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SMALL INDUSTRY
Indian Small Business:
Languishing At Death's Door 

Two lakh sick units, a thousand suicides, mass migration of workers as units shut shop, Rs 2,000 crore-plus of unpaid debts... Is this the end for the small businessman?

By Bharat Ahluwalia

Face-to-Face With Noel Tichy

When The Network Goes Down...

This isn't a story about one of the world's most easily recalled brands and its success in India; it isn't about the eye-popping starting salaries that IIM-grads are raking in; nor does it give a whole new spin to Mohanbir Sawhney's take on e-business. It's about the true state of Indian business. How else would you refer to an industry segment that accounts for 95 per cent of Indian industry, 40 per cent of manufacturing sector output, 36 per cent of exports, and employes 1.8 crore people (the largest employer after agriculture). This is what India's 32 lakh small and medium businesses represent.

Yet, this is the face of Indian business we don't see. It's not about making high decibel product launches, or running multi-crore ad campaigns on TV, it's about getting yourself the cheapest diesel generators so you can run your two shifts and still remain competitive, or getting your buyer to pay you in time, so you can pay your supplier. And by the looks of it, businessmen in small towns from Firozabad to from Aligarh to Murshidabad aren't faring too well. Over two lakh small businesses are sick and on the verge of dying. The growth of Indian small business at a shade over 7 per cent is the lowest it has ever been in the last 10 years. And employment generation at 3 per cent, is also the lowest for some time now.

Kanpur

  

Ravi Raina is an excitable kind of guy. A director of Letha-Tech Associates, a leather exporting firm in Kanpur, he remains bubbly and exuberant, even as he recounts an unpleasant story, in what are difficult times for him. ''Two years ago, I met an American buyer, who said that he wanted 60,000 rexin belts. We had no work, so I did my costing and offered a ridiculously low price of Rs 22 a strip,'' says Raina. ''He laughed at me and said your cost should be Rs 6 a unit.'' That was what units in China were willing to do it at. How? Because their cost of raw material was so much cheaper. Eventually, that's the price Raina charged, as the American imported the raw material, supervised the work and even took the waste strips away. Raina made marginal money, but that's when he realised what India's small-scale leather manufacturers were up against.

From Rs 2.38 crore in 1998-99, his turnover dipped to Rs 1.8 crore in 1999-2000. This year? ''I'm not sure if it'll even cross Rs 1 crore,'' says Raina. And profits? That's a dream. Earlier, Raina's company used to export to both Canada and the United Kingdom, now it's only Canada. ''I am quite sure that this is the case for all small tanneries across the country,'' says Raina.

What's gone wrong? Primarily the fact that we've already exploited most markets. Making an entry into new markets like South Africa, Israel and Turkey is expensive for small companies. Add to that, the fact that the Chinese with their lower cost of production are trying to beat the hell out of us in the market. And don't forget the advantages that a large scale domestic manufacturer has even in the export market. All three together are sounding the death knell for small leather exporters in the country. This, when Indian leather exports are growing at an impressive 20 per cent annually. ''But it's the large exporter who is cornering the benefit,'' says Raina. ''He can afford to work at 1-2 per cent margins, we can't.''

Since it's a sellers market, buyers pay up only after 90-120 days, whereas earlier, the norm was a 30-day credit period. This increases the requirement for working capital. The concept of a letter of credit is now history. ''If a buyer reneges on a payment, there's no way we can recover it,'' says Raina. ''And even one default loss means a lot to us.'' But a larger exporter can still carry on.

Today, small manufacturers like Raina, are relying on job work. ''Small tanneries have been under pressure for long, I wonder how long they can continue,'' says a despondent Raina.

These official numbers are just the tip of the iceberg. When BT correspondents fanned out across the country, the pictures they saw were much worse than what any official statistic will reveal. Over 1,000 reported suicides from among the business community in Coimbatore, and 15,000 workers in Hosur surrendering their ration cards and migrating elsewhere in search of jobs, after small businesses there began shutting shop. Out of around 400 rolling mills in Howrah, only 10 are working today. Every third leather exporter in Kanpur is now willing to do job work at any price for the larger exporters. The list could go on.

This was initially, a hesitantly proposed story idea at a BT edit meet. There was little to go by, just a few conversations with friends and acquaintances, who talked about how theirs and other businesses had taken a turn for the worse over the last two years. ''Follow it, it rings true,'' was the diktat from the editor. And followed up, it was. The findings are scary.

First port of call was Firozabad. An hour's drive from Agra, this is the home of India's glass industry. It's like any other small town in north India, narrow, dirty lanes, clogged with cycles and cycle rickshaws. We meet Ashok Gupta, the local distributor for Tata Chemicals. He supplies soda ash to most glass manufacturers in town. If there's anyone who knows how deep the rot is in the town, it's him. For, he's the one whose payments get stuck, every time someone can't sell his glass in the market. And these days that's the norm, rather than the exception. As we plough through the city's traffic, he points to one glass factory after another. ''See that building on the left, they've owed me Rs 20-lakh for the last six months, and that one further down, it's been eight months since I received my last payment from them,'' he says. ''But I understand, they genuinely can't pay up. Business is bad.''

Imports+Old Production
Methods=Death

We meet Bimal Agrawal, Director at the Rs 10-crore Shree Balkishan Agrawal Glass Industries. ''Half of Firozabad's glass factories will shut down within a year,'' he says. ''The Chinese, Indonesians, and Thais make better quality machine made glass at a cheaper price.'' Already, by his estimates Firozabad's share of the country's glass market has shrunk to 30 per cent from the earlier 80 per cent. Even that is expected to reduce further, once the imported product reaches the smaller towns.

His glass tumbler factory is the largest in Firozabad, but it's obvious to anyone taking even a cursory glance, that he can cut his staff strength down by at least half. And wastage? Well, it's so huge that he doesn't even keep track. But talk to him about his high cost of manufacturing and he'll say it's because of the expensive gas and soda ash. He might have a point, but there is no introspection.

Mumbai


Deepak Shah is a broken man today. His business turnover has plummeted, margins are non-existent and he's had to get rid of half his workforce. Shah's chemical unit is one of the 20,000 odd small-scale plants which dot the industrial area of Mira-Bhayander, on Mumbai's outskirts.

Shah's company, Emsons Chemical Industries, manufactures inorganic fine chemicals used in chemical laboratories as an intermediate. Founded by his father in 1978, this company in its heydays-barely four years ago-was notching up sales of close to Rs 90 lakh.

Today the plant is nearly shut. No fresh orders have been received in the last two months. Shafts of sunlight stream into its deserted and dismal interiors. Three workers squat, staring into space beside what once must have once been a roaring gas furnace with bubbling chemical vats of chemicals.

Shah points to an electric dryer and pulverizer machine used in the production process. ''I haven't used them for the last two years as no new orders are coming in and there is no work,'' he laments. As we wind our way through the floor strewn with 20 litre jerry cans, Shah reminisces: ''In 1997, pharma firm Dr. Reddy's Labs, was sourcing barium hydroxide at the rate of 5 metric tonnes per month. Today things have become so bad that in the last three years they haven't bought more than 600-700 kgs.''

Driving Shah and thousands of small scale manufacturers like him out of business are cheap Chinese imports. ''My raw material costs Rs 35 per kg and the cost of the finished product comes to around Rs 45 per kg. But the Chinese are selling the same barium hydroxide for Rs 25 a kg, even lower than my raw material price. How can we compete?'' rues Shah.

Along with cheaper alternatives, heavy indirect taxes also make it difficult for these entrepreneurs to make ends meet. Profit margins, which were in the range of 15-20 per cent, are now non-existent. ''Forget margins, we're trying desperately to retain old clients at any cost,'' says Shah.

And inventory is just piling up. Shah points to a corner stacked with bags of calcium nitrate and barium hydroxide, his primary products. ''What do we do with all this. In many cases clients haven't taken delivery after placing orders. Not only aren't we paid, but we don't know how to dispose these bags.'' Just like Shah's other problems, there seems to be no solution to this one too.

-Abir Pal

That's just the point. CII's Senior Director, Gurpal Singh makes in Delhi: ''Small businesses need to upgrade their manufacturing technology and build a professional management. Most seem to be very slow in doing this.'' That's precisely the picture BT correspondents got while covering this story.

Next stop is Aligarh, an industrial cluster that makes locks and other metal products. It's almost as badly hit as Firozabad. Points out lock manufacturer Rajiv Gupta: ''The buckles, toy pistols, and fittings (like door handles and hinges) manufacturers have been badly hit by cheaper and good quality imports.'' Why? ''Their technology is much better, while we still use age-old production methods. We still use sand casting, while the world uses forging or die casting.''

But wages play a part too. Not always can India claim that benefit of lower wages. Says S.P. Gupta, Member, Planning Commission: ''China's real wages have increased very slowly over the last few years. That is one advantage they certainly have.''

Government Assistance?
That's A Joke

In fact, sometimes the government is more of a hindrance. Take the leather chemicals business, for instance. Till a few years ago, they were competing successfully, on all fronts, against the transnationals. Then, a vanaspati manufacturer was caught using imported refined tallow to blend with other vegetable oils. The government tried to solve the problem with a sledgehammer: it banned the import of animal oil altogether. Now, fish oil happens to be an important ingredient for some leather chemicals. So, not only did the government's move bust the leather chemicals business, it also increased costs for the domestic leather business.

And government apathy is also one reason why most small scale drug factories that swarm the states of Gujarat and Maharashtra, and account for 60 per cent of the country's pharmaceutical turnover face rough weather. Bhadresh Shroff's Sunways India, once recorded 25 per cent growth rates and gross profitability. Today, these numbers are down to 5 per cent and 15 per cent respectively. Says Shroff: ''Our very survival is at stake.'' One of the reasons is that most drugs manufactured by small businesses fall under the Drug Price Control Order (DPCO). And if input costs go up, it takes over a year before sale prices are increased by the DPCO. And small businesses usually don't have deep pockets, to be able to absorb negative returns for such a long period.

While BT seemed to provide a shoulder to cry on for most small businessmen we met, there are some that at least try to remain stoic if not positive. Vijay Kumar Bajaj of the Rs 11-crore lock manufacturer Morris Bajaj Industries is as pugnacious as entrepreneurs come. He puts up a brave front, initially. ''I don't know why people are negative, I am not worried,'' he says. ''I have an action plan to make sure I grow.'' Can the plan fail? ''It might, and then I'll get into trading.'' Then, slowly but surely, the cribs begin. ''Even if there is no electricity, I have to pay for four hours of power. How can I compete,'' he asks.

Then, he tells us why he feels his and other businesses in Aligarh are under threat. ''Small businesses have a very low level of reserves, since most of us use our own money,'' he says. ''If we go through a prolonged bad business cycle, there's no way we can survive.'' Most businessmen BT talked to, said that money was available to them at 17-19 per cent, rendering them uncompetitive. ''If you add interest expenses to your costs, you'll be losing money on every sale,'' says Mehmood Alam of Kanpur's Rs 85-crore Sultan Tanners. ''You have to invest your own money.''

Firozabad

  

He stands out like a Gulliver among the Lilliputians of Firozabad, a town that is an hour's drive away from Agra and home to India's glass industry. Glass bangles, glass tumblers, flower vases, decorative pieces, lamp shades...you name it, if it's got to do with glass, they make it here. Two years ago, Bimal Agrawal, Director of the Rs 10 crore Shree Bal Kishan Glass Industries, invested Rs 3 crore to expand the capacity of his furnace to 70 tonne from the earlier 40 tonne, making it the largest in Firozabad.

But this Gulliver wouldn't be able to stand eye-ball to eye-ball against his competitors from China, where some furnaces are as big as 300 tonne. This wouldn't matter, since Agrawal has no plans of hopping across the Great Wall. But when the Chinese-this time in conjunction with Thai and Indonesian glass manufacturers-enter his turf, Agrawal has to face them. So far, he and the others in Firozabad have failed miserably. ''Till two years ago, Firozabad supplied 80 per cent of the country's glass tumbler requirements. Now it's come down to 30 per cent,'' says Agrawal. ''I am myself dumping three months of production in the market.''

Run through the numbers and it's obvious that Firozabad's 300-odd glass units, don't stand a chance against the imports. In India, natural gas, which accounts for 25 per cent of the cost of production, is twice as expensive as that available in China, despite being of a lower calorific value. Then, the main raw material, soda ash, which constitutes 35 per cent of the manufacturing expenditure costs over Rs 11,000 per tonne, compared to Rs 4,000 per tonne in China. So, how can the glassmakers of Firozabad compete? They can't. ''Some are already shutting shop and half might be closed within a year,'' warns Agrawal. The repercussions could be scary, considering that Firozabad's glass industry employs 5-6 lakh workers.

Agrawal, though, might be the last to go down. Thanks to economies of scale, he still enjoys some advantages. ''But I am sure that I have caused the demise of some smaller units,'' he says. It doesn't matter what glass product you are in, you are going to be hit. Since glass tumblers and bowls is where most of the competition is, some manufacturers have shifted to other products like bangles. ''Now, there's over capacity in those segments as well,'' says Agrawal. The only reason why Indian manufacturers still account for 30 per cent of the domestic market is still with domestic manufacturers is because foreign companies haven't been able to expand their distribution to the smaller cities. That, though, is just a matter of time.

Says the Planning Commission's Gupta: ''Banks don't want to risk lending to small businesses, since they usually don't have enough collateral. Plus, by lending to small businesses, you are increasing transaction costs.'' This forces entrepreneurs to use their own money. And since working capital cycles are the first to get hit, it becomes difficult to ride out a prolonged bad business cycle.

Economic logic suggests that businesses make investments to improve quality and productivity during a recession. But when money is stuck in payments that aren't coming in and you can't borrow, how do you invest? Bajaj for instance, feels that Indian lock manufacturers must invest in manufacturing pin-cylinder type locks. In India we use lever locks, whereas pin-cylinder locks, which most of the world uses, are considered safer. ''Pin-cylinder locks are already 10 per cent of the market, since the affluent classes are shifting to that,'' says Bajaj. But not many companies are in a position to make the investment.

The situation is as bad in the south of the country too. Take Coimbatore, known for its foundries, pump sets, electrical fittings, and precision tool manufacturers. You'll still see a fair number of Mercs in the city, but everyone knows it's a desperate attempt to maintain a facade of prosperity. The truth is that Coimbatore has already seen over 1,000 suicides from small businessmen. Often, whole families would rather die ''an honourable death'' than admit bankruptcy and live.

Coimbatore was jolted by bomb blasts and communal riots in February, 1998. Before that, to avoid state taxes, traders from Kerala would come to Coimbatore, purchase stuff and smuggle it into their state. But after the riots, it became difficult to get past the cops. And from a sellers market, it became a buyers market, overnight.

The next worry is the lifting of quantitative restrictions. Says K. Balachandran, Secretary, Coimbatore District Small Industries Association: ''We'll need three years to prepare for the WTO challenge, but the only information we have of how it will impact us, is culled from newspapers.'' No one from the government or an industry association has bothered to educate them.

Talk about infrastructure and it elicits nothing but laughter from entrepreneurs. Once Madurai had the largest number of small businesses outside Chennai in Tamil Nadu. Today, roughly 30 per cent are closed and most others operate a single shift. This after small businesses set up a private industrial estate, provided the land to house the dot telephone exchange and even constructed the building.

Up north in Uttar Pradesh, it's the same story of government apathy. The government charges you for a minimum of four hours of electricity every day, whether you use it or not. But the irony is that you don't even get electricity for four hours a day. ''Even if I get electricity, I won't use it,'' says Ashraf Rizwan, Director (Sales) at the Rs 13 crore Homera Tanning in Kanpur. ''The electricity rates are so high, that it costs me roughly the same if I use my diesel generators.'' Then, government provided power is never regular. A diesel generator at least assures you of uninterrupted power supply. So, Rizwan found an ingenuous solution. He went off to Alang's ship-breaking yard and just before a ship was broken, he bought two 500-kva generators dirt cheap. Today, his factory functions only on those generators.

Big Is Beautiful

Iqbal Ahmed of the Rs 30-crore Indian Leather Industries, recalls the days when Kanpur had only 35 leather factories in the early 70s. Today, there are 330. ''About 300 of them are near closure today, and only 8-10 are financially sound,'' he says. The 30 that will survive will be the big ones. No scope for niche players here.

This, when India's leather exports grew by 20 per cent in dollar terms last year. Most people in the industry believe that the larger players that have cornered the growth. ''That's because they can afford to work on lower margins,'' says Riazul Haque, Managing Director, Seema Tanning. ''Plus, with raw leather in short supply, the big ones muscle out the smaller players by making advance payments to leather suppliers, something the small guys can't afford.''

Virudhunagar

Wiry and middle-aged, C. Brindavan is an influential man in Virudhunagar, a town south of Madurai, occupying just seven sq. km, but packing in 80,000 people. Brindavan runs spgc Metal Industries, a company which packs oils, paints and ghee in tin cans. He is an influential man in this town of Nadars, but worries his power might wane with his business.

''I never had to search for customers and orders below 50,000 tins just weren't taken up,'' he recalls. That was till five years ago, when he used to pack lubricant oils in tins. Then, gradually but surely, oil companies began using plastic packaging. The superior quality of packaging apart, it is much lighter and reduces freight cost. But being a capital-intensive business, plastic packaging isn't something the small scale can do. His imported raw material and iso certificate didn't matter. So Brindavan tried other avenues to keep the business going. ''We turned to the paint industry and the ghee manufacturers, all whom we had scorned earlier. And they never fail to remind me of the days I turned down their orders,'' he says. Today, orders of any size are taken. ''I have to keep my factory running and pay my employees.''

But even if there are orders, it doesn't mean a profit. ''Earlier our gross profit was 10 per cent, now we are lucky if we break even,'' says Brindavan. He adds that this is the rule in tin packaging. This is a large business in Virudhunagar, since it supports the refined oil and processed spice-powder industries, that the town is famous for. Input costs have been growing, while prices of the final product haven't been hiked in seven years. In fact, after jogging his memory a bit, he says that eight years ago, a ghee tin was sold to Aavin, the state co-operative milk federation, for Rs 9; today it fetches Rs 7.50.

The way Brindavan sees it, things don't look like getting any better in the future. If anything, he's on a downward spiral. As an alternative, some time back, he thought of setting up a can manufacturing facility to cater to soft drink companies. But that required an investment of Rs 25 crore-money, which he would be able to raise only at an interest rate of 19 per cent. That would make the project unviable. His nephew, who had returned from the US to join the business, wonders why he did so.

-Nitya Varadarajan

It's not surprising, therefore, that Haque has been forced to shut one of his two factories. Turnover has come down from Rs 7 crore in 1992-93 to Rs 4 crore today. Then, most of the export markets that India caters to are saturated, and moving into new markets means expensive marketing, something the small ones can't manage.

There's also the threat from transnationals. In Coimbatore, along with 20 other such units, R. Mylsamy with a staff of 30, manufactures handling materials and conveyer belts. His margins in 1995, were 10-15 per cent, today they stand at 4 per cent. If this wasn't bad enough, a transnational is setting up shop in town. It intends to bring the best of manufacturing machines. He believes that on its own, it will kill all 20 existing manufacturers.

What Does This Mean?

''Policy makers aren't realising the extent of the problem,'' says the Planning Commission's Gupta. The problems are evident: high interest costs, poor infrastructure, competition from everyone's favourite bugbear, China, competition from large industry, badly directed incentives, no guidance on technology upgradation and marketing support, are sounding the death knell for small businesses. And we keep beating the old drums. Reservation, SIDBI, price preference on government procurement, excise exemption... clearly nothing works.

With the lifting of QRs this month, the policy of reservations becomes irrelevant. Price preference during government procurement doesn't help, since payments get delayed. ''Besides, the government isn't a big buyer these days,'' says J.M. Pawar, President, Federation of Associations of Small Industries of India. Add to that a big shift in consumer buying behaviour: everybody wants a branded item today. The small scale sector can't give that, or can't keep in touch with the latest fashions.

Doomsday? Maybe not, you might say. After all services are booming. But isn't that becoming a preserve of the large scale as well? Doesn't that transnational service brand give you confidence? Who would you rather give your package to, DHL or the neighbourhood courier guy? And how about those cable operators that sprung up all over the country? They've been bought out by the big guys. So (last question), is this the end of India's small business dream?

-Additional reporting by Abir Pal, Nitya Varadarajan and Debojyoti Chatterjee

 

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