Financial Daily from THE HINDU group of publications
Wednesday, Jan 28, 2004
Tenth Anniversary Special
Engineering costs and going places
It has been a transformation from a protected environment to one of intense competition; from the threat of Indian products becoming technologically obsolete to the prospect of India's becoming a global manufacturing base for a range of products; and from high dependence on imports to a far greater degree of self-reliance.
Manufacturers are now leaner and more cost-conscious.
Import onslaught: Post liberalisation in 1991-92, capital goods manufacturers had to face two challenges: to become competitive on cost and to upgrade technology expeditiously.
Imported machinery was cheaper than domestic machinery due to the lopsided duty structure. The consistent lowering of import duty from 80 per cent to 20 per cent, allowing zero or low duty imports for projects taken up in certain industries such as fertilisers and powerand freedom to import second-hand machinery aggravated the situation.
The textile machinery sector is a classic example. After its hey-day in 1994, the segment experienced its worst phase between 1997 and 2001. Even a dominant player such as Lakshmi Machine Works went through a harrowing period; but it has managed to stay in the black and has bounced back with vigour over the past 18 months.
Now, however, companies are better able to face imports with leaner cost structure and better products.
Technology upgrade: In a protected environment, technological assistance was sought through tie-ups with foreign companies. Post-liberalisation, domestic companies suffered on the technological front as foreign companies started establishing their own outfits.
The industry, then, realised the need for quick investments in research and development. As a result, the technology divide is narrowing. A number of domestic companies, such as LMW and Elgi Equipment, are developing state of the art products at their in-house R&D centres.
Indigenisation drive: In the early 1990s, over half of the manufacturing inputs and components were imported. Over the years, companies such as BHEL and LMW have become self-sufficient to a large extent by developing ancillary units. Even multinational companies such as Cummins have brought down the level of imported inputs to 20-25 per cent.
Advantage MNCs: In the late 1990s MNCs emerged as a stronger set of players, backed by unqualified support from their parent companies. Technological and financial support, and access to the parent's product portfolio, were their inherent strengths for these companies. This is also reflected in their stock market performance.
Companies such as Widia India, Sandvik Asia, Cummins and Alfa Laval enjoyed substantially higher valuations than their domestic peers. This gap is, however, narrowing, with domestic companies too becoming savvy in terms of technology, product development and marketing.
Over the past couple of years, companies such as Elgi Equipments and Kirloskar Oil Engines have emerged as strong competitors to their MNC counterparts by expanding their product ranges and also gaining market share in certain categories.
Restructuring pay-offs: The robust growth in the capital goods sector in the past nine months is not just the effect of a low base but can partly be attributed to the restructuring efforts made by the majority of companies in the industry.
Siemens, Thermax and Crompton Greaves, to name a few, have turned around in the past two years after a rigorous process of cost-cutting and restructuring.
These companies shuffled their product portfolios, hived off non-core businesses, shed excess manpower and reduced debt to show profitability. The stress on lean and just-in-time manufacturing in recent years has also paid dividends.
Emphasis on services: From pure manufacturing, the engineering industry is moving towards value-added services such as consulting, product design and development, annual maintenance contracts, turnkey solutions and project management.
Stepping abroad: `Go-overseas' is now the motto of the engineering sector to fuel growth. Engineering exports have risen manifold over the past decade. Outsourcing is a big opportunity for a number of Indian affiliates of MNCs.
Cummins, Alfa Laval and Ingersoll Rand have transformed into global manufacturing bases for their parents for certain products. The list of products that are outsourced is expanding.
Domestic companies such as Elgi, too, are riding the outsourcing wave; the company recently bagged an US order. Companies such as Thermax are also exploring international markets by setting up marketing subsidiaries abroad.
Geographical diversification from the developed countries to the Asian markets is another emerging trend that offers exposure to markets with higher potential for growth.
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