On the busy road to Chakan

A little-known region is the hub of India's next auto revolution.

Chakan is not entirely without history. There are the ruins of a fort where the last Maratha-British skirmish played out, some temples, a few picnic spots. A stretch of imagination and some infrastructure might just pull in tourists.

But in recent years Chakan hasn't been all that desperate "" businessmen, not tourists, have been flocking to it as this neglected site has mushroomed into arguably India's largest, certainly busiest, automobile hub.

Crores of rupees have poured in as the Maharashtra Industrial Development Corporation, in overdrive, has pulled out all stops to woo foreign investors.

And it is doing so in an aggressive mode. When German auto giant Volkswagen, which was to set up a plant in Andhra Pradesh, found the company being dragged into a land controversy, it relocated to Chakan where the Maharashtra government offered it 575 acres and speedy clearances. Nor was it just a rare gesture.

Earlier, flying from Detroit to Mumbai to sign a memorandum of understanding between General Motors and the state government, Nick Reilly, president of its Asia Pacific operations, found his visa to India had expired. Forewarned, the state's bureaucrats took over: when Reilly's aircraft landed at Mumbai airport, the babus were waiting with the relevant documents to whisk him away.

A mere two hours from Mumbai, the Pune-Chakan-Talegaon region is attracting auto majors in droves. Just last month, Mahindra & Mahindra and Tata Motors announced investments worth Rs 10,000 crore on expansions in the region.

Says Pawan Goenka, president automotive, M&M, "Because Maharashtra is our production base, it makes it easier for us to transfer people and materials within the state. And all our discussions with the government are businesslike." 
 

HOW MAJOR INVESTMENTS STACK UP
Company	Investment	Purpose	Capacity
Volkswagen	Rs 3,500 cr	New plant	110,000
General Motors	Rs 1,400 cr	New plant	140,000
Fiat-Tata	Rs 4,000 cr	New plant	200,000 cars, 300,000 engines
Tata Motors	Rs 6,000 cr	Capacity expansion	600,000
Mahindra	Rs 4,000 cr	New plant	300,000
Daimler	Rs 250 cr	New plant	5,000
Bajaj Auto	Rs 2,000 cr	New plant for 3-4 wheelers	500,000

US carmaker General Motors, which is investing Rs 1,200 crore to process 1.4 lakh cars per annum in Talegaon, has started trial runs at its 300-acre factory. Its rival, Volkswagen, has hiked the investment in its plant to Rs 3,500 crore, and brought forward the date of commercial production from 2010 to 2009. Says Thomas Dahlem, director manufacturing engineering in Volkswagen, "We had three requirements: easy availability of engineers, a large supplier base, and infrastructure. Pune-Chakan offered the best option."

The winding road that connects the highway with the factories is new, and a hill has been flattened to create a 200-acre vendor park for Volkswagen. An army of workers is giving shape to the factory, supervised by two dozen-odd Germans, most of whom stay in Pune, an hour's drive from the factory.

Meanwhile, land prices in Chakan have shot through the roof, having increased up to five times in just three years. Goenka says that makes it 10-20 per cent more than land prices in Chennai , but since land costs are only 5 per cent of the total cost of a project, it is not a pivotal factor in choosing the location.

Auto component manufacturer ZF Friedichshafen, a new entrant in India, has announced a plant to manufacture transmissions, shocks and clutches with an investment of Rs 125 crore. Explains Piyush Munot, managing director, who chose Pune over Chennai and Uttarakhand, "This region offers in-place infrastructure, manpower, electricity..." and "original equipment players" to whom they can supply their products.

Others are waiting in the wings. Bajaj Auto, which has a two-wheeler plant in Chakan, is considering a location nearby for its car project (with Renault-Nissan), according to executive director Sanjiv Bajaj. Even the Munjals, despite their stronghold on the Delhi-Gurgaon area, might opt for Pune for their truck facility with Daimler.

Together, the state government has wooed investments worth Rs 40,000 crore in the region. Says V K Jairath, former industries secretary and the architect of the state's industrial boom, "By 2010, we expect 1.5 million cars and trucks (nearly three times the current production) to roll out of this region."

This will constitute 35-40 per cent of the total automotive sector turnover in India. In comparison, Uttarakhand has been able to get investments worth only Rs 8,000 crore, and even close competitor Chennai has managed only Rs 15,000 crore in the auto sector.

To be fair, Pune was considered India's Detroit in the seventies and eighties with the Tatas, Firodias, Mahindras and Kirloskars using it as a vehicle manufacturing hub. But the rise of Datta Samant's militant unionism impacted auto companies in Maharashtra. "Our first shock was when we could not get Hyundai to the state," admits Jairath, "and the second when we lost Toyota."

When, in 2005, the state government took the decision to turn interactive, it found its incentive policies in comparison to Chennai and Uttarakhand were not attractive enough, the projects took too long to clear, and the hill state was providing attractive sales tax exemptions.

Maharashtra's mega project policy (for investments between Rs 250-500 crore) in 2006, therefore, put them on the fast-track clearance route, with the Chief Minister intervening where required.

"We put in place a one-window clearance policy and offered customised packages to investors "" if they needed cheaper land, we were ready; if they needed assurances on power, we gave them depending on what they required," says Jairath.

More importantly, the state government decided it would announce MoUs only after all clearances were in place. So the day General Motors signed its MoU, the state was ready with a report on its environment impact analysis which, under normal course, would have taken 7-8 months.

Nor did the company have to wait for acquiring land, which was already available with state agencies through a land bank it had created "" over 10,000 acres in the Chakan-Talegaon region, for instance. A year later, a new industrial policy brought incentives almost at par with other states, including subsidies for selling cars within the state.

The pro-investor policy combined with the region's inherent advantages in bringing investors back. General Motors opted away from Chennai and Uttarakhand because of transportation costs. Says P Balendran, vice president of GM India, "Our largest market is the north (35-40 per cent) while the west constitutes 30 per cent of sales.

We wanted to be in a place midway between the markets." GM found the region attractive for other reasons as well: 70 per cent of its vendors are already here (in Uttarakhand it would have had to build its vendor base from scratch); and it has a plant in Vadodara, so a second plant close by would improve synergies.

Mahindra & Mahindra undertook a study to work out the weighted average distance its vehicles had to travel to markets from Pune and Chennai. Says Goenka, "Chennai added on average Rs 4,000-5,000 in outbound logistics for each vehicle." But what cast the die was probably the subsidies offered in Maharashtra "" a refund on the investment over a period of time based on sales within the state.

Others have been attracted by the relative calm of labour relations in the state, and the availability of a port nearby. Says Suhas Kadlaskar, head corporate affairs, finance, for Daimler India, which is expanding its plant, "We have not encountered any labour unrest, not even when we decided to shift our new plant to Chakan, from Pimpri."

Underlying these advantages is the region's engineering talent. Pune "" referred to as the Oxford of the East "" has over 1,100 technical and engineering institutes, and an annual pool of 300,000 technically qualified students.

Already, Volkswagen is wooing engineering students with internship programmes "" it will need to hire 2,500 people once it is up and running. Admits Dahlem: "That was perhaps the most important factor that made us decide on the location." The top brass at Tata Motors has already met with the principals from some of the engineering colleges to get an idea of the kind of talent available to them.

But the hub isn't without its problems, the most debilitating of which might be a shortage of power. Argues P M Telang, executive director of Tata Motors, "The power situation has to be watched carefully."

The state government's assertion that it would have surplus power by 2010 has few takers. Others say that while fast track clearances have improved speed, the interface in other departments hasn't changed much. According to Goenka, "If the state government's promises and commitments on infrastructure are not fulfilled, many will be disappointed."

A more fundamental problem is that large projects like the Tata small car, or its plant for making the Ace, where price is a key issue, might never come to Maharashtra because of the growing cost of labour and land. Labour costs in West Bengal and Uttarakhand are virtually half those in Pune, and land prices could be as low as a third or a fourth.

Says the senior executive of an auto company, "For companies putting up huge capacities, their vendors will be willing to relocate because of the large volumes. And in such price-conscious products, it makes a huge difference to go to places were land and labour costs are low, or raw material (like steel) available nearby." Concessions like a sales tax holiday then are like icing on the cake.

Maharashtra is aware of these challenges. Since Nava Sheva is already congested, the state government is planning seven smaller ports under private-public partnership.

Fast highways connecting the industrial belts of Chakan, Talegaon, Ranjangaon and Nashik are under construction. And with the railway high speed freight corridor passing through the area, communications can only improve.

Says Jairath, "We expect another 2000 MW of power to be generated in the state by the end of this year, and are creating roads that will ensure faster links to ports and key markets."

When that happens, Chakan will write its own history.