Slowdown cripples micro, small industries

A year ago, Chandran, a worker at Cosmos Engineering, an automobile components manufacturing firm in Peenya Industrial Estate, Bengaluru was happy. He made about Rs 55,000 a month, used to invest about Rs 35,000 in a chit fund and had enough to run his family of four with his wife also earning a small sum. Now, hit by a slowdown in the auto sector, his employer has slashed his salary by half and Chandran is unable to maintain his family and fulfil financial commitments.

Consider the case of Ramesh, who also works in the same company. Now he takes home only 50% of his salary as the factory works only two days a week. “My wages have come down to Rs 20,000 from Rs 40,000 per month. I pay a monthly rent of Rs 10,000 for my house. With a kid in school, I am finding it tough to run my family as I am the sole bread earner,” Ramesh says.

Cosmos Engineering, which supplies components to Ashok Leyland, is one among 10,000 micro and small companies in Peenya that are deeply affected by the ongoing slowdown in the automobile sector. Fifty people are employed here.

Sobyasachi Biswas, one of the owners of the company, admits, “I have been in Peenya for more than 20 years and this is the worst slowdown I have witnessed. It is the result of a combination of multiple factors, many of them domestic and some international.”

Peenya is one of the country’s largest industrial clusters with units focusing on automobile components, machine tools, general engineering and garments, among others. Many factories in Peenya are now working only on one shift or only for three days a week.

Biswas says that if the demand doesn’t pick up, he may have to cut down production days to one day a week or shut down entirely.

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According to Biswas, the slowdown in the auto industry has impacted their profits. Though many of the consignments are ready to be dispatched, customers are not picking them up. The shift to BS-VI emission standards slated for April next year has meant that many vehicle manufacturers are sitting on a huge inventory of unsold vehicles and are cutting down fresh production. “This essentially means that we do not get paid since the stock is not getting picked up at all. We are also scaling down production as a result.”

Biswas points out, “Last year, we were generating revenues of about Rs 90 lakh every month. That has come down to Rs 12 lakh last month. This month, it has been only Rs 1 lakh thus far. I am not sure how long we can subsist on these margins.”

Micro and small units in Peenya with an annual turnover of Rs 30,000 crore contribute a little over 2% of Karnataka’s gross state domestic product.

Among the problems faced by small scale units in Peenya are loan repayment to banks and payment of wages to employees most of whom have been working here for over two decades. At the same time, they are not getting any payment from customers. The delay in payment beyond 90 days is adding to their woes. While the Micro, Small & Medium Enterprises Development Act stipulates that small and medium-sized enterprises (SME) should be paid within 45 days, many large enterprises who source components are delaying by up to 120 days.

R Raju, president, Karnataka Small Scale Industries Association says the rise in overhead costs, demonetisation and GST have also impacted the SME sector. “Everyone has been hit by the slowdown, though the auto industry has borne the major impact.”

With demonetisation, smaller units went under, since they were unable to scale up,” Raju said.

Biswas adds that the advent of GST and its complex structure has resulted in all micro and small units hiring the services of chartered accountants, almost 10 times more than earlier.

Recovery not in near future

He feels that factoring in the teething issues that the shift to BS-VI is bound to see in the initial months, recovery may happen only by September next year. “The slowdown began in March this year. I fear that a prolonged slowdown may result in law and order issues in Peenya. We have almost 10 lakh people working in the belt. The smaller industries will be hit the most. I fear that this may result in many small-scale industries shutting down.”

Alongside domestic issues, an increase in import cess on goods from India from 4% to 15% has also impacted the business. For instance, Cosmos had bought machines and began production of items such as ladder stops last year. “However, once the import duty on manufactured goods was raised to 15% last year by the Donald Trump administration in the US, it did not make sense to continue exports.”

The business at Amar Engineers, managed by a father-son duo, has gone down by almost 50%, on account of the slowdown.

The story is very similar in multiple other units as well. S M Hussain, treasurer, Karnataka Small Scale Industries Association, says, “The industries supplying to companies such as Ashok Leyland, TAFE, TVS, Toyota have been impacted the most. The first casualty is contract workers, with more than 50,000 rendered jobless so far.”

Work schedules have come down from 12 to 16 hours a day to less than 24 hours a week among many units in Peenya. It has left workers unhappy as they lose purchasing power. “The fittest will survive for a while. Those with borrowed capital in rented sheds will collapse soon,” Hussain adds.

A majority of 10,000 micro and small units in Peenya have seen a drop from 30% to 70% in their business over the last six months. Automobile components and general engineering companies are the worst affected.

“We are already in the ICU. Since March, we have seen a drastic reduction in the orders. We can’t survive more than one quarter if things don’t improve,” says Mohamad Arif, secretary, Peenya Industries Association.

Big players too affected

He expects a severe job loss in the next one or two quarters in Peenya, which may result in a law and order problem.

Micro and small units are not alone in feeling the heat of the automobile sector slowdown. Large players like Ace Micromatic Group, which supplies CNC lathe machines to the sector, have also seen up to 25% decline in orders this year.

“FY19 was the record year for us in terms of revenues. We hit our highest turnover of Rs 2,530 crore last year. This year, we expect at least a 25% drop in our turnover due to slowdown in the automobile sector,” says T K Ramesh, managing director, Micromatic Machine Tools Pvt Ltd.

Amid all this despair, there are the occasional green shoots of hope. Sandeep Parvatikar, director of Unnathi CNC Technologies, says, “I have business interests in multiple areas ranging from auto components and machine tools to agricultural devices and healthcare. This slowdown has impacted about 20% of my revenue since some of these sectors are in the doldrums. However, I have managed to weather the storm as of now since I have diversified my business.”

The diversification of the business was a reaction to the slowdown of 2008. At that point, work came to a standstill at Unnathi, that was just starting. “We changed our business model and moved into newer areas. That has helped us in this slowdown.”

Parvatikar has an interesting analysis of the slowdown in the auto sector. “With the implementation of the GST, the turnaround time for trucks to make trips has come down considerably. This has meant that demand for trucks has come down in the commercial sector.”

Other sectors

Apart from these sectors, the once burgeoning garments sector is also seeing a slowdown due to various factors including competition from Bangladesh. More than 21 factories have closed in Bommanahalli over the last six months. According to a garments company founded by a woman entrepreneur, orders have come down drastically in the last six months.

Another area where the impact of the slowdown is felt is at the Gurukrupa Bhat hotel, one of the most popular eateries in Peenya. Bhat, the genial owner, says, “We have seen reduced crowds since the slowdown. Earlier, there would be no place to even stand during the rush hour. Footfalls have come down by almost 15%.”