Coimbatore units more open to equity tie-ups

Entrepreneurs in this traditional town of family- managed companies, popularly known as the Manchester of south India, are now more open to entering into equity collaborations with both domestic and international partners.

One recent example is Penguin Engineers, a packaging equipment company, which has joined hands with an Italian company. Similarly, a Spanish manufacturer of castings, which it sells to oil exploration companies, is in talks with some Coimbatore-based companies to make castings in Coimbatore on a contract basis.

These potentially momentous changes have been triggered by the fact that companies in Coimbatore (including engineering units, textile mills and manufacturers of textile machinery) have run up a mind-boggling debt of some Rs 50,000 crore, which a cross-section of industry representatives here attributed to the recession, power shortages, poor policy and lack of financial support from the government.

“The attitude towards equity and other partnerships is now changing, thanks to recent trends,” said K Illango, president of the Coimbatore District Small Industrial Association (CODISSIA).

Manufacturers are also thinking of diversifying into new areas and have turned their focus to the public sector. For instance, the Railways are planning to establish a coach building factory at Palakkad in Kerala, which is near Coimbatore. According to a railway official this project alone can provide orders worth Rs 3,000 crore per year to the city’s engineering industry, provided cost and time commitments are agreed upon.

The other new focus areas for Coimbatore’s engineering industry include engineering giant Bharat Heavy Electricals Ltd (BHEL), power generation companies, infrastructure companies (both private and public) and shipyards.

Coimbatore is home to over 50,000 engineering units and a large number of textile mills and manufacturers of textile machinery. Most of these units are SMEs and have reported a 40-50 per cent drop in orders and capacity utilisation.

The engineering units, which produce equipment ranging from small spares to large items of machinery for big engineering companies such as automobile majors Hyundai, Ford, Ashok Leyland, Maruti Suzuki and organisations like Reliance, ISRO and BHEL, said that their order books and capacity utilisation had dropped by 50 per cent since 2007-end. This, along with delays in payments, had increased their borrowings to Rs 20,000 crore.

“Despite the recession there are enquiries from customers, but we are not able to convert them into orders,” said Jayakumar Ramdass, president of the Southern India Engineering Manufacturers’ Association (SIEMA). The cost of manufacturing cast iron rose by over 20 per cent in the last two years; this forced an increase in the selling price by 13 per cent, which customers objected to. There are an estimated 4,500 foundries in Coimbatore district, which produce five million tonnes of cast iron products annually, worth around Rs 24,000 crore.

There were also quality issues and the inability to meet delivery schedules. Customers then began looking at suppliers in Ludhiana and Gujarat in India, as well as in China. “If the government brings down the interest rate and offers fiscal and tax incentives on par with those offered by the Chinese government, then Coimbatore can compete with China,” said Illango.

The worst-hit are micro enterprises. In Coimbatore alone, there are about 30,000 micro units that employ almost 3.5 lakh people, said J James, district president of the Tamil Nadu Association of Cottage and Micro Enterprises (TACT). Owners of these units now have loans of Rs 7,000 crore on their books, borrowed mainly to address the electricity problem. These units, which were dependent on job orders, invested heavily to buy generators and machinery in the hope of getting orders.

But when the financial crisis began, the order book position and capacity utilisation of the micro units’ customers (the big engineering companies in Coimbatore) started dropping. To retain their employees and keep their units running, the big companies stopped outsourcing job orders, and began carrying them out internally.

Until end-2007, said Illango of CODISSIA, capacity utilisation was 100 per cent and growth used to be 10-20 per cent a year across industries in Coimbatore. But in 2008, things started changing, mainly due to power costs and shortages. Then followed an increase in raw material prices, labour costs and the recession — the last leading to a 25 per cent drop in business.