The
Tata Nano may have overshad-owed the recent Auto Expo. However, beyond the
Nano lay a large turnout of auto component manufacturers and other related
sectors like garage equipments, machine tools, industrial automation, etc.
They accounted for a large chunk of the Rs 30 crores worth of orders
generated and over 100 MoUs signed. According to Raghu Mody, president of
Automotive Components Manufacturers Association, the year 2006-07 saw the
vehicle industry in India grow by 14 per cent; passenger cars by 18 per
cent; commercial vehicles by 33 per cent; two wheelers by 11 per cent and
tractors by 19 per cent. The auto component industry recorded a growth of 25
per cent and exports of auto components touched the US$ 3 billion mark. New
investments, according to Mody, continued unabated in the year 2006-07 with
many OEMs and component manufacturers establishing Greenfield plants as well
as enhancing capacities in their existing facilities. If industry sources
are to be believed, the Indian component makers put in an estimated
additional capacity worth US$ 1 billion during the year 2006-07. Investments
for the year 2007-08 are expected to surpass the US$ 1.5 billion mark.
More and more automakers and Tier suppliers are increasingly investing into
India and stressing on further hike in outsourcing. Fiat is said to be
working towards sourcing more from India and reach Euro 150 million in the
year 2008. Fiat's joint venture manufacturing facility with Tata at
Ranjangaon will be ready in a few months to support some 300,000 powertrains,
transmissions and Fiat/Tata vehicles.
Tata, which is a leader in commercial vehicles and a dominant player in
passenger vehicles, is claimed to be on a major consolidation drive. If
sources in the industry are to be believed, Tata is working towards
streamlining the supply chain to an extent where it will have to deal with
30 sheet metal component suppliers compared to a few hundred that it does
now. This should ideally translate into termination of business for some and
realignment with tier supplier for others. In a market that has new global
players like Skoda, Volkswagen and Daimler hunting for substantial local
sourcing the termination of business with one automaker may open the doors
to others. However universal to all the suppliers are the challenges, which
flow down from automakers. Challenges like cost pressures and the need to
increasingly invest more into design, development and innovation rather than
just produce components.
With globalisation touching the Indian auto sector like never before,
suppliers are no longer just producers of components but part of the
automakers' value chain. Unlike the earlier times where automakers designed
cars and then ordered tyres, transmissions and mufflers, today the suppliers
quite often jointly develop the technology with automakers for the next
generation of vehicles. So, it is the suppliers that are as much a
technology developer and research firm as much as the automaker, and this
means costs incurred in not just the production but also design and
development. And this could run in big numbers as suppliers invest in
software and various other intellectual property tools. And with the trend
of squeezing more from suppliers on the rise in India, which was first
noticed by the world in the early 1990s when GM turned it into an art form
under the direction of purchasing czar Inaki Lopez, the situation is forcing
suppliers to review their strategies.
Ask R K Behera, chairman of RSB Group and he agrees that there is a
considerable amount of squeezing on the auto component manufacturers:
"The squeeze is from both the sides - OEMs and raw material suppliers,
though the pressure from the OEMs is more pronounced and severe." he
says. "On one hand, India is emerging as a competitive sourcing
destination owing to its frugal engineering competence and on the other hand
the same global competitive forces are squeezing the margins to become
thinner. This is an issue, which certainly cannot be resolved by a partisan
approach, it requires to be addressed in a partnership framework between the
OEMs and the vendors," adds Behera
Interestingly, when Inaki Lopez pushed for more out of suppliers, sales were
down, profits were down and suppliers grew to hate GM as it forced them to
bankroll its own poor performance. Chrysler Corporation was equally strapped
for cash. But rather than beat cost out of its suppliers, it tried something
totally unique. Chrysler asked for reductions and got them. Under the
direction of Tom Stallkamp, Chrysler created its vaunted Extended Enterprise
System, a true partnership with suppliers wherein price cuts were mutually
negotiated and risk and reward were shared equally.
Techniques like the ones that Chrysler employed in the 1990s when the US
auto industry was going through a tough time, are being tried by automakers
in
India as part of their production system. Bajaj Auto is known to have
implemented a system where the suppliers also incur the rewards and
liabilities depending on the success of a product.
This is reflected in Raviraj Takawane's comments. Director of the Pune-based
Siddheshwar Group of Industries, Raviraj says, "The slowdown faced by
the auto sector, and especially the two wheeler segment is trickling in the
form of de-growth to the vendors. All attempts are being made by the
companies to protect the bottom line; attempts are concentrated through cost
control measures and stringent implementation of cost justification; there
is an all round horizontal and vertical effort across the whole of supply
chain resulting in a wholesome reward in form of cost saving." In terms
of the changes borne by the changing equations, Takawane opines that volumes
and resultant plant utilisation are increased, even as customers/OEMs expect
a commensurate reduction in prices, resulting in a mutual benefit for both,
the supplier and the automaker."
With the transition phase the Indian auto sector is going through, practices
like a more innovative collaboration between the vendor and automaker, which
encourage equal sharing of risks as well as rewards, look like the best way
ahead, at least for now. Anil Goel, managing director of Pune-based Duroshox
aptly remarks that the industry in India is going through a transition phase
and things will settle down for better very soon.
With globalisation already a part of the equation of the Indian auto sector,
in addition to costs, component manufacturers are battling numerous other
challenges. Challenges like the emerging East European auto-comp industry
that is almost as competitive as India and probably better positioned in
terms of infrastructure and logistics when it comes to serving European
automakers. Mexico and a few South American destinations are growing more
competitive. And we are not even talking about China. The rising rupee is
already making its effect felt and the slow pace of infrastructure growth is
limiting volumes.
While Behera adds that OEMs, notwithstanding the competition, should rise
above the short-term approach and share the burden with the vendors and
nurture them for becoming cost and quality competitive in the long-term, the
Indian auto-comp industry is also witnessing the entry of foreign suppliers
with vast capabilities and deep pockets. While Behera expresses that
collaboration between foreign and Indian collaborators will give the OEMs
the desired benefits of quality and price without any compromise and yet
help the Indian vendors to upgrade simultaneously, this writer remembers the
anguished loud thinking of the promoter of a Pune-based tier supplier,
during a visit to his facility at Ranjangaon: "Global suppliers with
deep pockets are pushing us smaller players down as automakers ask us to
execute large investments. Where do they think we could get such amounts of
finance from, and how are we to sustain our growth? The autocomp sector is
no longer as viable as it once was."
The auto component industry is not the same anymore, he added. His was
probably a opinion that many would not agree with but the fact is that
challenges for the autocomp sector are on a rise and this could have a
lasting effect on medium and small scale enterprises unless automakers, tier
suppliers and the supply chain, which includes various smaller suppliers, do
not collaborate more effectively than be rather keen on streamlining or
consolidating with little regard for others.
Navneet Jairath, managing director of Metalman Auto states that he does not
blame the customer because they are also facing the price war. "Being
Tier I vendor it is our duty to strengthen the hands of our customers by
controlling the price line by virtue of value engineering, TPM activities or
other innovations. This is not the time when we can ask our customers to
give us price as per our costing; we have to match their target price as has
been in the case of Nano." Expressing further that he would not agree
with the customer if he is not ready to listen genuine grievances like not
passing the steel or any other material increase which is directly effecting
to supplier's fixed cost, Jairath adds: "Ratan Tata gave a target price
to his team for development of Nano, which has been achieved by them by
adopting different techniques. Now every manufacturer's success depends on
number game, which means maximum capacity utilisation for reducing the
overheads. It is our duty in our own interest to look for more customers for
capacity utilisation if it is not fully utilised with one customer, hence I
do not blame my customers."
It is worth recalling here the conversation with a few suppliers who
maintained that they were not keen on supplying to the Nano as it would not
help their bottom line. But then one can also remember the proud demeanour
of the suppliers of the Nano while talking about their participation in the
project after the car was unveiled at the Auto Expo 2008. Exide Industries
put the battery of the Nano on display with a hoarding that read: "Tata
Nano: Powered by Exide". S B Bedeker, CFO of Endurance Group, which
supplies aluminium castings to the Nano, is of the opinion that with
increasing price pressures, components manufacturers today have to deliver
more in terms of durability, technology and quality without charging a
premium in return. "However, a manufacturer who can attain high level
of efficiency and productivity not only in the manufacturing process but
across the supply chain will still be able to deliver and demand a larger
share of business," he adds.
Beyond efficiency, productivity and entry-level cars are newer developments
like the quest to attain green goals, and this includes the Indian auto
sector. To help automakers attain their goal of green vehicles, industry
experts claim that it is the suppliers who have to do the heavy lifting to
make the vehicles a reality and at minimal costs. Automakers end up making
huge investments in the quest for new technology to meet the stricter
emissions norms and other frames and in the process end up rubbing the
suppliers. Recouping with that massive investment can be challenging, claim
industry experts, pointing at suppliers like Delphi, Dana and Tower
Automotive, who have filed for bankruptcy in the US.
Suppliers, which are building conventional components currently, will be
driven towards manufacturing sophisticated components for alternate
propulsion vehicles. Components that are electro-mechanical in nature, and
those that are even more sophisticated like the fuel-cell pack. This will
certainly involve investments, design and development, higher resources,
communication and security needs, and above all the increased need to combat
cost pressures. An investment towards producing a lithium-ion battery is
looked upon as a smart move today but will be justified only by the success
of the fuel cell vehicle of tomorrow. So, until then the investments that go
into the process from design to manufacture of the fuel cell are best left
unaccounted. In situations like this, which are already knocking at the door
of the Indian auto sector, the need for right communication between the
automaker and its suppliers takes the front seat.
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