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LEADER Screwriver Technology The flurry of planned CBU imports should delight consumers. But the fear is it will choke supply of new technology and eventually kill car manufacturing in India. By R.Sridharan
Like the Lilliput emperor, the Indian government, having decided to play host to the Gullivers, is hard-pressed to please them. It is demolishing (tariff) structures to accommodate the automotive guerrillas. The most controversial of these appeasement efforts is the relaxation of imports of completely built-up units (CBUs), announced in Budget:2001. Thanks to the downward revisions in import tariffs, both CBUs and semi-knocked-down kits (SKDs) have become attractive alternatives to localising components. For, the effective import duty on CBUs now works out to just 120 per cent. What the new tariff structure has done is to encourage car manufacturers to import all their high-end, low-volume models, and deploy their under-utilised capacities to produce existing cars and their variants. Therefore, any significant investment in new capacity is unlikely. Sure, the consumer will gain, but at a huge cost to the local industry. Says K. Mahesh, CEO, Sundaram Brake Linings: ''We let too many players in to begin with, and now we are ensuring that they have little incentive to localise production.'' The root cause of the problem, of course, is the economics of car manufacturing. For a plant to be viable, the minimum capacity needs to be 1.5 lakh cars a year, entailing an investment of $1 billion (Rs 4,700 crore) or more. Making money on this kind of investment is a tall order when the market is small-like in India. Consider: To be able to sell a car at Rs 4 lakh (like Hyundai Santro or Maruti Zen), the manufacturer's factory price must be below Rs 3 lakh; the Rs 1 lakh buffer is not his profits, but the 32 per cent Excise that must be paid to the government. Assuming a debt-equity ratio of one, and an interest rate of just 10 per cent, the manufacturer will have to pay Rs 230 crore in financial charges alone. Add to that a 10 per cent annual depreciation (on assets worth, say, Rs 3,000 crore), and the figure snowballs to Rs 530 crore. On the revenue front, if the vehicle manufacturer is luckily enough to be able to sell 3,000 cars a month (Maruti and Hyundai are an exception, rather than the norm), we are talking about Rs 1,000 crore a year in revenue. Even assuming a generouns 10 per cent profit margin, the car maker still wouldn't have made up for his interest payments. So, what will the manufacturer do? Launch variants to expand presence in the market and share overheads and components across a larger number of models. But for a completely new kind of a platform-like the Hyundai Sonata, Honda Accord or Ford Mondeo-CBUs or some form of kit imports will be the preferred route. The success of new launches-measured in terms of sales-will determine segregation and survival in the industry. At the top of the auto food chain would be companies that have volumes-selling more than a lakh of cars each year. These will be the ones who'll be able to negotiate with local vendors, indigenise parts, and thus control their pricing. At the second rung would be those that have sedans and sell 50,000 to 60,000 cars a year. If the market evolves, and more and more people see sedans (like Esteem, Accent, and the Ikon) as entry vehicles, these companies would have an opportunity to move up the food chain. At the bottom-most end would be the premium players, stuck in a niche. ''Globally, car manufacturing is a volumes business,'' says B.V.R. Subbu of Hyundai Motor India. Less indigenisation would mean less technology upgradation of suppliers, many of who are already dying. Eventually, India could become a big market for assembled cars. But in terms of creating a strong local industry, it would do little.
BIOTECH They're flushed down the sink today. But if Indian companies have the vision, there are enough human embryos available to launch research into a field that could transform medicine. Some of the world's leading scientists would be stricken if they saw what Dr Anirudh Malpani flushes down his sink periodically-human embryos. Actually each is just a few cells old, grows up in a petri dish and would comfortably fit on the tip of a pen. Dr Malpani's clinic in teeming, downtown Mumbai is one of India's leading private centres for In Vitro Fertlisation (IVF), a procedure that allows many infertile parents to conceive outside the womb. Between seven to 14 embryos are grown. Four might be transferred to the womb, a few frozen for future use. As for the rest (more than 1,000 every year)-down the sink they go. Dr Malpani says he would gladly consider providing researchers and companies with the surplus embryos.
Human embryos are the best source of what are being called the ''magic seeds'' of medicine-stem cells. Stem cells, which form when an embryo is four days old, are the parent cells of the body. They can develop into cells that make everything from muscle to bone marrow to liver-virtually every human tissue. In Delhi, Dr V.K. Vinayak, Medical Advisor, Department of Biotechnology (DBT), says he hasn't seen so much promise in his 30 years of medical research. ''The future of biomedical sciences is dependent on the use of stem cells,'' declares Vinayak, whose department is prepared to invest a few crores in collaborative projects with private companies. Today's pharmaceutical industry sells drugs that have very narrow targets-clearing a clogged artery for instance. Stem cells offer a much broader approach. For example, they react to heart-attack damage by creating both blood vessels and cardiac muscle. And because they are the body's own, the possibility of rejection is dramatically reduced. They can potentially cure disease, regenerate organs, even prolong life. Some types of stem cells are also found in adults. But they do not appear to be as flexible as the blank cells found in embryos. The US is in the midst of a furious ethical debate about using embryonic stem cells. The issue is so volatile that the Bush administration threatens to reimpose a ban lifted only last year on federal funding for human embryonic-cell research. Using embryos that would otherwise go down the sink isn't an issue in India. So Indian companies are particularly well placed to join the race to carry forward stem-cell research-if they seize the chance. So far, only a handful of government scientists do stem-cell research. Only two companies, both from Hyderabad, have joined in. ''We can take huge advantage of the ethical concerns they have in the US,'' says Dr Krishna Ella, Chairman of Bharat Biotech, a biotech company from Hyderabad that plans to set up a multi-crore stem-cell production and storage facility with support from the government. The project, launched in collaboration with the Centre for DNA Fingerprinting and Diagnostics, Hyderabad, primarily aims to develop, store and produce liver and neural cell. The other company, Biological Evans, is collaborating with the Centre for Cellular and Molecular Biology in perfecting techniques to store stem cells. Animal studies and stem-cell experimental transplants continue. In Hyderabad again, a group of scientists have found stem cells from goats particularly promising in combating human liver failure. And at the L.V. Prasad Eye Institute, some stem cells have been used to reconstruct defective corneas. But stem-cell research is no gold rush. Dr Ella says his cells are four years away from market. If Indian companies are serious, they must get in now. ''We'd like industry to join in from day zero,'' emphasises DBT's Dr Vinayak. If that happens, Dr Malpani will not flush so many embryos down his sink. -Samar Halarnkar POTHUNTERS With good startups few and far between, VCs find a unique solution to all their investing woes.
Fifteen months ago, when Chrysalis Capital's Ashish Dhawan approached Raman Roy, then head of GE's call centre in Gurgaon, with the idea of running a call centre, the idea of a venture capitalist setting up a business and finding a pro to run it, in return for sweat or earn-out equity was revolutionary. Today, Spectramind, in which Chrysalis has to date invested $6.25 million (Rs 29.37 crore) and holds more than 60 per cent stake-the rest is held by strategic investor HDFC, Roy and his team-is one of the more successful call centres in the country, and the concept of veecee as entrepreneur is catching fire. Chrysalis, emboldened by its Spectramind experience, is working on five deals of a similar nature, mostly in the area of IT-enabled services. And Walden and Global Technology Ventures are also considering playing entrepreneurs for a change. The move isn't wholly unexpected. With most business plans that come their way not being up to scratch, venture capitalists have realised that the surest way to guarantee returns to their investors is to plough in the money and start a business that can't go wrong, and then find a team to run it. The management team is offered the option to sweat it out for equity. ''These are deals where executives are incentivised to perform,'' says Rishi Sahai, a fund manager with Infinity Ventures. It is, of course, possible for the venture capital firm to make a mistake either in choosing the business to launch or identifying the perfect management team for it. Chrysalis opted for call centres-and you can't really go wrong with call centres-and picked Roy, who's had experience managing both American Express' and GE's call centre business in India. Call centres aren't really dotcoms, and some would consider investing in them infra-dig, but if it is returns they are looking for, venture capital firms couldn't find a better destination for their investments. Expect to see more veecee entrepreneurism in this domain, then. -Vinod Mahanta TRADE Anti-dumping-happy India is hurting its image and trade in the global markets. Is the Indian government using the Anti-Dumping Agreement under the General Agreement on Trade and Tariff (GATT) to prevent market access and, therefore, protect inefficient Indian industries? The jury is still out on that one, but some trade experts believe that the government is trying to use the agreement to keep foreign competition at bay, and helping monopolies to continue their domination. The government, of course, doesn't think so. Says L.V. Saptharishi, Designated Authority, Directorate General of Anti-Dumping and Allied Duties (DGAD): ''We are only discharging our primary responsibility of providing relief to the domestic industries from any trade distortions arising out of the liberalisation process.'' Statistics say another story. From a mere eight in 1992, the number of anti-dumping cases launched by India went up to 67 during 1999 (the highest in the world). While the number fell to 27 in the 12 months to June 30, 2000, it is still the highest for the developing countries. US, for instance, had just 29 and the whole of European Union, 49. Contends Bibek Debroy, a well-known trade expert: ''The easiest thing in the world is to prove dumping since it involves an enormous amount of subjectivity.'' The agreement allows WTO-member countries to impose anti-dumping duties if the domestic industries have suffered material injury because of dumping. But there are several grey areas. For instance, how does one define material injury? Also, just one complainant is enough to trigger a dumping investigation. Take the case of Besophenol-A (a vital drug input), where anti-dumping duty has been levied against Brazil and Russia. The only petitioner was Kesar Petroproducts. In its desire to protect the domestic manufacturers, the government seems to have hurt some other parts of industry. ''The interests of the user industry have never been systematically addressed, even though in many cases the user industry is much bigger, employs more people and records a much higher turnover,'' says Nilanjan Banik, an economist, in his recent paper Anti-dumping Measure-A Critical Evaluation. For instance, his study reveals that anti-dumping duties have been levied mostly on raw materials and intermediate products-basic metals, chemicals, machinery, electrical equipment, and plastics and textiles-which find their applications in drugs, steel plastic, rubbers, machinery. Thus, the imposition of an anti-dumping duty means an average drop in import quantities by 70 per cent and a hike in import prices by 10 to 20 per cent. This, in turn, makes the final product that much more uncompetitive in the domestic market. Since anti-dumping measures cut both ways, they need to be handled with care. -Ashish Gupta ENVIRONMENT Hindustan Lever handles toxic mercury carelessly, then provides a lesson in how not to win friends locally. Navroz Mody, 50, was nosing around for old windows in a scrapyard in the colonial hill station of Kodaikanal in Tamil Nadu in November 2000, when he saw the two sacks of broken glass. As he looked closely, he saw bits of mercury, the stuff of thermometers-and a substance notorious for its toxicity to human health.
The source of the mercury was soon identified-a Hindustan Lever Ltd. (HLL) plant, which in manufacturing 164 million thermometers in lush Kodaikanal had released 539 kg of mercury onto the forested slopes around its factory. Another 284 kg went to ''off-site disposal''. The company sent potentially contaminated glass to a string of recyclers in Karnataka and Tamil Nadu to be converted into bangles, marbles, and other unrecoverable baubles. Mody's accidental discovery, and HLL's ham-handed handling of the issue, unleashed a wave of local resentment against one of India's most respected companies. HLL first denied the dumping after it became public knowledge on March 7, 2001, and later attributed ''human error'' for the 15 tonnes of mercury and glass wastes dumped in the shola, a stand of biodiverse forest. However, HLL says it has been "reassured" by confirmation from independent environment advisers that there has been "no adverse environmental impact outside the factory", company spokesperson Debasis Ray told BT. In reaction to allegations that many of the 150 workers (and 250 former workers) fell ill, Ray said ''comprehensive medical tests'' on all present and former employees showed no ''adverse health effects''. The issue has become a rallying point with activist groups worldwide. It didn't help that Mody is a campaign director for Greenpeace International. The internet is now awash in messages and postings targeting HLL's parent, Unilever (it holds 51 per cent of HLL) for following manufacturing practices long discarded abroad. The Tamil Nadu Pollution Control Board (TNPCB) ordered HLL to clean up the dump site. There's no controversy about contamination in the factory, though. HLL says it will clean-up its land to the "most stringent" Dutch standards by the end of the 2002 monsoon. HLL says it had decided in January to stop making mercury thermometers. Now, it says, no new thermometer will ever roll off the plant's production line again. -Samar Halarnkar
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When
Lemuel Gulliver lands in Lilliput, he's amazed by his microscopic
surrounding. The biggest temple in the kingdom is four feet high and two
feet wide. And it takes 300 tailors to stitch him a suit. Imagine the
kingdom's plight if instead of one, a dozen Gullivers had landed on the
shore. Actually, don't imagine. Just take a look at what's happening in
India's passenger car industry: 13 manufacturers, 125-odd models and their
variants (surprised?), and a market just 5-lakh-cars-a-year big.
AZIM
PREMJI Chairman,
Wipro
N.R.
NARAYANA MURTHY Chairman & CEO, Infosys
R.
RAJU, CEO, Satyam Comp.
ARUN
JAIN, CEO, Polaris
