Fwd: More spaces to park : Gujarat and Automotive Industry - A nice article
Mayur Shah
From: Gujarat India <guj...@gujarat-india.com>
Date: Tue, 11 Oct 2011 10:39:28 -0500
Subject: More spaces to park
To: mayur...@gmail.com
[image] Mon, October 10, 2011
More spaces to park
Five auto manufacturing hubs compete for investment
N. Madhavan
[image]
Tata Motors' Nano plant, Sanand
October 2008 is a time in his life that 63-year-old Ravubha Vaghela
will never forget. After all, it is not every day that one willingly
makes a Rs 7-crore sacrifice. The
banker-turned-teacher-turned-realtor-turned-industrialist parted with
30 acres of prime land off the Sanand-Viramgam highway, 30 km from
Ahmedabad, for Rs 1,000 per square metre - half the market price - to
enable the Narendra Modi-led Gujarat government to build an approach
road for the Tata Nano plant.
But for his decision, Gujarat might not have become the latest and the
fastest growing auto hub in the country. "Though the state government
had 1,000 acres of land for the Tata Nano project, negotiations were
faltering, as there was no access road to the site. When it became
clear that this could push the plant out of Gujarat's hands, I came
forward to offer my land," he says.
Close ties with Congress leader Shankersinh Vaghela - Modi's bete
noire - did not deter Ravubha from selling his land and persuading
other farmers in four villages to part with nearly 3,500 acres, so
that Gujarat Industrial Development Corporation, or GIDC, could
develop the auto hub. "We wanted to show how different the outlook of
Gujarati farmers was from those in West Bengal," he adds in English
laced with a mix of Hindi and Gujarati.
Three years later, not only is Tata Motors' Nano plant up and running,
but two other global auto majors - Ford Motor and PSA Peugeot Citroen
- plan to invest Rs 4,000 crore each to set up car factories in the
area. The impact is already visible in Sanand and nearby villages:
with the Rs 1,600 crore that farmers have got for their land, they
have bought luxury cars, built big houses, bought large tracts of land
at some distance from their villages, and invested the rest in the 12
new bank branches which have opened in the area in the past year.
[image]
To achieve our targets, we had to shift focus away from traditional
industries with low per capita value addition. So we picked sectors
such as automobiles: Saurabh Dalal
[image]
Tata Motors Nano plant, Sanand
And there is more in store: state government officials say Maruti
Suzuki , too, will build its plant near Sanand, and that the deal is
likely to be sealed in October. Besides car makers, two-wheeler
manufacturers are also considering expanding their operations in the
area. And GIDC officials say the deluge of offers from farmers who
want to sell their land is growing daily.
Gujarat's transformation into an auto hub began in 2008, with the
chance marriage of a realisation and an opportunity. Unhappy with the
level of value addition in terms of downstream industries and job
creation triggered by large chemical, petrochemical and
pharmaceuticals investments, Chief Minister Modi sought officials'
views on ways to improve the situation.
[image]
Click here to Enlarge
[image]
You cannot afford high logistics costs if you are selling small cars,
where margins are thin. Also, it can take 10 days to ship cars from
one city to another: Michael Boneham: Michael Boneham
Gujarat accounts for half the chemicals produced in the country and 62
per cent of petrochemicals. Modi wanted to take the share of
manufacturing in the state's gross domestic product from the current
31 per cent - the national average is 18 per cent - to 40 per cent by
2025 (the projected national target is 25 per cent). "We realised
that, to achieve this target, the state had to shift its focus from
traditional industries which were capital-intensive but with low per
capita value addition," says Saurabh Dalal, the state's industries
minister. "We identified sectors such as automobiles, where the ratio
of direct to indirect employment is very high."
The opportunity came on October 3, 2008, when Ratan Tata decided to
pull the Nano project out of Singur in West Bengal. An SMS from Modi,
asking Tata to consider Sanand as a possible location, set the ball
rolling. But it was no shoo-in: Tata Motors was considering locations
in Karnataka and elsewhere.
"Fortunately for us, land was readily available, and the state's
proactive governance, strong infrastructure credentials, coupled with
the trust Ratan Tata had in Chief Minister Modi , swung the project
our way," says M. Sahu, Principal Secretary in the state's industries
and mines department. "The Tata investment clearly gave the necessary
impetus and set auto investment into the state on a higher
trajectory."
Speedy execution has become the hallmark of Gujarat's new
industrialisation policy. Ford India, which inked a memorandum of
understanding on July 28 with the state government to set up its
second plant in Sanand, got possession of the land and the necessary
approvals to do the bhoomi pooja on September 5. But even after Tata
Motors' investment, some questions remained.
Despite Gujarat's strengths - abundant electricity, gas, water, ports
with fast turnaround times - potential investors were worried about
the availability of skilled labour and the auto component base. They
waited to see how the Tata project evolved before taking the plunge.
"As part of the negotiation with the Tatas, we underwrote a commitment
that 1,000 shop floor workers would be trained before the plant
started production. "We delivered on our promise," says Sahu. "This
eased the concerns of other investors." The state government has
started a programme called Industry Responsive Manpower Building, adds
B.B. Swain, Vice Chairman and Managing Director, GIDC.
Attracted by the investment climate, suppliers, too, are slowly
heading for Gujarat. Says Harsh Goenka, Chairman, RPG group, "For us,
Gujarat is fast becoming an important state to do business in. We have
been able to set up our Rs 650 crore CEAT radial tyre plant in Halol
in very quick time. There is no corruption and the state is definitely
the number one destination as far as the business environment is
concerned."
With the emergence of Gujarat, India now has five large auto hubs (see
India's Major Auto Hubs). Chennai - often called the Detroit of South
Asia - is the largest. In 2010/11, it accounted for 31 per cent of
cars and 35 per cent of components made in the country. The others are
Pune, Pantnagar, and the National Capital Region.
The competition between them is intense, and states woo investors with
facilities and incentives. In an indication of just how fervid the
rivalry is, the Tamil Nadu government jumped the gun in August this
year, saying Peugeot had agreed to set up its factory in Chennai. The
company denied it the next day, and eventually plumped for Gujarat.
[image]
Why India has multiple hubs
Large country with car buyers across the map
Rising transportation costs for shipping new cars
Infrastructure constraints
Attractive incentives offered by various state governments
Avoiding concentration of labour in one location
Availability of skilled labour at reasonable cost De-risking strategy
[image]
We wanted to show how different the outlook of Gujarati farmers is,
compared to those in West Bengal: Ravubha Vaghela
While hubs compete, they also complement each other in terms of
offering auto companies scope for distributed manufacturing. A large
integrated plant in one location may make for economies of scale, but
certain factors force manufacturers to set up production facilities in
multiple locations. India is a large country, and car buyers are
scattered across the map. For instance, the National Capital Region
accounts for 20 per cent of cars sold in India. Western India comes
next.
Having a plant in one corner of the country increases logistics costs.
It costs Rs 15,000, for example, to transport a car from Chennai to
New Delhi. This was one of the main reasons Ford India chose Sanand
for its second plant. "You cannot afford high logistics costs if you
are selling small cars where margins are very thin," says Michael
Boneham, Managing Director, Ford India.
"There is also time involved: it takes 10 days to ship cars from one
part of the country to another." There are other reasons for multiple
locations. "The concentrated power of labour in one location can be
crippling, as Maruti Suzuki is realising to its horror now," says
Abdul Majeed, Auto Practice Leader at PricewaterhouseCoopers. He adds
that in India, inefficiencies creep up as capacities rise beyond a
point, citing the example of congestion at Chennai Port. A single
production location is like putting all of one's eggs in the same
basket. "De-risking is a critical element," says Majeed.
Then there are the incentives that states offer to attract investment.
Pantnagar in Uttarakhand emerged as an auto hub because of central and
state government incentives such as 100 per cent exemption from income
tax for the first five years, 30 per cent for the next five, and 100
per cent excise duty exemption for 10 years. Two-wheeler manufacturer
Bajaj Auto took the opportunity.
Our total income tax rate in 2010/11 was 25.5 per cent, as against
33.2 per cent, and the excise benefit translated into a saving of
roughly three per cent on the cost of the bike," says Kevin D'Sa,
President, Finance, at Bajaj Auto. The effectiveness of incentives is
evident in the fact that, with the central government scrapping the
excise exemption from April 2010, the flow of investments into
Pantnagar has dropped.
The plurality of auto hubs compels car makers to balance distributed
manufacturing with economies of scale. "A capacity of about 250,000 is
the standard unit of production worldwide, and offers reasonable
economies of scale," says V. Sumantran, Executive Vice Chairman,
Hinduja Automotive. But, as Majeed argues, the benefits of scale in
India are affected by infrastructure limitations.
Globally, multiple hubs are the trend. "In the early part of the 20th
century, Detroit became the auto hub in the United States, with a
strong manufacturing base and cheap migrant labour," says Sumantran.
Over time, however, expensive labour and inefficient work practices,
coupled with incentives from other states, induced car makers to go
elsewhere: Honda chose Ohio, Mercedes went to Alabama, and BMW North
Carolina. "India is at a similar stage," he says.
[image]
Expensive labour and incentives elsewhere drew car makers away from
Detroit. India is at a similar stage: V. Sumantran
Ford India's Boneham says: "With the country's annual car production
set to triple from the current three million units to nine million by
2020, we will definitely see more hubs emerging."
Additional reporting by Manu Kaushik
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