The Indian arm of the Chinese heavy equipment firm Sany, with its manufacturing plant in Chakan, Pune, has invested close to INR 1,000 crore in the domestic market and will invest INR 1,000 crore more in the next five years to ramp up capacity and localization.In an interview Deepak Garg, managing director of Sany India & South Asia, told ETAuto, that the recent increase in commodity prices has made it difficult for the construction equipment manufacturers to meet export orders. Garg spoke about input cost increases, business outlook, and readiness for the upcoming emission norms and more.
I think the component crisis is a worldwide problem and the CE industry is no exception. We also face shortage of components such as high precision hydraulics and some engine parts. Currently, the high precision hydraulics is imported by Sany India and many others from Japan, Korea or China.
However, with the sudden spurt in demand, suppliers in these countries are unable to meet our orders on time. The demand surge was so sudden that some of the local suppliers for engines and steel parts could not ramp up production to the full capacity despite having a massive supply chain power.
Q. What is the cost pressure that you face from the increasing parts shortages?
On the cost side we faced three major impacts: First, the global hydraulics and component suppliers from whom we import hiked the prices due to supply crunch.
Second, steel prices went up by over 70% from August 2020 which is unsustainable for any industry. We used to buy the wide steel plate at INR 40-42 per kg. Today the same steel is quoted at INR 72 per kg.
Third, almost all CE companies in India depend on partial imports which range from 30% to 60% of import components. The international freight went up by 2-3 times last year that again added to the cost.
We also faced a shortage of shipping containers because of which the international freights zoomed three times.
Because of the slow down, the companies tried to recover their losses of Q1 and Q2 in the last two quarters of FY21. When all these are combined, we can say that we face a cost impact of 12%-13% on our entire purchases. This would erode our profit until we increase prices. Steel price increase is killing the whole industry.
- Did you increase prices in the last six months to mitigate the impact?
Yes, we first increased the prices by 2% last October and again in March by the same quantum. Due to high commodity costs we were compelled to execute some of the open orders at lower prices. However, these price hikes do not make up for the loss in purchase because the input cost is very high. On top of that the market is not willing to accept any spurt in equipment prices.
If this situation continues, we have to go for another round of price hike in the coming months. But I don’t think it is a wise strategy because this is making us completely out-priced compared to the other markets and ultimately the manufacturers will end up in losses.
- Exports constitute a substantial part of the CE industry. How do the foreign markets react to the revised price of your products?
In the current situation we are not able to compete in some of the foreign markets. We export from India to various countries, but due to input cost inflation we are no longer competitive with the products of our company in the other parts of the world.
Though we have taken some price increases in the domestic market, it has become very difficult to increase our prices on exports as we start losing orders.
In our business 70% of the production is to the multinational companies and the remaining comes from locally owned businesses. Under the present cost structure any foreign investor will find India a very difficult destination.
On the industry level, many of the companies that were using India as a manufacturing base for construction equipment and components have started looking at their other global factories to shift some of the sourcing from India to those countries. And this is happening mainly because our cost structure is becoming uncompetitive. I think it will take us 2-3 more years to recover from this kind of cost structure.
- Till the beginning of last year, you had plans to increase exports to 20%-25% of your overall business. Has the input cost inflation derailed your export plans?
We had some concrete plans to grow our exports to 20%-25% but in the last one year the situation has changed drastically on the cost of inputs.
Our exports at present are 10% of the overall production. Earlier it was more but this year we will try to keep it close to 10% as our costs have gone up substantially. We are losing some orders from West Asia and Africa because we are not able to meet the price competitiveness required for those markets. This year our exports will be less than 10%.
The current steel pricing is making a major dent on the pricing of our products and that is going to erode our export potential.
- The CE industry will switch to new emission norms in October. Have you completed trials of any of your new equipment? Are you right on your target?
As a company we have developed all our products with necessary ARAI certification for CEV Bharat Standard-IV norms. We are on track in the development for BS-IV norms. From April 1, we are producing only BS-IV versions of products. All of our products which are for CEV BS-VI norms have already migrated and upgraded to new standards.
However, again there will be two major areas of concern. The first is on the price which will further make our products expensive. The overall cost of the product will be hiked by 8%-10% depending on the type.
The second is the success of the products that are developed on new types of engines. We have done the trials but we still need to see that the products go to the end-customers in bulk quantities on how they are performed. In India we also need to see the quality of fuel oil. As we go to the rural area the quality of oils and lube that we use starts becoming an area of concern for us. So, we still have to see how these new engines will perform.
- What was the loss of production in the last one year at your Chakan plant in Pune? And what is the current utilisation level of the plant?
Last year our overall production was less than 30% of that in 2019. But in 2021 we recovered the production in the first four months. During January-April our production increased by almost 50% compared to the same period of 2020.
Now due to COVID production again came down in May and we expect the decline will continue till July. During May – July production will drop by 40%-50%. However, going forward we expect that the market would recover on the strength of infrastructure investment and wider vaccination drive.
Another factor is financing because 95% of equipment is financed either by banks or NBFCs. We have 30-35 financiers for our industry. Now because of COVID the delinquencies on their present portfolio are bad. They may take a conservative view for funding. That could be a challenge. We have already seen in the month of May that the delinquency levels of NBFCs and banks have suddenly shot up.
From the capacity point of view we are almost geared up. Our current capacity is close to 10,000 units a year but this year we will produce close to 7,000. We will try to maintain 70% capacity utilisation this year. I think this year demand should reach at least the 2019 levels.
- Localisation helps a lot in bringing down the manufacturing and operational costs. To what extent your products are localised and how much more localisation is under way?
If I take different product lines, the localisation levels will vary between 30% and 80%. On an average we should be close to 50%. Going forward we are looking at increasing our average localisation level to 60% in three years and up to 70% in 3 years after that.
We have also brought in some of the global suppliers who are associated with Sany Group to India to set up their shops in the country. This brings to focus the localisation of some of the specific parts in India.
There are some sources that manufacture components not only for us but for other companies as well. To such suppliers we are reaching out to increase their localisation level.
One crucial factor that we still face is scale because when we go for localisation these global component manufacturers ask for 1 lakh parts whereas our overall sale is 25,000 annually. Then they look for the economic viability of setting up a shop in India. To resolve the issue of scalability we introduce these component manufacturers to our global subsidiaries so that they get volume and scale.
- You are a leading producer of excavators in the country. What kind of growth do you see in this business? Besides this, how many products are you manufacturing in India at present?
Excavators are close to 40%-45% of our business. This is a growing market and barring last year the industry has seen a growth rate of 25% in the excavator market. We expect that construction activities will start gearing up from the second half and on the back of it we see 25%-30% of market growth in the excavator business for the year.
We are producing 30-odd products in India with 150 variants. All these products we are making in India but none of them are 100% localised as we use such high precision components for which the scale is not enough in India. So we have to source those parts from Japan, Korea, China or Germany.
Q. How much does Sany India contribute to the overall revenue of the Group?
Sany Group’s overall revenue was close to USD 15 billion in 2020 and this year we expect to reach close to USD 23 billion. The India market was close to 1.5% of the overall group’s business last year and in 2021 it will be around 2%-3%.
We aim to reach 5%-6% of our Group revenue in the next three years. Our domestic arm is looking for expansion and we have some solid plans to increase our presence in West Asia and Africa.
Q. In what areas will be your upcoming investments?
We not only invest in factories but also in distribution networks and supply chains. Thus far we have done investments of close to INR 1000 crore and we also have plans to invest another INR 1000 crore in the next 3-4 years. That will include expansion of our factory and distribution channels and also on R&D.
I don’t see any green field expansion coming up in the next 2-3 years as our Chakan plant has adequate space for expansion. We still have around 30%-40% of land area left on which we can plan our upcoming expansions. But, yes seeing the potential of the market, we might go for green field expansion 3-4 years down the line.
- Lastly, how are you working on the expansion of the dealer network?
At present we have 36 dealers and 160 offices across the country. Our next step is to focus on rural areas as we plan to increase footprint in the hinterland. We are planning to increase our offices to 200 this year in South Asia.
Source: Economic Times