TAX ANALYST V RANGANATHAN, in his inimitable style, hailed: “Auditing is dead. Long live the auditor!” He points to the statutory and other auditors of banks and the annual reports of companies they audit and certify seem like babes in the wood; none pointed to the pathetic state of finances of several companies that were later revealed by NCLT awards on IBC cases.
One sees the parallel of this in the recent reports on the closure of the Indian manufacturing plants of Ford Motor Co in Gujarat and Tamil Nadu, announced on 09 September. Surely, the steep deterioration in the performance of the company should have been staring at the face of its employees, vendors and dealers months earlier.
Anurag Mehrotra, Managing Director, Ford India, announced: “the decision was reinforced by years of accumulated losses, persistent industry over-capacity and lack of expected growth in India’s car market. We have not been able to find a sustainable path forward to long term profitability that includes in-country vehicle manufacturing. After investing over one billion dollars and in operation for 25 years, a loss of $2 billion has been accumulating in recent years.”
Almost six weeks ahead in the IE issue dated 01 August, IE reported: “the American icon Ford Motors is set to close down its two Indian factories at Maraimalai Nagar (TN) and Sanand (Gujarat). Their production adds up to less than a quarter of the capacity of 4.4 lakh passenger vehicles and 6.2 lakh engines.”
Surprisingly such a gaping hole was not evident to the three segments most affected.
WHAT A START!
Ford Motors entered India with great promise. It was the first auto giant to enter India after the spectacular success of Suzuki that commenced production in 1983.
In the wake of the liberalisation of the Indian economy in 1991, handsome incentives were offered in terms of Central taxes. The globalisation thrust made India highly attractive for manufacturing cars. Cheap land and low permitting construction costs; finance costs, made attractive sourcing funds from across the globe and also with 100 per cent equity; steep reduction in import duties that made cost of imported plant and machinery comparable; most importantly, availability of skilled labour in abundance at a fraction of the cost in Europe or US. (for Maruti Suzuki wage costs formed 1.8 per cent of total revenues, much less than the 10 per cent or more in Europe or US car makes at that time).
With the freedom available to the states there was the race to the bottom battle among states with offer of incentives to attract mega investments. These included sales tax exemption for 14 years, 1 per cent sales tax on components procured from within the state, low price of land, rebate on stamp duty and registration charges, assured supply of power including subsidy on consumption …
Ford succeeded in wresting such concessions; these formed the base for other global car manufacturers to access these with ease. Hyundai made the best use of these: it set up facilities in two years and released its first car a year ahead of Ford.
Initially Ford struggled to introduce a model attuned to the Indian needs – of a small car at affordable price. The requirements of the US market with left-hand drive vehicles were different. With its wide roads and cheap petrol. US consumers have traditionally been opting for big cars and SUVs. But what needed in India then were small cars more suited to the Indian road conditions where Maruti, Hyundai and Daewoo scored over Ford.
That was the initial handicap for Ford. With low volumes and low margins Ford could not offer a range of products to choose. It did succeed in introducing brands of quality that won specific customer loyalty like Ikon, Figo, Fusion, EcoSport… Later Ford also used the Chennai facility for the export of specific models which sustained its operations for a few years.
Ford made rich contributions in bringing global standards – in design and construction of buildings, in its concerns for the community around, environment, training, vendor development safety… Its management systems were of value adopted by numerous medium and small industrial units.
One wonders why Ford did not expand its facilities in Tamil Nadu to meet higher volumes of demand and higher capacity utilisation rather than spending on a second plant at distant Gujarat. Hyundai did this to great effect expanding its capacity at a single location to around 700,000 to good profit. Even while load on the first plant was low and uncertain, Ford went for another large investment at its second plant at Sanand, Gujarat, which strained viability and increased losses.
The market share of Ford cars fell to less than 2 per cent. With steep increase in the price of petrol, acute competition for custom and the Covid pandemic causing big holes in the market, both Indian and global and the transition to electric vehicles, the decision of Ford Motors to close down appears logical and inevitable.
In the light of the efforts of the state to lure investments by multinationals on attractive terms, the closure of Ford is a dampener. Of greater concern is the impact on the livelihoods of thousands of workers employed directly and indirectly at the dozens of vendors and the 170 Ford car dealers.
What of the future?
The state government has indicated financial incentives similar to that offered to Ford to an investor acquiring the Ford facilities spread over 350 acres with sophisticated plant and machinery, a high quality paint shop and other infrastructure. Affected employees have also pleaded for government’s help to get them jobs in other mega investment projects.
These are beset with problems of their own. Remember the Maraimalai Nagar plant is 25 years old. Over these years, manufacturing lines would have evolved through a much higher degree of automation and thus would need entirely different architecture. The switch to electric cars, with much reduced set of components would also demand different configurations of production lines. Workers at Ford have are much older and have become costlier. Today a young entry level engineering apprentice would be available at a wage of around Rs 15,000 p.m against a mature employee of Ford earning an average of around Rs 50,000 plus p.m. Thus, absorbing the Ford workforce by a new company wouldn’t be easy.
There cannot also be huge demand for the manufacturing facilities of Ford. Big brother General Motors went through similar experience: years after establishing a plant at Halol in Gujarat, the US auto major expanded into Maharashtra, but later closed down both the plants; their Talegaon plant near Pune was sold off to Chinese Great Wall Motors last year, but has not yet settled fully the closure issue.
Ford did try the alternatives of contract manufacture, collaboration with Mahindra & Mahindra (with which it started in 1996, but later terminated) and even outright sale. With no progress in any of these it had chosen the inevitable option of closure.
A century of connections…
Ford commenced its operations in India almost a century ago in 1926. Ford joined hands with Escorts to produce tractors. The Ford tractor was a reliable workhorse and was popular for quite some time. But was no match to the products of Mahindras or TAFE.
In the late 1970s Amalgamations group reluctantly activated its licence to produce Ford trucks. Over the next few years, it assembled medium-sized Ford trucks. It was a sleek model with a comfortable built in, tiltable driver cabin. Sadly it was not equal to competition from the Tatas and Ashok Leyland and the assembly operations were closed down.
For the global giant Ford, that dominated global car manufacture for over 100 years, such successive failures in India, should be surprising. One sees a certain pattern of American corporations entering India with promise but withdrawing mid-way.
As global marketing strategy, Ford will focus on marketing its popular brands like Mustang and electric cars imported from its other global plants. You can expect US President Biden lobbying for lower import duties for fully imported American cars as attempted by his predecessor Trump for Harley-Davidson motorcycles.
Ford will continue to focus on its strong business solutions team that works on R&D, software development, data and finance management… at its sprawling facilities in Tamil Nadu employing a few thousands.
Sadly, there are no clear guidelines for closure of industrial units. Any economy is bound to see the rise of thousands of new companies as also the demise of equally large number of enterprises. With the livelihood issues involved, sound and quickly implementable solutions on exit of companies are an imperative. – SV
