Concerns and discussions over Trump’s tariffs can wait. MSMEs in Coimbatore are grappling with the China Plus One opportunity knocking at their doors for some time now. Companies in the US and Europe keen on an alternative to China for their production needs have set their sights on Coimbatore, which was once known as the Manchester of South India due to its textiles cluster. The global firms are looking for auto component and power ancillaries, machine parts, precision engineering products as well as textiles and electronics. The list could grow as there’s opportunity in every sector. It’s up to Coimbatore to open up and grow its capabilities.
Funding scalability is an issue to be addressed since there’s a limit to what MSMEs can borrow from banks. And the traditional Coimbatore mindset is to not jump at new opportunities but to hasten slowly. “The foundry sector has embraced the China Plus One opportunity as companies from Europe and the US came calling. While Europe has its own limitations in terms of order size, the orders from the US are large. But this comes with its own set of problems,” says M Ramesh, managing director, Alphacraft Pvt Ltd, which exports aluminium castings to leading brands in the US and Europe.
“In terms of capacities, China is 20 years ahead of us. If there is work for five machines, they will erect 50, expecting more work. When the work comes, they deliver. Otherwise, they keep the machines idle. Not just approvals, funding and interest rates too play a key role for them. If someone is doing 100 crore turnover this year, they can take it to 500 crore next year. The opportunity is 10x, but I am hinting at just 5x. We are up against the wall here,” says Ramesh.
“We lack both capacities and at times capabilities in manufacturing some parts. Hence, we have been delivering what’s possible. Knowing the opportunities, companies here are now in a phase where they are investing. But that is not happening at the phase the customers want,” says Ganesh Jagadeesan, managing director, Indo Shell Cast Pvt Limited. “The opportunity is big, but it is easier to get the investment in China, while we spend a lot of time running here behind loans and approvals. While big size companies handle it with ease, the medium and small size companies have their own challenges in addressing them,” he adds.
Of late, knowing the limitations of companies here, several multinationals are themselves looking at establishing manufacturing facilities here. “This way, we get an opportunity for employment and not for entrepreneurship development,” says Jagadeesan.
Coimbatore units cannot borrow for scalability overnight, since banks look for security. SME IPOs are another route; they can go public through BSE and NSE. Companies in India have been taking that route. “Private equity is the best option for such companies, especially for those into exports. Or MSMEs can avail the latest scheme introduced by the Centre – Mutual Credit Guarantee Scheme for MSMEs (MCGS MSME) that provides up to 100 crore credit through banks without security,” says M Ponnuswami, CMD, Pon Pure Chemicals group, and co-chairman, CII MSME National Council.
Unfortunately, MSMEs have limited options for raising equity. They are too small for an IPO and in most cases too small for private equity, barring aerospace and defence. “SME IPO and family investments have been the only options. In the process, they have become too dependent on debt and this trend has persisted for almost two decades now,” says C Venkat Subramanyam, founder, Veda Corporate Advisors, leading mid-market investment bank. “This is in stark contrast to small and medium sized businesses in tech services, digital, consumer and health care, which attract both venture capital and private equity funds. The need of the hour is a dedicated VC fund for MSME manufacturers that can enable them to scale, compete aggressively with Chinese companies and capitalize on this big shift from China,” he says. Until then, the banks will continue to celebrate how they contained their NPAs, unmindful of China and Donald Trump.