By Arvind Joshi
Arvind Joshi is Whole-time Director, CFO and Company Secretary of Sandhar Technologies Limited. An Associate Member of the Institute of Chartered Accountants of India, and the Institute of Company Secretaries of India, he has over 26 years of experience in managing corporate finance, legal, and commercial functions across diverse businesses and companies in India and abroad.
The automotive industry is at the cusp of evolutionary transformation of a nature as has only been witnessed in the past few decades in the entertainment and communication industry. Gone are the days when the automotive components supplier rode piggy back on the technology provided by the OEMs, either in terms of product or process know-how.
The OEMs themselves have to face a plethora of uncertainties, including in cash flow, owing to lack of consumer demand and rise of shared mobility across nations. The development of e-mobility, the entry of the technology giants and their push towards making autonomous driving a reality add to this. The technological hurdles still continue. A convincing business case for the end customer is yet to be established. However, in the coming years the tightened emission regulations may have a catalytic impact. With the OEMs and the new players combining all these with vehicle connectivity, it is inevitable that completely new business models for automobile use and ownership should emerge within a decade.
Experts believe that the 2020s will be the decade of the electric vehicles and it may trigger the next oil crisis by 2028. (Source: Bloomberg). This then brings us back to the auto component suppliers. They say that the market for electrified vehicles is likely to multiply by a factor of seven to 10x over the next decade – leading to substantial growth potential for e-powertrain component suppliers while driving the traditional combustion engine segment more and more into a commodity corner. Suppliers are also likely to face a market for assisted/automated driving components that is expected to grow by a factor of five until 2025, and at the same time, see the advent of fierce competition from new players from the non-automotive components supplier industry that would be keen to capture that revenue and profit pool.
Ultimately, the more volatile and rapidly changing environment requires suppliers to speed up their flexibility and agility to develop and run their business. They should think well ahead of the next generation vehicle scenario and plan a more innovative approach to product development. These would be crucial success factors but would call for a paradigm shift in the way investment decisions are taken. The suppliers would now have to rethink if a customer-centric and customer-driven decision alone would help them withstand the turbulent times ahead.
We at Sandhar, have always looked at more contemporary ways of making investments with a purpose. Our company has been at the forefront of pursuing diversification as the main theme of withstanding the ever evolving mobility segment. The diversification is not only with regard to product, but also with regard to the various mobility segments, technology, geography and processes with an optimal mix of automation and labour.
While we pursue diversification, we remain conscious of continuing to pursue a ‘being glocal’ (globally local) approach, be it with reference to customers or suppliers or even management and governance. Our investment decisions do remain centric to the customer needs but continue to grow at a higher trajectory than the automotive sector; an inorganic growth strategy calling for larger investments at times, does play a big role. Our investment decisions weigh around achieving multiple objectives. Financial parameters do play an important role.
Return on capital employed, payback period, asset turns and a healthy self-serving cash flow generation are some of the key parameters on the financial front. On the technology side, we view our investments to fetch the right technology which helps us achieve scale, backward and forward integration and facilitates a lateral entry across industry segments. This is because while industrial technology remains the same, it is its mode of application that catapults across industries.
At the core of our investment decisions is the aspect of increase in content per vehicle across the mobility segment. We have made investments for the future which exceed over USD 100 million in the last seven years. All these are geared to meet the growing demand of future mobility. In order to succeed in the new automotive environment, the company has adopted multi-pronged strategies as an evolutionary process to re-energise its existing business models. Product innovators clearly outpace process specialists in terms of sustainable profitability. We acknowledge this and are preparing ourselves for the same.
The company’s investments are directed to develop products based on the current trend in the industry such as increasing focus on safety, fuel efficiency, comfort, customisation, entertainment and communication, as well as auto electronics to develop products that meet our OEM customers’ requirements in these areas. We aim to dominate the market with our new products as well as tailor our existing portfolio to suit the needs of our customers. Our company plans to focus on amplifying its contribution per vehicle and enhance its research, design and development capabilities to gain competitive advantage in terms of quality and costs. We will do this by continuing to collaborate with the world’s auto-component manufacturing leaders in their respective areas of expertise. Our joint venture partners are organisations of esteem and their continued trust and confidence in our company, bring in a lot of confidence to achieve our objective of excelling in new product offerings.
We will continue to pursue our five pronged growth strategy, both on the short term and the long term, which would involve (i) Rethink overall strategy in order to either capture new growth opportunities or consolidate the market around the existing portfolio; (ii) Define a long-term technology roadmap and strategic positioning in the value chain regarding both product and service offerings to have a lower operating cost base and ensure sufficient financing for the upcoming transition; (iii) Adapt organisational structure and governance model to successfully manage the emerging technologies and competencies alongside the old declining technologies under one roof; (iv) Create a new company mindset and culture to foster innovation to compete in the new technology areas; and (v) Build up new partnerships and leverage this ecosystem to find new ways to innovate.
Our inorganic growth strategy of mergers and acquisitions would be the specific rationale base to help us (a) Gain access to new or strengthen existing technology/material or process capabilities to secure/establish horizontal and vertical unique selling proposition, and (b) Gain access to regions or customers not served to date via existing business or asset deals. However, the bedrock of all these would be continuing to pursue the highest level of corporate governance with value creation as the goal for all stakeholders.