Time for David to take over Goliath

A big new opportunity is opening up for Indian companies to take over ailing foreign ones and become global number one in their respective fields. The financial troubles of General Motors and Ford, the two top car producers, are hitting their auto ancillary suppliers. Not only are ancillary order books shrinking along with car sales, the downgrading of bonds of the big two to junk status means that the credit worthiness of ancillary suppliers is also affected. Besides, these companies have high labour and pension costs, and find it increasingly difficult to compete with Indian, Chinese and Thai rivals.

These woes forced Collins and Aikman, a top auto ancillary in the US, to apply to bankruptcy courts under Chapter 11 on May 17. Earlier, Tower Automotive Inc and Meridian Automotive Systems went to bankruptcy court. The two biggest auto ancillary producers in the world, Delphi and Visteon, have lost billions of dollars between them in recent years. Both have opened factories in India to try and lower their costs, but their US operations are too big to be rescued by their Indian subsidiaries.

Bharat Forge is one Indian company that is ready to seize the new opportunity. It started in 2000 by acquiring a small British company, then in 2003 took over a major German forging company, CDP. It has just got the green signal to take over Federal Forge, an American company in Chapter 11, and is planning yet another takeover in Finland.

This is only the start of its global takeovers. The company has diluted its equity in order to build up a war-chest of $220 million for takeovers. Banks are willing to lend a matching amount. So the company has buying power of almost half a billion dollars. The average cost of foreign takeovers may be $25 million or so, which means Bharat Forge has the cash for over a dozen acquisitions. A wide geographical spread of acquisitions will insure Bharat Forge against recession in any one area. No wonder, it is confident of that by 2008 it will reach a turnover of $1 billion and become global number one in forging, overtaking Germany’s Thyssen.

Is it worth buying uncompetitive foreign companies? Yes, because many of them have decades-old ties with European and American auto majors. By acquiring European and American ancillary companies, Indians can acquire order books and traditional marketing relationships. The most sophisticated production, R&D, and marketing can remain in these foreign acquisitions, while lower-end work and back-office operations can be shifted to India. This can be an unbeatable combination.

What about competition from China, the manufacturing superpower of the world? Baba Kalyani, CEO of Bharat Forge, says that the Chinese are unbeatable in mass production, but India is unbeatable in brainpower-driven production. Some low-end auto ancillaries can be mass-produced, and the Chinese will dominate there. But many other auto parts, such as forgings, require constant upgradation of design and specifications in consultation with customers. In this milieu, engineering skills are more important than mass production skills.

Information technology (IT) enables Indian engineers to engage in computer-aided design. Computer simulations can test the new designs in a variety of simulated conditions. This can slash the time from concept to production from three months to one.

American and European engineers are excellent, and are somewhat more productive than Indian ones. But this cannot remotely compensate for the fact that US wages are seven times higher. Wage costs in US forging companies average 35% of sales, against Bharat Forge’s 5%.

Bharat Forge has for almost a decade been implementing a revolutionary new concept: creating a workforce without any blue collar workers. Instead, the company uses engineers on the factory floor. This is true even of the fiery forging shop, where red-hot steel is hammered into shape. This manpower revolution has been facilitated by installing the most modern automated equipment, with robotics and computer-controlled machine tools. Each engineer obviously costs more than each blue collar worker, but the productivity of an engineering workforce is so high that labour costs as a percentage of sales have been halved.

India’s comparative advantage lies in cheap brainpower, not cheap labour (where China wins hands down). The emphasis in many parts of the auto ancillary business is increasingly on engineering and design skills, and in these areas Indian companies can become global number one.

Other companies need to follow the path pioneered by Bharat Forge. Amtek Auto is already doing so. Indian auto majors also own ancillaries, and should be in this race too. Tata Motors, Mahindras, Bajaj and TVS should all be building war-chests to buy foreign ancillary companies. Buy the ancillaries today and one day you may be able to buy General Motors and Ford too. Think big, gentlemen.

What do you think?