VZCZCXRO2882
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHCG #0359/01 2980047
ZNR UUUUU ZZH
R 240047Z OCT 08
FM AMCONSUL CHENNAI
TO RUEHC/SECSTATE WASHDC 1937
RUEHNE/AMEMBASSY NEW DELHI 3363
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC

UNCLAS SECTION 01 OF 02 CHENNAI 000359 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD IN
SUBJECT: FALLOUT FROM GLOBAL FINANCIAL CRISIS HITTING SOUTH INDIA, 
TOO 
 
¶1. (SBU) Summary: Our contacts in South India remain largely 
optimistic about the longer-term trajectory of the region's economy, 
but they are bracing for a rough ride in the short-term.  Banks are 
tightening credit, importers are facing rising costs as the rupee 
drops, and exporters are not benefiting from the lower rupee as 
their markets in the West soften because of the financial crisis. 
Even South India's vaunted high-tech sector may have to tighten its 
belt as it faces challenges it has not had to deal with before. 
Nevertheless, South India's business still appear relatively 
optimistic about their longer-term prospects.  End summary. 
 
South Indian Banks tighten credit . . . 
--------------------------------------- 
 
¶2. (SBU) Several Indian banks base themselves in South India, 
notably Canara Bank, Vijaya Bank and Syndicate Bank.  Our contacts 
tell us that they are becoming stingier with their lending, scaling 
back credit limits and scrutinizing potential lenders more closely. 
The Managing Director of Syndicate Bank, for example, told us that 
his bank had tightened credit controls by moving decision making to 
higher levels.  He also said that his bank was seeking to limit 
exposure in western markets by focusing more closely on its core 
market, which consists mainly of serving entrepreneurs based in and 
around Bangalore.  A Citibank official told us that his company was 
already scaling back credit limits for some of its corporate clients 
it thinks are currently vulnerable. 
 
¶3. (SBU) A top Ford-India executive told us that the company's 
customers are finding it nearly impossible to get car loans from 
banks.  He added that Ford's finance arm was operating successfully, 
and that about 80 percent of Ford's dealers already regularly secure 
loans for customers through it.  Given current conditions, he said, 
"the other 20 percent are asking us how to join." 
 
¶4. (SBU) The project director for the infrastructure company charged 
with building Hyderabad's metrorail system (a USD 3-4 billion 
project) told us that his company planned to deliver the project on 
time, but complained that the current financial environment was 
unhelpful.  He said that the project is currently working on 
securing financing and that he doubts that any U.S. banks will be 
willing to lend to such a project.  He told us that he would need to 
rely on Indian banks to provide the funding, but complained that 
this financing would be at a higher rate, raising costs. 
 
 
 . . . And look for money in all kinds of places 
--------------------------------------------- --- 
 
¶5. (SBU) Some banks are also working hard to shore up their 
deposits.  A Canara Bank board member told us that his bank had 
succeeded in strengthening its capital base through a "deposit 
mobilization program" that targeted high-net-worth individuals based 
in Bangalore.  He also said that he is confident that South India's 
banks will remain solvent even if the financial markets collapse in 
the West. 
 
¶6. (SBU) Other banks are apparently pursuing potential depositors, 
as well.  An owner of a Chennai-based manufacturing outfit laughed 
as he told us that several local banks had approached his company in 
recent weeks looking to borrow money, a situation he found rather 
ironic. 
 
Importers see costs jump as rupee drops 
--------------------------------------- 
 
¶7. (SBU) While Indian exporters may cheer the rupee's recent drop 
against the dollar, manufacturers of computers and automotive parts 
who source components -- generally priced in dollars -- from outside 
India have seen their margins shrink.  An executive at Dell's 
manufacturing center in Chennai told us that he is struggling to 
keep costs down as the relative price of imported components shoots 
up.  He said that Dell increased the price of its computers by eight 
percent in the Indian market in mid-October yet saw its margins 
shrink as the rupee dropped.  A Visteon executive, whose company 
manufactures and assembles automotive components in Chennai, told us 
that he was similarly having difficulties controlling costs, since 
many of the sub-components his company sources are from suppliers 
located in places like Thailand that price in dollars. 
 
Exporters not faring well, either 
--------------------------------- 
 
¶8. (SBU) Despite the rupee's fall, textile and leather exporters are 
witnessing a drop in demand as their markets -- generally in the 
West -- soften.  A contract manufacturer of high-end lingerie told 
us that demand for the holiday season has dropped 50 percent from 
last year.  He said that he had to reduce the number of shifts at 
his facility from three to one and lay off half of the 2000 
 
CHENNAI 00000359  002 OF 002 
 
 
employees that his company usually employs. 
 
¶9. (SBU) A shoe manufacturer, who exports shoe uppers to Western 
markets, gave a similar account of the current situation.  He said 
that Christmas orders from large stores in U.S. and Europe had 
dropped by over 40 percent from last year.  He explained that this 
is usually the best time of the year for his company but admitted 
that many orders he has been expecting have not materialized.  He 
also predicted that many of the small, local producers of shoe upper 
units that survive by doing piece work will close by the year end. 
 
IT companies don't expect to be immune 
-------------------------------------- 
 
¶10. (SBU) The pinch is even being felt by India's software giants 
whose greatest management challenge hitherto has been trying to 
manage effectively their rapid growth.  Several of them have begun 
scaling back their revenue projections for the next two to three 
quarters.  An Infosys executive told us that his company announced 
with a lowered revenue forecast because they remain unsure if some 
contracts that were currently being negotiated would actually 
materialize.  He also said that decision-making in the company's 
large clients had become more centralized, requiring more time to 
seal deals and get customers' decisions.  The top executive at a 
medium-sized software developer said that some of its key clients 
(often U.S. firms) were deferring decisions on contracts.  He said 
that the company is not only scaling back expansion plans, but also 
looking at reducing its head count. 
 
¶11. (SBU) One high-tech company that may be bucking the trend, 
however is IBM.  An executive with IBM-India told us that his 
company had made no changes to its investment plan for India. 
(Worldwide, IBM has continued to be one of the bright spots in the 
world economy, announcing in early October that its Q3 earnings were 
up 22 percent.)  He even noted that hiring new talent had become 
easier in the current environment. 
 
¶12. (SBU) An executive at Dell's call center in Hyderabad told us 
that the situation for his company was "getting more challenging." 
He said that he probably would not need to lay people off, but that 
he probably would need to reduce his employee count by not replacing 
people lost through attrition.  He said that he is employing 3500 
people in Hyderabad now and that he thinks his numbers could drop to 
3000 by Q3 in 2009.  He added that his contacts in companies like 
Infosys and Wipro are really worried, because they do a lot of 
business with finance and insurance firms, noting that he would not 
be surprised if they had to start laying people off.  On the plus 
side, he noted that employees had taken note of the economic 
situation and were not quitting as much, lowering attrition -- a 
costly and chronic problem in this sector. 
 
Not all doom-and-gloom 
---------------------- 
 
¶13. (SBU) Despite the worldwide financial crisis, however, many in 
South India remain optimistic about their companies' chances over 
the longer term.  Many South Indian business groups hold large cash 
reserves that they believe will see them through.  The editor of a 
business publication owned by one of these family-owned groups said 
that these reserves, built conservatively over the years, would 
probably be sufficient to sustain most large South Indian businesses 
during an economic slowdown.  He did, however, predict a potentially 
turbulent shakeout in the IT and financial services sector, while 
maintaining that manufacturing enterprises stand a better chance of 
weathering the storm. 
 
Comment 
------- 
 
¶14. (SBU) There's no question that the current financial and 
economic situation is causing concern in South India, but most of 
our contacts still seem guardedly optimistic about the future.  They 
recognize that the road immediately ahead may be rocky, but they 
still believe that the factors that have made the region attractive 
-- availability of world-class talent, an attractive investment 
climate (compared with most of the rest of India), and an 
increasingly large consumer class -- will eventually overcome 
whatever obstacles are placed by the financial crisis.  In the 
shorter term, too, financing may very well improve as the government 
and central bank continue to liberalize fiscal and monetary policies 
aimed at getting financing flowing again to sustain India's growth 
story. 
 
SIMKIN