting for large projects with a clear index to dollar,” he adds.
According to him, Saint-Gobain’s customers find it difficult, but they are not “unwilling”. The construction industry is able to appreciate Saint-Gobain’s point of view and some of the progressive, large builders are willing to discuss this. They do not want to be victims of the market, says Santhanam.
Builders also do not want to find themselves in a situation where after two years, there is a shortage of glass in the market and consequently prices shoot up. His goal in the next two years is to dollarise the price of the value-added glass it sells to the building industry.
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