Heroic effort highlights Indian hurdles

Hero Honda Motors Ltd. employees work on the production line at the company’s factory in Haridwar, India

Hero Honda, the world’s largest producer of motorcycles and scooters, opened a state-of-the-art factory in the Indian pilgrimage town of Haridwar in April 2008.

Just six months later, the collapse of Lehman Brothers sent global markets into a tailspin, raising fears about the future of global growth.

At Hero Honda, as in the rest of India, executives fretted about the impact the global crisis would have on sales.

The Indo-Japanese joint venture and about half of its suppliers had together invested nearly $422m into the greenfield project – Hero Honda’s third Indian factory – to tap what it expected would be strong demand for motorcycles.

Yet two years on and Hero Honda’s Haridwar plant is running full tilt, cranking out 5,500 motorcycles a day.

The company is installing new machines and hiring hundreds more workers to increase production at the factory to 6,500 motorbikes per day.

“During the downturn we had a great run,” says Pawan Munjal, Hero Honda’s managing director and chief executive. “At the new plant, we ramped up capacity very steeply.”

Even that is not enough to keep pace with India’s rapacious demand for scooters and motorcycles, a market that grew 24 per cent last year.

Hero Honda is conducting a feasibility study – and scouting for potential locations in 10 states across India – for a fourth factory to increase its annual production capacity from the current 5.4m units.

However, Mr Munjal says it is “premature” to discuss the size of the potential investment.

Hero Honda’s investment plans are not unique.

After two years when Indian investment slowed to a near halt, Indian companies are once again activating plans to expand capacity.

“During the downturn people did not invest in expansion, but the demand is picking up very fast, and a lot of industry is finding that a constraint,” Mr Munjal says.

The Federation of Indian Chambers of Commerce and Industry says that 40 per cent of companies surveyed by them expect to have “higher or much higher” investment over the next six months.

However, the upturn in the capex cycle is once again putting the spotlight on many of the constraints that have long hindered Indian manufacturers’ expansion plans.

Land battles are shaping up as a major problem for many heavy industries, especially those – such as steel plants and power plants – seeking to access coal in remote forest areas, inhabited by impoverished indigenous people.

Last weekend, 25 people in the eastern state of Orrissa were injured when police fired rubber bullets at villagers protesting over plans by South Korean steelmaker Posco for a $12bn plant.

Numerous other projects, such as a proposed Tata Steel plant, have been stalled by a radical Maoist insurgency in central India’s mineral belt.

Indian companies are also struggling to find qualified workers – both at the managerial and labourer level.

“Vocational education is under-delivering in terms of the need of an 8 per cent rate of growth,” says Amit Mitra, secretary-general of FICCI.

“This vocational education was absolutely fine for a 3 per cent rate of growth, which we had for four decades. But this scaling up is so high it has resulted in unexpected demands for human capital at the lowest end.”

Foreign groups including Nokia and Bosch as well as domestic manufacturers such as battery-maker Exide and tyre-maker Apollo, have also been hit by labour unrest over the last year, triggered in part by rising food prices that soared by about 17 per cent.

According to a FICCI report released on Monday, 72 per cent of companies are worried that rising inflation will put upward pressure on wage rates and labour costs, while 82 per cent are fretting over the surging costs of raw materials.

Analysts, meanwhile, are warning that new capacity is unlikely to come online soon enough to prevent supply shortages from pushing up domestic prices for manufactured goods, adding to inflationary pressures.

“Even if we have the revival of the investment cycle, it will take 12 to 15 months more for the capacity to come on stream,” says Jahangir Aziz, chief economist for India at JPMorgan.

“During that time, India will remain under pretty strong inflationary headwinds.”