Finding value in auto solutions

GUEST COLUMN

When an Indian company builds the world's cheapest car and provides the first instance of end-to-end vehicle development in Asia, it is more than isolated corporate progress; it represents the entire coming of age of India's automotive engineering design and manufacture industry.

Coming of age for this reason: For decades, we imported components and assembled; thereafter, we imported the design, re-engineered the component and assembled; in the next dramatic stage of evolution, we are saying that "Well, we don't need your design, we have created one end-to-end for ourselves, we can sell you design and perhaps it is time to consider a JV with us to make this product in your country, for a change."

Even that would have been the icing, but trust the Tatas. They created a vehicle from scratch for the first time in Asia and just when the world was waiting for it to stagger, they created the world's cheapest car. Cheapest. Period.

So, pioneering on the one hand (which is an internal statement on its capabilities) and lowest cost on the other (which is as external as you can get). Like Gavaskar's 774 in his first Test series. Like Azharuddin's centuries in his first three Tests. Like...oh well, you get the idea.

The remarkable thing: the ability of this company is gradually now an endorsement of the nation. Consider: suddenly Carlos Ghosn of Renault concedes that the only country where indeed a sub-$3000 car can be made is India; he puts his money near his molars by announcing Renault's intention to put a small car from this country on the roads by 2010; his pronouncement: "You cannot compete in India without producing in India." 

THE INDIAN AUTOMOBILE REVOLUTION
Compact segment	Mid-size segment	Entry-level sedans	Luxury sedans	SUVs
Tata Nano	Maruti Swift Sedan	Fiat Linea	Mercedes new C-Class	Hyundai Santa FE
Tata Indica V3	Hyundai i20	Honda's new City	Alfa Romeo 159	GM Captiva
Skoda Fabia	Renault Sandero	Volkswagen Jetta	BMW M3, M5 & M6	Mitsubishi Outlander
Maruti Splash & A-Star	Fiat Grande Punto	Mitsubishi Lancer (Galant)	Porsche 911 new GT2	BMW X6
Hyundai i10 Diesel & Automatic	Fiat Bravo	Hyundai's new Elantra		Nissan new X-Trail
Tata Indigo Compact
Fiat Cinquecento

Why India? Why now? Number of reasons:

A number of bright Indian engineers with global OEMs are returning for various reasons (worried about their children's tehzeeb to wanting to do something more daring than just being an inconsequential cog in the videshi wheel to living the easy life in India with naukar-chaakar at beck and call); then there are people from within Tata Motors who have got entrepreneurial and moved out in the last few years. So, the community just got bigger.

People, at around 50-55 per cent, represent the highest cost proportion in the design business; India's costs are estimated 40 per cent lower "� even after the ESOPs, pay hike and job hopping "� than the corresponding cost in the west.

Aha. So, the trend: from engineering services outsourcing to actual engineering outsourcing; from segmented insourcing-outsourcing to full capability outsourcing.

Dear investor, there are two ways to benefit: one, buy Tata Motors and hope that the

CR-HR price stays steady. Two, buy into all those companies that will benefit from the swelling tide.

The Pune-based Autoline Industries figures in the latter list. From a limited perspective, Autoline will benefit because it is a Tata Motors vendor; more importantly, it will benefit because it is one of the first to have evolved its business model from mere re-engineering to design and manufacture. The end-to-end solution.

Autoline is in the right place and right time not because as a manufacturer it is intending to enter the rarified space of automotive design; it is already there. Autoline is in the right place and right time not because as a manufacturing and design company it is intending to acquire global companies with expertise and clientele; it has already done so.

Autoline is in the right place and right time not because as a manufacturer-designer it is in the process of making prudent investments in proprietary technology and tool room; it has completed this agenda.

This is what: In March 2006, it acquired an Indian company with about 45 engineers in the design engineering area; thereafter, it acquired a 51 per cent stake in a Detroit engineered products company with existing customers like General Motors, Ford, Nissan, Hyundai and Honda ; it paid only for the inventory and not the assets; this company has eight patents and 30 proprietary designs; the unit was turned around in the first month (December 2007); the company also invested in a toolroom in Chakan to facilitate a complete product development solution.

In effect, a client company now invites Autoline to partner in complete product development. Autoline provides a concept, designs the complete product, conducts CAE analysis, makes the tool, completes the prototype and commences supply. Result: a complete evolution from sheet metal supply to bigger complex assemblies supported by captive tooling and engineering designs.

This is why I am going to sleep well with Autoline:

It is among the few automobile industry equivalents of the pharma industry's research plus manufacture model; its design plus tooling plus manufacture model will translate into working at the high margin levels and into volumes which will provide continuous engagement

Its prudent skill in design, toolroom and manufacture is already shrinking a customer's time-to-market in a world where an increasing number of companies are accelerating model launch to counter shorter product life

Its integrated expertise has helped reduce the weight of Tata Motors' Ace by 20 per cent with a share in the savings and a potentially growing load body exposure.

The company's third quarter results are indicative: a consolidated EBITDA of Rs 15.77 crore on an equity of Rs 10.90 crore (face value Rs 10) with a corresponding margin of around 19 per cent. The company expects to finish the current financial year with revenues of Rs 400 cr.

It is not the immediate, but the slightly distant that captures my attention. Autoline's bullishness is derived from the following optimism:

A team of 170 software design engineers represent critical intellectual capital

Increasing orders from global OEMs as they evolve from manufacturing to outsourcing

A growing replacement of sub-component supply with full assembly completed products

A growing use of Morpher to address model and design changes, helping capture and transform legacy design data into net metrics without complete bottom-up re-design; the Meshworks Morpher will shrink design time by 90 per cent

A joint venture for axle manufacture, engaged in 13 cost reduction projects with six patents being filed.

This should translate into revenues of Rs 800 crore for 2008-09 at pretty consistent margins. But that's for the impatient soul.

For the truly patient, there is always the management vision of emerging as one of the biggest jack manufacturers in the world and one of the biggest sheet metal players with integrated design capability.

And when this happens, you one can look back at the spring of 2008 and thank the sub-primers of the world for creating an attractive buying opportunity.

Mudar holds stock in Autoline. He responds with speed at mudar@trisyscom.com