To Hell with China- the confused us!

OUR CHINA BEATERS!

Corona, Ladakh and other things got every Indians’ muscles flexing! Ban Chinese goods, buy Indian and be Indian! The slogans are seen everywhere in discussions, social media and wherever we look. Great idea! But there is a cynical joke. A lot of posters, Ban Chinese goods, buy Indian and be Indian are seen everywhere- the only problem is they were printed and imported from China because these were good quality and inexpensive.

Import and export between nations is not an emotional decision, but such decisions are based on hard bargaining to try and see that both the sides are benefitted- and it needs to be a win-win situation. Import and export values between any two countries are never the same. In the case of China, the import from China is always higher than the export to China for most countries. Why has this happened? China has ensured that the industry grew phenomenally. They maintained quality and lower price than most of the nations in the world. They found efficient ways of sending goods to Europe by using the rail network of Russia. That reduced the transit time by almost 30 days.

Can any nation beat China in their own game? No, it is not easy, and there are other reasons like a dictatorship, lax labour laws and so on. In China, businesses rarely have to face legal hurdles. In democracies, legal issues can really strangle the industry. But is it doable at all to beat China in their own game? Yes, it is feasible, and this “miracle” has been performed by a sector in India. But before this, let me share thoughts of my friend Arvind on the subject.

Nobody, citizens, government, companies or anyone else can stop using, buying Chinese products overnight. The government, unless it officially declares war, can not stop or cancel orders or participation in tenders. It takes time for companies to develop alternative sources. The alternative sources will be costlier since China uses a dumping strategy. Being a totalitarian government, it has many advantages as for labour, company and other laws are concerned.

Atmnirbhar Bharat will be successful only if we as citizens of this country are ready to pay more for some products, initially. Businesses should put the nation first policy too, and the government, bureaucracy and politicians should not manipulate things for pushing their individual interests. Only competent leadership can change the future of the nation.

The link below are views of Rajeev Bajaj, MD of Bajaj Auto and Suzuki India, Chairman Mr. Bhargava. They have spoken pragmatically about China.

https://www.news18.com/news/auto/maruti-suzuki-bajaj-resist-boycott-china-movement-says-chinese-parts-necessary-for-production-2670601.html

I am talking about the Motorcycle industry in India. Motorcycle industry jointly has reached the top position in the world in numbers. In the early part of this century, Chinese companies started pushing their motorcycles in India. The “experts” began writing epitaphs of Indian Motorcycle companies Hero, Bajaj and TVS. But these companies were made of sterner stuff. They got their act together, pulled up their socks. And lo! Within a couple of years, the Chinese bikes were thrown out from Indian markets by customers and not by tariffs and jingoism by Deshbhakts. What did they do? They did the right things.

Those were days when IT companies were on a high, after the success of Y2K in the global market. They started hiring engineering talent from IIT’s, NIT’s and all good institutes. The kids wanted to do only coding in life, engineering career was a no-no. Here was what Bajaj tried. They used to get an opportunity for campus interviews on 7th or 8th day. One year they decided to hire people on zero-day. They told the institutes that they would pay three times the salary that IT companies paid. They got the zero-day slot, but to their surprise, very very few students wanted to join even at such a high salary. All wanted to jump the IT bandwagon. Bajaj reversed their strategy and went to the next level of schools. Changed interview language to Hindi, Marathi, Telugu and Tamil when needed. They got the hidden gems as these kids were good but had a language issue. Rest as they say is history.

Another example of Bajaj. Today they export about 1.8 million bikes a year, their primary market being Africa. In Africa, bikes are used as a taxi or a tempo. Bajaj has earned a name there. Before Bajaj, there were Japanese bikes which were superb but expensive. They had a limited market. The Chinese bikes were sent to Africa in an individual box, and they were assembled by local mechanics and sold. Bajaj made better bikes and despatched them in assembled condition, ready to use. They priced them between the Chinese and Japanese bikes. They have ultimately captured the market and running a highly profitable operation.

So, friends, it is doable. What you need is the will to fight, gauge the market correctly. Besides this, the Motor Cycle industry had the advantage of a large Indian market for Motorcycles. The local market helped them volume, which has proved beneficial.

Coming back to the slogan to hell with the Chinese products. If you look at Chinese cars, they are not so competitive in the world market, yet. But since many global multinationals went to China- Volkswagen, Land Rover, Mercedes, Toyota- all the named companies and others have a significant presence in China. Chinese manufacture seven to eight times the cars that we manufacture in India. In India, we simply do not have a market for more cars. Plus we do not have the infrastructure of roads and pollution control. With smaller numbers, we cannot compete with Chinese in four-wheelers. Mind you, China is still not able to sell “Chinese Branded” cars in the global market. But these vast volumes helped China to create a reliable components industry; the Indian industrial buyers have fallen into China trap due to low price. Many international component companies like Aisin, Denso, Conti, Valeo started China operations in a big way. Corona pandemic exposed the errors made by Industrial buyers. I have discussed this with many senior friends in the industry. The corrective measures have already begun, and over a period, China dependence will come down. It takes time to develop components suitable for your use.

It is impossible to boycott China immediately. It will take at least five years of focused efforts. In automotive products, direct import from China is about 10%. However, many tier two suppliers of the vendors from ASEAN countries import quite a lot from China. It will take time to develop ‘non-Chinese’ tier-two suppliers.

The government can discretely ensure that items like Ganesh Idols, Agarbatti, Patang Manja and such stuff does not get imported from China. These items can not be put on the banned list. So the government can talk to the business community and trade groups to make sure that “Indian” items are not imported. For such things, how do you know that they are cheaper? These are imported simply because trade margins are high. There could be hundreds of such items which can be easily “banned.” This is also doable. When Malaysia started behaving strangely with India, Indian government discretely talked to import organising bodies. Within three months the majority purchase of palm oil was switched over to Indonesia.

The main thrust of India should be to push local manufacture of good quality cell phones, tvs and such things in India. Special efforts will have to be taken. Years back, there was a story of the US pushing the Japanese to allow them to sell the US-made cars in Japan. It was declared during the visit of the US president to Japan, that the market is now open. When the delegation went back to the US and talked to car manufacturers, they realised that the manufacturers would take at least three to four years to manufacture Japan-specific, right-hand drive cars.

So it is good to let out steam, but there is no point in shooting the bullet in your foot! Another point is to find out if banning Chinese goods going to damage Chinese trade more or hit the Indian manufacturing capability? The right way would be do it over a period!

Recession or Cyclic downturn?

The automotive sector in India is under significant stress. Sales are going down drastically in unprecedented numbers. It is a vast sector and has already started giving layoffs, having non-production days- a euphemism for plant closures. A large number of dealerships have cancelled their tie-ups as the business does not appear to be lucrative. On top of this, BS-VI norms will be starting from 1/4/2020, which will cause further stress as no BS-IV vehicle will be even registered from 1/4/2020.

More difficulties will come up during this year and maybe even next year. The reasons for this is that CAFÉ norms will come into the picture from 2022. There is already a discussion of auto companies going slow on investments, but statutory requirements are mandatory, and these companies cannot avoid them. BS-VI norms and CAFÉ norms will increase the prices of cars. One thing that never comes into the discussion is the sale of old vehicles. It is not that people are not buying cars. People suddenly don’t change their habits. But people become practical and smarter.

George Mathew

I will tell you what I mean. I read an article from Indian Express which was discussing the sales pattern in the industry in general. The data in the table is for two thousand plus companies. The table above shows the business figures for April-June quarter comparison of 2018 and 2019. Sales of AC’s are generally seasonal. But other items like TV’s, Microwaves have not shown any decline. Sales are almost normal and have only shown seasonal changes.

I want to write a disclaimer. I cannot “read” the financial data, and hence, I cannot analyse it too! But as a layman, I thought there is not much difference for these two years. The sales have gone up in 2019.  Operating margins have reduced slightly. Depreciation is quite high in 2019, indicating the investments done in the that year. Hence interest paid has gone up maybe due to investments in plant and machinery. Proportionately tax paid has gone down, and profit has gone down. These figures do not show any drastic changes happening in the market. Companies considered in this table exclude banking and finance companies.

Then why is the auto sector in distress? I have mentioned that people have become smarter and practical. In the last financial year, the total number of vehicles sold was large. But the sales of new cars have come down. There is a secondary market where people buy used cars. The total number of old vehicles sold was four lacs more than new cars. Why is this happening? Small cars like Alto are now sold more in three-tier towns. Young people in big cities want to buy bigger vehicles. I understand that a 3 to the 4-year-old big sedan is now available for the price of an Alto. The trend of buying used fancy cars is affecting the sale of new cars.

I am not arguing that there is no recession in the auto sector. But we should not forget that it is one of the most protected sectors in India. Customs duty on cars below US $ 40000/ is 60 % and above this value 100%. The used cars have a customs duty of 125%.  For various reasons, this sector has remained inefficient. After many international companies started coming to India and opened their factories in India, the auto sector had a tough time. Some Indian companies took 15 years to reach the quality levels of global companies. One company that followed a correct way of doing business is Bajaj Auto. They currently export 1.8 million motorcycles every year. It gives them a buffer when the local market sales dip!

Some of the reasons for the downturn could be that main barrier for transport vehicles like octroi has been removed. The action has speeded up the turnaround time of vehicles  substantially. The effect would be that the number of trucks needed to transport material would be less than those previously required. Another reason that is making rounds is that demonetisation effect causing the sales to drop. Is such a large industry dependent on cash? In the rural areas cash was being used to buy vehicles; even large SUV’s were bought using cash. If people had so much cash with them why did they not use bank instruments to pay? The answer is obvious. Not paying taxes honestly is a habit that does go away quickly.

What was the auto industry turnover 20 years back? How much has this industry grown? The auto industry has made decent profits all these years, so I am sure they have reserves. Pollution norms have been known to everybody, so no point in raising hue and cry about investments needed.

Any sector that is in stress always talks of alarming results of the recessionary trends in their business. Should the government give selective help to the stressed industry? Is such action fair to other sectors which are doing okay in their business? The financial stimulus can be a solution, but such money gets diverted from equally essential areas. We should not forget that high tariff on imported vehicles has helped the industry for a long time.

All the companies in the automotive sector are large organisations, and they have the wherewithal to overcome current tough times. Asking for a reduction in GST is a short-term major and is taking a myopic view of the situation. In the last couple of years, the government has been receiving feedback from business about GST. Government has already made changes for the benefit of both industry and the government. Making changes for a specific industry for a short duration is an incorrect way. The auto industry has been generating decent profit for the last few years. Some things have changed; some new variables have come into play. There are who experts can find a solution and suggest corrective actions. I am sure the industry will come out of it.

Raising the alarm, making statements like “It is the wake-up call for the Government of the day” does not solve issues. But the government help should be an exception but not a rule. There is an interesting story about General Motors and Chrysler. When they were in serious financial trouble, a decade ago, the senior executives of both companies were called to Washington DC for discussions. In the initial informal chat, they were asked if they reached Washington the previous night. The surprised executives said, “Oh, we landed only about 45 minutes back. We chartered a plane to come here.” The government official was aghast!

So where is the vendor conference this year? Italy, Las Vegas, Macau? How can you have the conference inside your factory? Cost cutting is for others. I have attended General Motors vendor conference once in Pune. It was at the Oxford club and there were at least six helicopters used by GM bosses to arrive at the venue! It is not a surprise that GM closed their shop in India.