BackTata Motors, other automakers on austerity drive to cut costs
With auto sales seeing a prolonged slowdown, firms have embarked on a cost-saving plan to make operations leaner
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Mumbai: Tata Motors Ltd has started an austerity drive to contain costs. In the past two months, India’s largest automaker by sales has initiated several measures to keep a check on overheads, according to three people familiar with the development.
Among other things, the cost-cutting drive restricts travel and hotel stay for executives and trims costs for events organized for company’s suppliers. Tata Motors announced the cost-cutting measures through an internal circular in the first week of September.
The initiative to cut flab within the system comes against the backdrop of domestic operations incurring losses for four consecutive quarters.
The September quarter has been the worst. The maker of Safari, Indica and Nano incurred a loss of ₹ 800 crore in the three months ended 30 September, the steepest in company’s history.
Poor passenger vehicles and truck and bus sales singed earnings at the Mumbai-based firm, dragging operating margins to 2%. While company’s truck and bus sales fell 25% to 101,902 units, passenger vehicle sales halved to 35,411.
“Given the difficult macro-economic environment and the challenges for the auto economy, Tata Motors, like most other companies, has put in place various measures for prudent fiscal discipline across the operations of the company while maintaining the required focus on our future in areas such as new product development and providing the right work environment and facilities to our employees," a Tata Motors spokesperson said in an emailed response. The new travel policy requires all domestic air travel to be approved by the members of the executive committee group consisting of business heads of each department—sales and marketing, research and development, finance and procurement, to name a few.
“Even those fairly senior by age and experience have to seek an approval from the respective members of the executive committee," one of the persons cited above said. Also, officials are being encouraged to make their travel plans brief and if possible return on the same day. “Should they be required to stay longer, accommodation in company-owned guesthouse over a hotel is the norm," said the person, who declined to be named.
All foreign travel is required to be approved by the managing director Karl Slym. Additionally, all events—conferences, workshops, etc.— hosted for the company’s vendors and dealers have to be low-frill with low budgets. “We can only offer tea and snacks, no meals, at such functions," said another person, who also wanted to remain anonymous.
In a post-earnings conference call with the analysts on 8 November, C. Ramakrishnan, chief financial officer at Tata Motors, said that the company has been aggressively focusing on internal cost-reduction measures.
“These are occasions when the focus is brought out very sharply," said Ramakrishnan, adding that whether it is material cost or operating cost or anything else, the company has been monitoring each line item of expenditure and has been focusing on cost reduction in a bid to make the operations much more efficient.
To be sure, Tata Motors is not the only company to initiate a cost-saving drive.
With auto sales seeing a prolonged slowdown, idle capacities and excess inventory are hitting automakers and most companies have embarked on a cost-saving programme to make their operations leaner.
Half-yearly auto sales for the fiscal year dropped to a lowest in 11 years, according to industry lobby Society of Indian Automobile Manufacturers (Siam). Signs of recovery continue to elude.
October passenger car sales dropped 4% to 163,199 units over the last year, while sales of commercial vehicles declined 20%.
Mahindra and Mahindra Ltd, India’s largest utility vehicle and tractor maker, too, has announced a cost-saving programme. The company’s overall revenue was hurt by the lower contribution from its automotive segment, which fell 19% to ₹ 5,780.52 crore from ₹ 7,194.84 crore a year ago.
“Christened Operation Kuber-II, the programme aims at saving costs across all functions to add at least 200 basis points to the bottom line by end of the (fiscal) year," said V.S. Parthasarathy, group chief financial officer at Mahindra and Mahindra, on the sidelines of a press meet in Mumbai on Thursday.
One basis point is one-hundredth of a percentage point.
Mahindra had a similar programme for the tractor business last year when the sector had performed poorly, he said. “We however, don’t believe in knee-jerk reactions. A multi-purpose portfolio helps in tiding over challenging times like these better," he added.
Ashok Leyland Ltd, India’s second largest truck maker, announced a voluntary retirement scheme (VRS) for its executives on 9 November. “Conceived as a response to the continuing slowdown, the scheme aims to reduce manpower costs and align fixed costs to reduced activity levels," the company said in a statement.
“Volume pressures continue and we need to take some definite steps to manage the slowdown," Vinod K. Dasari, managing director and chief executive at the Hinduja Group flagship, said. For the September quarter, the Chennai-based firm reported a loss of ₹ 26 crore. Its medium and heavy commercial vehicles volumes fell by a fourth to 41,509 units compared to a year ago.
According to Deep Mukherjee, director, India Ratings (a Fitch Group company), household balance sheets have seen a deterioration as inflation is outpacing the wage growth. While consumer price inflation has inched up to 10% the average salary growth in India’s top 1,000 companies dropped to 8-10% in fiscal 2013 from 14-15% in the last decade. “Buying a new vehicle is least on the priority list for anyone in this scenario," he said.
Mukherjee expects balance sheets of auto firms will continue to remain under pressure for the remaining half of the financial year as volumes remain weak although they look relatively better with a low base kicking in the first half of fiscal year 2015.
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