On the dining room table a candle burns, the house is silent and yet, this is far from romantic. It is a weekday morning in Chennai, South India and the computer on the table is running out of battery; all of the electrical appliances in the house lie still and living in one of several apartment blocks clustered together; natural light is poor. Welcome to the age of the power outage: up to 2 hours scheduled; sequenced by zones to share the burden and, even more that is not expected from time to time.
Households are feeling the pinch and, with exams around the corner so are the kids. Small firms and the self-employed hawkers on the street are finding the going even tougher. Shanmuga Sundaram, in Thiruvanmiyur, collects old newspapers and magazines and sells them to the recycler everyday. “Work comes to a stand still because the electrical weighing machine will not work during the power cuts and I cannot dispatch the load. And by the time the power returns and I get my load to the recycle unit in Kodambakkam, it is time for their cut. We are paid on day to day basis, and the rate of the paper is only going down. We will lose a lot of our income this way,” he said.
Most flour mills also have a tie- up with hotels and restaurants, and have deadlines. They run on diesel generators which his has increased their power cost. “We charge Rs.5 for a kilo of flour, which can be increased to Rs.7. We cannot work during nights because the rules don’t permit us to. The immediate requirements of customers cannot be addressed, and that might mean losing some of our customers,” says R. Vasanthi, Bhavani maavu mill, Mylapore.
Then, there is the frustration felt by the State itself; Tamil Nadu is home to 90 million people and, there is a building resentment that Chennai is given priority treatment and, the Multi Nationals even more so. Across the State in Coimbatore, the Manchester of India with its textile industry and can-do mentality, textile mills are losing a lot of capacity to the outages and the uncertainty is not helping forecasts either. Contrast this with the approach to Apparel City in Andra Pradesh – a Special Economic Zone in the Vizag District for the textile industry spearheaded by the Sri Lankan Brandix company- and the threat to Tamil Nadu from other States is clear. You have to have the land but, without reliable power a business is not sustainable. And to depend on back-up generators adds to cost significantly.
Chennai has long been considered a viable manufacturing hub. Back in the 1850’s India’s first train was manufactured by Madras based Simpson and Co. These days, Chennai produces everything that moves from bicycles to military tanks; cars, earth-moving equipment, tractors and railway carriages. But it is the auto industry that Chennai has taken a real lead in. “Every third car produced in India is from Chennai or around it. The area makes three cars every minute and one commercial vehicle every 75 seconds. The state has a capacity of 350,000 commercial vehicles each year,” says a senior official from the industries department. On the commercial vehicle side, besides Ashok Leyland, the state houses Daimler, Caparo, Komatsu, Doosan and Caterpillar are all headquartered here.
The Chief Minister’s vision for Chennai as an auto hub is clear: “to make Chennai the World’s largest auto cluster,” said Chief Minister Jayalalithaa. Ford set up its facility at Maraimalainagar, 45 km South of Chennai, and invested about $1bn in a plant that has a production capacity of 200,000 cars and 250,000 engines. At present, 85 per cent of the vehicles are sold in the domestic market. Last year, the company shipped its first ‘Made in India’ Figo to South Africa and plans to expand exports to include 48 countries including North Africa, Mexico, South America, Arab Emirates and West Asia. The Auto industry employs over 250,000 people and, in 2010, more than 1 million cars produced – which makes Chennai one of the Top 10 car manufacturing areas in the world.
Let’s get back to the candle on the dining room table. The power outages have become so much a part of daily life that, the auto makers and other industries are taking note. In the past, Tamil Nadu was able to beat off competition for FDI; especially from the entrepreneurial powerhouse of the State of Gujurrat. This month French car maker Peugeot announced that Gujarat, not TN, is a front runner for a 4,000 crore plant that the Peugeot plans on setting up soon. Then, there’s Ford which established its first factory in India at Maraimalai Nagar, near Chennai in 1996 , announced a few weeks ago that its second facility will be set up in Gujarat, not Tamil Nadu. That’s a loss of close to 250,000 cars per annum. Ford said it selected Gujarat because of the state’s pro-business environment. “Gujarat is a classic example of what works. It is run in a professional way. No Bureaucrats hurdles at all, no electricity, water and connectivity problems and incentives are also high. Somehow Tamil Nadu is missing these and has become more bureaucratic,” says R Dayal, executive officer, Maruti Suzuki Pvt Ltd.
Tamil Nadu needs an estimated 3,000 MW to fill the shortfall. Drax powerstation near Hull in the UK generates 4,000 and that is about 20% of the UKs electricity – imagine the impact of that loss in and around the North of England. The issue is not just the big Corporations – that many people feel are given unfair preferences – the real problem is with the SMEs who they outsource 80 per cent of the work to. All in all, this means that an Indian business worth $30 billion – of which Tamil Nadu has a 30 per cent market share – is being slowed down by power outages. Then, there is the cost impact. I spoke with one manufacturing business who explained: “We pay 5.5 Rs per KWH from the grid and, 12.5 Rs per KWH using our back-up generators. We are using this back up around 4 hours a day; 24 hours a week! This is a major problem.”
Several commentators are stressing that these outages and the disruption they are causing is highlighting a near doubling of operating costs in Tamil Nadu. Component makers end up paying around Rs 12-13 for a unit of power due to usage of generators versus Rs 4-6 for grid power. This is compounded by increasing strike action that is seeing some players evaluate their options elsewhere within India and in places like Turkey. In recent years Tamil Nadu has built a strong reputation in the auto sector and had started to be the default location for manufacturers and component manufacturers alike. It is a salutary lesson – tough to gain a reputation but very easy to lose one.
Now, this power outage story is not unique to Chennai. There are many areas that are suffering energy shortages and inconsistent supply across all emerging and frontier markets. It is a sobering thought that any company suffering from stagnation in the US and EU markets and seeking growth elsewhere will have to be extremely careful with their target markets. Recently, we were working on a project in Africa. I asked a leading businessman for his advice on any company wanting to start up in the country “Pick your location well – understand the weather; the infrastructure to cope and be aware of the realities of local corruption. Make sure that you know who can keep the lights turned on. Then, you can get down to business.” In other words, setting up in emerging and frontier markets is far from “plug and play”.