South India at the crossroads

Earlier this year, the South was in the news when the Tamil Nadu State government announced that Peugeot would set up shop there. The French carmaker is one of the last big names to enter India’s turbo-charged automobile sector and this seemed to be a clear victory of sorts for Tamil Nadu that has been able to woo some of the biggest names in the global auto sector.

Starting with Ford Motor Company, Tamil Nadu has been able to get considerable investments. Today it can argue that it is a Detroit of sorts with marques like Hyundai, Renault-Nissan and Daimler India Commercial Vehicles setting up shop there. However, it appears the State government had jumped the gun on the Peugeot news. The very next day after the announcement was made, Peugeot top brass met with the chief minister of Gujarat; the company also issued a statement saying that the final decision of plant location had not been taken. (Now we know).

Choosing the right State for its investment is not easy for any manufacturer. Investments by automotive majors are typically big ticket and bring with them a host of benefits to the State that is able to get it. These include tens of thousands of jobs, direct as well as indirect, and tertiary benefits such as better roads, logistics and a boost to the overall development of the area. Take Sanand, for example. Who would have heard of Sanand even two years ago? Today, land rates have gone up and in the not-too-distant future, the area will see a whole new development. Today, it is home to Tata Motors’ latest facility from where the Nano rolls out. And though the story goes that it all started with an SMS in the aftermath of the Singur fiasco (which saw Tata exit West Bengal), it does indeed take much more than that.

There are a host of approvals to be received for a variety of things but perhaps the biggest is land. Land costs are increasing and it’s a fixed investment that every player, in any industry, has to make.

Meanwhile, Honda Motorcycle & Scooter India announced its plans to establish a third plant in Karnataka. That is a boost for a State that has been able to bag one of the biggest names in the auto sector – Toyota – which has two plants and has recently announced plans to invest Rs 900 crore to enhance capacity to 310,000 units by 2013.

Some weeks ago, Ford announced its plans to set up its second plant at Sanand in Gujarat. No doubt this would have come as a major disappointment to Tamil Nadu but Ford India’s president and MD Michael Boneham could only say that his company was appreciative of the ongoing support that it was receiving from the Tamil Nadu government.

In his interview to Autocar Professional (15 August issue) Boneham said Ford India chose Gujarat because of its pro-business environment, infrastructure, access to ports in north-western India, skilled workforce and the geographic location itself.

In Tamil Nadu, recent events will, however, sound a note of caution to existing and future players. In June last year, Hyundai Motor had a six-day strike that affected the production of over 2,000 cars and resulted in substantial losses for the manufacturer.

In other parts of the South, belligerent workers have struck work, even being responsible for the murder of an HR employee. One major consequence of having so many auto companies or even other industries such as IT, is that there is a limited pool of talent from which to chose from. This means that hiring and retaining talent is an all-out war. Attracting talent from other parts of the country isn’t easy as there can be language and culinary issues too. But HR issues apart, as companies aim to use India as a hub for exports to other parts of the world, it is important for a potential player to look at what a place offers in terms of ports facilities. Take Ford India. It exports the Figo to several countries from Chennai. So does Nissan which has, so far, exported 85 percent of its Micra hatchback.

Talk to any automotive CEO and the one problem that supercedes all others is the availability of talent. They have called it a major headache but know that there is no easy way out. Time perhaps for State governments to work closely with automotive majors to look for innovative ways to generate talent.

The Gujarat factor(y)

So is South India losing its hold to a burgeoning competitor – Gujarat? M Velmurugan, executive vice-chairman, Tamil Nadu Industrial Guidance and Export Promotion Bureau, tells Autocar Professional that the Tamil Nadu government is in discussions with very large OE players that are expected to be finalised during FY’12.

"We hope to draw another Rs 6,000 crore of investment from a couple of vehicle manufacturers and 15-20 new auto components suppliers into the State in the current fiscal. The parts vendors are suppliers of Renault Nissan and Daimler who will be investing close to Rs 1,000 to 1,500 crore in the State with the balance being invested by OEs," he says.

In the past 10 years, automotive investments in Tamil Nadu have crossed Rs 30,000 crore of which vehicle makers have brought in close to Rs 23,000 crore.

However, Velmurugan agrees that the automotive market is largely pan-India and cannot be catered to only from the South due to logistics issues related to deliveries. Hence the movement of investments of an established South-based OE manufacturer like Ford India towards Gujarat.

L Ganesh, chairman of the Rane Group, shares a similar view and is considering setting up two to three new steering gear plants in Gujarat to service the requirements of Ford India and Maruti Suzuki there.

For instance, Ford's second plant involves an investment of Rs 4,000 crore (approximately $1 billion) in a manufacturing facility and an engine plant at Sanand where Tata Motors led the way with its Nano project. Ford plans to produce 240,000 cars and 270,000 engines there, thereby generating employment for 5,000 jobs. Moreover, it has very aggressive expansion plans in India, Asia-Pacific and Africa and these two new plants will further its growth strategy.

Maruti Suzuki India, whose Manesar operations have been bogged down recently by labour strife, has also indicated its keenness to tap the Gujarat region for its seventh plant with an investment that could run into Rs 18,000 crore along with its vendors for producing 20 lakh vehicles in the long term. Maruti is believed to have also zeroed in on a site near Sanand out of locations shown at Sanand, Halol and Dholera.

French carmaker PSA Peugeot Citroen, having vacillated between Tamil Nadu, Gujarat and Andhra Pradesh for establishing its Indian manufacturing facility, has finally chosen Sanand. It plans to invest Rs 4,000 crore for an initial capacity of 170,000 vehicles per year with options for further expansion. In addition, an engine and gearbox plant will be established using the most advanced power train technologies.

So does this mark a new chapter in the growth of Gujarat as a major auto hub and the beginning of the flight of investments from the South? R C Bhargava, chairman of Maruti Suzuki, had earlier said that the main reason for exploring Gujarat as an option is due to its close proximity to the Mundra port that would help save logistics cost while exporting cars. Srivats Ram, ACMA president, says that when OEs invest in the range of $1 billion in a State, component manufacturers will also relocate to be within close vicinity. Today, OEs rely on ‘just in time inventory’ which necessitates the supplier to deliver at short notice.

The Southern belt and the Delhi/NCR region have become saturated and have been increasingly facing infrastructural problems like shortage of power and hence the hunt for newer geographies by automotive majors.

Abdul Majeed, Leader of Automotive Practice, Pricewaterhouse Coopers India, says that Gujarat is attacking investments and eventually OEs have to move from south to north to west to locate a second or third plant due to logistics costs. Similarly, north-based companies have to set up base in the south for the same reasons.

Why South India needs to act fast

A recent Confederation of Indian Industry (CII) and McKinsey Report of 2011 on sustaining South India’s growth momentum points out that the southern region has been a major driver of growth for India from 2000 to 2010, contributing to over 22 percent of India’s GDP and 28 percent of its employment. Simultaneously, it admits that while the region begins this decade on a sound footing, a slowdown in its recent growth and growing competition from other States has meant that South India must now act to retain its edge.

The report has listed certain challenges of power, roads, ports, logistics and housing, which in recent years have not kept pace with demand. Besides managing talent, its availability has become a major concern across the manufacturing and services sectors. Besides, strengthening of policy-making and implementation to bridge time-consuming approval processes and slow implementation of policies and projects as well as building of capability in industry to move up the value chain from low-end services to higher levels of sophistication has been felt.

The way ahead for South India

For countering this challenge, the CII report has suggested four critical enablers including a cluster-based economic development, development of physical and social infrastructure, a clear policy direction, rigorous execution, and a sustainable funding plan for facilitating such growth. It has suggested that a comprehensive implementation plan, jointly monitored by the respective governments and industry through an association like CII, should foster this growth.

Becoming a global hub in automotives or auto-components would involve obtaining a six to eight percent share of the global automotive market by 2020. This implies an annual automobile production capacity of around six million vehicles. Further, at least three to five of the top 10 global players should have manufacturing and design facilities in the region. The industry should move beyond component manufacturing and vehicle assembly to all parts of the value chain including R&D and product development.

The report suggests that Tamil Nadu should have a world-class automotive research university for nurturing talent, finishing schools and vocational training infrastructure that will create industry-ready talent across semi-skilled and skilled labour.

A differing view emanates from Arvind Balaji, joint managing director of Lucas-TVS who feels that Chennai continues to attract significant new automotive investments including BMW, Daimler, Renault-Nissan and Ashok Leyland-Nissan. In addition M&M is making technical investments in Chennai. Honda has announced a new plant in Karnataka. The longstanding eco-system of companies combined with a good industrial culture, availability of technical manpower and supportive government would further help to ensure that the South continues to be a significant player in the domestic automotive industry. Like any top player, South India is facing some stiff challenges but nothing that cannot be dealt with successfully.