Davos 2020: Why Baba Kalyani Thinks The Worst Is Over For The Auto Sector
Baba Kalyani (Source: BloombergQuint)

Davos 2020: Why Baba Kalyani Thinks The Worst Is Over For The Auto Sector

For industrialist Baba Kalyani, there’s only one indicator which gives him the conviction that the worst is over for India's automobile industry: consumer demand.

“I think the worst is behind us. I think we’re already beginning to see growth come back,” Kalyani, chairman and managing director of Bharat Forge Ltd., told BloombergQuint on the sidelines of the World Economic Forum 2020 in Davos, Switzerland. “It’s based on what demand we’re seeing from customers. Give two quarters more and we should be getting back to normalcy in the automotive industry.”

Davos 2020: Why Baba Kalyani Thinks The Worst Is Over For The Auto Sector

Last year, India’s automotive industry saw its worst slump since at least 1997 with a record fall in the sales of cars and utility vehicles. Auto and component makers—which together contribute more than 7 percent to the nation’s gross domestic product—have been forced to lay off contract workers and dealerships shut showrooms as Indians cut back spending amid an economic slump.

Kalyani, though, is of the view that this is not a structure slowdown but a cyclical downturn. “I don’t think we need to be overly pessimistic about things. The automotive industry is cyclical in nature and we’re in a downcycle,” he said. “And unfortunately for India, a couple of events coincided with the downcycle so that it seems much deeper than it is.”

It’s a global phenomenon not just an Indian phenomenon. We have to run through this downcycle. This isn’t the first time. This might be the fifth downcycle I am seeing.
Baba Kalyani, Chairman and MD, Bharat Forge

He said that growth will continue to remain muted over the next two quarters before climbing up again. He added that they are seeing signs of things improve “slowly, but steadily”.

The slowdown, however, was not limited just to the automotive industry but to the manufacturing sector as a whole, he noted. But the turnaround will depend on what interventions the government makes and the measures it announces to boost infrastructure spending in the upcoming Union Budget.

“I think things are turning around. At what speed it turns around and how fast we get back to higher growth will, to a large extent, depend on many other factors including what happens in the budget, what are the interventions,” Kalyani said. “What will help the economy in a large way is investing in infrastructure.”

It will create an immediate demand for capital goods, making the economy more efficient in the medium term. That’s what they should do.
Baba Kalyani, Chairman and MD, Bharat Forge

Watch the full interaction with Bharat Forge’s Baba Kalyani here.

Here’s the edited transcript of the interaction:

The IMF marginally reduced its growth forecast for the global economy. The big cut, as expected, came from India. What do you make for the growth environment for industries like yours in 2020?

2020 is going to be challenging for manufacturing, especially for the automotive industry not only in India but also worldwide. We are in a cyclical phase where we are in a downcycle in India, Europe and North America. And I think this downcycle will play through at least the first two-three quarters of 2020 and then you’ll start seeing the growth come back. It was very interesting to hear President Donald Trump speak in his inaugural address. I have never seen a U.S. President be more optimistic about growth.

But he has to be. He is in an election year.

That’s okay but the numbers he rolled out were very impressive. I don’t think we need to be overly pessimistic about things. The automotive industry is cyclical in nature and we are in a downcycle. And unfortunately for India, a couple of events coincided with the downcycle so that it seems much deeper than it is. But I think the worse is behind us. I think we are already beginning to see growth come back. Give two quarters more and we should be getting back to normalcy in the automotive industry.

What gives you the conviction that the worst is behind us?

The numbers.

Which numbers? Order-book numbers or is it the conversations you’re having? Is it anecdotal or data-based?

It’s purely data-based. In this industry, there is nothing called an order book. It’s one industry which is highly automated in terms of the supply chain so everything is digital. It’s based on what demand we are seeing from customers. That makes me believe that the worst is behind us and I think slowly things will get back to normal.

What kind of uptick are you seeing in demand? Because on a company level you had forecast that the second half of FY20 will be muted growth. Is the uptick you are seeing good enough to revise the guidance?

No, we are not revising guidance. The growth will be muted. But I think we were very clear six months ago that we will have a difficult period in Q3 and Q3. And after Q4, once you start seeing an upward movement—we’re seeing that, slowly but steadily. It’s a global phenomenon, not just an Indian phenomenon. We have to run through this downcycle. This is not the first time. This might be the fifth downcycle I am seeing.

Most business leaders I am speaking to have told me, off the record, that this is the worst downcycle they are seeing. Nobody had anything optimistic to say. You sound a little better off. Is it just because you think the first and second quarter of FY21 will look a little better than the first and second quarter of FY20?

It’s not that. I don’t think I am talking about numbers or guidance. I am talking about a general outlook. There is no doubt that we have been through a downturn as an industry, not just as a company. The whole manufacturing sector has gone through this grind. And I think things are turning around. At what speed it turns around and how fast we get back to higher growth will, to a large extent, depend on many other factors, including what happens in the budget, what are the interventions. The government has had a lot of dialogue with every sector of the economy. So it’s not just one sector. We may be connected to the automotive and industrial sectors but our sector is driven largely by investments and GDP growth. If you look at the truck business, the general formula is transportation increases 1.5-1.8 times the GDP growth. Today’s session also had many people from Middle East and Australia who were saying the same things. I think the focus has to be to get the GDP growth up. Once that starts happening, growth will come.

I want one insight on the slump we’ve seen in the auto industry in India. There’s been a lot of hand-wringing in trying to figure out the reasons for this ranging from new emission norms, therefore higher cost of vehicles, to changing consumption patterns and millennials. What would you ascribe as reasons for this downturn?

Let me take your issues once by once. First, emission norms are yet to kick in. That will happen from April 1. The pricing change will happen from April 1. It is not affecting anything today. As a matter of fact, we should’ve seen better pre-buy, if at all.

But maybe people are not buying because they want to buy the newer vehicle that comes after April...

Yes, possible. According to me, the reason is very simple and it is only one: this is a cyclical downturn. Every four or five years the auto industry goes through a cyclical downturn and this is one of those.

But all the auto companies have been asking for government help, stimulus measures, suggesting this was abnormal and out of character for an industry which should be growing given our population.

Then why is the European auto industry down?

Maybe they’re in a different phase, different car ownership data. No?

I don’t think so. I think we’re far away from millennials not buying cars, shared mobility etc. They are all concepts that are coming in. But as a volume percentage of the whole automotive trade worldwide, it figures not even one percent.

So you’re saying this is just a cyclical downturn. Not a structural issue?

I don’t think we should be overly worried about it.

On budget and other fiscal interventions, what are you a votary of? Should they expand the fiscal deficit and invest in infrastructure, which is medium-to-long-term measure but with better quality of return? Or immediate consumption boost?

The government has already announced its intention of investing in infrastructure.

That’s intentional and not planned.

So we need to wait to see what comes out of the budget.

But you are in favour of more money towards infrastructure as opposed to an immediate consumption boost?

What will you do in consumption boost?

Maybe boost the NREGA programme or put more money in the hands of people through PM-Kisan and those kinds of measures?

I think those kinds of things will happen but I don’t think that will help the economy incrementally. What will help the economy in a large way is investing in infrastructure. It will create an immediate demand for capital goods, making the economy more efficient in the medium term. What is infrastructure all about? Making the economy more efficient and competitive. I think that is the direction, at least from my sense, that the government is taking. That’s what they should do. They should put large amounts of money into infrastructure. Second, programmes like Make In India need to work.

How many Davos editions have we discussed Make in India?

Not many.

At least eight?

No, no, no. It started in December 2014.

It is 2020. It is six years now.

So five-and-a-half years. I wouldn’t say it has been a total...

I am not suggesting that. It just has not achieved the success one would have hoped for.

A lot of things have happened. But a lot more things need to happen. Look at the bright side of it. You have a huge amount of imports we do in manufactured products. Our electronic product imports are touch $70-80-90 billion a year. It keeps increasing. Defence imports are increasing. These are great opportunities for India to get into manufacturing.

You sound sanguine about slow growth, you sound optimistic about getting over hurdles. Yet, any time I ask for a tentative forecast for your businesses you prefer not to answer.

You can ask me about the economy, I can answer.

But not on the company?

No.

In the last few months, we have had several business leaders voice concerns about the way the economy is being run and the way regulations are being run. For instance, Mr. Rahul Bajaj mentioned how he felt there was a sense of fear about speaking up about the economy. N. Chandrasekaran of the Tata Group said that businessmen are looked at with a lot of suspicion, and instead we need supervision, not suspicion. There seems to be a sense that the government should step back a little bit from the very tight rein it seems to have. What is your view?

I think that’s exactly what they have been saying for a long time. The whole concept of ease of doing business, one India one tax.

Is there ease of doing business in India?

In many areas, yes. If you look at the central government, of course. Everything has become a lot easier and simpler. There’s a lot of work to be done in the state governments. The problem in India, which most people don’t understand, is that everything is not run by the central government. The Centre lays down policies. The implementation of those policies, 80-90 percent of it, depends on the state government. If the state government is unable to implement policies efficiently and effectively then you won’t see growth. Look at Telangana, it came into being just a few years ago. But the state government is so proactive in implementing policies, whether industrial or agricultural. It’s a fantastic place to be.

There has been a degree of social unrest. Students are protesting an amendment to an act that they are not in favour of that they believe is discriminatory on grounds of religion. What do you make of the situation? Business world has been very silent on it. Do you stand in solidarity with India’s youth or is it something you don’t want to wade into?

First of all, let’s understand. I don’t think these are India’s views. I empathise with the country. But that doesn’t mean that you need to empathise with everything that is happening. Sometimes lack of information or understanding of what the system is trying to do can create this kind of situation. I am pretty much with the government as far as this is concerned. I don’t think there’s anything wrong. Every country in the world, I mean, why are we discriminating ourselves against other countries in the world. That’s my answer.

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