Politicians and bureaucrats in Tamil Nadu take pride in the fact that Chennai has come to be recognised as the 'Detroit of South Asia'. They (for once both DMK and AIADMK - the political parties which have been ruling the state alternatively for decades now agree on this) want to make Chennai world's largest automotive cluster. Not an impossible task considering, many of the world's leading car makers are located here - Ford, Hyundai, BMW, Renault and Mitsubishi and so is the world's largest truck maker Daimler and Japanese commercial vehicle maker Nissan.
Ford India's decision on July 28th to invest Rs 4,000 crore at Sanand in Gujarat to locate their second plant will thus hurt the pride of Tamil Nadu's policy makers.
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Chennai and its neighbourhood, as Ford India found out early in 1996 when it became one of the first global car makers to invest in Tamil Nadu, was clearly the most attractive location to locate any automobile manufacturing facility. The auto component base is so strong that a car maker can procure over 80 per cent of its component needs within 80 kilometre distance. That apart, the state had an excellent pool of skilled talent. The engineering colleges in Tamil Nadu spewed out over a lakh engineers and many more technicians every year. More importantly, the labour was very productive and docile. The infrastructure too was good --- a large international airport, two major ports and quality power supply. On top of all these, the state government was responsive and focussed on making the state friendly for the investors.
In fact, the state government often requested Ford India to come and share its experience with other potential global investors when they came to the state scouting for location and some hard bargaining for incentives with the local government.
Ford India may explain its decision to expand at Sanand as a move to de-risk its operations in a country that is prone to supply side shocks, save on logistics costs (after all it costs a lot to haul the new cars from Chennai all the way to North and Western India) and take advantage of better incentives offered by states which are desperately seeking to create a new automobile hub.
What the company will not say openly is that some of the positive factors that made it to come to Chennai in the first place do not exist any more. In 1996 Tamil Nadu was a power surplus state. Today it is reeling under a massive power shortage. The labour, though still very productive, is not docile anymore. Hyundai and Nokia manufacturing facilities saw a series of strikes last year. So did desi companies such as MRF and Pricol. MUST READ
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Then there is the issue of good governance. Tamil Nadu's profligacy - the culture of being populist and giving away freebies in a bid to woo the voters --- at the cost of fiscal health has come to haunt the state. Need for resources to fund the populist measures and bridge the gaping hole in its finances, is beginning to hurt the state's ability to offer incentives like before. Other states are beginning to take advantage of this.
Gujarat does not have a strong auto component base. Its pool of skilled man power is still a suspect. But what it has is adequate and quality power and good governance. Ford India seems to hedge its bet on the fact that this good governance will ensure that the shortcomings will be over come.
Tamil Nadu has in the past lost car makers such as Volkswagen to other states. That did not hurt much. But when a car maker who, till recently was your poster boy, decides to expand in another state, alarm bells should start ringing. It is a wake up call, indeed.