New Delhi/Mumbai: Sunil Ranjhan, a general manager at Honda Siel Cars India Ltd’s Greater Noida factory on the outskirts of New Delhi, says he has a new mission: to grow creepers on the 1,200 sq. m roof of his shop floor. Why? A green roof will allow him to reduce air-conditioning costs and save the company up to Rs6 lakh a year.
It may be peanuts compared to the total costs at a company that sells more than 60,000 cars a year, but it is just one example of how the auto maker is cutting expenses in troubled times.
All this to save on 6% of the money that Honda Siel spends on general administration. The Honda unit is not a publicly listed company in India and its total expenses are not known.
Welcome to the Indian auto industry, among the world’s fastest growing and now struggling with inflation that is at a more than 13-year high. Making components lighter by using alternatives to costly metals, redesigning components to eke out more component per kg of material, and redeploying logistics patterns are but a few of the survival tactics being adopted by Indian auto makers and vendors.
See: The economy drive
“About 72-75% of my total costs are input costs,” says Ravi Sud, chief financial officer at Hero Honda Motors Ltd, a firm that makes half the two-wheelers sold in India. “I can do something only about the rest.”
The soaring cost of raw materials and slowing demand on the back of higher borrowing costs have hurt profits of auto makers in recent quarters. In the quarter to June, most four-wheeler makers posted their lowest operating margins in the last three years. Operating margins measure how much profit is left after deducting basic expenses of running a business and are a key measure of profitability.
For companies such as Maruti Suzuki India Ltd, which makes one of every two cars sold in the country, and Tata Motors Ltd, the nation’s largest auto maker, this dip was more than four percentage points, the largest fall in 12 quarters.
While companies maintain that cost-cutting is a continuous process, “the intensity this time is much more,” says Karl Slym, managing director and president of the local unit of General Motors Corp., or GM, at his company’s headquarters in Gurgaon, the hub of the auto industry in northern India.
At General Motors India Pvt. Ltd, the staff is encouraged to contribute ideas to cut costs and Slym himself heads a committee that sifts through these proposals.
GM India usually gets around 100 proposals a month, but after Slym made a personal appeal to employees, he received 1,000 ideas in June, of which he says he has had 300 implemented.
Example: GM India no longer hires outside trainers to train people across functions, but does it in-house and expects to save one quarter of training costs this year.
Slym wouldn’t say how much his company spends on training.
A few kilometres down the highway leading to Jaipur, Arvind Kapur, chairman and managing director of Rico Auto Industries Ltd, chairs weekly cost-cutting meetings as he tries to improve margins.
One attempt is Rico’s efforts to reduce power costs, that make up around 9% of total costs, by using producer gas, which is about one-sixth cheaper than fuel oil normally used to run power plants and electricity generators. Producer gas is a combustible mixture generated by passing air with steam over burning coke or coal in an oven. Rico wouldn’t detail the savings it expects as a result.
Tata Motors, according to its latest annual report, has adopted energy conservation measures such as energy-efficient pumps and blowers, lamps running on so-called LED, or light emitting diode, technology, wind ventilators, and natural draft cooling towers—all of which have saved some Rs24 crore for the firm.
Another focus area for Kapur of Rico, which makes castings, is yield improvement or increasing the number of components produced for a given amount of metal. Rico’s most recent success story, he says, is the yield improvement of 15-20% it achieved by redesigning an engine component casing that it supplies to global car makers.
After six months of brainstorming, Rico’s engineers figured a way to punch more cavities in the product, while retaining its strength and structure, enabling them to save on metal used. The punched metal is then melted for use in other components. “In the last one year, costs have gone up by the lot,” says Kapur. “Saving 5g here and 5g there is not enough. You have to go for more.”
Elsewhere, Hero Honda changed the coating of its leg guard from chrome to paint for its Hunk motorcycle. Chrome plating requires the extensive use of nickel and the firm was able to save Rs45 on a bike by switching to paint.
Maruti Suzuki cut down on the use of platinum and rhodium, metals used in exhaust components, by switching to palladium. The company had to change the tuning specifications of engines, and get fresh certification to do this, but it has resulted in cost savings of up to 20% in manufacturing the component, said an executive, who didn’t want to be identified as he isn’t authorized to speak to the media. Platinum prices have increased by 23% in the last year compared with a 5% dip in palladium prices.
Another chunky component of costs for companies is the wage bill. The average wage cost as a proportion of total expenses for 11 companies in the Bombay Stock Exchange’s auto index, for which data is available, was 7.23% last fiscal. With wage bills for Indian companies rising up by an average 15% in 2007, according to human resources consultancy Hewitt Associates, auto makers are introducing low-cost automation and redeploying tools to improve productivity.
Rico’s Kapur says he changed the way machines were placed in the die-casting section of his factory and used conveyors made by the workers themselves. As a result, he didn’t hire about 100 workers he had budgeted for and had notional savings of Rs1.2 crore a year.