Arvind Balaji, the new president of Automotive Component Manufacturers Association (Acma) and the joint managing director of Chennai-based component maker Lucas-TVS Ltd, has had enough of the protracted downturn. “Four years is a long time," he said, about the period when the Indian auto industry was expected to outshine others but suffered instead. What may bring him relief are signs of a broad-based recovery visible in the sector. But it is still a tough road ahead, he said, as the vast majority of auto companies do not return the cost of capital. Even as 90% of the auto component firms in India make positive Ebitda (earnings before interest, tax, depreciation and amortization), only one-third make positive economic profit or have returns greater than the cost of capital. While exports are the preferred go-to area for the Indian firms, Balaji said India needs to provide a level playing field for its industry if it wants the ‘Make in India’ initiative to succeed. Edited excerpts from an interview:

Last year, around this time, things were pretty bad for most original equipment manufacturers (OEMs) and component makers. How has been the improvement so far?

I think we are starting to see some improvement. The passenger car segment is showing some signs of improvement. Among two-wheelers also, you see scooters doing better than motorcycles. Heavy commercial vehicles have started to improve. Tractors are subdued. So, it has started to move, but it is still a little bit subdued. But it is a little bit more broad-based than before. So, we are hoping that by next year, there will be a more broad-based recovery.

But we have not seen signs of a sustainable recovery. Growth is primarily driven by excitement created by new models across segments. Clearly, there is a problem in the market, isn’t it?

On one hand, just because the market is competitive, every OEM is coming out with newer models to gain share. So, there are more opportunities for people to choose. The more opportunities people have, you are going to see different models... hit and miss. I think it’s just a part of the nature of the beast. But there has been an improvement in the overall numbers and you cannot discount that. The overall passenger car sales have improved.

The market is not growing enough for everybody to grow but the market is growing enough for some people to take share from others. So, the economy has not fully recovered to see a broad-based growth and what you are seeing is pockets of growth. Last year, we had very few pockets of growth and now we have more pockets of growth. It is just moving in that direction.

That makes it difficult for the component makers who only cater to some specific segment.

It is tough. If you happen to be with guys who are winning, you are doing well. If you are very narrowly focused, you are suffering. Today, a vast majority of the Acma members are MSMEs (micro and small and medium enterprises) and they have less and less muscle to withstand that kind of stress. That’s an issue. It’s up to each company to take its own decision on how to grow and how to diversify.

In every economy, when the market goes through a cycle like this, some consolidation does take place. Some people close and different companies combine. These things do happen. So, it’s not unrealistic for this to happen.

If you take imports and domestic combined, we are up 10% on a CAGR (compounded annual growth rate) basis as against -2% last year. So, there is an improvement that has happened.

Clearly, we are growing more on the exports side than in the domestic market.

In fact, in the last two years or so, it’s exports that saw us through when the domestic market was not performing well. More and more Indian players are getting into OE (original equipment) exports than aftermarket exports because Indian quality and technologies are getting recognized. Many of the MNCs had no experience with the Indian supplier base, so they are finding us competitive in some areas. So, that’s a good trend.

Our industry is a globalized industry and increasingly, more companies have global ambitions and as they work with many MNCs in India, they are getting an opportunity based on their quality and cost performance to export. Many companies are looking for opportunities to grow abroad.

We don’t see a lot of action happening in China on behalf of Indian companies as compared with North America and Europe.

I think that’s precisely that we are talking to the government about. They have certain policies in place to favour their domestic industry. I think we need to incentivize or make the policy framework such that it becomes viable for Indian companies to compete in such an environment. They have certain tariff and non-tariff barriers to prevent people from importing into that country. Our government will have to give us a way to enter because we feel the way we are growing as an industry, I think Indian companies can compete very well. So, how to make things equal is a challenge.

We are really trying to promote that the Indian companies are able to develop world-class quality and technology products, engineered in India. We have been asking the government to give us a level playing field against our global competitors by making the raw material cost similar. We do have in some cases (an) inverted duty structure. If they make a level playing field, the Indian industry has a strong chance to compete and succeed globally.

So, instead of seeking a way forward into the Chinese market, you are looking at how to stop them from making inroads into our market?

You can’t control these things. They will do what they have to do and we will do what we have to do. I am not saying increase barriers. Why are we making raw material costs so expensive for Indian companies? Make that more competitive. It is also customer-driven. As more Indian companies develop their own IP and technologies, the OEMs will prefer those companies. It is also a question of Indian companies showing the capabilities. Look at the pharma industry, they have managed to do that; they are exporting. I think they are going through that process now.

So, because of the downturn and inverted duty structure, the Indian automotive (industry) has not been very profitable. A vast majority of the Indian automotive companies don’t return the cost of capital. That is hampering the ability of the industry to invest in R&D (research and development).

It is a matter of concern right now. Without that kind of investment potential or capability, you can’t compete with the global scale. If ‘Make in India’ has to happen and India has to go and compete with the rest of the world, we need money to be able to invest. The automotive mission plan calls for $80 billion capital to be invested in our industry to reach that size. Unless people see return on capital, people are not going to invest $80 billion.

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