The automobile sector’s downturn has hit smaller component making businesses the hardest
Michael Engineering Works stands forlorn on Thadagam Road in Coimbatore.
Once a successful auto ancillary unit, making wheel hubs for Ashok Leyland and engine components for other automobile firms, it now stands silent.
Out of three units making auto components, two have been shut down. The third has been restarted last week for a solitary chance order.
“We have closed two out of three units,” said J Michael, 52, the tired owner of Michael Engineering Works. “The overall investment I made was Rs 8 crore. But now I have broken and sold my machines as scrap. They bought it for Rs 20 per kilogram and took it. Each machine cost me Rs 5-6 lakh to buy but they took it for nothing,” he lamented.
As the automobile sector faces a sharp and severe drop in demand countrywide, the hardest hit are the small engineering units that make auto parts, like Michael Engineering Works.
In Coimbatore, a hub for auto components, there are over 15,000 such small and tiny industries that make a living off the automobile giants that manufacture cars near Chennai.
They, together, employ around two lakh workers from across the districts of Tamil Nadu as well as workers from the north and north-eastern states of India.
But in the past four months, orders have gone to nil and units are shutting down one by one. The owners of these small units say that they have been facing hit after financial hit since 2016.
“The situation started becoming bad over the past two years,” continued Michael. “First when demonetisation happened, we suffered for 6 months.
There was no income, no liquidity, we were unable to work. Demand then picked up in May 2017. We hired new workers, changed our working structure and began to deliver.
In July came GST. After GST implementation, our problems started again. That problem got resolved only in March-April. By the time we completed all the GST processes and things got regularised, things got a bit better.
But now after the 2019 election, there has been a severe problem. There are no orders coming our way at all,” he said.
“After GST implementation, the price of each automobile component has gone up by 30-40%,” said J James, Coimbatore District Secretary of the Tamil Nadu Association of Cottage and Micro Enterprises (TACT).
“As a result we fear that people’s purchasing power has gone down. We believe that is a key reason for the troubles we are facing in this sector.
The larger units have lakhs of components in the inventory. They have told us that until their existing inventory is sold they cannot give us new orders,” he said.
“After GST was implemented, the MSMEs’ problems have increased and the government has not paid heed. There are already hundreds of MSMEs who have shut shop and gone to set up a roadside idli stalls or have begun driving autorickshaws. We are afraid that Coimbatore will turn into a desert from being an industrial hub,” said Michael.
The 18% GST levied even on these small units which only carry out job orders, had hit them hard. Within months of introduction of GST, at least a thousand units had shut down, unable to withstand the burden of the new tax and the longer delays in payments.
As soon as Budget 2019 was announced, TACT had expressed strong disappointment with the fact that there were no tangible measures announced to revive the tiny and cottage industries which were reliant on job orders.
With orders from the automobile industry completely drying up over the past four months, these small units are unable to pay salaries to their workers, as a result of which droves of unemployed people are leaving in search of greener pastures.
Anjan Kumar, 30, who had come to Coimbatore in search of work six years ago says that he is one of the last few Biharis still in the city. “For the first four years there was a lot of work,” said Kumar. “In the past two years, work has become very less. We are poor people, how will we eat? If there is work, we work.”
Kumar says that most of his fellow “Hindi speakers” have already left Coimbatore in search of jobs elsewhere.
“70% of labourers in Coimbatore are Hindi speakers,” said Kumar. “Of these at least 30-40% have gone back to Bihar. The reason is that there are no orders so how will the owner give us work? There is no work in Bihar either. People from Bihar who go to other places to work go back to Bihar when they lose their jobs.”
Vetriselvan, who has worked in Michael Engineering Works for the past two decades says that business had been good with the units operating in two shifts.
“For the past 6 months there has been no work,” rued Vetriselvan. “Only in the last 2 days we are working. But we are not sure whether the work will be continuous. At this rate we will all have to starve to death,” he said.
“There used to be 70 workers here. Now there are only seven people of which two are Hindi speakers. Earlier there were 20 Hindi speakers and now there are only 2 left.
They have left in search of work. They are not in touch with us. But there are no jobs available. We have heard there are around 700 small companies like us which have closed down.
Those labourers are very poor too. If this situation continues we will not be able to survive.
If there are no jobs in this city itself, I don’t know where else they will get jobs. But they are not in contact with us so I am not sure what they are doing for survival,” said Vetriselvan.
Michael is upset that a number of skilled labourers have left as he was unable to pay salaries.
“There were Bihari workers and workers from all districts across Tamil Nadu,” said Michael. “It was a great opportunity for them.
Apart from this, there were 20-30 sub-contractors of ours. They have all been affected too.
The worst thing is that no payments are coming in. If we don’t get our payments, we cannot pay our workers.
They cannot buy food or pay school fees for their children. They don’t have even the capability to buy medicines.
They turn to very costly private loans. Those loans are terrible. The rate of interest is too high.
A lot of people are saying this situation will continue for 6 months, others say it will go on for a year, some others say it will go into acute stage.
My opinion is that 30-40% of the population of Coimbatore will soon leave.
5-10% will definitely suffer without food or basic medicines. This is coming upon us,” he said.
Tiny industry owners say that they could have even somehow managed the current situation if not for the bank loans they had taken to buy machinery.
With zero orders coming their way, repayments are the Damocles’ swords over their heads.
“Bad times fall upon all humans but this kind of a situation should not come to anybody, not even one’s enemy,” said Michael.
“We have bought our machines and set up this industry here by taking loans from banks.
In the past 3 months we have not had any work so we have not been able to make our repayments.
We have not been able to pay our labourers. The banks have begun to blacklist us.
It is an embarrassing situation. The government needs to help us by announcing at least one year of interest-free credit,” he said.
“If this is the state of small industries like mine, the bigger industries which have spent crores – we don’t know what they are going to do.
There will definitely be news coming from here soon – of suicides and suicide pacts. What is the government going to do?” he asked in desperation.
In June 2018, the Tamil Nadu government tabled a policy note in Assembly that showed that 50,000 MSMEs had shut down in the previous year. Not only this, five lakh workers employed in the MSME sector were out of jobs.
As per the 2019 policy note of the Tamil Nadu MSME Department, 20.13 lakh entrepreneurs had registered as Small Scale Industries as on March 2019. They provide employment to 1.3 crore people with an investment of Rs 2.23 lakh crore, as on March 2019.
As on March 2019, there are 6.7 lakh micro enterprises, 88,355 small enterprises and 2306 medium enterprises in Tamil Nadu.
The Tamil Nadu government has attempted to make life easier for new entrepreneurs setting up MSME units.
Entrepreneurs can get approvals from 11 different departments online in a single window format.
Apart from this, a number of subsidies too have been provided to keep the sector afloat.
For instance, 25% capital subsidy is provided on the value of plant and machinery, up to a maximum of Rs 30 lakh. Since 2011-12 up to 2018-19, the capital subsidy disbursed was to the tune of Rs 930 crore. Around 15,000 beneficiaries have availed of this between 2011-12 and 2018-19.
Enterprises set up by women, Scheduled Caste, Scheduled Tribe, differently abled and transgender persons are offered additional capital subsidy.
MSMEs get 20% subsidy on low tension power tariffs for 36 months from the date of commencement of production. Rs 42.6 crore was disbursed to 7308 beneficiaries between 2011-12 to 2017-18.
Generator costs too are subsidised by 25% for MSMEs subject to a maximum cost of Rs 5 lakh. In 2017-18 alone, Rs 2 crore was disbursed towards this subsidy, benefitting 161 MSMEs.
The state government also offers credit flow to MSME sector. Disbursements of credit from April 2018 to March 2019 is Rs 35,230.84 crore. The micro sector alone got 47.54% of the credit amounting to Rs 16,747.13 crore.
In January this year, the second edition of the Global Investors Meet was held in Chennai and MoUs were signed for investments to the tune of Rs 32,205.75 crore by 12,360 MSMEs.
As of March this year, a total of 612 enterprises, who have signed MoUs, have commenced production with an investment of Rs 929.12 crores, creating employment for 8994 people, according to the 2018-19 policy note.
Another scheme extended by the state government up to 2022 is the NEEDS scheme - New Entrepreneur-cum-Enterprise Development Scheme.
This is a scheme that assists and enables first generation entrepreneurs to set up and run their businesses smoothly. It includes extensive training programs, mentoring and credit from the state.
“A total of 1000 entrepreneurs are proposed to be trained per year during the next 5 years from the year 2017-18 onwards, at an average of 40 batches comprising of 25 trainees. The minimum project cost will be above Rs 10 lakh and the maximum project cost will be Rs 5 crore. For projects costing more than Rs 1 crore, subsidy component will be restricted to Rs 25 lakh,” according to the Tamil Nadu MSME Department.
The Unemployed Youth Employment Generation Programme (UYEGP) is also underway which is meant to help the unemployed amongst socially and economically weaker sections of people in the state to become self-employed. This scheme has a thrust on manufacturing businesses.
But all of these subsidies and schemes seem to be of little use to the automobile components industry in Coimbatore.
“What are we supposed to do when there are no orders coming in?” asked J Michael of Michael Engineering Works.
“Subsidies are good when people want to set up a business. But who will set up a business when there is no market for it?” echoed J James of TACT.
“What we all need urgently is for the government to step in and announce relief from bank loans for us,” he continued. “That is the knife at our throats right now. We are unable to pay the loans back. A breather of one year would be very useful.
We are all willing to pay our loans back. We do not wish to cheat any bank. But what do we do if orders have dried up completely and there is no income?” he asked.
Representations to the state government by associations have not yielded any success so far. With businesses, small, medium and large, falling like dominoes, a solution, at least temporary, needs to be found and pronto.