My article predicted current TATA deadlock at Singur!

Craters in the big CAPEX rush

Since the past year reports of new investments announced in places like Uttaranchal and West Bengal have created much excitement for their state governments, the new investors comprising vehicle makers like Tata Motors, Bajaj Auto, TVS Motors, Ashok Leyland and many of their suppliers.

A growing domestic demand as well as the hope to enlarge exports have been the obvious reasons for enhancing capacities elsewhere as there is a limit to what a company can produce in one or a few places alone. These are the prime factors that have dictated multi-manufacturing locations in the country where we see a dotting of earlier vehicle making bases mainly in the north and south of India. With a vehicle parc of around 7 cars and 50 motorcycles per 1000 people and improved road infrastructure and networks that will push up the usage of commercial vehicles, there is huge potential in India for the vehicle manufacturing community.

However, like the IT sector, the automotive industry is in a business where product and technology life cycles are increasingly getting limited and hence companies in this business now have to work faster in product and technology development as they did, say a decade ago. They will need to do whatever it takes, to meet the “pull” from market forces, to survive.

No vehicle maker now has the luxury, like Bajaj Auto did in the past, for the consumer to wait for years till his booking fructified into final delivery of the vehicle. It was fine a decade plus when first-ever manufacturing sites or new capacity investments in industrial belts could wait for long periods to get the resources they required in terms of power, roads and more importantly in obtaining and training the manpower to run their new investments. In those days the consumer was necessary but not the king or queen. Today the consumer is king and queen and any delay to get what he or she desires in terms of a preference of mobility will deviate their minds to other choices in a matter of days if not a day.

The reality on the ground despite the excitement of the new CAPEX announcements is that locations like Pantnagar in Uttaranchal and Singur in West Bengal are not turning out to be cakewalks. While the former is not mired in political drama it will face tremendous hurdles especially in terms of manpower and the infrastructure required to house them near enterprises --despite the fact that resources such as power will not be a problem. The latter’s progress, no one could ever imagine in their worse nightmare, is being held up by a hunger strike of an opposing party leader!

The West Bengal government should have done its homework better especially in consensus building before it nose dived excitedly into alluring and giving Tata Motors the offer of land for its car project. At the same time one also wonders if the company did its own independent research or where it fell short if the research was done, before it said yes to the offer. Even if this issue gets sorted out it has no doubt been very embarrassing for both the West Bengal government and Tata Motors and taken off on a very bad foot. Bad publicity cannot be taken lightly and will have its consequences.

The fiscal and non-fiscal incentives offered by the Uttaranchal government are very enticing. These look good on paper and will transpire mostly on paper. But where are the requisite people who will be able to handle functions of engineering enterprises? TVS Motors, it is understood, has been clever in its strategy to do final assembly but what will happen to companies that plan to manufacture there?

Suppliers will face even tougher times. They have had no choice but to follow their customers and will have to ply them with parts under the usual axiom of keeping their costs and prices low. Input costs are said to be high in Uttaranchal. Those suppliers who opt for supplying products from their existing locations would have to dole out large sums on transportation. While it is easier for big vendors, who are cash rich, to invest in Uttaranchal, it will be the smaller ones that will have a more uphill task of catering to business interests. Entrepreneurs are already thinking of innovative ways. One such person said that he would have to initially manufacture sub-assemblies in his existing location and transport them for further value addition at his upcoming facility in the state. He would also have to engage in manpower rotation where skilled people would be shipped out to the state and new recruits would be sent to the existing base for training. How this innovative jugglery will work out remains to be seen.

Some vendors have blatantly refused to go to Uttaranchal saying that they already have enough challenges to deal with and do not want more while some companies are finding it difficult to convince their managers to locate there despite lucrative offerings.

Though CAPEX is inevitable to meet the growing demand for vehicles, proper planning and realistic homework is more important. Lessons learnt by companies in regions such as Gurgaon, where infrastructure is still a huge problem despite the large number of investments that have taken place and the MNC-owned BPO operations which have sprung up, should not be ignored.

One wonders how seriously state governments such as the one which runs Uttaranchal can be taken when despite having a sector like the automotive industry running there, with large-scale investments, does not mention the sector among the list of preferred industries on the website of its promoter the State Industrial Development Corporation of Uttaranchal Ltd!

(Published in June 2007 edition of Autocar Professional Magazine)