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Strategic Focus
 
AUTOMOTIVE INDUSTRY: IMPACT OF LABOUR UNREST
Oops, They Did it Again!
North India, The Country’s Biggest auto belt, has seen Spurts of Labour unrest over The Last Few Years to The Extent that Automakers are now Shying Away from Investing in The Region. Can The Stretch retain its No.1 Position?
Issue Date - 21/07/2011
 
The management of Maruti Suzuki, India’s largest passenger car manufacturer, heaved a sigh of relief as the company reported 2% sales growth in May 2011, selling 104,073 units against 102,175 units in May 2010. No doubt, the growth was negligible considering Maruti’s sales trend over the last 12 months, but in a month when car sales grew by only 7% (the slowest pace of growth in two years) and players like Tata Motors saw a fall of 8.3% in passenger vehicle sales (due to a massive 35% decline in both Indica & Indigo sales), the 2% growth gave management enough reasons to cheer. However, the party didn’t last long. Just three days after, on June 4, 2011, the New Delhi-based company was grappling with labour unrest as 800 workers at its Manesar plant (the plant produces about 1,200 vehicles a day, including the popular Swift and A-Star hatchbacks, and the DZiRE and SX4 sedans) went on strike demanding recognition of a new union specific to the plant. The days that followed saw the company sacking 11 workers accusing them of instigating the strike at the facility, which only added fuel to the fire. Although the strike was called off in just 13 days, on June 17, 2011, it had already made a Rs.4.2 billion dent in the company’s topline by then. And not just Maruti, even its vendors reportedly made losses to the tune of Rs.300 million per day taking the total revenue loss to over Rs.8.1 billion.

It’s not the first time that the northern auto belt has been affected by labour unrest. Companies like Hero Honda, Honda Motorcycle & Scooter India (HMSI), Rico Auto, Sunbeam Auto, Hyundai, et al, have reported similar problems over the last few years. For instance, in 2009, while workers at HMSI’s Gurgaon plant were on strike to protest wages and other issues, Hyundai Motor’s India plant saw a three-day labour unrest. Almost half the workers at the Indian unit of Sweden’s Volvo Bus Corp. too went on strike in 2010, protesting wages. All this has certainly dented the image of India’s leading motown and automobile manufacturers are now shying away from investing in the region.

For instance, when Nissan decided to set up its new unit in India, in alliance with its global partner Renault, it chose Chennai as its home and not NCR. The company now plans to invest Rs.45 billion in this unit by 2015. Similar has been the case with Volkswagen and Tata Motors that chose to set up their base in Chakan (near Pune) and Gujarat (as the home for Nano) respectively. In fact, Maruti Suzuki too is setting up its third facility (its first outside Haryana) in Gujarat with a production capacity of 10 lakh units per annum (expandable up to 20 lakh units). On the contrary, except HMSI (which is planning to invest Rs.8.6 billion in production capacity expansion), no other big name is willing to set up its base in the region, at least not in the near future. This certainly raises questions over how North India will preserve its auto hub status amidst rising labour unrests. For the less informed, auto majors like Maruti Suzuki, Hero Honda, Honda Siel, Hyundai, Yamaha, and Suzuki Motorcycles are operating from the northern region, which accounts for over 50% of the country’s automobile production.

 
“North India will see investments only from players that are already operating in the region. Maharashtra and Tamil Nadu are the hot destinations for setting up automobile manufacturing facilities today,” Kapil Arora, Partner – Automotive, Ernst & Young tells B&E. Undoubtedly, Maharashtra and Tamil Nadu continue to strengthen their stature as the major auto hubs in India. In fact, Maharashtra is already home to players like Tata Motors, Bajaj Auto, M&M, Volkswagen, Fiat, GM, Piaggio, Premier, et al, and produces 4.15 million two-wheelers, 820,000 cars and 245,000 commercial vehicles, which is 25% of the total automobile production happening in India. Tamil Nadu, for that matter, houses companies like Hyundai Motors, Ford India, BMW, Renault-Nissan, Ashok Leyland, Mitsubishi and Bharat Benz. The region today accounts for 35% of the total $35-billion revenue that the Indian auto industry generates every year and 69% of the total automotive exports from India (KPMG report). Gujarat too is slowly turning out to be the next major auto hub with GM being an early entrant followed by Tata Motors and Maruti Suzuki. The state today produces 600,000 cars, 250,000 e-bikes, 48,000 three-wheelers and 50,000 trucks. It is expected that several auto majors will soon be setting up their base in Gujarat in the near future.

Considering this, it seems that NCR is already miles behind in the race to the top. Although it continues to be home to both the market leaders (Maruti Suzuki in passenger car segment and Hero Honda in two-wheeler category), no other big player in the industry is willing to join them, especially if the scenario (read: labour unrest) remains the same. Agrees Abdul Majeed, Head – Automobile Practice, PwC India as he tells B&E, “Strikes are not good news for anyone. If necessary, there should be several rounds of discussion between the stakeholders to resolve the issues as soon as possible. Learning from the recent incident in NCR, strikes should not become a label for any location as it will then create problems for the OEMs operating from the region. Even new players would not like to invest in the region.”

At a time when India is well poised to become the third largest auto market by 2020 (JD Power report), incidents like the one at Maruti Suzuki clearly raise concerns about the ability of the northern belt to retain its leadership. Thus, it’s time for the respective state governments to take the matter seriously if they want to remain relevant to these companies, in a manner similar to their southern counterparts.

For instance, Maharashtra Industrial Development Corporation, the state’s nodal agency, has played a key role in attracting investments by offering a single-point speedy clearance system. The state also offered tax breaks to the industry and tried to link employment with investment in 2006. The move has been successful in attracting investments from players like Volkswagen, GM, Mercedes-Benz, et al, followed by the Koreans and then Chinese. Similar has been the story of Gujarat where CM Narendra Modi’s marketing tactics have been showing overwhelming results for the state, which is well on its way to become the next auto hub in India.

However, when it comes to North India, the continuing labour woes remain the biggest hurdle in attracting investors. Thus, the respective states need to overcome this barrier really fast if they want the region to retain its leadership. But, as things appear now, racing for the top slot seems nothing, but a distant dream.

Pawan Chabra           

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