We need a scrappage policy, says Cummins India MD Ashwath Ram

Engines and power equipment supplier Cummins India is expecting full revival of business in 2022, according to its managing director Ashwath Ram. With FY20 revenue of ₹16,000 crore from seven entities employing 11,000 people across 20 manufacturing sites, the company has been hit hard by the pandemic. Excerpts:

How has COVID-19 affected Cummins India?

All our factories were shut for the first two months of the lockdown and once the ramp-up started, we have gradually picked up and are now at roughly about 70% capacity utilisation. Demand differs across segments.

Some segments such as construction or our distribution business units are doing quite well and demand is rising pretty rapidly. [But]demand from sectors like rail are badly impacted.

In our power generation segment, demand from data centres, telecom, residential reality and FMCG is moving up rapidly. But segments such as commercial real estate and heavy manufacturing are reviving at a much slower rate. Overall, we are about 70% of the peak of the pre-COVID level.

When do you think the auto sector, mainly HCVs, will bounce back?

The heavy commercial vehicles segment has been significantly impacted because it had already slowed down due to many developments such as the NBFC crisis which happened the year before last. It triggered the slowdown and then there were many changes in regulations.

The government allowed 20-25% extra loading on all vehicles already on the roads. Then we were supposed to do the BS-VI transition in April which was very expensive. It was also the fastest we had to go from BS-IV to BS-VI in three years as against 10 years in other countries.

When we launched products with investments worth thousands of crores of rupees, we were already in the lockdown; so it was like a perfect storm with all variables being bad.

The market for the medium and heavy commercial market is now at a 10-year low. We haven’t seen such poor demand since 2008 or 2009. The demand in medium and heavy commercial vehicles is closely linked to GDP; as the economy recovers, this market will also bounce back.

This market will fully revive only by 2022. But it has already started to come up, slowly. By January 2021 we will be at 50% of pre-COVID levels; now, we are at 30-40%.

There must be a heavy financial impact on the company….

Absolutely, its really really tough. We are managing through the cycle mainly because many of the investments were made in the last 3 years. We are not making any new investments now. Also, we have taken many cost-cutting measures at various levels from operational resources to human resource and in various other aspects of our businesses. We had employee lay-offs early this year, we have cut employees’ wages, we are working from home, we are adopting every form of cost cutting we can think of to make sure that we come out of this low demand period. Also we have made massive investments in the country so we can leverage those investments and keep growing.

Are you scaling down your investments?

In fact we are investing more into new technologies and new products because we believe that with this pandemic, certain aspects of the business are going to change significantly and it benefits technology leaders like Cummins. So we are scaling up what we do in India and the kind of products we are developing. So, we are looking at it as an opportunity to gain market share.

India and China are at logger heads. Have your exports to China been affected?

No. As a matter of fact, we have had record exports to China during the last 3-4 months and there has been no impact on our business with China. We have created advantages versus China in certain products. We have the scale here as well as a cost advantage. Our labour cost is roughly 20-25% lower than China’s. So, are pricing is competitive.

We are able to get entry as well as continued business from China. If relations between the two countries worsens, I don’t know how that will go. But as of today, we continue to have strong exports with China. We sell them gensets, engines, manufactured components…

What would you like the government to do?

The government is taking a long time to introduce the scrappage policy. That would certainly help this industry because with BS-VI, the pollution levels will see 60-70% improvement over BS-IV standards. Even today we have BS-I, -II and -III vehicles running on the roads.

Over 90% of the pollution is caused by these old vehicles. So, we have introduced these ultra-clean engines to the point that [exhaust from] those engines is cleaner than the Delhi air. But, it is not going to have any impact if these old pieces of equipment keep running.

So, the government needs to introduce the scrappage policy immediately. Also, to boost demand, they should [waive] GST. A lot of export incentives have now been taken away and there is no clarity yet on what is going to happen from January. We’re going to lose money.

What is the outlook?

I am very optimistic and bullish about a company and its growth prospects. I think we are reviving strongly and we’re confident that will come out of this in a strong manner.

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