Auto parts units shift base

Gujarat, Chennai, Uttarakhand and Goa are now favoured investment destinations

Gujarat and Chennai are emerging as favoured destinations for auto parts units due to issues like octroi and electricity problems in Maharashtra. In the wake of the boom in car sales, almost 85 per cent of large- and medium-sized auto- component manufacturers are back to their original production schedules, though the situation remains grim for micro and small enterprises, especially in Maharashtra.

Large- and medium sized auto-parts companies are increasingly shifting base; as a result, small vendors have been losing business. Companies in Maharashtra have a price disadvantage of up to 1.25 per cent on the ex-factory price, which erodes competitiveness. Multiple taxes further widen the gap due to octroi of 3 per cent and a value added tax (VAT) of 12.5 per cent, which amounts to a gain for the newer production hubs.

Tata Motors’ Nano is mainly produced in Gujarat, and others like the Sumo and commercial vehicles made in Pantnagar (in Uttarakhand). Besides, Bajaj Auto has shut down its Chinchwad plant (near Pune), and all of Finolex’s new plants are in Goa, Uttarakhand and Gujarat. Big companies and their vendors therefore see an advantage in moving out of Maharashtra and relocating for better prospects.

Big players like Mahindra and Mahindra, General Motors, Honda and Hero Honda have spoken about expanding capacity, but auto-component makers are not investing in large-scale capacity expansion.

Asheet Pasricha, the spokesman of the Association of Indian Forging Industry, said, “Individual companies are investing in expansion plans like equipment upgradation or replacement, but this is not happening everywhere.”

Vikas Khanvelkar, managing director of DesignTech Systems, offers an explanation. He says, “Even though India is seeing a surge in auto sales, demand in overseas markets like Europe and the US has not increased. It will be some time before big and mid-level companies who supply to such players see a revival.”

Unhappily for the auto-parts companies, costs have also been rising. Vendors sign contracts with suppliers at current rates, but when rates increase, their margins come pressure.

Large auto companies have big vendors. Such units are shifting base and following their clients, which the smaller players cannot do. Investment destinations that are gaining are Uttarakhand and Gujarat — as a result of zero or low octroi, electricity tariffs that are lower by 30-35 per cent compared to Maharashtra, the absence of power cuts, and policies that are conducive to industrial growth (including quick licensing provisions).