ETAuto Roundtable: How are Indian auto component SMEs gearing up to take on the Chinese Challenge?

welcome to ET Otto round table how Indian auto component SMEs are gearing up to take on the challenge with their Chinese counterpart indian auto component industry contributes 25% to India’s manufacturing gdp and three-point-eight percent to national GDP it employs directly to 1.5 million people like many other industry this sector is also largely dominated by semi and medium enterprises however they have always been called the weakest link in the industry the Indian auto component industry now aims for a three-fold growth to achieve 100 billion dollar than by 2020 and exported expected to contribute thirty-five to forty percent while automotive mission plans looks at it 223 billion dollar by 2026 now when we see look at the current landscape of auto component industry last two years has not been so great for automotive industry including auto component industry which has huge over capacity only fifty to sixty percent capacities are being utilized at the same time import from china is increasing every year last year it grew by nineteen percent which poses a strong challenge for specially small manufacturer ET auto brings to a roundtable discussion with the experts in the domain we have here with us mr. Sunil Aurora managing director abilities India piston mr. Jay stronger managing director stock rubber and mr. Nathan beheld director radiant industries my first question would be to mr. Sunil Aurora what is the current status of Indian SME in terms of policy in terms of technical investment R&D and all that okay deal traditionally indian industry has been working through the reverse engineering route has been working through the reverse engineering route and the bill to print fruit now that needs to change you know we need to do a lot of code development with the OEMs and here the SME segment has a big challenge but that needs to be corrected and modified the other thing is that we need to get out of our traditional weaknesses you know that we have whether in terms of several you know several weaknesses productivity and whatever we are working on it but we still need to go further if you have to fight the Chinese well not fight but compete with the Chinese so we end with the all these you know opportunities that we have under the automotive Mission Plan 2026 there are all these things that we need to do and act fast and get things right now in terms of technology in terms of innovation that is where Indian SMEs need to get their act fast I am very happy to say that the government is recently you know come up with a lot of schemes to help the to help the SME sector there is a DI PP scheme you know where you can get money there is a there is a another scheme called the prism scheme the dsi are prism scheme where you can get 70 lakh rupees and that’s not even refundable so and then you know they’ve got these technologies epc had a meet last month where all the cs IRS and the cs iOS and the dsi are got together and drunker sup was there with me and all these guys get one bill one percent of india’s gdp that’s like 25 billion dollars a year and there are technologies which are lying embedded latest technologies they are working on technologies as recent at 2014 and they are all there with them and now they are wanting to give it to the Indian MSM ease so that is where what we have to use and that is what we have to go forward with and I think it’s going to help us a lot but the key is execution the speed of execution has to be really really fast if we have to you know talk to the Chinese and you know compete with each other so execution is going to be the main and appreciated mr. Unger you have been doing quite well in exports you’re a seventy percent of contribution comes from exports how you have been able to achieve this and what has been the idea and which are the market you are currently competing him see the markets we compete in our primarily the developed markets we large part of our exports his focus to Europe United States Latin America South Africa etc and are you know mantra for competing and staying ahead of the curve is

development now you know when I talk about development I’m talking about primarily the aftermarket not the OE business but the aftermarket business in the oil business in the aftermarket business typically a customer comes to you and he wants as complete a package as he can get so what we do is we source databases globally to identify you know which vehicles have sold what is their population in the global markets and we try and keep our product offering up to date so that is a very important factor which you know keeps us ahead it’s a huge investment in tooling and development but it’s all reverse engineer and it’s designed to be as good or equivalent to the OE product we have seen that import from china has been increasing last year also it grew by nineteen percent if i’m not wrong so do we see a opportunity for medium and small enterprise from india to start pushing supposed to china like market well China like market yes why not even China you see China is now becoming a huge consumer market in itself so far the Chinese industry has been completely focused on export but now there are many Indian companies which have started exporting to China although it’s going mainly into the OEM segment not so much the aftermarket as yet but the opportunities are there and there is no reason why Indian companies cannot compete coming back to our Indian market we have seen that SME is always complain that the Chinese input is impacting the aftermarket space what are the ways how can we deal with this problem because we have had this complaint for quite long time standing why are we not able to break see I mean the Chinese definitely have certain advantages so I’ll talk about the advantages that the Chinese have and then we will talk about how we can leverage our own strengths to gain an upper hand so firstly one thing that we find more abundance in China compared to India is availability of capital now if you have more capital available to you up front then what you can do is set up equipments and two links for geared up for much higher productivity levels so that’s one if you have higher productivity of less cost secondly absolutely secondly you also have the cost of capital itself if you have a lower cost of capital you can work on a much lesser return on capital employed expectation from your product that’s number two so capital and the financing of that capital is a key factor which drives their costs down and our costs up secondly a lot of our raw materials are imported our raw material industry is fairly innocent and it’s not very well developed or mature visa we are Chinese counterparts where rom till itself is which is almost anything between sixty to eighty percent of the content of the product in our automotive industry so that’s much cheaper there so that’s in terms of what the Chinese have an upper hand on us but all is not lost the Indian companies are also doing very well and we need to understand where we are stronger and leverage that so for instance quality Indian companies have shown the world how they can be leaders in quality we have fairly high number of deming Award winners gip a medal winners in fact i was seeing the GI p.m. vinny’s list this year sure sure so quality is one aspect that we need to work more on in fact we were at we met the purchasing head of one of the major Japanese OEMs and these guys are keen to buy from India the only bottleneck that they see today and the only thing they keep insisting on is to improve our quality of our operations that’s number one secondly is technology mr. Arora spoke about technology the Chinese are excellent at reverse engineering I’ve been there I’ve seen companies do it we’ve seen their OEMs do it but where we can be better is innovation so for instance I can speak from experience that we have one of the companies that exports to China and where we’ve been successful is innovating in terms of on the process on the product itself and that has given us indoors into the Chinese market and thirdly we gotta invest in our people we have a huge pool of talented engineers in our company and if we can in our country if we can invest in them we can

surely get an upper hand so quality technology and people that can help us in a pan anjali services think but still that you entered all the cost of capital land availability and all that remains a problem you said there mr. Arora that their policy is coming up in place which will help but if we see there to threaten like in some part of the world you see the raw material are important at very low cost under empty is but in India the certain you know vomited which are very costly probably costlier than finished goods so what the government is doing in that direction well you know we are talking to the government that you have to look at the FTAs and that you’ve already signed and what is the result of those FTAs and also don’t jump too fast into FDA’s the future fts that we talking about for example there is a regional comprehensive economic program the our sep in which china is a partner along with the AC on in china japan and i think a few other countries so and that is slated to happen sometimes the next couple of years so if that happens that is going to be I think the government needs to go very slow on that until and unless we put our house in order you know with all these schemes are the government is announced currently and they’ve all been just been announced like a couple of months ago or a month ago so it’s going to take a while for the indian industry to adapt to innovate and to get these things right the other thing that I want to mention here Nabil is that the Chinese have now started taking the best practices out of Indian auto component companies so they’ve started doing cluster programs in China i was there in china two weeks ago attending a multinationals supplier day we supplied to china and also to japan we export as OEM OEM there and you know we heard from the there were presentations made by chinese companies who showed the improvements that they’ve done in the last one year in their pastor programs and believe it or not there was an Indian who was leading a cluster program so there you are so the Chinese are taking your best practices from your country and adapting that and what has you know we are very happy that we you know all of us have done some cluster or the other our companies done all you know the all four or five clusters but those guys are very fast in learning in you know and doing things and and and speeding up things so as I said you know speed is very very essential for execution so this cluster is a wake-up call and maybe in a few years they will also start talking about all the QC CDMS let me say you know so that’s that’s another challenge that we have to face in China probably one of the few companies that has been able to establish themselves and for the past seven years that sets here right hand into a market which is almost very well it’s very coughing very loud so they are perceptions are lot of policy implications in China that also comes as a detrimental for the people so how does it was for you and what were the issues that face belt is no really sorta or you would like to tell you that right well let’s say this till about a year ago it was tough but it all depends on how the the government’s interact with each other how how you can bring the other side onto the table and there was there was a big detriment for even our exports they used to always find some logistical issues some customs issues some because they could never find a problem the quality and the price was already settled so these two days to come up with various issues you know every three four five months you know I had to go to China to pacify them but the quite the point is you have to pacify a customer wherever ease and even for a logistic issue if the company is empty is traveling I was traveling you know just to put things at ease but now for the last one year all those things are gone and i think it’s i don’t need to state it but i think it’s the present government which is kind of being more proactive with China and being more you know talking to them more often so I think it’s helping a lot so they don’t now look at India as a wall that they wanted to create in fact unofficially they wish to say that we are not interested in buying anything out of India but they had to buy because you know if you offering your qcd at a price which was better than their Chinese supplier was a multinational so then it obviously your product was more more competitive so these are things that you have to do now and I think it’s you cannot ignore China you have to export to China but also you have the thread that they will flood your market because their markets are going down you know their car industry is down by fifteen percent there to where industry is very badly down so they are of course coming into India you know and engine parts and all these things are coming into India in a big way mr. dr. do you agree that

it’s been really a better situation now for people going to China from Yale not really still there any any shift in policy from the Chinese government that would allow more people to come in from you see it’s a well-known fact that it’s not an easy market to get into what Sunil told you is just sort of the tip of the iceberg there are a lot of you know non-tariff restrictions when you get involved in dealing with China and those still exist and that is how the government there is operating but nonetheless there is you know still a lot of opportunity in China which is available which needs to be exploited they have advantages of cheap raw material cheap capital like Nathan said cheap electricity easy access to lands and bland and building all those things are there and their labor force is very very much more productive than ours even though we have lower labor rates here than China but they do have so it’s a question of you know which products you can target in that marketplace there are certain segments where the Chinese are very good but there are others where India is far better in terms of quality in terms of the available technology and the world accepts it it’s basically price but you know if you in every market there is always a segment which is price driven so it’s only the price driven segment we which is looking at Chinese products if you go into the market today you go into the order component market you go to kashmiri gate and others you will find that the preference of customers is towards indian made product they have they know what the product is they have recourse to a if there is a problem in quality they can get back to the manufacturer in the case of Chinese products these things are not there it is a trader who is imported it who are you going to go back and claim from if you are if you put a piston in your engine and the engine seizes in in five days who are you going to go and claim your damages from nobody so it’s it’s not entirely true yes you find chinese products in accessories in you know the exterior parts there because of their finish and the appeal and the look of the product they are doing reasonably well thank you mr. bell we will just heard that chinese have an advantage of mass production they are able to expand well because they have a low-cost availability of manpower captain cause like we have been talking about capital cost being very high in india for quite a long time that is the major problem for us to expand in india so do you see the government trying to assuage the industry in this area do you see what would be the comfortable level of Captain costs that will help especially as it is will you look at this amazing you know to be given some excavation if you would like the Japanese yeah so I was just about to say that see I mean now I could ask for the moon but not get it of course but bear in mind what are we competing against we are competing against well not rly Japan but then you know the cost of capital there if you look at the Chinese counterparts that virtually working at half our cost of capital now if I for instance or any Indian SME works at a say thirteen or fourteen percent cost of capital a twenty percent return on capital employed is a very very reasonable expectation for an entrepreneur now if a Chinese entrepreneur has a seven to eight percent or six percent cost of capital for remember thirteen or fourteen percent return capital is is great just look at the difference and that completely pushes you out of the market now I am NOT a finance expert or a banking expert but the cost of cattle is not something that you know we can at the click of a button depressed by three or four percent it’s got there’s a lot of structural issues in the economy lot of legacy issues because of which the cost of capital today is at a level at which it is so our effort should be not to worry about something that is outside our circle of control let’s start worrying about things that are under our influence which is quality productivity and innovation but I just like to add to that you know the cost of capital will is a it requires the Reserve Bank and all that which is not probably going to

happen the point is there are certain schemes which are within the ambit of the government for example the emmy is key now if you want your products your auto components if the government wishes the auto components to be exported to China or two countries where we have Indian products Indian OEMs you know Indian vehicles but Chinese parts being used in them well those are the markets that the government should and we can provide the data that is not a big deal or the government has it for I mean for all practical purposes increase the MEI a scheme there the amount of funds right now I think they give about three percent increase it to a reasonable level because you know when we say about capital so this is the best way to tackle the solution right now you know to get the to get the get the problem right now you know on on cost of capital Nabil what Nathan said is very right we can ask for what whatever we want but it’s not necessarily we going to get it but having said that recently the government came out with the interest subvention scheme on packing credit and you know bill discounting for exports that’s a very good thing which is come in it’s a three percent subvention yeah it’s been reintroduced and three percent subvention so essentially if you manage your you know your foreign exchange well you can actually reduce the cost of your borrowings for export purposes to as low as to or less than that show of course in terms in terms of the working capital but not the not the capital yeah capital intensive yeah so there you know if you if you are taking a term loan to finance plant and machinery there the cost of capital is extremely high SME has a one problem in terms of R&D and technical capability is their policy place or comments for SMEs to enhance these capital or what is happening in the skill development because that is also important so yes I do there are certain government programs in place for instance the government is set up NAT rip which really helps you in engineering simulations design testing there is also accelerated and for in-house capability there is a accelerated depreciation which is there an R&D and I know a lot of colleagues in the industry of availed of that look at the sony model you know they moved from walkman to m2 discman to mp3 player and whatnot every 45 you know recline and that’s something that we also try and do in our organization try and dig up the product portfolio every three years because you got to keep innovating because in the automotive industry of as my colleagues here would agree items tend to get commodity fight really really fast very fast so mr Arora one thing we have been hearing that the SMEs are also sometimes you know little they go on they diversify their fan funds they don’t reinvest and they really do not have that aspiration to be a big corporation or something like that 00 what can we do to you know encourage such a people to come and dream big yeah good question in fact during this China visit that I was there 10 days ago 15 days ago and i was going for a weekend to to Macau and the multinationals European executive said well don’t blow away all your money in Macau because the Chinese do exactly that you know they build hotels and they diversify and they get funds out okay we have but but there they do it a lot you know here maybe we have a few examples there they do it a lot so every company which is 40 50 30 million dollars is a diversifying the point there is which I think Nathan made a while ago was when we went all three of us were on this trip to 22 msme trip to China two or three years ago and the point is that folk swag and told us the vice chairman of Volkswagen said that it is reasonable for a Chinese auto component company to expect a 15-percent net profit we said that you know and and what about us what about us where you if you talk about a fifteen percent net profit as an auto component maker in India you will be laughed out of the of the of the meeting so there is the critical difference you know volkswagen and then we asked them about the quality well that was three years ago and now their quality is getting better and better but he said yeah it’s reasonable to expect large amount of PPM’s from chinese suppliers but what he said was

that if you want the chinese auto component manufacturer to increase his production or his delivery by forty percent in two weeks you have it and that is how they’ve been able to become the number one automobile you know manufacturer in the world micro they continue to remain that way do you expect that there should be a consolidation in many a bigger SME is coming and by those companies don’t see so much of why typically i just take that you know there was that other thing that i forgot to mention on the same thing i think you repeated the question to him there’s this there is this 10 corrode limit on msme you know in the bill the 2006 bill and that has been info and that is going to be changed whenever it is going to be changed to 30 crores so a lot of SMEs in india have put plants and separate separate cities and i’ve stayed within the SME ambit but even if we talk about 30 corrode see outside we are the definition of SME is according to valuation is much higher so the support gets ended at a very that’s true today the definition of SME is very different or the expectations from an SME are very different to what they were 20 years ago you know it’s the mindset is still that an SME is typically a owner driven company with a few employees doing a little you know garage technology they’re using to manufacture products but the SMEs today are coming out of that and there are lots of SMEs which aspire to you know become global players or if not global players to be at least you know reasonably big national players but the availability of capital the restrictions caused by you know them being taken out of the SME ambit these things hold people back and the single biggest thing I think is the ease of easy availability of capital you go to any bank you go to any financial institution the first thing is collateral you know nobody talks about your balance sheet nobody talks about your business plan it’s what collateral can you offer so if that is the benchmark for funding then it’s a severe limitation at the tier 2 level I’m inundated with offers every other day to buy out smaller companies so it’s real it’s very much out there it’s law of the jungle out there so what’s going to happen is either deals are going to happen or these companies are going to get wiped out and their businesses will get swallowed by the others so I’m not sure which way is going to swing but traditionally one my expectation would be that the business would get swallowed by the others and deals may not happen unless unless there’s a japanese tsunami that comes our way and starts picking up strategic stakes in these Indian tier tools that is a fairly that’s a trend one can really expect to happen in the next few years also do that funding for Emma neighs within the country is not easy to come by you can finance and M&A overseas but to do that within the country is not so easy the funding is not available the interest rates go around in circles but what this we see in other sectors happening quite good being faster than you know our sector one question for all of you three of you according to the automotive Mission Plan 2016 we have backed out of component in the sea to be 223 billion dollar and exports to be 80 200 billion dollar how viable is this target do you think it can be achieved in what do you see looking at the lands change in automotive landscape one by one okay I’ll go first on that it’s it’s it is a plan which should happen because as you know the the the growth here also we missed out on the right significant but the point is when you have the right policies in place when you have the right thinking in place then it will happen we’ve been saying that the growth I mean you know the numbers 14 or 18 people per thousand people 14 or 18 cars per a thousand people as against China’s

100 and America’s is heaven hundred so there is a huge potential there the main factor which will get us there is you know really innovation and you know what we say it’s an old thing don’t build to print do our two part instead of part to what you know now how we going to do it it’s easy to say these three words how are we going to do it that is the critical feature and that is where the government has to step in has stepped in to some extent by this dsir scream okay there is another very good dsir team that I probably not mentioned and that is if you have an innovative idea you go to them and they give you money at four or five percent you know and you can pay it back after your product has been successfully launched and so we have done that for one new technology piston manufacturing and and that’s been successfully launched in march 2015 so then they start taking back the money a year later in five installments so that is another very good scheme so we really need to do all these innovations technologies and basically the owner of the company has to have a bent a mind frame that you have to innovate even if you are doing 300 crores of build to print stuff you are going to be in trouble so you have to innovate you have to find out what is the new way of making your product what is the new way of you know making your product cheaper and more productive and and that is the only way that you’re going to do it if you just say bill to print and build to print then it can be trouble we on whether the least investing are much less than see your question that you know this figure of 223 billion and 180 billion in exports is this just a figure that’s band being thrown about or is it reality well if you actually analyze it this is a figure which is achievable given the growth of the auto sector that is projected and you know the changing perception of Indian products in global markets this is a very very achievable target there are however you know limitations to this one is to achieve this target we need a huge infusion of capital so we come back to the same thing again and again capital has to be made available to the order component industry and a lot of it has to be made available to the MSM ease because the tier ones still have certain capability certain inherent strengths which they can cash on the tier tues are the weakest link on the tier threes so unless effort is made to you know bolster them by providing the adequate capital by providing adequate skills the skill development aspect comes in here there is huge workforce available but what is the caliber of that workforce we are not talking about engineers and you know diploma holders we are talking about general workforce they need to be trained in specific skills in the industry so if you know the Indian Industry cannot come up to these expectations unfortunately what we may see happening is the multinationals coming here and taking over the largest part of this 223 billion that we are talking about pressure of them’s almost everyone he is going to target like five billion 5.5 million million 25 million passenger vehicle similarly I was with under guys they said we’ll maximum achieve 20 million so because they cite infrastructure mainly the idea we’re on the road are we going to drive on those vehicles we see what kind of congestion we have in Delhi Monsieur rulings so given that i can understand that there are certain things happening like safety features and all that will announce the cost of the make a lamp that will and but how about the infrastructure do you think that by that time we’ll be able to have the capacity to run those many babies so I’ll answer this question in conjunction with your previous question where whether we can achieve our automotive mission plan I am sure a lot of thought has gone into making that plan by industry experts and the government experts all I would like to say here is that at the end of the day everything is possible if you have visionary leadership both in the corporate sector and in the government

the government has already indicated its intentions of being a visionary government it’s I think the onus is also now on the entrepreneurs and the industry executives to show visionary leadership and secondly to back it with strong execution in my visits to china in my experience I have seen a lot of Chinese entrepreneurs and successful companies not to say there aren’t successful companies in India but the sheer number of those companies is far larger in China and ultimately everything gets attributed to two things visionary leadership of the Chinese entrepreneurs and secondly the execution capabilities that these Chinese companies have and their government has so our government is to learn from their government are entrepreneurs need to learn from their entrepreneurs if we do that 223 billion is possible so general budget is going to come nigh on my next wed for all three of you come the budget it’s not semester that would set the tone for this kind I turn over that means too much well at least for the auto component industry you need a specific technology upgradation front and and and you know that that money needs to be given out to entrepreneurs at at a at a viable cost of capital and that is the main thing you know reduction and there’s that and all is not what we want we say just make a technology upgradation fund for us to achieve the automotive mission plan of 2026 you know to get to that figure if the capital is in place the Indian entrepreneur the Indian auto component entrepreneur is definitely you know going to put all his efforts to get into that so I would say that that is the main demand from the auto I wouldn’t like to put it like I would like to focus on exports and you know there is talk in exports King I hope you are not having fun ten percent problems for food well I would like everybody to have seventy percent export let’s put it like that but you know the what are the roadblocks we face and what is the government where’s the government helping to facilitate exports we are talking a lot about China today if you look at Chinese exporters you will find them by the hundreds at any show you visit anywhere in the world it doesn’t matter what product line it is whether it is textiles or its hand tools or its auto components anything the reason you have such a plethora of Chinese visiting is because they are not funding their trips themselves the government is supporting a lot in that the second thing is the infrastructure it costs more to ship a container from Delhi to Mumbai then it costs you shipper container from Shanghai to San Francisco so you know it’s a huge cost which has to be borne by somebody and who’s that somebody not necessarily subsidy it’s just a question of how the other infrastructure is and how the rates are you ship from England China to the port the government ensures that you your cargo is not more expensive to your customer when it gets to him because they know that the difficulty of setting up industry in the eastern part of China and you know then shipping it out to Shanghai etc so those those are the key areas where we really need to focus the government has in the last year logistic costs is very very high so for us we tried but failed to battle logistics costs so what we’ve done is we’ve gone and set up a plant at a cost coastal town so then we Gujarat so then we completely eliminate the land freight from the port to the hinterland in fact at a Japanese up oems conference they told us that the cost of importing at the cost of freight from say south korea to chennai is lesser for the same item if you get it from bonei to chennai can you imagine so we’ve obviously cannot beat this so he said let’s go and station ourselves at the port because our raw materials are imported and then we can also export the finished output and hence try and become more competitive in the global scenario in terms so the so this is what mr wrangler already mentioned that then infrastructure is something that we need to really work on in terms of building

better highways better trained connectivity because we need to get our goods quicker to our customer and keep the entire supply chain lean if goods are going to take 12 days for instance from North India reach Chennai imagine 12 days of inventory 12 days of cash is blocked in the system leave alone the cost of freight itself that’s a huge go so these are all disguised costs in our structure when we say China is more competitive we need to break it down and look at all these causes and built up into our supply chains trucks you’re coming and I biggest one with such kilometres ah yeah yeah compared to Europe compared the United States compared to China they travel six times that in a day yeah so you know I mean 10 days from here to Chennai six days to Bombay for a truck it’s it’s really a lot of God Sri suggestion that you would like to all of you please if they are up to five in Chinese what with those three key elements so I would say be smart and pick your battles when I say pick your battles you cannot really battle with the components with low value add a lot of commodity a lot of commoditization so pick your tough and fight with the Chinese on that tough for instance we decided to pick safety critical parts and that’s why we’re giving them a fairly fair fight well I agree with what Nathan says fully but I’d also like to add that we need to be innovative and we need to be quick to develop products if you want to fight the Chinese auto component manufacturers in the replacement part market or in the OEM market we need to demonstrate the ability to develop products quickly and our turnaround time has to come down dramatically I would say yes design you know all of us have to get in design capabilities in our company’s most of us are you know we’ve developed to piston assemblies for a European OEM and I’m very proud to say that they’ve gone into production after two years of tests and trials so I think design is the first key thing and then go on to innovation because once you learn to design then your engineers and your people would you know think about innovating so get into the design mode ASAP so what is the conclusion of today’s roundtable discussion is that all the auto component manufacturer who was trying to take a face of the Chinese counterpart should take care of three important thing one they should start investing in innovation and technology so that they can have quality product secondly they should try to reduce turnaround time of the products thirdly that will start investing in the skilling manpower this comes as an end to this episode of ETO to round table till then take care and wish you all very happy new year from entire idiota team stay safe thank you for watching