Ellora Time's Manufacturing Woes

BACKGROUND NOTE contd...

Individual initiative is encouraged at all levels and innovation is sought.” All products were reportedly made from the finest quality raw material in a dust-proof environment, which ensured better functioning of electronic goods. There were quality checks at all stages of the manufacturing process. These initiatives paid off in the form of Ajanta receiving the ISO 9002 certification.

In its initial years, Ellora imported spare parts, raw material and components from Japan, Taiwan and Korea. However, from 1998, the company began to import these items from China, which were not only good in quality, but were much cheaper as well. Little did Ellora know that these very cheap, good quality Chinese imports would soon prove to be its biggest enemies. Although imports from China had always been trickling in for a long time, Indian markets were flooded with Chinese imports in the late 1990s.

This was because in 1999, the Indian government removed restrictions on import of electronic goods. Thus, clocks, telephones and calculators from China, exactly the same range of products Ellora had built its empire upon, were suddenly available in abundance. The difference was that they were much cheaper compared to Ajanta or Orpat products in the same categories.

In spite of the fact that the Patels did not have to pay interest to any lenders, had the most popular brand in the industry and owned a good marketing and distribution network, they realized that they were not in a position to compete with Chinese goods in the Indian market. More importantly, they were afraid of the fact that Chinese goods will sooner or later affect their export markets as well.

To demonstrate the effect of the Chinese influx on its operations, Ellora cited the example of the hardships being faced by its calculator business. Orpat was the only major player in India for calculators. According to company sources, while the demand for calculators went up from 20 million in the mid 1990s to 40 million in early 2000, the company’s production had gone down from 6-7 million to 2-2.5 million during the same period.

Its market share touched an abysmal low of 5% from 70%. This was because approximately 90% of the calculators used in India were imported. And a majority were either smuggled goods or were imported and assembled in India. In case of imports, the goods were under-invoiced and thus saved a substantial amount by evading custom and excise duties. In addition, the importer did not have to pay central sales tax and local taxes.

These calculators were sold in the grey market. Eventually, the cost of such calculators worked out 30-40% cheaper than of those manufactured by organized sector players like Orpat. The problems were further compounded when imports came in via Nepal. Under the South Asian Association for Regional Cooperation (SAARC) Rupee Trade Area (RTA) arrangement, India allowed imports from Nepal at concessional duty rates.

Chinese companies began to use this low duty facility by routing their goods through Nepal. The problem aggravated because it was difficult to monitor the country of origin of the goods most of the times. According to the Indian regulatory setup, while spare part imports were charged a duty of 5%, raw material imports are charged a duty of 25%. Thus, it did not make sense for manufacturers like Ellora to import raw material at all.

Therefore, Ellora began to import parts from China, assemble them at its Morbi plant and sell them. It stopped purchasing raw material from the local market, which resulted in many transporters, drivers and cleaners losing their jobs. While a few years ago, Ellora employed around 15,000 workers, by early 2001, the company had onl about 5,000 employees. Commenting on the company’s sorry state of affairs, Jaisukh Patel (Patel) said, “Chinese traders have almost ruined our market.

We too are shifting to China now because of the attractive incentives given to manufacturers there. If we don’t do that, we will not be able to compete in the global market and be wiped out.” He further added, “We have leased a building with 300,000 sq. ft. floor space in Shenzhen. Our machinery – worth Rs 3 billion – will be moved in phases to China. In the first phase, we will shift about one-third of it. Six months later, we will shift all our machinery.”

Analysts however commented that Ellora’s decision to shift to China was completely logical. China had emerged as a low-cost producer that could beat any country in the world, with the promise of cheap labour, high productivity and attractive government subsidies. There were a host of other factors that made China a lucrative manufacturing destination for corporates across the globe (Refer Exhibit I for major factors influencing plant location decisions)

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