Baba Kalyani, the chairman of Bharat Forge, is perhaps the best-known name in the world of automotive components. His list of clients is long and he has done a string of acquisitions abroad to grow. Yet, he expects supplies to non-automotive sectors to bring in 40 per cent of his revenues by 2012, and eventually 75 per cent by 2016.
SRF is the undisputed leader in the tire cord market with a share of over 50 per cent. There isn’t much competition in the marketplace. Its order books are full. Still, SRF wants to diversify into new areas like pesticides and grow its specialty textile business.
Surinder Kapur is another venerated name in the automotive components industry. His customers include the who’s who of the automobile world: Maruti Suzuki and Mahindra & Mahindra, amongst others. Yet, the chairman of the Sona Group is trying to de-risk his exposure to the passenger car business by widening his product range to parts for trucks and farm machinery, and is also looking at developing a non-automotive business.
As profit margins come under pressure, Indian component makers are drawing up plans to de-risk their business by leveraging their core manufacturing strengths or processes to develop allied businesses.
All businesses need to de-risk over time. They need to widen their range. They have 55 to 60 per cent share of the Indian market in the products they make for passenger cars, but may not be able to retain this kind of share. Hence, they need to look at other products, segments and geographies as well as non-automotive businesses.
They are also engaging consultants to develop non-automotive revenue streams and trying to use core strengths of machining, heat treatment and assembly (as well as casting, forgings and stamping capabilities) to develop new applications. They are already supplying parts for the Tata World Truck and is developing parts for construction equipment.
Some like the Pune-based Bharat Forge Group adapted early to this game. In 2005-06, they made a strategic move to focus on the non-automobile business. The automotive business is largely cyclical, and follows a cycle of four to five years. The downturn in commercial vehicles in 2001-02 hurt Bharat Forge badly as Tata Motors was a key customer. The best way to de-risk against the cycle is to develop non-automotive businesses using base knowledge of forgings, metallurgy and machining.
Today, besides automobiles, Kalyani makes forgings for the energy (for hydro and wind turbines), railway (axles for high-speed trains in Europe, crankshaft for locomotives) and marine (ship components) sectors. Bharat Forge has a large number of customers in energy, railways and oil & gas. It supplies rotor shafts for BHEL’s turbines, crankshafts for diesel locomotives of the Indian Railways, and also forged components for hydro and industrial turbines.
There’s a good reason why Bharat Forge wants to focus more on the non-automotive business. Margins in these sectors are well in excess of 20 per cent as these are high value and custom-made items, though volumes are lower. Things for the automotive sector, on the other hand, don’t look too good at the moment. Worldwide, though not so much in India, the sentiment has turned against car makers. They are under tremendous pressure to cut prices. Indian component makers were the first to integrate themselves with global automobile makers. Till the late 1980s and early 1990s, they were content to supply to the Indian market. Car technology was old, the roads were bad. As a consequence, the replacement market gave them very good orders. But with automobile technology growing by leaps and bounds, the need for regular replacements came down sharply. This forced them to look at car makers in the West for orders.–