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Overseas acquisitions signal mindset change

HAS THE Indian auto component industry arrived at last? One keeps hearing this question one too many time these days. The question demands a legitimate answer in the wake of announcements of overseas acquisition plans by a couple of leading component manufacturers in India. Bharat Forge has said that it is buying CDP of Germany, the second largest forging player in the globe. This was followed by a low key statement from Sundram Fasteners of the TVS group that it has penned a memorandum of understanding with Dana Spicer Europe in the U.K. to take over one of its units as `a going concern'. The two companies may yet have to clear many hurdles before bringing these overseas ventures under their fold. Yet, such moves have begun to tell tales of their own.

It is a bit difficult and may even look foolish to assume that the Indian component industry has announced its arrival on the global scene. A couple of overseas acquisitions may not be sufficient justification to proclaim that the highly disaggregated Indian auto component industry is ready to take the global bulls by their horns. Nonetheless, the moves signal a welcome change in the mindset of local players.

The `opening up of the mindset' has come at a stage when global auto OEMs (original equipment manufacturers) are caught in a pincer-like situation with the inevitability of squeezed margins. Surely, this bodes well for the Indian component industry as a whole.

Far too long, the Indian component industry has lived a `frog in the well' life. Time was when it was glued to the domestic market. In the post-liberalisation era, some players in the industry graduated to the next higher level of supplying to MNCs which had made a beeline for the Indian sub-continent. Even then, the fact that they allied with MNCs only to service the local market was not lost on long-time watchers of the industry.

Beneficial thrust from MNC link

Nevertheless, the association with MNCs has had its beneficial impact on individual companies in terms of process capability, quality standards, delivery schedule and the like. Below par organisations may have perished in the post-liberalisation era. For several other genuine firms, however, the MNC connection has proved to be the much needed pressure point to pull up their socks and prepare competing on cost and quality.

The international foray did come when some of them began exporting. Save for a few like Sundram Fasteners, component exporters have to contend with serving the `after-sales segment' of the global pie.

It is against this backdrop that Sundram Fasteners and Bharat Forge have announced their overseas acquisition moves. The companies being acquired by them are suppliers to OEMs. Access to OEMs through an acquired entity is quite different from direct supply to them. Perhaps, direct supply to OEMs will be the next stage in the evolution of the Indian component industry. That may take a good number of years down the road.

Nevertheless, any acquisition of units overseas will do a world of good for Indian companies. For one, their volume can go up. For another, they can read the minds and needs of the OEMs better. Still more, the practices, systems and procedures followed in the acquired firms could prove a good learning for the Indian firms and may even result in their transplantation back home.

Growing maturity

One can make any number of interpretations vis-a-vis the latest happenings in the field. Yet, it is safe to presume that the domestic component industry is slowly coming out, gradually maturing and definitely gaining visibility. Critics almost wrote them off when the MNCs just rushed into the sub-continent post-liberalisation. That the industry took the beating, picked up strength, regained composure and is now standing up not just to survive but to compete with MNCs is indeed gratifying.

In all these difficult times, some units have passed the quality muster by winning Deming Awards and other quality recognitions. In the Detroit of India, the TVS groups and now Rane have landed these awards. They appear to be lot more confident than at any time in the past. So it comes as no surprise that Suresh Krishna-led Sundram Fasteners has gone to China to set up a greenfield project there. Time and tide wait for none, they say. A mindset changed India Inc is just beginning to appreciate this.

The good tidings have predictably forced many to wonder if the auto component industry will see a BPO (business process outsourcing) boom of the kind that the IT (information technology) is witnessing now? It is easy to get carried away. It will, however, be wiser to ponder over a few points before jumping to sweeping conclusions.

Though the quality bug has bitten them, only around five per cent of the Indian component industry can claim to have moved up to global standards.

Further, it is an acknowledged fact that the Indian industry has acquired global competitive strength in high volume products such as forging, casting, powder metal, sheet metal and the like. Production of these items does not require high technology. High-end products like emission and fuel injection systems are still the exclusive preserve of multinational companies. Neither does the Indian industry have technological capability nor the deep pockets to graduate to high-end levels.

It is, however, true that automakers and OEM suppliers are moving away from the conventional `built to print mode.' They now want the vendors to take up R&D work and supply systems.

The IT potential in India can be leveraged to make this happen. But this is easier said than done. Limited as they are by their experience within the boundary, it will be difficult if not impossible for the domestic component industry to graduate to that level in the near term.

Nonetheless, going abroad — either through acquisition or by putting up greenfield projects — could help them gain a lot of learning. A few years down the line, the Indian component industry is likely to become a lot more creative, vibrant and outgoing though the road is long and bumpy.

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