For Baba Kalyani, chairman of the $2.4 billion, or around Rs11,352 crore (by revenue for the year ended March), Kalyani Group that owns Bharat Forge Ltd, venturing into global business through the 2004 acquisition of CDP Aluminiumtechnik GmbH of Germany, was part of a carefully charted strategy. The acquisition turned the company from a low-cost supplier of auto components into a multinational that could compete globally.
Over the next three years, the group made two more acquisitions in Germany, and one each in Sweden, Scotland, the US and China, becoming one of the world’s largest forging companies. In an interview, Kalyani spoke about his firm’s investments and acquisitions in Europe and the way ahead in what is one of the worst times for the auto industry .
On going global
Playing safe: Kalyani Group chairman Baba Kalyani.
The decision to get into acquisition mode and acquire a global presence was a very clearly thought-out strategy. At Bharat Forge, we knew in early 2000 that despite the big growth in the domestic auto industry, it was not enough to give us the kind of growth we wanted. The only way to grow rapidly was through establishing a global footprint, especially in Europe. We realized early on that it is not enough to be a mere low-cost supplier of components. A company has to be in the local market (in the world market) to get local business. Our overall acquisition strategy has played out very well. Going global meant that our image changed from being a low-cost Indian supplier to a global MNC (multinational company), which got us the same opportunities that other global MNCs got. Even our Indian operations benefited from our European experience, in that our entire business model changed; our exports went up dramatically and that put us way ahead in the business.
On managing buys
We decided it would be strategically right to keep the management of all subsidiaries with local people. There was the usual initial resistance—the tug-of-war between white and non-white—but in the end, people respect hard work and, talent and intelligence, and now there are no issues. We now have strong cross-functional teams in India and European subsidiaries, but management is local.
On the hard times
Nobody anticipated the meltdown, and we are going through the same tough time that the entire manufacturing industry is. While the global auto industry has witnessed recessionary phases earlier, this time the scale is completely different. The US, which was running on (sales of) 16.5 million light vehicles (cars and vans) annually, is down 60% to 9.5 million in just one year. Europe has come down from 15 million units to 11 million units. Can you imagine the havoc it is playing with the suppliers and the system?
Volumes will never come (back) to the same level, and both the auto manufacturers and suppliers will have to restructure to the new realities. But we are taking steps that will help tide over difficult times; we are right-sizing operations, cutting costs, freezing capex (capital expenditure) and bringing down manpower across locations.
In Europe, across the board, we have reduced manpower. By 2010, we will be a leaner organization, and the bright side of the recession, I think, is that companies, which survive this recession will emerge stronger.
Our US subsidiary is a different challenge altogether and unless the Chrysler and General Motors saga unfolds completely, we can’t put any strategy in place for this market.
On overseas acquisitions
With the depressed business scenario that we are going through now, it is easy for people to say in hindsight that it could have been avoided. But, like I said, for us it was a conscious decision and a very successful journey. We invested prudently. On a total €57 million (around Rs377 crore) investment for all our acquisitions, we have made a 25% return, which I consider as reasonable. It is not a great RoI (return on investment) but then the entire cost structure abroad is different, and it is not possible to have the same level of RoI as in India.
On profitability abroad
You can’t compare foreign operations with Indian operations. The cost structure is completely different. The cost of manpower there is very big. Average Ebitda (earnings before interest, tax, depreciation and amortization, a measure of profitability) margins in Europe are between 8% and 12%, but analysts want everything to be the same as in India. It does not work that way.
We are also told things would be better if we shifted production to India. Yes, it would be cheaper and we might better our margins but this is not the time to do so. It has to be done strategically, in the medium term, with planning. It would be suicidal to take up something drastic when morale is so down all around you.
On 2010 priorities
It is not a good time for mergers and acquisitions (M&As) just now. Distressed companies are possibly available almost for free, but there are too many imponderables, you just don’t know what liabilities these firms come with.
M&As in the US are out of the question. In Europe, valuations will come down even more after a couple of months. Our priority is to secure our companies so that by 2010 each one of them is back on track and in the black.
Samar Srivastava contributed to this story.