The Hindu Business Line : Look beyond India for sourcing and markets

Mr R. Seshasayee, the 56-year-old Managing Director of Ashok Leyland Ltd, feels that the commercial vehicle industry in the country will have to face up to competition from abroad, especially from China and Thailand. It will be a year or slightly more before vehicles from these countries hit the markets here.

However, he feels, that it will be some time before they can wean customers away from companies like his. It is here that customer-centric initiatives are needed, something that Ashok Leyland has been actively working on. Mr Seshasayee, a chartered accountant by training, talks about competition, the commercial vehicle industry, economy and the road-building programme. He voices concern on two issues: That the government is not talking much about the highway development programme and over the dichotomy in views between the Finance Ministry and the RBI on interest rates.

Excerpts from the interview:

You talked of competition from abroad, especially Korea and China. Could you elaborate?

Definitely it will come. It is not going to be too long before we see Korean products. Chinese products, you watch out, you will have a story there. I expect that they will come in purely for two reasons — one is that China will have excess capacity. They have been building capacities and the market will start tanking, perhaps in 12 months.

That production has to be disgorged somewhere, and where else other than India. Second, it might also come through the Thailand route. Through the Free Trade Agreement (FTA). It could well happen that you could find more units being set up in Thailand, not so much vehicles, but may be aggregates and components.

Is that going to hurt or help you?

For sourcing it might help us. But it could also mean that some company which comes here is able to source it more competitively and is able to produce the product here. So it will be a combination.

Even with the 40 per cent value-addition, will it be cheaper there?

If you ask anyone which is the more competitive manufacturing destination, forget about the market, in the east or west, where will he put his finger on — Thailand. Because

(a) the infrastructure is far better; and

(b) they do not have rigid labour laws.

Manufacturing-wise it is better. For a neutral market, between India and Thailand, the latter would be more appealing. Second, where is the market? Thailand or India? India. Therefore, an FTA would mean that you are really saying that you can get manufacturing to take place in Thailand and address the market in India. This is the first level.

You will say that this a wrong way of doing it. You will say you have to do an FTA with the US. Because you can manufacture here and sell there as the market is there and not the other way around. An FTA with this kind of disadvantage does not add value. But, if you go to the second level and say, fine, nobody is stopping you from going and establishing manufacturing in Thailand.

The Government is not stopping you from doing it. So if you have an international mindset, then why do you have to suffer by thinking that you can only manufacture here. You can manufacture in Thailand and bring it here. And be competitive.

But from a national perspective it is not good. You need economic value-addition...

That argument is certainly valid. When you do that and become more competitive, you could also be more competitive elsewhere in the world. You don't have to be only in India. Then you say, internationally, I am not looking at sourcing as being confined to India. I am not looking at market as being confined to India.

And, therefore, an FTA will make sense from the point of leveraging whatever is the best available, wherever it is. But you will not get the benefit if you do not have an international mindset and if you are going to be confined in your mind to looking at sourcing and market in India.

The Chinese and Koreans will come in before the end of the year, may be end of next year. That said, I think it will certainly be a longer time before they can wean away customers. Which is why part of our strategy is to say how can I bind customers to me in different ways.

How is the market here? Freight rates are down. Is it because of iron ore exports slowing down?

Yes, Hospet (Bellary-Hospet in Karnataka from where iron ore is exported) had come down. So, we have a large number of MAVs (multi-axle vehicles) that have come into the southern market. That had depressed freight rates, had resulted in some slowdown of MAV offtake. Iron ore exports have commenced again. And so the equilibrium will get restated now.

What about your strategy on components and aggregates?

Our large focus would be in foundry machined products, particularly engine components, followed by whatever we can do to sell components and aggregates and, lastly, some step towards getting the engineering services of IT products.

In components and aggregates, there are basically three types of demand. One is process-oriented outsourcing such as castings and forgings. We sense that there is a great opportunity for us.

Ashok Leyland has decided to set up a foundry of 50,000 tonnes capacity at an investment of Rs 150 crore in Tamil Nadu.

The second is with regard to technology-oriented kind of exports, either through multinational corporations which have their own operations here or others looking at sourcing components either through a joint venture or a technology agreement. In that space, the only thing we are now looking at is the sale of aggregates such as engines, gear box and axles.

Then, there is a third space, in engineering services or in products such as telematics, which are not necessarily required for the Indian market but would be competitive because we have the IT skills and the domain knowledge. The breakthroughs in this will probably come in a couple of years.

How would you counter cyclicality in your business?

We have done it in the past. It depends on how steep this cyclicality is. In 1997-98, we could not do that because it just came crashing down. But in small cyclicality, in 2000-01 we did that, we went forward. And we will continue to do what we are doing, which is to spread our risks not in one area, but in larger areas, and to look at bigger markets, and to the non-cyclical movements like defence. You can't say I will grow regardless of the size of the dip. You can grow subject to the size of the dip being marginal.

On other factors that may have an impact on the industry?

This government has not said in any clear terms what its policy with regard to road development is going to be. We had this hype on this Golden Quadrilateral for some years and things have progressed but we did not find any statements in the Budget about the road development project, apart from allocations.

This is something which the government should come out with. Both to say that the Golden Quadrilateral will be completed in the prescribed time and the investments are moving forward and to say that the Golden Quadrilateral/North-South-East-West corridor and also to say that road development is going to be a priority and this will continue to be focussed in the coming years. I have not heard robust statements on this. It is critical not only because of commercial vehicle industry, but is also an important message to give out at a time when sentiments could be sagging. This is a booster at a time that sentiments begin to sag.

Are sentiments sagging?

Fortunately, the monsoons has revived and, therefore, sentiments have picked up. But to my mind you have lot of uncertainties in the external environment. You have the oil price increase which is casting a fairly big impact internationally in the manufacturing and corporate sector. That is worrying. You also have the interest rate moving up... there is a contradiction between what the Finance Minister said in the Budget speech about soft interest regime and then you see, on the other hand, the RBI is not making the same statement. Both of them are saying that inflation is under control. But the RBI is not saying that it is going to continue in the same way. There is a disconnect between the two. You will see some interest rates **move up taking place. Therefore, before sentiment turns negative, you need to take it to the next trajectory and not allow it to sag.

From the commercial vehicle industry point of view, there has been no mention in the Budget about retiring old vehicles. We made a presentation from the association about how to do this retirement of vehicles in a manner that is voluntary and incentivised, rather than through a ban. A more organised, orderly way of retiring old vehicles, which will also improve demand and clean up the environment, is needed. We had made this proposal not only for commercial vehicles but also for cars.

We are saying that there must be a scrap allowance that would be set off against duties to be paid. In other words, there is a revenue implication on that. We have done this in a revenue-neutral manner. That is the reason why the Government should step in. My concern is that things have gone on well, and are moving okay, but we need to take it to the next trajectory.

This is a cyclical market and there are instances where trends have been bucked by, at the right time, injecting or infusing a level of confidence, putting a booster dose to take it to the next trajectory.

I am a little worried about the sentiment issue; about the diesel increases, which will be inevitable because of international pressures, and the interest rate increases... as I said I do not know why there is dichotomy between the way the Finance Minister and the RBI are talking. I will tell you why I feel that it will go up. If you merely go by inflation and if they say that it is not to go beyond 5 per cent, I do not see a need to increase interest rates because our real interest rates are still higher.

There is scope for more efficient intermediation in the banking industry where the spreads are higher than in many parts of the world. Given that kind of spread one would expect that competition must bring down that spread and bring about greater efficiency in intermediation.

One of the ways to counter inflation would be to decrease the cost of intermediation. A counter process would be an efficiency improvement in the bank intermediation to soften the inflation. Up to 5 per cent or even 5.5 per cent, I do not see the need for interest rates to move up. My worry stems from the fact that I am not hearing enough in terms of improvement of the intermediation cost or the pressure that is being brought upon the banking system. The good thing is that some private banks are certainly showing the way. But it is still a small part of the total banking system.

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