In the late 1990s Arvind Dham, the founder of New Delhi auto parts maker Amtek Auto, was worried. The market for auto parts in India was small and getting crowded. And the big US and European automakers weren't interested in getting supplied by a modest outfit on the other side of the world. Dham recalls being shown the door after mentioning the capacity of his plant. "We got a few small orders," he says. "We did not have scale."
Today Detroit is knocking on India's door, seeking a hub to make auto components at a fraction of the cost back home. Troubled General Motors, Ford and partsmaker Delphi plan to buy $800 million in auto parts in India over the next five years, according to the Automotive Component Manufacturers Association of India.
Currently India makes $10 billion a year worth of auto components--less than half of what Delphi produces--and just $1.8 billion of that production is sent abroad, says the association. But by 2015 that total could reach $25 billion, estimates US consultant McKinsey & Co in a report last September.
In Pictures:
The Forbes 40 India
By The Numbers:
India's richest under 40
Dham's worries about whether Amtek could win overseas orders are long behind him. Having bulked up with a series of acquisitions, Amtek now makes parts that are used in transmission and suspension systems and in engines for GM, Ford and Suzuki. The company's revenue has been growing by 60 per cent a year over the last decade, reaching $635 million for the year ending last June.
That puts number two Amtek within striking distance of India's biggest player in the sector, Bharat Forge, which tallied $659 million in revenue over the same period. And Amtek wrung more profit out of its revenue, earning $57 million compared with Bharat's $56 million.
Amtek has expanded by buying ten companies over the past five years, spending $90 million. Five were US and European auto parts makers. Still flush with $300 million remaining from the $469 million he's raised over the past three years by selling convertible bonds and global depositary receipts, he plans to resume buying machine shops and foundries in Europe and America once prices come down.
The son of an irrigation official for Haryana state, Dham, 45, grew up in Jalandhar, 235 miles from New Delhi. After getting an engineering degree at a university in Chandigarh, the state capital, he left for the US in 1981 for a graduate program in architecture at the State University of New York at Buffalo.
In Pictures:
India's 40 richest
In Pictures:
The world's billionaires
Budding architects were poorly paid, so Dham followed up with a course in construction management at the University of Florida. He came back to India--something rare in those days--to start a construction business, which never got off the ground.
Around that time Maruti Suzuki, an Indo-Japanese venture shepherded by the Indian government to build a compact car for India's millions, was looking for suppliers. So Dham started Amtek Auto in 1987, cobbling together $1.7 million from banks and the Haryana government. He set up a plant to make 300,000 connecting rod assemblies--rods that connect a vehicle's crankshaft to its pistons--a year.
Amtek's production has risen to 5 million a year, and the company is still Maruti's sole supplier of rod assemblies. But Dham's ambition was to "start with metal and end in a connecting rod; I save in costs if I have my own forging facility," he says.
The chance to expand into forging came in the late 1990s when the Indian economy stalled and several small companies went bankrupt. His first purchase was a small forging unit in Bhopal. He paid roughly $1 million, installed new generators and won some orders. Within a year he had recovered his investment. He then paid $4 million for 63 per cent of Ahmednagar Forgings in 2003. Today the separately listed outfit boasts a $217 million market cap; Amtek owns 51 per cent.
In Pictures:
Asia's fab 50 companies - India and Hong Kong
In Pictures:
The world's 2000 largest companies
Turning around sick companies in India, helped largely by an upturn in the economy, gave Dham the confidence to try his luck in America. When he finally got a call in 2002 to buy a moneylosing auto parts maker, Dham's initial reaction was, "Do you think I am a fool? I don't have that kind of money."
It would be his biggest deal, but not by much--some $2.5 million, plus $3 million in liabilities, for Smith Jones, an Iowa supplier of flywheel ring gears and flex assemblies to big automakers. He revived Smith Jones in a year by moving low-value production to India. Since buying another Western supplier, he's become the world's biggest ring-gear maker, meeting a third of world demand. "Our advantage lies in arbitraging labor costs," says chief financial officer Santosh Singhi.
The savings can be enormous. Labor in Europe accounts for up to 40 per cent of a product's price but only 6 per cent in operations that Amtek has shifted to India. "I pass on 10 per cent of the savings to my customers and keep the rest," says Dham. He keeps the design and marketing staff overseas to stay close to customers that now include Jaguar, BMW and Saab.
Unlike many entrepreneurs, Dham doesn't feel he must control the company he started. Since 2002 he has pared his holdings by more than half, to 35 per cent, to make room for foreign investors and to grow faster. Foreign institutional investors--such as Warburg Pincus, with a 9.5 per cent stake purchased last August--hold 41 per cent of the shares. And while he has brought his nephews into the business, he has given a free hand to the Westerners who stayed on to run the foreign operations he's purchased. "I meet them once a month in the UK for a report, but they run the international operations," he says.
But while growth is coming fast, the export ride for Amtek and other Indian component makers promises to be bumpy. In Japan, for instance, it takes 48 hours for a manufacturer to move vehicles from a factory to a ship; in India that can take up to two months. Taxes and power tariffs are high. So sales to the biggest automakers overseas haven't grown as sharply as expected, though they do mount steadily.
"Lack of scale has prevented Indian component players from winning outsourcing deals exceeding $50 million," says S Ramnath, an analyst with Mumbai's SSKI Securities.
This slowed the rise in Amtek's share price last year, after it roughly doubled in each of the previous two years. Last year it climbed only 20 per cent, compared with a 47 per cent jump in the Bombay Stock Exchange index, and it now hovers around $8. But Bharat's shares declined 7 per cent last year.
For now Dham has reined in his acquisitive streak because foreign partsmakers are no longer cheap. Chinese makers are now competing for deals, spurring Western manufacturers to raise their asking prices. "Paying ten times the company's operating profits is suicidal," says Dham, who bought companies for 3.5 to 4.5 times earnings just a couple of years ago.
A better idea would be to set up a plant in China, and he plans to invest $7 million to make rod assemblies there. For Dham, who'd rather lose a deal than pay a premium, that sounds like a bargain.
