Automotive: Changing Tack

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It's a good thing that Nitin Anturkar is a man of boundless energy and rabid optimism. As the head of engineering services at the Tata Group-promoted Tata Auto Components System (TACO), Anturkar is going to need all that and more. Recently, the 42-year-old, whose previous stint was at Ford's Dearborn headquarters in Michigan, was charged with putting the off-trajectory components group into a new orbit of growth. By all indications, it's going to be anything but easy.

In 1994, when TACO was conceived, the idea was to build the components group into the largest integrated vendor in the highly-fragmented industry in India. As group chairman Ratan Tata saw it, taco would grow rapidly and become a supplier of components to global majors both in India and abroad. The targets that taco set for itself were overarching. By 2002, it planned to have 40 joint ventures in place, and by 2005-06 revenues were expected to touch Rs 17,000 crore.

The report card of today is in stark contrast to the ambitious blueprint. There are only 12 joint ventures (and the number may not exceed 25 in any case), and the topline stands at Rs 675 crore. Not surprisingly, the sales projections for 2005-06 has been slashed to Rs 5,000 crore. What went wrong? TACO's CEO D.S. Gupta says they were led up the garden path by consultants, who put passenger car sales at 1 million by 2001 (compared to the actual 700,000), and commercial vehicle sales at 300,000 (actual is 110,000). ''We have learnt the hard way to base our projections on our own estimates,'' rues Gupta.

THE SOBERING OF TACO

THEN: 1994
ť Rack up 40 international joint venture by 2002
ť Clock sales of Rs 17,000 crore by 2005-06
ť Become the largest Tier-I supplier in India
ť Become a fully-integrated vendor organisation
ť Plug into the network of global OEs & Suppliers
NOW: 2001
ť The count stands at 12, and may not exceed 25
ť The topline has inched up just to Rs 675 crore
ť Sister company Telco still accounts for half its business
ť Engineering and supply chain will likely be bigger
ť Exports rake in a bare 6 per cent of the revenues

The sluggish automobiles market has prompted taco to make some mid-course corrections. It has five strategic business groups (SBGs), of which only one-manufacturing-was the focus so far. The plan now is to seek opportunities in engineering services (SBG2) more aggressively. Anturkar, the pointman for the SBG, faces a formidable task: In the next three years his division has to rake in $150 million (Rs 705 crore) in revenues, and by 2005 push that figure higher to $250 million (Rs 1,175 crore).

But just why does Gupta think engineering services will deliver where manufacturing hasn't? He says that, contrary to popular perception, it's not labour that's India's competitive advantage, but factors such as design skills, domain knowledge, and managerial expertise. So, TACO wants to be a ''full service provider''. It will not only design components for global customers, but will design tools needed to manufacture vehicle parts. And in case the global original equipment manufacturer (OEM) wants to source components from India, taco's sbg3 (which specialises in supply-chain management) will step in and identify the best-quality, lowest-cost suppliers.

The good news is that the engineering services business, which is barely a year into operation, has already racked up Rs 18 crore in billings. This number is expected to grow 250 per cent year on year at least for the next few, and 95 per cent of it is to come from OEMs abroad. ''The strategy here is to lock on to global OEMs as well as the Tier-I and Tier-II suppliers,'' says Anturkar.

The engineering SBG already has big customers such as Ford, General Motors, Volkswagen, and Tier-I suppliers including Visteon, Valeo, Yazaki, and Johnson Controls. In fact, for Johnson Controls, taco has set up a dedicated design centre, where 110 engineers work in two shifts. On the whole, Anturkar's SBG has 230 design engineers. This year alone, four more design centres are to be set up, and over the next three years, about 15. ''We are tremendously upbeat about (the engineering SBG) because by setting up manufacturing operations in India with big names like Ficosa, Yazaki, and Johnson Controls, we have established global credibility,'' claims Gupta.

That may well be true. Of the 40-odd major autocomp manufacturers in the world, taco is already doing business with 11, including Knorr Bremse, Faurecia, Yutaka Giken, Valeo, Meritor, and Foggini, to name a few. And it is winning recognition for its capabilities. For example, an automaker recently gave out a component design order to four different companies, including taco (the other three were big US design houses). The brief was daunting: the vendor had to come up with a design that could serve as a benchmark for other suppliers. And guess who won? TACO.

In the future, such contracts will be fought for with greater ardour. Even today, 30 of SBG 2's engineers are placed onsite with various customers outside India. Two years down the line, taco intends to set up design centres in the US, Europe, and Japan. ''Those design centres may be smaller, but their brief would be to understand the business, spot new opportunities for taco, and liaise with their colleagues in Pune,'' says Gupta.

What helps is that SBG2 can provide integrated engineering services. It can not only develop embedded software and real-time systems, but also do testing and homologation (a component acceptance process), engineering of powertrain, ride control, interiors and exteriors, and chasis. In addition, it does style and structural design of components, and tooling. A lot of big vendors think this may be the way ahead for the industry in India. Says Anil Verma, Managing Director, Delphi Automotive Systems, which plans to increase the headcount at its design centre in Bangalore from 100 to 400 by the end of next year: ''It's a question of how well the vendor integrates with car designers and manufacturers.''

SBG3, which focuses on supply chain management, is hoping to make it big too. It has bagged its first two orders worth Rs 4 crore-one for turbo charger castings and the other for sintered parts. To help evaluate vendors, the SBG has developed its own audit system based on the selection systems of Delphi, Robert Bosch, and Visteon. So far it has audited about 70 suppliers, and shortlisted 27. Gupta believes that there are at least 300 companies from whom the SBG can source components for its international customers. By 2004-05, the SBG has been given a revenue target of Rs 500 crore. What it means is that by then, engineering and supply chain management services would be raking in almost half of taco's Rs 3,000 crore sales.

Gupta admits that for taco to grow and survive, opportunities have to be found outside India. He isn't exaggerating. Take components, for example. JBM Sungwoo, which makes sheet metals and is the biggest of the 12 joint ventures, is projected to touch Rs 185 crore in sales only next year. The second biggest, seating systems manufacturer Tata Johnson should do Rs 160 crore of business, and JBM Tools could hit the Rs 125 crore mark. The rest will be far below the Rs 100 crore figure.

The problem? Despite the entry of new players into the auto industry, the demand for vehicles hasn't grown proportionately. For example, the total market for passenger cars and multi-utility vehicles has doubled, but in seven long years. But sales of commercial vehicles, typically a high-margin business for OES and vendors, have actually shrunk. The medium and heavy commercial vehicles (M/HCV) market grew from 1.03 lakh units in 1994-95 to 1.51 lakh in 1996-97, but by last year, it had dropped back to 87,588 units. In that time, the light commercial vehicles segment has also dropped from 94,863 to 62,864.

In a falling market, OES in India have done what their peers elsewhere do: tighten the screw on suppliers. That has lead to a consolidation of sourcing, with OES preferring to divert volumes to select vendors. For a newcomer like taco, breaking into the supply chain of a large manufacturer has proved tougher than expected. And although it has some of the best international suppliers for partners, the global slowdown has made the fight for orders internecine-geographically different units of the same company compete with each other, not to mention rivals. Worse for taco, the largest car manufacturer in India, Maruti Udyog, doesn't buy from any of the TACO JVS, apparently because it regards the Tata Group as competitor. Says Verma of Delphi: ''Finally, it boils down to grabbing volumes. A vendor can make profits only if he generates sufficient production volume.''

Luckily for TACO, it had Telco-and its new passenger car, Indica-to bank on. Not surprisingly, then, almost half of its revenues come from the vehicle major. But Gupta wants to lower that figure to about a quarter ''shortly''. In fact, in the next two years or so, taco even expects Maruti to start buying from it. At the moment, though, it is focusing on getting more out of its relationship with companies like Ford and Fiat. Tata Ficosa and Tata Johnson supply parts for Ford's made-for-India Ikon in countries like Mexico and South Africa, where the ''Josh'' machine sells more than it does in India.

Despite such successful relationships, taco's export income is a bare 6 per cent of its total revenues. If the engineering services and supply-chain management SBGs deliver, that figure will soar to 50 per cent in another three years. For taco on the whole, that would mean having to grow at a 70 per cent clip year on year. Besides, it must weather the consolidation happening globally. There's an increasing trend towards modular supply of systems. For example, instead of sourcing gear box, transmission assembly, and axles separately, OES now want the Tier-I supplier to send in a fully-assembled ''module'' that can just be put on the assembly line, fastened to the chassis and rolled out. ''Increasingly, car makers only want to do the designing and marketing of the car,'' notes Verma.

Driven by safety and regulatory issues, automotive technology is changing. There's more electronics going into cars than ever before. That means few high-end components-such as anti-lock braking systems or electronic fuel injection systems-stand any chance of being sourced from India. In such a situation, taco will have to pull not just its own skills up by its bootstraps, but also those of its own suppliers, many of whom are not up to scratch. ''Think of (taco) as a global auto components company that started in India,'' is what the group's head honcho, Ratan Tata, had told Gupta in 1994. Seven years on, Gupta has a lot of catching up to do.