ABB is looking at India as a manufacturing hub

ABB Ltd (India), the local subsidiary of the Swiss-Swedish engineering company, has had a few turbulent quarters recently due to intense competition from Chinese and Korean companies and because it had to exit some businesses.Its foreign parent, ABB Ltd, though, is taking a long-term view of the Indian market, seeking to lift its stake in its Indian arm from 52.1% now to 75%, spending about $965 million (Rs4,516.2 crore). Its open offer, which began earlier this month, is on till 27 July.

ABB India’s vice-chairman and managing director, Biplab Majumder, says he is focused on improving operations and is set to commission two new units in Baroda at a total cost of Rs250 crore. The first will focus on manufacturing wind generators and associated electricals for the European market; the second will enhance the firm’s transformer manufacturing capacity to include high voltage systems of 765kV.

Majumder, a 33-year veteran at the company, said in an interview the hike in stake holding by the parent firm is a vote of confidence in the India operations. ABB India’s share price has increased around 24% in the past year, ending on Friday at Rs872.55.

ABB Ltd, which had revenue of $31.8 billion in 2009, is looking at making India a manufacturing hub to rival China, he said. Edited excerpts:

What has been the response to the open offer till now?

I can’t comment on that as the process is ongoing. Also, it is just one shareholder seeking to increase stake. However, the fact that they are looking to go up to 75% is a compliment to the work being done by the management team here as the ABB Group feels that India can be used more. If they are investing an additional $1 billion to increase their stake, it gives an indication of what they think of the long-term potential of the Indian market.India already contributes around 6-7% of ABB’s global turnover. Already, we are the largest R&D (research and development) outfit within the group with around 1,000 people. We have an engineering centre for process systems and power automation.Last year, we applied for 12 patents from here. Indian operations are really increasing its footprint within the group and, therefore, I am not surprised that they would (want) to invest more money here... ABB Group, however, is run as a small conglomerate of independent states. So we will continue to have a fair degree of operational freedom to respond to the unique requirements of the Indian market, as long as we adhere to group guidelines.The last couple of quarters have been challenging with growth and profits taking a hit.ABB’s portfolio is very vast and extensive. We sell everything from a(n) electrical switch, which costs Rs50, to a transformer, which costs Rs50 crore. For instance, the Delhi airport’s entire electricals and a lot of equipment in the Bangalore as well as Delhi Metro have been supplied by us.There have been some segments of the business which have been doing well, like projects, process automation, while some others like power products have been impacted due to market pressures. Price levels have come down a bit. ABB has certain cost and quality levels as our norms are the same globally.

So we have had some challenges from local players and particularly from Chinese and Korean companies. So we will have to reduce some materials or, as I keep saying, increase the intelligence per kilo (of product equipment weight).

In some cases, we go wrong once in a while and the market doesn’t easily forgive. That is what happened in the last few quarters. However, this is a transitional phase. We are a growing company and a few quarters (of setbacks) doesn’t matter really. Look we are a(n) energy starved country with demand exceeding supply by 13%. We need to add 1 lakh MW (100,000MW)..immediately. So for the next two decades, the opportunity for us, the world’s largest player, to grow here is huge.

Why did you choose to exit the rural electrification business? It used to constitute close to 10% of revenue.

ABB is a very technology-intensive company. The business looked good from far, but was in reality not ABB’s (kind of) business. In the rural electrification business, you put a string, an insulator and a small transformer on the pole and connect to the grid. While the margins were decent, it was not the kind of business we wanted to be in, given all the challenges in managing the environment in terms of contractors, workmen, etc. We couldn’t take control of the safety of people. We had some five to six fatalities in a year. Given ABB’s rigorous standards, we decided we would rather stay away. While revenues and profits were ok, cash flow from that business was also not so good.

What about manufacturing? After the hike in stake, would this get a boost?

Definitely, yes. ABB is looking at India as a manufacturing hub on the same scale as what China, which is the largest currently, is. In certain product lines, for instance, ABB India already exports to 105 countries. We have eight factories and the number will only go up. Two new factories will be inaugurated shortly by our group CEO. While one of them will manufacture wind generators for Europe, the other will enhance our transformer capacity.For some products, while the R&D (research and development) is done and the design provided from India, they are being manufactured in places like France and Germany and sold globally. India is a very exciting market for ABB.