Georg Graf, Freudenberg´s Regional Representative in India and former President of the Indo-German Chamber of Commerce in India, talks about the customs duty hike for the select auto components in Budget 2021, Freudenberg’s business in the light of the Covid-19 pandemic, Atmanirbhar Bharat campaign and more.
The Indian auto components industry accounted for 2.3% of the country’s Gross Domestic Product (GDP) and 25% of its manufacturing GDP, providing employment to around 50 lakh people in 2018-19. According to the Automobile Component Manufacturers Association (ACMA), India’s auto component export is expected to reach $80 billion by 2026.
Between FY16 to FY20, the Indian auto component industry registered a CAGR of 6%, reaching $49.3 billion in FY20, with exports growing at a CAGR of 7.6% during FY16-FY20 to reach $14.5 billion in FY20.
Such an important industry has been facing several hurdles in recent times, initially because of the global economic crisis and later due to the Coronavirus pandemic. The FY21 marked a historic slump.
Freudenberg Group that been doing business in India for more than a century since 1920, is a key player in the Indian auto component industry when it comes to automotive applications such as filtration, sealing, fuel cell technology, etc. Georg Graf, Freudenberg´s Regional Representative in India and former President of the Indo-German Chamber of Commerce in India, spoke to Autofintechs in an exclusive chat, where he talks about the customs duty hike for the auto component sector in Budget 2021, the company’s business in the light of the pandemic, Atmanirbhar Bharat campaign and more.
Edited excerpts below.
Q. The Budget 2021 has proposed the imposition of a 15% customs duty on certain auto parts from the current 7.5-10%. Besides that, there will be 5% of infrastructure and agriculture cess. How does this move impact the auto component industry?
We should not forget that Budget 2021 is an overall pro-growth budget. There are lots of unpredictable circumstances like foreign direct investments (FDI) lower than expected. It’s a difficult economic environment in the wake of the global pandemic. Some of my colleagues have stated that there is a need for rationalization of customs duties. There should be more focus on development.
Companies have started understanding that India is not just a consumption market, but a manufacturing and R&D hub as well.
India is a very complex market. The country is being consistently preferred as a manufacturing partner across industries. If we look at Budget 2014, the Make-in-India initiative was emphasised. Companies have started understanding that India is not just a consumption market, but a manufacturing and R&D hub as well. It allows foreign companies to produce export products for other markets. From this perspective, the cess hike can be seen as a strategic opportunity.
The cess hike of auto components is only for very specific auto parts such as ignition wire, safety glass, windscreen wipers, defrosters, signaling equipment, etc.
The cess hike of auto components is only for very specific auto parts such as ignition wire, safety glass, windscreen wipers, defrosters, signaling equipment, etc. In my opinion, these are not very critical parts and they are also available locally. Hence, the move of hiking cess on these parts in the budget could be linked to the idea of boosting local manufacturing. Maybe, this could support the local R&D also.
Many auto component players are from the Small and Medium-Sized Enterprises (SME) sector. This move could provide them a faster business recovery opportunity, particularly to small players. Promoting domestic manufacturing will help entire India to get into global value chains. The hike would help in the growth of local manufacturing.
I believe, it is always a benefit to turn a segment from a business model of the commodity into a speciality and this is what the budget tried to do, despite the hike being an unfavourable move in the first set for the Indian manufacturers.
Q. How Freudenberg India’s business activities in the automotive segment have been impacted due to the Covid-19 pandemic? How is the revival path?
If we would have talked around February 2020, we would have talked about difficult times ahead. No one had foreseen how tough 2020 would be. In December 2019, we anticipated a weaker global economy. The mobility sector was facing enormous transformation also. But Covid-19 has very certainly and drastically changed our world on many different levels.
Globally, 7 of our 10 Business Groups have seen a revenue reduction, mainly in the mobility segment.
In such an unseen environment our first priority was to protect our employees and to lead our company and business units through the crisis. On the other hand, the weaker demand in the mobility sector was very negatively impacting our business. However, following the dramatic slump in April and May 2020, our business has seen a continuous and gradual improvement.
Despite the gradual recovery, we have not seen the same business performance as 2019. Globally, 7 of our 10 Business Groups have seen a revenue reduction, mainly in the mobility segment. On the other hand, three Business Groups have seen positive impacts despite the pandemic. Taking a lesson from that, we are continuing our strict cost management and other related measures such as reduced investment to the lowest level possible, which is not jeopardizing future growth. However, we have avoided cutting our research and development activities.
What we know from the financial crisis of 2008-2009, revamping of business needs a lot of investment, activities, and time. Most companies in a crisis are focusing on cash.
Q. Megatrends like electric, connected, autonomous technologies have been disrupting the auto industry across the world. How do you see Freudenberg’s business being impacted due to these megatrends? How the company is evolving to adapt to these changes?
The auto industry is all about mobility and mobility is all about getting people and goods from point A to point B. The sector is experiencing continuous transformation around the world. This is why people name it as megatrend as it is impacting the industry across the world.
The automotive industry is facing the very specific challenge of improving existing products while at the same time developing new drive technologies.
From our perspective this – and I mean the transformation – currently includes lower-emission combustion engines and hybrid drives, as well as new developments in battery-electric drives and fuel cells. Freudenberg is accompanying this transformation with future-oriented innovations for components and as a systems supplier.
The automotive industry is facing the very specific challenge of improving existing products while at the same time developing new drive technologies. You are asking how Freudenberg is assessing such an impact and how Freudenberg is adapting to it. Freudenberg’s strength as a partner – here particularly as a partner for the auto industry lies not only in the Group’s broad positioning (we serve more than 40 markets and thousands of applications) but also in its technological and materials expertise across numerous Business Groups.
Q. According to research, the global automotive air filter market is expected to grow at a CAGR of 8.45% during 2020-2027. How the pandemic impacted this growth projection? Where do you see India in this growth story?
The planning horizon has changed dramatically due to the pandemic. Earlier, a 2-3 months’ plan was solid. But the pandemic has reduced the timeframe to nearly a week/fortnight for making any solid projection. While such a long-term CAGR projection in the pre-Covid time was okay, it doesn’t make much sense in the pandemic scenario.
While the European Union was India’s first partner with around 15% of its total trade in goods during the last periods, India was the EU’s only around 9/10th largest trading partner, accounting for only around 3%.
Filter systems from Freudenberg Filtration Technologies (FFT) can be found in all vehicles, including those powered by batteries and fuel cells. All-electric vehicles are focusing the attention of FFT’s filter specialists on the possibility of providing passengers with even cleaner air. The impulse for this is that electric motors are significantly smaller, leaving more installation space for vehicle cabin air filters, which in turn means the filters can be larger and even more efficient.
It seems the need in India for efficient cabin air filters will not only follow the cars produced in the coming years but demands from passengers for cleaner air and more comfort and therefore efficient filters should increase on top of production numbers.
Q. Germany has strong business relations with India. Having played a key role in the Indo-German Chamber of Commerce in India, how and in which sectors do you see the business collaborations between these two countries evolving?
While the EU was India’s first partner with around 15% of its total trade in goods during the last periods, India was the EU’s only around 9/10th largest trading partner, accounting for only around 3%. There is a lot of scope for India and Indian companies. Moreover, I feel wonderful opportunities for Indian companies with an additional footprint in Germany too.
Missing trade opportunities and missing investments are missing growth opportunities. We have to grow even more solid in India.Missing opportunities not to create jobs. We need jobs. In addition, this is what I feel is our pre-dominant responsibility: to create jobs with a sustainable dimension. New jobs…also to pay taxes and to contribute to social security systems – here and there.
Most of the German companies doing business in India are in the SME segment what we call Mittelstand in Germany.
All business models are very specific and complex at the same time. You were asking for sectors. To be honest I do not know which sectors are the preferred ones. What I see in most of the larger and matured German companies doing business in India is… that companies remember their core success factors and to maintain them:
- Long-term orientation
- Excellent technologies
- Support diverse industries
- Bring up countless innovations
- Live corporate values in practice
- Have joint responsibility for the two countries and societies.
India is attractive for German companies and “a place to be”. Indian companies are invited to come to Germany.
Q. Is the Atmanirbhar Bharat or self-reliant India campaign poses a challenge towards the German companies in India?
It is impacting the German companies in India, but it is clearly not a challenge for them. I see it as an opportunity. Why? There’s a very successful German business model out there in the market. Most of the German companies doing business in India are in the SME segment what we call Mittelstand in Germany.
The SMEs believe in innovation, quality, and long-term orientation. They are often niche market players and operate in a highly competitive, complex world without compromising their values. They are very flexible and invest in people. They are also a pool of vocationally trained employees. This is the business model that made Germany and Freudenberg successful.
Not more than 2% labours in India undergo formal skill training, which is nothing compared to other countries.
Skills and education are the driving forces of economic and social development. India makes the case imperative. India is currently facing a shortage of well-trained skilled workers. According to a study, not more than 2% labours in India undergo formal skill training, which is nothing compared to other countries.
I see the campaign as an opportunity to make India an active manufacturing hub, placed at the heart of the global value chain. The principle of the campaign is to increase local production catering the local consumption and catering to the global supply chain as well. The German companies are very excited about the growth opportunity through this program, especially when it comes to IT-related and R&D-related activities. Almost all R&D centres of the global companies are already located in India.
India is the youngest connected democracy in the world. That says all. Hence, I see the campaign, not as a challenge but as an opportunity.
Q. Freudenberg India reported 5.7% sales growth at Rs 2,533 crore in 2019. How the company’s journey has been so far in 2020, especially in the light of the pandemic?
Freudenberg performed well in the 2019 financial year, in spite of the difficult economic and geopolitical market environment. In 2020, following the coronavirus-related complete shutdown, our companies in India worked hard to reach normal operating levels fast. Such a pandemic is eating up many years of business success. Businesses will lose the top line and some may lose profitability too. However, important is, you should not lose market shares in such a crisis. I feel we have not lost momentum.
In dealing with Covid-19, we have found new ways of working such as in digital communication and collaboration, both internally and with our customers. But we miss the face-to-face meetings and the discussions
Most of the Markets are obviously coming back again. Many of our Indian businesses are doing pretty well. I can read that almost all indicators since October 2020 (industrial activities, trade, logistics, financial services, sector-wise impact, macroeconomic indicators, sentiments like PMI in manufacturing and services) – all these indicators show an upward trend or a level of pre-pandemic or even better. I can see also good year-on-year growth rates.
I am happy to read also that most of the indicators of our most important segment – the automotive segment – have improved.
Freudenberg intends to continue investing in long-term projects. The mobility transformation, digitalization, and an expansion in sustainable solutions will remain central components of Freudenberg’s strategy.