Inside Bosch’s ₹20,000 crore bid to de-risk from the auto sector9 min read . Updated: 02 Apr 2021, 10:24 PM IST
Several years of weak growth in auto is pushing manufacturing conglomerates to diversify. What are the new bets?
Several years of weak growth in auto is pushing manufacturing conglomerates to diversify. What are the new bets?
In Tamil Nadu’s Sriperumbudur, the poster at a plant’s lobby announces what you may expect inside: “Nothing leaves our factory until it is 100%. We’re German. We’re mad about our machines."
Huge machines do the heavy lifting at this front-loading automatic washing machine factory run by BSH Household Appliances, a Bosch Group company. In the pre-production arena, rectangular metal sheets are pressed and converted into cylindrical components. A few machines hum at 85 decibels (dB)—a sound intensity somewhere between the noise made by a car horn (110 dB) and a vacuum cleaner (70dB). Workers who’re picking and placing components wear earplugs. By the time the washing machines are assembled and packed, it is tested multiple times, not just by humans but also by camera vision systems. A scratch in a component, for instance, is flagged on a screen in bright red colour.
The factory can produce 350,000 washing machines a year. By March 2022, the capacity will nearly double, as BSH plans to capitalize on the growing demand for such appliances. The pandemic has underlined the need for gadgets which were considered to be unnecessary luxury appliances earlier. That includes automatic washing machines of course, but also dishwashers.
BSH’s plan is to grow four times by 2025 by selling a range of such products. And the strategy of this one company matters because it is an important signal about several larger trends which are underway in India’s manufacturing universe.
The quadrupling of the consumer vertical is key to the future of the 99-year-old Bosch Group. It is one of the largest auto component suppliers in the country but wants to hedge its bets against the trials and tribulations of the automotive market. Not only has growth slowed in India’s automotive landscape, but the sector is also bracing up for disruptions with the coming electrification of vehicles and the advent of new technologies such as the Internet of Things (IoT).
Here’s an indication of Bosch’s reliance on automotive, or what it calls the “mobility" business—the group operates 14 companies in India that generated consolidated sales of nearly ₹20,000 crore in 2019-20. A majority of the 14 firms supply to the automotive sector. Bosch Ltd, the flagship company, is a listed entity with revenues of ₹9,842 crore in 2019-20. Its bread and butter is the fuel injection system, which is sold to vehicle makers. 80% of its business is generated from mobility products and services. Globally, Bosch is more de-risked with 60% of the business resting on automotive.
Non-mobility businesses like home appliances, therefore, have to step up within India.
“BSH is a very important part of the group strategy because we are the only consumer-facing organization," Neeraj Bahl, managing director and chief executive officer of BSH Household Appliances, said. “Going ahead, there are big plans for investments in India because Bosch sees India as the biggest potential market after China," he added.
Besides consumer appliances, Bosch has other non-mobility businesses which have had varying degrees of success. The group sells power tools, surveillance equipment, access control systems, hydraulics and automation solutions, among other products. The strategy is to push even their share further up and penetrate new markets.
“We want to maintain our position in mobility. However, in the medium-to-long run, it is our strategic intent to grow the non-mobility business to 25% from (the current) 20%," Soumitra Bhattacharya, the managing director of Bosch Ltd and president of the Bosch Group in India, said.
Most conglomerates diversify at some point to bring down their dependence on one business line. When growth slumps in one vertical, either due to rapidly changing market conditions or due to disruptions brought about by government regulations or technology, other businesses cushion the earnings.
One company with comparable revenues to the Bosch group is Titan Co. Ltd (revenue of ₹20,156 crore in 2019-20). Over the last 25 years, Titan diversified from watchmaking to jewellery, eyewear and precision engineering. The pandemic battered discretionary spending and resulted in a free fall in the sales of watches. However, the company’s jewellery business, boosted by the festive season and marriages, is lending stability to the overall revenues in 2020-21.
The Bosch group’s de-risking efforts, and its degree of success, will inevitably offer lessons to similar manufacturing and engineering companies. The question is: How easy will de-risking be, considering the fiercely competitive nature of verticals like the consumer goods business? Besides, in the home appliances vertical, Bosch currently maintains a premium positioning. Will that become an Achilles’ heel? In the nine months to December 2020, the non-mobility arm of Bosch Ltd declined at a faster rate than even the mobility solutions. While the sales of mobility solutions dropped by 13%, the business beyond mobility shrunk 24%. What are the odds that the non-auto businesses can spring back faster in the coming years?
The answers aren’t quite that obvious right now.
The slow lane
While the noise around diversification has grown, possibly in the context of the pandemic, this is not the first time the group has tried to hedge its bets.
“Bosch, globally, has always been talking about how not to rely so much on automotive forever," a former Bosch executive, who didn’t want to be identified, said. The plans have seen mixed success. A merger of Mannesmann Rexroth AG and Bosch Automation Technology to form Bosch Rexroth AG in 2001 worked out well, the executive added. Rexroth sells assembly and control technologies. “However, the group’s bet on solar energy did not work. Bosch folded up Bosch Solar Energy (around 2014) after the Chinese created a glut of wafers, cells and modules in the market."
Nevertheless, a three-year-long slowdown in India’s automotive market is making the group’s diversification plans more urgent than ever. In 2018-19, the Indian auto industry produced over 30 million vehicles, a growth of 6% over the previous year, data from the Society of Indian Automotive Manufacturers (SIAM) showed. In 2019-20, the industry declined by 15%. In the 11 months till February 2021, the industry slipped by a further 19%. Bosch’s results mimic this trend. The company grew 12% in 2017-18; in 2019-20, sales nose-dived 19%.
“From the peak of 2018-19, it will take (the Indian automotive sector) approximately four years to regain that peak," Bhattacharya said. “Tractors are an exception. It will perhaps take three years. Heavy commercial vehicles will take five years," he added.
Bosch faces other headwinds as well. From a near-term perspective, there are challenges on the supply side. A semiconductor crunch is one such problem. “In the medium term, the challenge for Bosch will be to ramp up on electric vehicle components, primarily on two-wheelers," Jinesh Gandhi, an analyst at Motilal Oswal Institutional Equities, said. “But only time will tell if these products are successful and whether Bosch gets the volumes," he added. Over the long term, electrification may play out in passenger four-wheelers and commercial vehicles as well. “Will Bosch be the drivers of the technology or will they try to catch up, that’s the key question," Gandhi said.
Given this scenario, what non-auto businesses can help reduce the group’s reliance on mobility? In the business-to-business segment, power tools and security systems appear promising.
Oragadam industrial area, which is about 55km from Chennai, buzzes with the construction of new factory sheds. Bosch’s power tools plant, located here, commenced operations in mid-2015. Internally, the plant is called chiP—short for Chennai plant.
Before you can get to the shop floor, one has to pass through galleries that display grinders, drills, cutters, blowers and hammers made at the plant. An appreciation board too hangs nearby with photographs of the “star of the month" and those who did a “good job" on the floor.
The 8,150 sq. m manufacturing floor has 13 lines. About 400 workers, mostly women, assemble the tools, which go into sectors ranging from infrastructure to mining. As economic activity picks up post the pandemic, Bosch sees higher demand for such tools, partly driven by government spending.
“The government is focused on metro rails, roads, airports, the Production Linked Incentive Scheme in manufacturing—all of this is beneficial for the power tools industry," Nishant Sinha, regional business director, India & SAARC, Power Tools, at Bosch India, said. “We expect to grow at a CAGR of high single digits in the next five years… as high as 8-9%, slightly ahead of the GDP growth," he added.
Sinha estimated the organised power tools market at ₹5,000 crore and said Bosch is the market leader, with one-fourth to one-third of the market. There is growing competition from the unorganized market. However, Sinha said he is planning to expand to smaller towns using a digital platform called ‘BeConnected’. Product packages come with a QR code, which, when scanned by re-sellers and users, can help the company push promotions. Instead of sales executives having to physically visit towns, the digital approach is far more scalable and cost-effective. “It can help us get to tier-3 and tier-4 towns more aggressively… get the rural connection using digital means," Sinha said.
Next to the washing machine plant at Sriperumbudur is a shed that will soon start humming. As of now, it appears peaceful; few workers walk down the aisle that cuts the factory floor into two. One side of the aisle has dyes and moulds stocked up. The other side has yellow cages with machines.
BSH Household Appliances has set up this new refrigeration plant and is running trials. By Diwali this year, the plant can produce 25 models of frost-free refrigerators, sized between 260 to 390 litres. Beyond washing machines, this is the company’s other big consumer appliances bet.
“Unlike air conditioners or the TV market, the refrigerator market is not crowded," MD and CEO Neeraj Bahl explained, speaking about the choice of this product category. Refrigerators require specialised manufacturing. It is also high investment. Bosch, he reckoned, might become a formidable player in the frost-free category over the next four years. “We are aiming to be in the top three," he said.
As the company prepares for the refrigeration business, it may need to worry about its carefully cultivated premium positioning.
The front-loaded automatic washing machines (where prices start at 25,000), for instance, aren’t consumed by the mass market that prefers semi-automatic machines ( ₹10,000 or lower). According to TechSci Research, India’s washing machine market, by value, totalled ₹10,152 crore in 2019-20. The share of semi-automatic is nearly 65%. Avoiding the mass market can cripple growth in the long run, experts warn. In any case, BSH isn’t among the top movers and shakers, according to TechSci Research. India’s washing machine pecking order is led by LG Electronics, Samsung, IFB, Whirlpool and Haier Appliances.
“India being a large country with a low per capita income, people look for machines at the ₹10,000 range," Shashi Arora, president and CEO of Lloyd, an Indian appliance maker, said. “Companies like Bosch know the front-load technology well. The disadvantage is that customers and traders both perceive them to be good only in the high-end segments. The transition for some of these companies to make top-load machines has been difficult," he added.
Bahl said that BSH might bring in semi-automatic machines as part of a longer-term strategy but it would still retain a “Bosch-ness". In other words, it wouldn’t really be mass market.
Company watchers Mint spoke to said all depends on how well this strategy is implemented—only then will there be true de-risking from the auto business. Clearly, the growth of Bosch’s non-mobility portfolio will be a keenly watched segment over the next three years.