Growth pangs for Tiruchi SMEs

To grow or not to grow. This is the dilemma that scores of small engineering units in the Tiruchi belt face. They sprung up under the banyan called Bharat Heavy Electricals Ltd (BHEL), mainly to fabricate parts for the public sector power and heavy industrial equipment manufacturer. A number of them were started by technocrats and first-generation entrepreneurs.

Most are still content doing just that even after more than two decades of being in existence. A handful – the most notable of which is Cethar Ltd, started by Mr K. Subburaj, a former BHEL employee – have enlarged their business and have proved that there is life beyond BHEL.

Some like Cethar even compete with BHEL for power plant equipment orders, while a host of others have tied up with a number of power plant equipment manufacturers to supply parts and are also executing overseas orders.

But, for the vast majority survival still depends on BHEL. The public sector company would like these fabricators to do more – even design and fabricate the parts themselves, rather than relying on BHEL for the designs and merely fabricating the parts. But, the small and medium enterprises are reluctant.

The problem is that most of them were started by first-generation entrepreneurs. The next generation is not willing to join the business, because of which the unit has been contracted out. For the contractor, there is no incentive to grow the business and hence he is happy doing what had been done from the beginning.

This is how the chief executive of a company that started out as BHEL's supplier but now provides components to other companies, including those overseas, explains the problem confronting these units. In those units, he adds, where the second generation has stepped in, the business is doing well and the units are expanding. “Enterprise is lacking because of the business model we are in. We are all under a banyan tree called BHEL. We didn't know how to grow by ourselves. We took the safest route of growing in our businesses,” adds the partner of another company.

The comfort that BHEL offered in terms of regular business and assured payment, has been a dampening factor for most in being aggressive in their business.

It is over four decades since BHEL started outsourcing some of its fabrication work. From about 815 tonnes of work done by 12 vendors with a total cash outflow of Rs 25 lakh in 1969, BHEL outsourced four lakh tonnes of work to nearly 500 vendors, involving a cash outflow of about Rs 1,200 crore in 2010-11. This year, it hopes to end with about 4.8 lakh tonnes of fabrication work, of which 2.8 lakh tonnes will go to the vendors in the plant's vicinity and the remaining two lakh tonnes to vendors closer to the power plant sites – what BHEL refers to as “away centre fabrication.”

Away-centre fabrication

BHEL's away-centre fabrication has grown much faster than that done by its local vendors. For instance, in 2008-09 the local vendors fabricated 2.06 lakh tonnes of steel while those in places such as Bhilai, Kolkata, Delhi, Nagpur, Pune and Hyderabad 37,000 tonnes.

In the next year, according to Mr J. Kannan, General Manager – Outsourcing, BHEL – Tiruchi, the local vendors accounted for 2.32 lakh tonnes, while the away-centre fabrication's share more than doubled to 77,000 tonnes.

In 2010-11, the vendors in the vicinity increased their share marginally to 2.15 lakh tonnes, while those in other places fabricated 1.25 lakh tonnes of steel. Away-centre fabrication also helps BHEL cut down on transportation costs.

Will the local vendors be able to deliver on the 2.8 lakh tonnes of fabrication work that has been set aside for them this year, is Mr Kannan's main worry. “I want to give preference to them. I would like to stay with the local vendors,” he says. But, he acknowledges that the SMEs in Tiruchi face problems. One is the poor electricity supply situation. The second is the lack of skilled workers – welders to be precise.

A solution for them would be to adopt industrial training institutes, promise jobs to welders passing out of the ITIs and give them training. Apart from these two, Mr Kannan says the second generation not coming into the business is hurting its growth.

BHEL, says Mr Kannan, runs on the concept of Product Group and Main Assembly (PGMA). “I tell them that I will give them the PGMA, why don't you do it. The vendors are not sure,” says Mr Kannan.

Says Mr Rajappa Rajkumar, President, BHEL Small and Medium Industries Association, Tiruchi, and Managing Partner, Kumar Industries, a BHEL vendor, the association has been taking steps to help its members. For instance, it has a not-for-profit company that will buy consumables for its members. This way, the association is able to negotiate prices with the manufacturers because it is buying these commodities such as electrodes, welding cables and oxygen gas in bulk. This year, the company hopes to buy consumables worth Rs 50 crore.

Manpower shortage

Mr Rajkumar admits that if the units do not expand, more business will go to vendors in far-off places. A number of units are expanding, but skilled manpower shortage is a serious issue that they face. To cater to the growing business, he estimates that the units planning expansion will need at least another 5,000 workers. A number of units have started other fabrication work, especially of wind mill towers.

Not for nothing is Tiruchi called the country's fabrication hub, but he admits the units need to expand and improve their capabilities if they are to retain that status.

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