Expect 15% sales growth in India: Bosch

In an interview to CNBC-TV18, Bernd Bohr, chairman – automotive group of Bosch says the company is seeing growth in India. "As far as Bosch group in India is concerned, we are expecting 15% growth in sales. That is well above the average of the group worldwide," he adds.

Below is the edited transcript of his interview with CNBC-TV18’s Shereen Bhan.

Q: We are an economy that is now expected to grow between 5.5% and perhaps 6% as opposed to more than 8%. The auto industry has seen a significant slowdown, especially on the passenger car side. What are your clients telling you about the slowdown that they are witnessing? How is that going to impact Bosch’s plans for India?

A: First of all, we are still seeing growth in India. As far as Bosch group in India is concerned, we are expecting 15% growth in sales. That is well above the average of the group worldwide.

Obviously, we are seeing lower GDP growth, we are seeing lower increase in the production volume in India, but still compared to other markets, it has grown.

Q: Are you scaling back your capex? The last conversation that we had, you had outlined a fairly significant capex of about Rs 2,200 crore. Right now, when we talk to everybody else in the auto sector, they are a bit cautious in terms of additional spending, incremental investments.

A: Capex basically stays. As far as the mid-term and long-term outlook for the Indian market is concerned, we are still expecting double-digit growth in production volume. We are preparing for this. We had outlined these Rs 2,200 crore of investment in 2012 and 2013. We might see minor adjustments, let us say pulling it back three months or six months. But we are not questioning any basic investments. We are not scrapping any investment projects that we have been outlined.

Q: In terms of India’s contribution to Bosch’s global revenues, currently 3%, the target was 5% by 2015, does the current turbulence in the Indian environment changed that?

A: We have this year over average growth, 15% in India, maybe 4-5% for the group as a whole. So, the share of India is increasing. We are looking forward probably to the 5% in the second half of the decade.

Q: We have had a couple of things go wrong, interest rates have been very high, fuel prices are very high in India, commodity prices have bounced back, they are now back on the higher side, and labour is a huge issue now we have seen. How much of a concern is that? How is Bosch looking at labour related issues in India?

A: I think labour relation is something that needs to be managed.

Q: You have to deal with it at your own facility in Bangalore as well.

A: Obviously in discussion with labour, there is always a vested interest of the employees and vested interest of the company. The point is to have an open communication to manage the labour relations in a positive way. As a company, we are very used to working with unions. In Germany, we have strong unions. So, in the management, we deal with tough unions in France, in Spain etc. So, I think as a company we have the basic competency.

Q: Do you believe what we have seen happened at Maruti is going to change the way that Indian auto companies are organised? We are going to moving away from contract labour, you are now going to have to pay much more to people who maybe perhaps on contract, but their salaries will now be equitable to people who are permanent employees. Is the cost arbitrage advantage that India enjoyed going to be diminished significantly? What is this going to mean then for competitiveness of the Indian auto sector?

A: First of all, we as a company do not employ contract labour in manufacturing. So, we have equal pay for the employees in the manufacturing area. I will not comment on what the Indian industry or the Indian car makers should be doing or shouldn’t be doing. The labour cost advantage of India is still quite significant, even if you go to 100% non-contract employment.

Q: What seems to be the biggest challenge here, as far as India is concerned? What are clients telling you? I outlined the number of obstacles as far as growth was concerned, but we are perhaps going to see a bunch of new models being launched around the festive season.

A: The expectations for the second half of the year are basically positive. So, August-September-October, they are hoping that the festive season will turn things around. I am not so near to the festive season, but we tend to believe them. We hope that is this way.

But again we are only looking at these short-term developments. As far as Bosch is concerned, we are much more interested in the long-term, the structural development, in the potential of the country. We do not see a basic change or basic negative trend.

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Q: Not too many people in India know about quadricycles but from where you come for in Europe, quadricycles are available on the roads in the country, not to a large extent, but they are there. Do you believe that there is a market for a quadricycle which is essentially for lay people, something between a two wheelers and car? Do you believe there is a market for such a vehicle in India?

A: I believe not only in India, but I believe generally in some emerging markets, some regions. Apart from India, maybe Africa, countries like Vietnam which have high density of two-wheelers. Here is a product which is safer than two-wheeler and comfortable than a two-wheeler, but is far away from cost of a real car.

I am very much supporting this view that there is a market segment for this. quadricycles in Europe, there is regulation which allows quadricycles. These vehicles limited to 400 kilograms in weight and of 20 horse power.

Q: And they don’t have to go through regular crash test?

A: Yes, they don’t have to go through crash test and that is a big difference. Now it’s an absolute niche in Europe. So, if you go driving for a day, you wouldn’t find one, but maybe in a week or month you would see one. This point of not having a crash test, for me crash test are not made for the government and for the regulator, but they are made for the people who sit in the car.

Q: Do you believe that these vehicles, which are somewhere between a two-wheeler and a car should have to comply with the same regulations as a regular car or should there be some concessions given a the fact that the top speed will be very different, they will be much lighter and they are servicing a very different need in the market. They are trying to upgrade two-wheeler or a three-wheeler consumer to four-wheels essentially and a top.

A: I think we should let the market decide that. The customer should have the transparency to see, this vehicle, quadricycles has not had crash test; this low end car has had a crash test. The car costs this much, the two-wheeler this much and the quadricycles somewhere in the middle so let the market decide.

Definitely a quadricycle would be safer than a two-wheeler, so it’s an advantage. The consumer must decide whether he will additional money to buy a full car which has been crash tested or will he would say I will do step one first and then Step two.

Q: Would this be an area of opportunity for Bosch?

A: Absolutely because we are supporting the low price vehicle market, it is much published, what we did for Tata Nano. We are working on single cylinder, diesel engines which comply with the modern emission regulations. We are working a lot with two-wheelers because that is one of growth opportunities we see for Bosch.

India has two wheelers which have for instance injection systems on them and also anti-lock braking system (ABS). The safety addition of ABS system on the two-wheeler is much bigger than a car because on a two-wheeler one wheel blocks, the danger of falling down and sliding on a car is huge. So, we are working with our customers on very low price systems here.

Q: One of the other big factors in India is the fact that you actually have petrol prices being deregulated whereas diesel prices haven’t been deregulated yet. That has put the auto makers in a quandary - should you go the petrol way, should you go diesel way? Most people are now trying to up their diesel capacities. How have you sort of weighed in on this debate and what are clients telling you? Do you see Indian increasingly dieselising?

A: Obviously this differential in petrol-diesel prices along with the advantages diesel has as far as consumption is concerned, it has 30% less consumption per kilometre, has put strong bias on diesel cars and we are seeing dieselisation or diesel share gone above 50% in India, which is now above the European value. For us and I think for the industry it is important to have consistency as far as the policy of the government is concerned.

So, if there is going to be change, we should know well in advance to adjust because obviously the industry is putting in engine manufacturing capacity. We are putting in injection system manufacturing capacity. These are huge investments part of the Rs 2,200 crore I mentioned. A major policy change would make this absolute.

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Q: Is there likely to be any hold up in terms of your plans for India till you hear from the Indian government on what their plan really is for diesel? We are still waiting to hear on whether they are actually going to move toward complete diesel decontrol and if they do then a lot of these plans could go awry?

A: Obviously, we are in close contacts also with the government to understand their intentions and to consult with them. We wouldn’t see the diesel subsides going to zero because the importance of diesel for their agriculture and therefore for the rural people is very large. What we are saying is - give us a medium and long-term perspective.

Q: I want to ask you about the uncertainty in Europe. We don’t know what is going to happen. It comes down to what the ECB does or doesn’t do. But as far as the auto sector is concerned and manufacturing data is really varying from region to region - most regions at this point in time continue to see contraction. What is your sense about growth in Europe and when it is likely to turnaround?

A: We are pretty conservative as far as growth prospective in Europe is concerned because the basic sentiment is uneasiness. The Central Banks are reacting, the governments are doing probably the right steps but the consumer is feeling uneasy. We will take quite a few months, maybe for this to stabilise. In the end, it is the sentiment which is probably more important than the fact or figures.

If you feel uneasy about the future, you don’t spend 15,000-20,000 euros on a car, you say let us postpone this for another three-six months.

Q: So, it will continue to be Asia-pacific region that will drive growth, not just for Bosch, but pretty much for everybody else?

A: If you look at 2012, then North America has been a big growth driver for the automotive industry with around 15% increase in production. So, that is obviously levelling off from everything we hear across the Atlantic but it’s not going down again. So, that has been an advantage. China has been pretty slow.

Q: There are concerns about Chinese auto market slowing down considerably are you getting a sense of that as well?

A: The growth rate we are seeing is definitely below the Indian, so it’s just slightly on the positive side, maybe 2-3%. The heavy duty sector is really in a misery with minus 15-20%. From my talks in China last week where we also visited several customers, their medium-term outlook if you look at their private five year plan so to say is basically plus single digit growth for the automotive sector.

Q: You have visited China a week ago and you are in Indian now. In terms of private plans that your clients are sharing with you, does India score better or is China more confident of bouncing back?

A: India is more optimistic as far as the mid-term is concerned.

Q: Is that based on reality or is that based on misplaced sense of confidence?

A: I would say it is based on reality because if you look at the density of cars per 1000 inhabitants here in India, it is round about 14, in China it is 3, so we already have a higher density, in India, four million vehicles plus-minus and in China 18 million plus-minus. So, the base is already higher so we are talking percentage points, we are not talking growth in absolute numbers. But I think the overall sense that there is higher growth potential, relative growth potential in India - we would also agree to that.

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Q: You have not been a big supporter of going the electric route, especially in markets like India. The government seems to be pushing forward on that. Do you believe that it is the place of any government or the Indian government in this case specifically to be pushing subsidies for electric vehicles?

A: We have always been conservative on the electric vehicle. But to give us credit, the rest of the world has come all the way, as far as the forecast for 2020 is concerned. So, in the days of the electric hype, maybe 18-24 months back, we always looked conservative because we said 2020 low single digit number of electric vehicle, that would I think currently be the consensus opinion.

We are still saying, in 2020, maybe 3 million electric vehicles worldwide, 3-3.5 million plug in hybrids with maybe 20-30-40 kilometer electric range and then six million hybrids. We have always supported that government money fed into research, into development projects, at point in time, is the right way to go. The products, which we find today in the market or would come into the market maybe in next one-two years, are probably not the electric vehicle that will be mass marketable.

Q: Why should the government be subsidising an electric vehicle that is not a mass market vehicle?

A: Our point to saying do not yet subsidize or support that much the end product, but anything which goes into research. Now being conservative until 2020 is one thing. But we are investing 400 million euros per year into electric motor power, electronics etc. We are not doing that because we are pessimistic long-term about electric vehicle.

If we look after 2020 with the battery prices significantly coming down, maybe new car structures coming up with carbon etc, lighter structure, we see between 2020 and 2030, the market having a significant share of electric vehicles. That means definite two digit numbers of electric vehicles. The automotive industry is a very long-term industry. So, if we do not get going now, we will not have the right starting position in 2020.

Q: So, you are saying that the current downturn in India is pretty much of an aberration. You believe it is temporary and we will begin to see growth coming back to the kind of double digit levels that we enjoyed over the last couple of years, as far as the auto sector is concerned, with several assumptions at that.

A: First of all, I think it is not a bad thing for an economy to have less growth now and then. Just like for a company which would grow 15-20% every year.

Q: Because it forces companies to be more efficient, it forces companies to focus on what to focus on.

A: Yes, you can cover up a lot of things to with growth. You have higher economies or scale etc. So, you do not look so much into productivity increase and all these nitty-gritty things of running an operation because you are growing.

So, to build these competencies of what can we do to optimise production, to optimise the company in times of less growth, how can we look for other markets because the old market is not sort of a windfall growth anymore. I think that is a good thing.

Structurally we are optimistic, as far as India is concerned. So, one point is ofcourse on hearing is that this policy gridlock is obviously something which needs to be solved.

Q: Does it worry you though what you are hearing, what you are seeing? Headlines are not particularly flattering about India at this point in time whether its politics or its scams or its corruptions. Does that worry you as a foreign investor, though you are a long-term investor in India?

A: We are a long-term investor. We know how the country works. It is worrying. Obviously a corruption is an issue, if you are an investor. As an investor you want to have a stable certainty, as far as the environment is concerned.