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This chapter focuses on increasing the understanding of the reader about the dynamics of the small and medium enterprises (SMEs) operating in the auto component and leather sectors in the Chennai cluster by throwing light on the operational structure, revenue growth, IT adoption, challenges faced by the SMEs.

Section A: Auto Component Industry

Chennai is among the prime manufacturing hubs in the country for auto components and has been able to attract investments due to the availability of well-qualified, talented professionals and abundant, skilled manpower. Some highlights of the auto component companies that emerged during our study of the cluster are as follows:

Ownership pattern

Private limited companies have a dominant share of 76% in the Chennai-based auto component companies followed by proprietorship firms that have a 13% share. Majority of the auto component manufacturers (63%) were established before 1995. Around 69% companies are involved in manufacturing as well as trading of auto components; in fact, majority (72%) of the private limited companies are into manufacturing and trading activities. Most players (79%) supply their products to original equipment manufacturers (OEMs) and to the replacement market.

Revenue classification

According to the survey results, in FY09 around two-third of the surveyed companies registered a turnover in the range of Rs 10.01 - 100 mn, and around one-fourth companies had a turnover below Rs 10 mn.

Exports

The auto component SMEs in Chennai prefer supplying to the domestic market than to the international markets because only 21% SMEs are involved in export activities whereas the remaining 79% cater exclusively to the domestic market. Moreover, only 10% export-oriented companies are involved in 100% export activity. Thus, there is tremendous untapped opportunity for SMEs in the overseas markets. Among the various export destinations, the American region emerged as the most prominent destination, followed by Europe and Asia, which were at par with each other.

Segment classification and industries served

The major product portfolio of companies comprises engine parts, body chassis, electric parts, suspension and braking parts, drive transmission, and steering parts among others. According to the survey results, engine parts had a major share of 39% in the production of auto components. More than 90% of the engine parts were supplied to OEMs as well as to the replacement market. Apart from these engine parts, companies also manufacture other ancillary components such as enclosures, transformers, sheet metal and stamping parts et al. More than 75% companies source their raw materials from across India.

The auto products manufactured by these SMEs are used by multiple industries in the commercial vehicle, and two and three-wheeler categories. However, more than 80% products are supplied to the commercial vehicles segment comprising HCVs, LCVs and UVs. Two and three-wheelers collectively account only for 10% of auto parts.

Investment and production trend

The auto component SMEs in the Chennai cluster seemed not very keen on investing high amounts in plant and machinery. According to the survey results, around 86% surveyed companies made an investment up to Rs 5 mn in plant and machinery while 10% companies made higher investments between Rs 5.01 – Rs 10.0 mn.

Most companies operated with one plant in the cluster and collectively employed more than 2,500 employees (including permanent and contract). Around thirteen per cent companies used both automatic and semi-automatic machines for production.

IT adoption and challenges

Around 31% of the surveyed companies were found to be IT-compliant in their businesses, which highlighted the fact that IT is yet to gain wide acceptance among the SMEs in the Chennai auto component industry. The companies mostly use printers (47%) in the hardware segment and ERP solutions (75%) in the software segment. Software applications like ERP and/or customised software help 88% companies in better planning. Seventy per cent companies use their existing IT applications for payroll activities.

High cost of implementation emerged as the most significant challenge faced by SMEs in IT adoption. Moreover, 78% ITcompliant companies spent less than 1% of their total expenditure on IT products and services, while 11% companies spent 2.5 – 5.0%, and another 11% spent more than 10.0% of the total budget on IT. Thus, financial factors are the major deterrents for IT adoption among SMEs.

Challenges and solutions

Fluctuating price of raw materials such as iron and steel and arranging finance for working capital emerged as the two pressing challenges faced by the companies in the cluster.

According to 25% companies, growth in the sector could be boosted by training on marketing, technology, design and quality control. Further, according to 19% companies, huge capital infusion can act as a major driver for the SME sector, as it can be an effective solution to the problem of unavailability of finance for working capital that affects SMEs in the cluster.

Section B: Leather Industry

Chennai is one of the prime manufacturing hubs for leather and leather goods in India and the leather companies in this cluster operate at various levels of the value chain and manufacture a wide range of leather and leather goods.

Some highlights of the leather companies that emerged during our study of the cluster are as follows:

Ownership pattern

Private limited companies have a dominant share (39%) among the leather companies in the Chennai cluster, followed by partnership firms (32%) and proprietary firms (29%). More than 50% of the companies in the cluster were established before 1995.

While 29% leather companies in the cluster are solely manufacturers, 52% are manufacturers as well as exporters and 13% are manufacturers, importers and exporters.

Fifty-two per cent leather companies supply their products to wholesalers as well as retailers.

Revenue classification

In FY09 the turnover of around 45% surveyed companies lay in the range of Rs 10.01 mn – Rs 100.0 mn, and that of around 23% companies lay in the range of Rs 100.01 mn – Rs 250.0 mn.

Revenue classification

In FY09 the turnover of around 45% surveyed companies lay in the range of Rs 10.01 mn – Rs 100.0 mn, and that of around 23% companies lay in the range of Rs 100.01 mn – Rs 250.0 mn.

Exports

Among the leather companies that were surveyed, 81% are involved in export activity, which indicates the export-oriented nature of the leather industry. Europe emerged as the most significant export destination as 62% companies exported their products to European countries such as the UK, Sweden, among others. In the Asian region, companies supplied their products to China and Cambodia.

Sub-segment classification and value chain

The companies are involved in manufacturing a wide range of leather and leather products that include footwear and components, garments, hides and skins, accessories, finished leather and goods and so on; however, leather goods account for 31% of the leather product portfolio, while leather footwear and components collectively account for around 29%. More than one-fourth of the surveyed companies source their raw materials from across the country, whereas only 8% procure it from within the cluster.

Tanning, processing, designing and finishing are the various operational activities carried out by the companies. Even though 25%companies are involved in more than one activity in the value chain, finishing activity is the most common as 46% companies are engaged in it. More than 50% of these companies cater to wholesalers as well as retailers.

Investment and production trend

Most leather companies in the cluster are not very ambitious when it comes to investing in plant and machinery; 61% of the total companies surveyed have made an investment up to Rs 5 mn in plant and machinery. However, 26% companies have invested between Rs 10.01 mn – Rs 50.0 mn in plant and machinery.

Majority of the companies in the cluster have only one plant. Thirty-five per cent of the companies use both automatic and semi-automatic machines for production. The total number of employees, including permanent and contract employees, in the surveyed companies is more than 4,000.

IT adoption and challenges

Around 39% of the surveyed companies are IT-compliant in their businesses. Even though the leather industry is fairly IT savvy, there is scope for enhanced IT adoption. Desktops, printers and scanners are the hardware employed in the leather industry. More than 50% of the leather companies prefer using customised software. While 36% companies have been able to better manage their inventory with the customised software, 60% companies manage their payroll with the payroll management software.

Though IT adoption is the need of the hour, companies face some hurdles while adopting IT in their businesses. In the Chennai cluster, the biggest challenge that confronts leather SMEs in IT implementation is unavailability of funds. This is corroborated by the fact that around 50% companies use less than 1% of their total expenditure on IT products and services. One-third of the remaining companies, spend around 2.5-5.0% on IT products and services. Thus, paucity of funds for ITrelated activities affects IT adoption among SMEs.

Challenges and solutions

Fluctuating price of raw materials and arranging finance for working capital are the two pressing challenges faced by companies in the cluster, according to the survey results.

More than 70% leather companies cited two factors - training on marketing, technology, design and quality and participation in marketing fairs and exhibitions as important enough to boost SME growth. Thus, the overall training at different levels of the business supplemented by visibility can positively impact the development of leather SMEs.