'There has to be a vision to take the Indian economy forward.'

Dr Surinder Kapur, chairman of the Sona Group, tells Shobha Mathur what he expects from the new government, expanding operations abroad, gearing up for growth in Gujarat, and how the Indian auto industry can improve labour relations.

With elections In India drawing to a close, what are your expectations from the new government?
My hope and prayer is that we have a strong government and not a khichdi. Prime minister Manmohan Singh has said, very correctly, that coalition politics has its own price to pay – differing parties, different ideologies, different agendas, even though they have a minimum common programme. Somewhere you have to give into something that you should not.
As businessmen, we are mostly apolitical and want good economic growth because India requires it and deserves it. To me economic growth means employment. Every year 12-15 million youngsters look for jobs when they graduate. Therefore, jobs have to be investment- and infrastructure-led because that’s what really kick-starts the economy. And in the past five years, there has not been that kind of investment in infrastructure.
So my hope for the new government is a strong Centre that is able to really push through good legislation; for instance, the Goods and Service Tax (GST) which we have been awaiting for long. It will add 1.5-2 percent to the GDP growth rate.

Anything specific for the automotive sector?
The auto sector grows because of three things – good interest rates (they are high today) that need low inflation, fuel prices (diesel and petrol prices need to be contained, which in turn needs investments in the petroleum sector) and, most importantly, a feel-good factor which will surely come about if you have a strong government. If we have a khichdi government, we are in trouble.
The slowdown has affected the auto sector, which is very sensitive to fuel pricing and high interest rates. To stabilise interest rates and inflation which in India are supply-sided, investments are the key. And, for investments we require FDI. I recently read a report that said European nations believe that India is a great place to invest, provided there is a strong government. Retrospective tax in business is putting people off. We need to correct that. There has to be a vision to take the economy forward.

How badly has the Sona Group been impacted by the slowdown?
If the automotive industry does well, we do well; if not, we also suffer. However, as a component manufacturer, we have to make sure we are diversified. For instance, in our Group, Mahindra Sona and Sona Okegawa have been able to expand in markets overseas so the impact is less.
Sona Okegawa, which supplies to passenger cars, commercial vehicles, agricultural tractors and exports, is the least impacted by the downturn. Mahindra Sona has got exports and utility vehicles and has now entered the heavy commercial vehicle sector, so it is now balancing off. Sona Koyo, which is mainly in the passenger cars and utility vehicle sector, has now entered the agricultural off-highway business. Exports have begun for John Deere's off-highway vehicles in North America.
I don’t think you can look at the component industry separately from industry or from OEMs. All of them are impacted in a way. The question is: are you able to retain your market share? Our market share has not dropped. We are doing very good work in areas of reducing costs, so our margins are improving especially in Q4.
Now we are looking at how to focus more on R&D. Therefore, we are looking at many R&D projects – some fully in-house, some with CSIR, and with Fraunhofer in Germany.
We are in the process of setting up an R&D Advisory Board, separate from our company board. We are also in the final stages of taking on some people from Europe, from both component makers and OEMs, as well as from India. We will meet twice a year and share notes on what we are doing and get ideas from them. The first meeting of the R&D Advisory Board will be held in October this year in Europe and the second in February 2015 in India.
The advisory board will be independent. All the Sona Group companies will make presentations and get advice from this board on the areas to look at.
Globally everybody is looking at making their products and cars smarter and more connected. All these areas offer opportunities to component makers to invest in R&D.

What is the Sona Group’s strategy to expand overseas?
Currently, Sona is a Rs 4,500 crore Group, of which 45 percent revenue accrues from overseas. We made an acquisition in 2008 of a precision forging company in Germany and a company in the US. We employ 1,300 people in Europe and 200 people in the US.
Mahindra Sona, a Rs 350 crore company, generates 20 percent of its revenue from abroad. Sona Okegawa, also a Rs 350 crore company, gets 25 percent of its revenue overseas. Sona Koyo is a consolidated Rs 1,600 crore company which draws 10 percent of its revenue overseas.
Mahindra Sona and Sona Okegawa are finalising definitive plans of entering South East Asia, where we see good market potential. Sona Koyo, which is diversifying into agricultural tractors, also has potential in South East Asia. All these companies in the future will have to look at geographies as a means of growth and South East Asia will be the first market that we will attack. We will then look at Turkey and Russia.
We see good potential for our precision forging business for Sona Okegawa in South East Asia and a good market for propeller shafts for Mahindra Sona. Once we are fairly strong in the Indian agricultural tractor market for steering, then we will examine how we can take it overseas.

Will you look at exports or setting up a base in South East Asia?
Both. For Mahindra Sona and Sona Okegawa we are currently examining setting up a base there, not just exports. We believe that it will be more economically viable as South East Asia has got a very peculiar import tax regime. Even though we talk in terms of a Free Trade Agreement, there are still some parts like raw material and steel that are quite high in terms of import duty.
I recently met some people from South East Asia who want to enter into a joint venture with us to first see its feasibility. I am still not clear on the import duty. Neither are they.

This means you plan to tap South East Asia through a joint venture?
We will probably set up base through a majority JV but will also require local partners to help us because there are local issues.

Is the manufacturing facility coming up in Thailand?
Yes, it is in Thailand but we have not yet been given the green signal for it. The project is still in the serious feasibility stage with potential partners but we are going ahead with it.
Once you are in the ASEAN, you can export to anywhere in the ASEAN. We are also exploring whether China is a good market from there, but have not decided.

What about entering South Africa and Latin America?
We can chew on only one thing at a time because we want to be successful in what we do. We also need to manage the bandwidth. It is not just money, brick and mortar. At the end of the day it’s people – we need strong management teams that can go and implement projects and manage them.

What about Sona's plan to license its technology in Germany from its acquisition?
We are looking to license that technology to a Russian company and are in a dialogue with them to make bevel gears through the forging process.
In precision forgings, we are the global leader and hold a 30 percent market share. There are products we have developed like speed gears where there are only three players – one Japanese company, one small Chinese firm and us. It’s a new technology. We are thinking of licensing the Russian company for bevel gears.
We are also looking at China because we have been asked by one of our customers to go to China and we are trying to structure a licensing arrangement there. The Chinese are not known for protecting intellectual property rights and our technology is too sophisticated, so we want to keep control of our technology. I don’t want to take a hasty decision for China. In Russia there is some semblance of IPR and for us IPR protection is very important.

Clearly, you have ambitious global plans. What is your gameplan for garnering a larger chunk of the pie?
I think it is every company’s mission to be amongst the top 2 or 3 depending on the size of those markets. ASEAN is beginning to be a very strong market. India should have been at 5.5 million vehicles by next year but we are only at 3.5 million. Now we are talking in terms of 9 million by 2020. Will we reach there?
Our strategy is wherever we are strong in terms of technology, in manufacturing processes, costs and quality, those are the products to take to whichever geographies we can enter without any great difficulty. Today we have 14 manufacturing sites in India and one of the most difficult things is geographical management.

You had plans to relocate the Gurgaon plant to Dharuhera. What is the status now?
We started the Gurgaon facility 27 years ago. Manufacturing facilities need continuous upgradation and manufacturing is one activity that requires continuous innovation, what the Japanese call kaizen. Even production technology keeps changing and from Japan we learnt just-in-time production.
Our partner in Japan (JTEKT Corporation) has come up with a new process of manufacturing called 'fishbone concept' which is much more effective. We have now introduced that in Dharuhera and we have three plants there that are seeing productivity improvement. By the end of CY 2015, we would have moved out of Gurgaon. We will see what we will do with the land bank of 14 acres there.

How does the fishbone technology work?
Simple. Just-in-time is a straight line, in fishbone you make components separately and assemble them in one line. We have achieved 10-15 percent improvement in productivity with the same number of people and investments using this concept. We started it in Dharuhera and are now spreading it across to other plants in Chennai and Sanand.

What is the current status of the Gujarat plant?
We set it up for the Nano which, unfortunately, has not done well. So we have started manufacturing products for Mahindra from there. Sanand will now become a very strong facility for all our western region customers. Ford India and Maruti Suzuki are setting up new plants there, so we will expand that facility.
Currently we produce steering systems and differential sub-assemblies there for existing customers; for new clients, we will use those lines. We machine all the components in Gurgaon and send them there. Once we start with the new customers, we will start manufacturing there because that is assured business. We are moving some lines from here to Sanand and some to Chennai to spread ourselves. We eventually intend to have three hubs for manufacturing in north, west and south India to cater to individual customers in those locations with a centralised R&D, centralised procurement and centralised engineering.

Would you look at new plants in any other region?
A lot of people looked at Uttarakhand for a facility. We said we would wait till we started supplies from here. The real benefits of excise of those plants would have been if we were to supply to the aftermarket which is not something that benefits us at this stage.

Which are the latest trends that you perceive in the automotive sector?
Lightweighting is a big trend because everyone wants to improve fuel efficiency. We are seeing smart products being developed. There is a lot of talk on electric vehicles (EVs) but not much is done on it. I am on the council for e-mobility and I know that though a mission has been started, there is no work done on the ground. A lot of work needs to be done in the area of transmissions, battery, charging units, electronics and motors.
The good news is that India has got the talent and the will to do it but initially some support is required that is given anywhere. In America, the real success story of EVs is Tesla that received venture funding. In India, the EV market is not mature from that perspective. I think the Indian government can give some funding or do some PPP models of work in R&D.

How soon do you see the CV sector picking up and recovery starting?
There seems to be a trend that the decline is beginning to stop which augurs very well for potential growth. But I think it will take at least 18 months for the CV sector to go back to its original level. What’s required is investments.
The new government will have to perform from an economic point of view. Once investments start – whether in road building, ports or dams – there will be a need for cement, steel and power that will require things to be transported.
If you look at commercial vehicles, studies show that over a five-year period, they all grow at the rate of the economy because they are really capital goods. Passenger cars, on the other hand, grow at 1.5 times the rate of economic growth as they are aspirational products but have a cost. Two-wheelers grow at twice the GDP growth rate because they are aspirational plus they are lower cost.
So if you look at the cost-market analysis, the lower the cost the higher the volumes and higher the cost, the lower the volumes. It is very evident that for the CV sector to grow, you need to see the economy growing.

North India and even South India have of late witnessed much labour strife. What is your take on this?
My view is that labour problems are individual company problems; they are not a regional problem. A number of very good companies in the north and south have never had labour problems. There is a genuine demand of management and also a genuine demand of workmen to be met. Problems happen when people take positions and don’t talk. Communication and understanding of each other developed by consensus always finds a solution. But if people get stuck, like in the case of Toyota Kirloskar, some education and employee involvement are required.
Labour problems are specific to companies because there are attitudes in that company which need to be changed, both at the management level and at the worker level. Workers require a lot more training. I am seeing young workers becoming union leaders. All they know is naaragiri, they don’t understand the responsibility and accountability which comes with being a union leader. You need to protect your workforce and see how they are skilled and trained and not only look at the money angle. From the management's perspective, they are asking only for discipline and following of their manufacturing processes. When communications break down, it is a free for all.
There is a national agenda to create good companies and to look upon your workers as an appreciating asset and not as a cost. From the workers’ side, they need to remember the company is what secures their employment; so they need to do all that is required and increase their participation.
I am currently chairman of the CII-Industrial Relations Committee. My message to everybody is to look at the good practices. The company is like a family, so a lot of education is required. In Germany, if a company wants to recruit somebody, in the final interview the union leader will also sit in because he wants to make sure that the person who is recruited is skilled and will contribute to making the company strong. He is not there to see that his relative gets employment. Here, unfortunately, the attitude so far has been to recruit relatives. Having said that, we need to overhaul our archaic labour laws – they are stupid. They need to be made simpler and more contemporary. There is no consensus on what is required, hence no changes have been made so far.

What is your opinion on counterfeiting of components?
That’s a longstanding issue. There are two types of counterfeiting – people counterfeit OEM products and counterfeit Tier 1 products. This started because prices of products are not correct and thus there is a market for cheaper products.
I have noticed that there are multiple brands in Europe, USA and Japan. For instance, Bosch may have two to three brands that are sub-brands, so it is able to cover the entire market segment. In India, TVS will create its own products but will not have sub-brands, which are then counterfeited. The counterfeiters don’t know what to call them so they name them TVS. So we need to restructure our thinking and understand the root causes of the problem.

What is your forecast for 2014-15 for both the Sona Group and for the Indian auto component sector?
I think growth cannot be more than 4-5 percent for the industry but individual companies will do differently, depending on their market and product mix.
In the Sona Group, the Sona Koyo Group will post the industry growth – maybe 10 percent – because it has got new launches and newer products lined up and we are seeing that new launches create a lot of excitement.
For companies like Mahindra Sona and Sona Okegawa, which also do exports, their growth rate will be higher and double that of industry because their product mix is different. If the Group grows 7-8 percent or even 10 percent, we will cross a turnover of Rs 5,000 crore with 45 percent coming from overseas.

This interview has also been published in Autocar Professional’s May 15-2014 issue.