More power to local value

THE mantra for a section of the Rs 20,000-crore auto component industry is ‘local value addition’. It believes this will be helped if its long-standing demand for a differential rate of import duties is introduced.
Then there is another segment within the industry that has put this demand behind it, facing up to the reality of stronger lobbies in the raw material sector.
This is the lobby that displays a new-found confidence, buoyed by its exports, which industry players believe will make India the preferred destination for outsourcing.
In the global league with China and Brazil, players claim that the inflation ridden Brazil and the legal and language problems of China make India the most attractive bet.
For this section, issues of concern are outside the Budget: they harp repeatedly on power availability (a state subject), flexibility in labour laws and simplification of government procedures which will allow them to function at full capacity.
A votary of this school, BN Kalyani, CMD, Bharat Forge (BFL), said, “There is a realisation in the system that market forces are the driving force for all actions, even in government. There is thus an alignment between government and market thinking.�
The auto component sector witnessed total investments till March ’02 of Rs 12,000 crore, turnover of Rs 20,000 crore and exports of Rs 2,775 crore. A huge 90% of the turnover came from the 407 members of the Automobile Component Manufacturers Association (ACMA).
Stressing on “value add�, Dinesh Munot, managing director, ZF Steering and former president, ACMA, said, “In a liberalised scenario, value addition is the only thing which should be supported. For that, value addition has to be done in India. And this requires we get raw material at international prices.�
He added, “Our conversion costs are comparable with the Chinese and if the raw material is available at international prices then local value addition is even more attractive.� So, Mr Munot suggested duties on raw material should come down to 10%, if the current peak rate on components, now at 27%, is brought down to about 20%. There should be a 5% differential for every level, from finished, intermediates to raw material. Mr Munot admitted that interests of steel makers and others in the raw material sector would have to be looked at and a balance struck between the two. Mr Kalyani said this would eventually happen, since this is part of the WTO regime. “These are aberrations and will eventually be corrected and rates will fall in line with global ones,� he said. The industry is now looking to stay ahead on the curve. For this, it would like the government to support research and development effort through fiscal sops.
After all, Mr Munot pointed out, not everyone will invest in R&D, only the vehicle manufacturers and their Tier-I suppliers will. Having put the worst behind it, the auto component industry is confidently looking at a very sustainable growth, over the next two years, growth rate of 7-8%.
“Barring agricultural tractors, every segment of the automotive industry is up. We expect passenger cars to grow at over 10% in the next financial and if excise duties are at 4%, then this could be higher,� Satish Sekhri, managing director, Kalyani Brakes (KBX), said.

He was categorical that India was finally converting its potential into reality, as a destination for out-sourced manufacture. “At least 10 component manufacturers are expected to show a 100% growth in exports in this financial year. Next year, this could be 30. As it is, 40-50 Indian auto component manufacturers are focused on Europe and the US, where the pressure is mounting to reduce costs,� he said.
He added that India is now competing with Brazil and China as a destination for global outsourcing. Brazil has a problem with its inflation and China with its language and the legal system, leaving India in the fray. It is not only the exports but also the domestic market which has brought the segment back to health. “Local industry has improved, there is a growing number of vehicles and exports are healthy. Moreover, with a rationalisation of the vendor base by larger OEMs the capacity utilisation problem of the component industry over the past few years is behind it,� Mr Munot said.
PN Paranjape, managing director, Paranjape Auto Cast, whose Rs 40-crore group has a presence in the export market, was emphatic about the need for the power sector and labour law reforms. “Ours is a foundry-based industry and power accounts for 15-20% of our turnover and this pushes up our input costs. We need reforms in this sector as we need flexibility in labour laws,� Mr P Paranjape said.
Industry players admitted that there have been a spate of closures, due in part to OEs reducing the number of vendors and in part their inability to sustain in a competitive environment. However, all of them agreed that those whose units survived the downturn of the past two years, have now begun to add capacity, a sign of returning confidence.