Mumbai: In a significant shift in strategy, Indian automotive ancillary manufacturers are holding off acquiring troubled overseas companies, even when going cheap, largely on account of foreign banks’ hesitation with the auto industry and already idle capacity at existing units abroad.
The top acquisitions. Sandeep Bhatnagar / Mint
Indian ancillary units are instead looking to Indian banks for funding and are restructuring existing units to counter the fall in demand and a shortage of working capital that has plagued these units following the global economic downturn and the crisis of confidence the auto industry is going through after bankruptcy filing by General Motors Corp. and the sale of Chrysler Llc. to European auto maker Fiat SpA.
Hemant Luthra, president of Mahindra Systech, an auto component manufacturing and engineering solutions arm of auto maker Mahindra and Mahindra Ltd, said compared with two years ago, he is no longer excited by proposals from investment bankers to acquire troubled European auto parts makers.
Mahindra Systech and other auto ancillary firms such as Bharat Forge Ltd, Amtek Auto Ltd and Sona Group, had earlier adopted overseas acquisitions as a way to access technology and expand their global presence. But that strategy hit a bump when, faced with a global economic slowdown, and the crisis in Detroit, banks in European countries started avoiding the auto sector.
Luthra said he could not understand why Mahindra Systech’s businesses abroad are categorized with the rest of the auto industry despite the fact that these firms are operationally profitable.
“The auto sector in that part of the world has become a four-letter word for the banks and they have been too busy shrinking their balance sheets,” said Luthra. “Some of the banks are straining their relationship with Mahindra even for an amount as small as $25 million (Rs118.2 crore) to $30 million,” he said. Systech hence had to seek assistance from Indian and some other foreign banks to meet its requirements.
“The banks in Europe are not reliable. They are the first to press panic button when the going gets tough,” said Santosh Singhi, chief financial officer at Amtek Auto, which has subsidiaries in Germany, the UK and the US. “We are hence happy working with PSU (public sector) banks like State Bank of India, who are any day more dependable.” Executives at both companies though conceded that with global economy improving, bankers are beginning to start lending.
Industry experts, however, maintain that the decision by Indian firms to adopt the acquisition route for growth was the right one at the time, and that the current situation is an unforeseen one. “It’s only a hump they need to get over as more than anything its all the function of the business environment,” said R. Venkatraman, partner at AT Kearney Ltd.
With most Indian companies getting exposed to multi-currency issues for the first time, there is a need for a more prudent financial management, he said.
Which is what most Indian firms are doing with their overseas units as demand falls precipitously. Volume at auto makers in markets such as the US and Europe have fallen as the global economy reels under recessionary pressures, forcing many ancillary parts makers to go under. The US, which had sales of 16.5 million light vehicles (cars and vans) annually, is down 60% to 9.5 million in one year, while European sales have fallen from 15 million units to 11 million units, Baba Kalyani, chairman of Bharat Forge, had said in an earlier interview to Mint.
Amtek’s Singhi said his firm foresaw the crisis to some extent and has managed to bring down the working capital requirement of the company from £40 million in 2007-08 to zero in 2008-09.
Mahindra Systech recently tied up a deal with its union in Germany for cutting personnel costs between 5% and 7% of revenues. Working hours have also been cut from 36 hours a week to 10; workers will forego their Christmas bonus, leave encashment and other such benefits till normalcy is restored. Instead of fresh capital infusion in its India unit, it is also utilising idle capacities at its facilities in the US, the UK and Germany. While margins will be lower because of shipping charges, this will bring down overall costs, said Luthra.
Amtek, which had five units in the UK, now has only two. It has laid off 300 employees in that country. The Sona Group, which has manufacturing units in Germany and the US, in February announced that its German subsidiary Sona BLW Prazisionsschiede GMBH was starting a restructuring process in which four plants in Germany and the US would be transferred into independent business units.