‘The auto sector is almost like an orphan sector’ : Shriram Pistons & Rings’ Ashok Taneja on government’s stimulus package

Ashok Taneja, MD and CEO, Shriram Pistons & Rings, who is also the former president of industry body Automotive Component Manufacturers Association of India (ACMA), used the metaphor of a mini-tsunami to describe the crisis beleaguering the automobile industry. He also believes that this is not the end of the road, but only a bend in the road for the grappling sector.

The auto-component industry is not completely new to demand fluctuations, however, this time, the crisis is across all the segments, impacting two-wheelers, passenger vehicles, commercial vehicles and even tractors, said Taneja. “On top of that, even the export markets are impacted. To this extent, this crisis is much more severe. It's much deeper and is naturally causing greater concern.”

In an interview with BusinessLine, Taneja spoke about an array of topics like how the pandemic is impacting the auto-component sector, what companies are doing to survive the crisis, the changes expected post Covid-19, his outlook on the automobile sector and the efficacy of the government’s economic revival packages.

Excerpts here:

The auto component industry was already facing a 20-month long downturn before Covid-19. What is your take on the crisis that is currently facing the sector?

It has just made a bad situation a lot worse. We did think that from January onwards, we were beginning to turn the corner in the auto industry. And then came this Covid crisis in March. So, I would say it has been a double whammy.

How has the pandemic aggravated prospects for the auto component sector?

The most important thing is, customers have disappeared. There have been virtually zero sales in the month of April. Even March was impacted. We are only limping back in the month of May. The customer demand disappeared in the last two months and is only coming back very slowly.

The second thing which happened is that the industry had to go into a lockdown. And that means it has its consequences on the company's cash flow, profitability and other plans. I would say it's like a mini-tsunami that the auto industry has faced and continues to face. But having made the point, I remain optimistic, that it is not demand destruction which has taken place, but demand postponement which has taken place. And demand will return.

What are the priorities of the auto component industry right now?

The first priority is to survive, come out solvent on the other side, and be able to sustain operations thereafter. This is clearly priority one, and for doing that, the number one priority is to remain cash positive to ensure that we don't run out of cash. Companies that have taken large amounts of debt are obviously more impacted, and have a bigger challenge.

The second priority is to make sure that we are ready to go back into action when the demand returns, because this is not the end of the road, it is only a bend in the road. And we have to be prepared to come out the other side, ready to go into action.

The third priority is to really look at the whole business for long-term sustainability, to carry out those changes which are absolutely necessary to survive in the future. For example, the widespread adoption of digitisation on shop floors and in business processes across all operations of the company. So these are the three priorities.

Due to Covid-19, people have been talking about reducing their dependence on China for parts and components. While auto components are largely made in India, there are still parts which are imported from China. Do you think this can be 100 per cent ‘Made in India’ going forward?

I think this whole China game is misunderstood and a little overplayed. We don't have to wait for China to lose for India to win. We have to develop our own capabilities within the country, from design and development to validation and testing to being able to prototype and and build capacities, build scale and cost competitiveness. And this will make us more atmanirbhar .

Atmanirbhar has nothing to do with China. Yes, there will be opportunities, both in India and in the rest of the world, which is seeking to de-risk from China. That does not mean they will walk out of China or they will relocate capacity from China. It means they will look for a second footprint, and if India is attractive enough, if we can be cost competitive, if we can offer them the confidence of stable policies, then that business will move to India. This will apply to auto components, it will equally apply to other businesses.

So, I feel, it's important to not only look at China as a competitor, but if you are brave enough, to look at it as a market — it is the largest auto market in the world. And it's going to remain that way for a long time to come. Yes, it's very challenging, but that is the challenge we must work towards — to be so cost competitive, to have such a compelling proposition that we are able to export to China. And incidentally, Shriram Pistons exports to China.

What do you think would be the kind of job losses that would happen in the auto component sector currently and going forward?

Job losses are inevitable. If there is no demand, what do we do with the workers? ...With the Covid crisis, where demand is further lowered, there is a lot of uncertainty. There is no question — there will be job losses in thousands. In fact in lakhs — it is already happening.

There is no way to reverse this except for taking measures to stimulate demand rapidly and this will automatically bring back industrial activity, production and jobs. This is no other way to do it. The demand has to return for jobs to return.

Do you think that the government’s economic revival packages have been effective to restore demand?

All problems are either acute or they are chronic. An acute problem is something that needs immediate attention. Otherwise, you die. And a chronic problem is something you have time to deal with — it may take several months and years. Almost every measure that has been announced by the government is on the supply side. There is almost nothing on the demand side. The acute problem is demand. The investment will come if there is demand; jobs will come if there is demand. Economic activity will revive if there is demand. We don't find enough measures taken to stimulate demand for the auto sector. Sometimes, I am given to thinking that the auto sector is almost like an orphan sector. There is just no direct stimulus for the auto industry.

And having said that, I must say the other measures taken by the government are indeed very useful and very timely - of giving a moratorium on repayment of loans. This will really benefit the micro, small and medium enterprises (MSME) sector particularly… (With) interest rates reducing, many companies are able to renegotiate and restructure their loan repayments. There is more willingness to do that. I think all these measures taken by the government are good, and in the right direction. But will this be enough to revive the industry? Maybe in the long run. But, if there is no tomorrow, who knows about the day after tomorrow.

What are some of the measures that could have directly and immediately spurred demand, especially with respect to the auto sector?

We have just migrated from BS-4 to BS-6 in April this year. To implement BS-6 emission norms, there is a significant increase in the cost of vehicles. This was the right time to announce a GST reduction on vehicles. Even if this was done for a period of one year, it would ensure that demand is not depressed or suppressed because of high prices. Please remember, in our country, demand is more a function of affordability and the problem of liquidity is far less. Banks are flush with money and ready to lend. The question is, does the buyer have money, can he afford to buy? So by reducing GST, we could have stimulated demand.

The scrappage policy for vehicles has been in the making for the last couple of years or more. There have been several announcements that this is about to be introduced. This could have also given a fillip to demand.

I just named two factors. There are a host of other things that can and should be done to stimulate demand. Of course, the most important is, to make sure that the daily wage workers are given relief to go through this difficult period and be able to come out on the other side, ready to go back to work.

Do you think enough relief measures were given to these daily wage workers to go through this period and come out of it?

Certainly, there is a need to do more.

As far as auto components are concerned, I can also give you one example of stimulating demand. We are completely dependent on the production of OEMs. If the vehicle demand increases, the component demand will increase. But, we also have an export market. When we are in a situation, when we are in a crisis like this, it does not take a lot of thinking to decide to give a temporary, one-two year incentive on exports. Yes, there will be people with a counter argument that it may not be WTO compatible etc. I think we can't worry about these political niceties at this time. Our big competitor, China doesn't bother about it.

So this was a time for us to introduce some direct incentives on exports and get the industry going.

You said you are optimistic about the revival in demand in the auto component sector. What is your outlook on when there can be a revival in demand?

I would say that there is nobody with a crystal ball who can forecast when demand will return. But there are some good signs, for example, the tractor industry is coming back strongly. The sales were good in the month of May. The demand in June and July is appearing to be even better. So, the farm sector - relatively un-impacted by the Covid crisis and with a lot of measures taken by the government to support them — is one bright spot on the horizon.

It also appears that the two-wheeler industry may bounce back strongly. The reason for that is, with social distancing becoming the new norm, there will be many people who will be reluctant to travel by bus or metro. So, I feel there is a good chance of revival of demand for two wheelers, both particularly two wheelers and the entry level cars. Possibly also second-hand vehicles.

And beyond this, it all depends on how we manage the Covid crisis, when we are able to say that - one can return back to normal life.

It's also clear that demand will return because the desire to own a vehicle, the need for a vehicle, continues to remain strong. There is no doubt. But I feel instead of looking at when demand will return, it's more a question of being fully prepared to meet the demand when it comes.

What do you think would be some of the changes in the post-Covid world when it comes to the auto component sector? There were already talks about how e-mobility can hamper the sector, and now there's a pandemic as well.

There is a strong likelihood of the postponement of e-mobility in terms of volumes, primarily because this industry is highly import dependent. Almost every major component of an electric vehicle is currently imported, from a battery to traction motor to controllers and inverter units. So, it is logical to assume that this will slow down a bit in the near-term. The long term plan for e-mobility will remain unchanged. E-mobility will happen. It's only a question of when, and not whether.

As for the changes in the post-Covid demand scenario when it comes to the auto component sector, there are many things which will change. Number one, the realisation that all companies will focus more on de-risking, the what if (or) the scenario building will become very important.

Number two, there will be more focus on automation. We will move faster to adopt automation now. Number three, digitisation of the shop floor, digitisation of business processes, workflow systems, all this will gain traction.

Number four, the basic realisation that less is more. When it comes to de-risking… if you are over-dependent on a particular segment of the market - for example, you are only supplying commercial vehicles or you are supplying only two-wheelers or you are overly dependent on a customer - you have only one or two customers where bulk of your sales take place. Or if you are only supplying in India, you are only dependent on the demand situation in India and not other geographies. I think there will be a lot more focus on de-risking. These supply chains will also get remodelled.

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