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In Low Gear- Impact of the Financial Crisis on Workers and Firms in the Auto Parts Industry31 Dec 2009
The study analyses the impact of global financial crisis on workers and entrepreneurs in the auto parts industry in the North Indian city of Ludhiana and draws inferences for interventions to address the adverse impact on the workers in the short and medium term.
The opening of the global market, post-liberalization has brought with it both challenges and opportunities for Indian industry. Although, there are differences in performance across sub sectors, the overall response of the manufacturing sector has been commendable. The contribution of the small industry segment to the economic growth (which was more than eight percent) during the period 1999-2000 to 2007-08 cannot be undermined. The Small Scale Industry (SSI) sector accounts for almost 40 percent of the gross industrial production of the Indian economy. Production increased at an average annual growth rate of 15.42 percent, over the three years 2004-05, 2005-06 and 2006-07. Direct exports from the SSI sector accounted for nearly 35 percent of total exports. Besides direct exports, it is estimated that the SSI accounts for another 15 percent of exports, indirectly (Pandey, 2007). Despite commendable growth, the working conditions, income levels and social security of workers engaged in the production process, particularly the workers in tiny and small firms, have seen little improvement.
The working conditions in micro and small enterprises are far from satisfactory, when measured on various parameters of ‘decent work’ (Awasthi, 2007). The Indian auto component industry witnessed a growth of 18 percent during the 2001-02 to 2006- 07 period; yet the condition of workers in the small units in this sector is distressing. As reported in Cygnus (August 2007), there are 400 large firms in the organized auto component sector, which cater largely to Original Equipment Manufacturers (OEMs) and another 10,000 firms operate in the unorganized sector, manufacturing lowtech auto parts and components. The entire industry is located in 10 major clusters in the country, in Aurangabad, Belgaum, Chennai, Gurgaon, Jalandhar, Jamshedpur, Ludhiana, Phagwara, Pithampur and Pune. These clusters account for over 93 percent of the total output.
Export of auto parts grew at CAGR (compound annual growth rate) of 23.56 percent during the period 2001-02 to 2006-07 (Cygnus, August 2007). The share of exports in total production has risen from 12.93 percent in 2001-02 to 18.48 percent in 2006- 07, and the exports were worth Rs. 2.22 billion (US$ 0.06 billion) in 2006-07. The proportion of OEMs to ‘after market’ or ‘spares market’ has changed from 35:65 in 1990, to 75:25 in 2006, and hence this segment has shown a significant growth in its contribution to exports (Awasthi, 2007). The Indian auto components industry is in the midst of transition from being low-quality, low-tech and heavily dependent on the domestic market to becoming a global industry, which is driven by quality, scheduled delivery and reliability. As per Cygnus (January 2007), the major export destinations are Europe (34 percent) and America (26 percent). Export of auto parts has increased from about 12 percent in 1999-2000 to 18 percent in 2005-06, in the auto components segment. Gross value of output of the auto components manufacturing sector registered a steady growth rate of around 25 percent in the period 2003-04 to 2005-06, as compared to 22.86 percent during the period 2001-02 to 2003-04 (Pillania, 2007). However, since the first quarter of the last fiscal, India’s auto component makers are in the throes of one of the worst crises ever. With the domestic market in the doldrums and the exports to the American market being adversely hit; many companies are on the verge of shutting down. The entire supply chain of auto companies is bearing the brunt of the economic meltdown. From Tier-1 companies to small-scale units, all units are facing a huge fall in demand, delayed payments and a stiff liquidity crunch.
The commercial vehicle (CV) segment has been the worst hit by the crisis. While such crises are cyclical, and tend to recur every five to six years, the magnitude of the decline in demand has put all companies in trouble. ‘Auto component makers are hit very badly. The OEMs have not been able to sell their piled-up stocks. Cash flow is getting adversely affected. Payments are getting delayed, affecting a lot of projects’ (Bhambra, 2009). The overall sentiment is negative, as was observed by the industry leaders in Ludhiana. The cyclical fluctuations in the demand and the production of the auto component sector have a direct link with the demand for vehicles in the domestic as well as in the international market.
Sales data of different vehicle segments reveals that the demand for two-wheelers, three-wheelers, CVs and passenger vehicles (PVs) has been fluctuating in the period from 2002-03 to 2006-07. Growth rates of sales of two-wheelers, three-wheelers, CVs and PVs in 2002-03 were 14.47 percent, 15.60 percent, 30.01 percent and 4.75 percent, respectively and by the year 2006-07 the growth rates of two-wheelers, three-wheelers, CVs and PVs were 11.42 percent, 12.22 percent, 33.28 percent and 20.7 percent respectively (Badri Naraynan and Vashisht, 2008, India Law Officers’ Newsletter, 2009). This period of crisis has coincided with the financial and economic downturn at the global level. Those firms and producers who are dependent almost entirely on exports, with little or no share of the domestic market, as in Ludhiana, have been the worst hit. Thus, the meltdown has only heightened the crisis that had already begun in this sector.
The liquidity crunch, the inventory pile up and the re-scheduling of export orders has taken the sheen off the auto components industry. For the first time in a decade, the sector has clocked single-digit growth or registered a fall in earnings. The Auto component Manufacturers’ Association (ACMA 2009) projected a six percent growth in turnover and 5.5 percent growth in export earnings for 2008-09; against projections of 20 percent and 24 percent respectively, in previous years (see Appendix II for ACMA Report 2009).
Although, the $18 billion sector (in India) has seen its overall revenue for 2008-09 going up by $1 billion, the rate of growth of exports has nose-dived – from 47 percent in 2005-06 to 5.5 percent for 2008-2009. Further, as many as 70,000 casual labourers were laid off, between September and December 2008, according to the ACMA Report (ACMA Newsletter, January 2009). As per another Report from the Federation of Indian Micro and Small and Medium Enterprises (FISME), about 4,000 ancillary units are on the verge of closure and about 200,000 people will be affected by the current crisis. Most companies have cut down the number of shifts, working days and production (FISME Newsletter, December 2008).
As a result of technological up-gradation, automation and modernization since the 1980s, there has been a tremendous growth in the size of the auto industry in Punjab, and a huge improvement in the quality of products. Due to these factors, the auto parts industry in Punjab has been exporting its products and is able to face the stiff competition from other auto parts manufacturing industries, located across the world.
According to rough estimates, there are about 2,000 registered units, manufacturing auto parts in the state, out of which 400 units are in Ludhiana. About 200 auto part units export their products directly, of which 50 units are located in Ludhiana. In addition to these registered units, there are hundreds of units which are not registered and produce ancillary products for the auto parts industry, such as nuts and bolts or washers, etc., from temporarily erected workshops, often located in their homes.
Although, in the last few years (especially since 1995), the auto parts industry in Punjab has been adjudged as one of the better performing sectors, due to its excellent quality (Bhambra, 2009), it continues to face numerous difficulties. The fact that the ports are far away from Punjab, means that the transportation costs for auto parts exporting units are high. The other impediments to the industry, in Punjab, are the subsidy and incentive packages being provided to the industry in the states of J&K, Himachal Pradesh, Bihar, Uttar Pradesh (UP) and Uttarakhand, by the Central Government. Due to these incentives to the industry in these states, the comparative cost of similar products are as much as 15 percent lower than in Punjab (where there are no subsidies). Other factors like ‘inspector raj’, rigid labour laws, fluctuations in raw material prices, nonuniformity in VAT rates, frequent increase in power tariff and the apathetic attitude of the Punjab Government have adversely affected the growth of the industry. For example, Value Added Tax (VAT), is levied at 12.5 percent on auto parts, whereas it is four percent on tractor parts. There is the issue of freight charges, which the entrepreneurs have to pay for the supply of raw material. This is highest in Punjab, when compared to other states, where this is subsidized, so that the units can absorb the financial burden.
Another factor is that the labour engaged in the auto parts industry in Punjab earns less than labour engaged in agriculture. The minimum wage rate for industry workers in Punjab was Rs. 3,200, per month, in 2008, while in agriculture it was about Rs. 4,500 per month, in the same year. This has led to the shifting of labour, (the workers are largely migrants, from states such as Bihar, UP and Orissa), from industry to agriculture during the peak agricultural season, when labour demand in agriculture is high. There is another shift as well, labour is moving from Punjab to the newly created industrial hubs in the states of J&K, Himachal Pradesh, UP and Uttarakhand, where wage rates are higher.
Several auto component factory owners, with turnovers of more than Rs 100 crores, concede that they are caught in the worst period. Most of the companies are closely held firms, which have been in the industry for generations and have seen many ups and downs. Huge capacities have been built up to cash in on export opportunities. However, with the global meltdown, the auto component sector is facing a crisis. Plans have gone awry, making it imperative for firms to re-strategize, in a bid to cut costs and survive the crisis.