August 14, 2012: With state government support, Maruti hopes to re-open operations at Manesar even as suppliers await more indications of a return to normalcy.
The dark clouds of labour strife hanging over Maruti’s Manesar plant are expected to blow over soon. The carmaker is considering re-starting production by August 16, say sources who spoke to Autocar Professional. The lockout at Manesar continues to have a cascading effect on around 650 ancillary units in the Gurgaon-Manesar-Dharuhera industrial belt that employs over a million workers, many of whom are contract workers besides those employed by the 270 parts suppliers in the vicinity.
With expectations rising that the lockout will be lifted soon, some Maruti suppliers are beginning to keep inventories for about 10-15 days to meet Maruti’s demands at a short notice should production commence.
Meanwhile, P K Gupta, additional chief secretary, Haryana Labour and Employment Department, has confirmed that the state’s chief minister in his meetings with the top management of Maruti as well as subsequent official level meetings, has pushed for restoration of production at the Manesar plant at the earliest. While some of the key people behind the mob violence at the Manesar facility on July 18, who had been eluding arrest so far, have been caught, Gupta says that with the SIT investigation underway, the lockout should be lifted soon.
The lockout is costing Maruti about Rs 90 crore a day with the Centre and state government together losing Rs 15 crore daily from excise revenues and other duties, according to Assocham secretary general D S Rawat. As a result of the lockout, daily production of 1,600 to 1,700 units of Maruti’s popular models have been affected. The Swift, Dzire, A-star and SX4 are manufactured at Manesar and account for 30 to 35 percent of Maruti’s total production. The backlog for the Swift and Dzire has already climbed upto 120,000 units. Maruti has also recruited 1,000 workers – both contract and diploma holders from ITIs and other institutions – to replace those who allegedly indulged in vandalism at the Manesar plant last month that led to the death of one official and injuries to another 100.
Will the crisis lead to a flight of capital?
The labour crisis at Maruti has had industry worried. At a recent Assocham conference attended by prospective foreign investors, there were strong indications of an imminent flight of investments from Gurgaon to either Tamil Nadu or Andhra Pradesh should the labour issue continue to simmer.
According to Rawat, several Japanese automotive companies are open to the idea of investing in the Chennai-Bangalore corridor rather than in the Delhi-Mumbai Industrial Corridor as it is seen as a safer haven with 42 SEZs at various stages of being set up.
This is attracting the Japanese companies to the southern belt even more than to Gujarat which has been able to draw major investments from the likes of Ford and Peugeot. Meanwhile, the southern arm of the Confederation of Indian Industry has proposed the setting up of a Southern Industrial Corridor that will link the major cities in south India to draw investments further for developing infrastructure and generating employment in the region.
In order to make up for output lost at Manesar, Maruti is believed to be beefing up production at its Gurgaon unit by 200-250 units per day from the second week of August. This includes ramp-up of the Wagon R which ran into some production glitches at the end of May. In addition, Maruti is believed to be making small numbers of the Swift at Gurgaon. Body parts for the Swift have been procured from inventories at Manesar. However, production of the Dzire is still on hold, say sources in the know.
On other fronts, production of the Eeco van, stalled for the last two months due to the absence of a die for making chassis members, is now on track and notching 200 units daily. The carmaker normally produces around 250 units per day of the Eeco.
Production of the Alto has also been put on hold to make way for the new 800cc small car that is slated for a late September-October launch. The new Ritz model rollout is also in the pipeline, so there is a go slow on the existing Ritz model.
Ripple effect
Meanwhile, component suppliers are reeling under losses due to the lockout. A recent ICRA report has placed 14 auto ancillaries on rating watch with developing implications. This is due to their high revenue dependence on Maruti’s Manesar plant that could lower their cash accruals and in some cases cause possible stress on their liquidity position during the period of lockout. The overall average realisation of components for suppliers for the four models produced at Manesar is higher than those of components that go in models produced at Gurgaon.
ICRA has estimated that vendors which supply to all models of MSIL derive around 35-40 percent of their revenues from supplies to models produced at Maruti’s Manesar plant. Parts suppliers are together believed to be losing Rs 40 to Rs 50 crore of revenue daily.
Krishna Maruti, a joint venture between the Krishna Group, Suzuki and Maruti Udyog, has been significantly impacted by the lockout since 95 percent of its supplies and revenues accrue from its JV partner. Five of its manufacturing facilities located at Manesar are shut down with the company posting a daily loss of Rs 4 crore. The component supplier that manufactures seats, injection moulded door trims and tooling is one of the suppliers placed on the rating watch by ICRA in its recent report. However, chairman Ashok Kapur says that at this stage, he is not as worried about the ICRA rating as he is concerned about Maruti because these ratings would turn around once Maruti production is in full swing.
Since Maruti’s stand against workers is based on discipline, Krishna Maruti despite suffering losses is not in favour of a short-term compromise between Maruti and the workers as it would affect suppliers in the long-term. Maruti lost potential sales volumes of around 40,000 units to labour unrest in 2011-12 before the crisis blew over.
Similarly lighting equipment supplier Lumax Industries is also on ICRA’s rating watch and Deepak Jain, senior executive director, says he is concerned that this may lead to an increased rate of interest being charged by bankers on loans availed by the company.
Though Lumax services multiple OEM customers, its exposure to Maruti Suzuki, its top client, forms a high 30 percent of its topline. A third of the MSIL supplies are headed to the Manesar plant and hence the lockout impact for Lumax is to the tune of Rs 3 crore every week.
Lumax is keeping a buffer stock of 10-15 days for Maruti in the hope that once production kicks off, it can supply right away. It is also doing its bit to support the carmaker by advising its workforce not to create any problems that would be detrimental to the growth of the company. It is keen that the government plays a strong and crucial role in resolving the current labour-management imbroglio instead of indulging in vote bank politics to mar the growing industrial environment in the region. This stems from the role of the extreme left suspected in the recent Maruti violence.
ALP Nishikawa Company, another supplier on the ICRA rating watch, fears a sales loss of Rs 3 crore to accrue in a month if non-production at Maruti continues especially as it maintains a three-day inventory. According to ALP, since ICRA carries out a periodic surveillance for ratings, once the lockout is lifted, ICRA would review the situation and remove the rating watch on ALP. Individually, it will assess its dent on revenue and profitability thereafter but is optimistic that with its diversified customer base, its cash flow and profitability would be less impacted.
Further, the Gurgaon-based Machino Polymers, a Tier II supplier is losing monthly supplies of 300 tonnes of advanced polypropylene (worth Rs 30 crore) to vendors for making plastic parts like bumpers and instrument panels for Maruti models, but maintains it has diverted much of the business to other OEMs in the west and hence, its actual loss is much lower.
Awaiting normalcy
While viewing the situation at Maruti as a law and order problem, ACMA president Arvind Kapur has sought to assuage suppliers fears by assuring them that once Maruti reopens its Manesar factory doors, all problems at the vendors’ end would be sorted out as would issues of possible higher interest rates being charged by bankers. He hopes the situation will return to normalcy thereafter as suppliers, though impacted at present, have a breather in supplies to Maruti’s Gurgaon facility that is functioning normally.
Overall, about 30 percent of the suppliers' profitability is believed to be have been shaved off due to the ongoing lockout. Subrata Ray, senior vice-president, corporate ratings at ICRA, agrees that the negative development involving clamping of the rating watch on suppliers could adversely disrupt their borrowing rates and profit margins. ICRA is likely to decide on its future course of action in terms of downgrade or removal of rating watch on suppliers within a couple of months.
All said and done, all the stakeholders concerned are keen to see the last of the lockout. An analyst in a financial services firm suspects a stronger motive behind the recurring labour strife at Maruti, one that is not easily apparent. This could trigger off a de-risking exercise by Maruti as well as a fast tracking of its Gujarat plant and a subsequent scale down of its Manesar operations. If this happens, the supplier and logistics chain could well be in for a bigger shock in terms of employment and business.
SHOBHA MATHUR