Engineering firm Siemens Ltd is being cautious on accepting new orders after seeing payment delays because customers, mostly building infrastructure, are stressed due to a faltering economy. Sunil Mathur, the German multinational’s new chief executive officer in India, said in an interview that there is much pressure on capital goods firms, but things will improve when India regains its growth momentum. Edited excerpts:
The Indian economy has been depressed for some time and the infrastructure sector has been one of the worst hit. What is your assessment of the situation?
If you look at the last year and a half, it hasn’t been easy for capital goods companies, and Siemens is one of them. We are convinced that the economy will turn around. The logic is very straightforward. You have a significant number of young people coming into the workforce. These people want job opportunities. If you want to generate jobs and drive economic growth in the country at 7-8%, infrastructure has to play a key role, including power, energy, transportation, manufacturing and healthcare. Siemens is present in every single one of these sectors. We believe we will be ready for the upswing. This is only a blip. We have been here for 140 years and know the Indian market. We are in a position to hand-hold our customers and partner in India’s economic growth.
What is your strategy to deal with the current situation?
Not too long ago, we were importing technology and equipment from Germany and selling it in the Indian market. This was tantamount to essentially trading. Over a period of time, we started competing with international players, who had more or less the same technology and also had an interest in the Indian market. To get that competitive edge, we started localizing it. But that was more to do with taking a factory in Europe and adapting it to Indian conditions, benefiting from arbitrage of low-cost labour and supply chain. But the competition catches up again. This time, the competition is local suppliers.
The only way to meet the challenge is to design, engineer, manufacture, source, deliver equipment in India for the Indian market. This is where we developed a strategy called SMART (developing products that are smart, maintainable, affordable, reliable and quick in time to market). These are products designed for the Indian market, competitive against other offerings in India. This could eventually help us protect or defend Siemens’s market share in the global market since many of our Indian competitors have global aspirations, and to protect your market share internationally, the first phase is to do it in your own home market.
Since the times aren’t good, are you getting your payments on time?
There is pressure on the system, bad pressure. The stress on our customers is high. A lot of the customers are borrowing for their projects and funding is difficult to come by. Alternatively, if they have the money, they are sitting on it and passing the stress on to the food chain. And everyone’s perception is that since we are a multinational company, we have a lot of money. Multinationals and large companies like ours are the ones that get the third priority when customers have to make payments.
That’s not easy because our inventories build up. We are responsible for our own balance sheet and cash flow. The bigger strain is down the line. Our suppliers are all the small and medium enterprises (SMEs). These guys don’t have access to funding. The interest rates today are too high for them to afford. They live on working capital cycles of 30-50 days. So if the volumes don’t come and the customers don’t pay, they dry up very quickly. This is really the problem right now.
How are you hastening payment recovery? Are you leveraging your financial services arm to inject liquidity in the supply chain?
We do vendor financing. We try to support our suppliers to the extent possible. Some of our suppliers are working with us for years. It is in our interest to keep them afloat. At the end of the day, if I am not getting paid by my customers, there is only so much I can do for my suppliers. That’s part of the problem.
On the receivables side, there is nothing else to do but keep talking to your customers. It is also deciding which customers you want to take orders from. Out of anxiety, do we go out and take orders for the sake of taking orders? That is really the temptation at a time like this when the orders are few and far in between and competition is intense. Price levels fall and customers don’t pay on time. We are being very conscious and all the large orders are reviewed by my chief financial officer and I, before we actually go out and make an offer. The book can be small, but the quality has to be high. We do not want to grow at any cost. We want to grow profitably and in a capital-efficient manner.
Since cash is drying up and volumes are shrinking. Are you cutting costs?
There is no doubt about the fact that volumes have come down, as they have everywhere in the capital goods sector. The question is, how do you match your capacities and cost in that position? We want to be careful about this. There may be a blip for two-three years. But if in that period you throw out all your top people in your urgency to cut costs, you won’t be able to capitalize when the boom comes, which has to come back. Our cost structure, we believe, has reached the best it can. We now have to wait for the volumes to return. The time in between is the opportunity to skill our people, and equip factories and processes to handle the floodgates when they open.