cii - valcon report on engineering industry in punjab 2012

Engineering Industry in Punjabmaking the big leap forward 2012

CII – Valcon Report

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Message by Mrs Kamna Raj AggarwallaChairperson, CII Destination Punjab 2012

It is my proud privilege to present CII Valcon report on “Engineering Industry in Punjab – Taking the Big Leap Forward” at the 2nd Edition of Destination Punjab – An Industrial & Engineering exposition. The report and this event is part of our endeavour to showcase to the world, the tremendous potential & promise that engineering sector in Punjab holds.

CII and Valcon through this report have tried to come up with a holistic approach and practicable solutions which would help create capacity and also bring in concepts of competitiveness & automation that will help engineering sector gain momentum to become the true growth driver of our economy.

While Destination Punjab 2012 seeks to provide a rare perfect platform to the engineering sector in Punjab to explore boundless opportunities which will help foster new partnerships & engineer profits.

I would like to convey my sincere gratitude to Government of Punjab, Valcon Management Consulting and my dear friends from Industry as also our exhibitors, buyers, sponsors and other stakeholders, who have supported us in this endeavour of reenergizing the engineering sector in the state.

Wishing everyone a meaningful and productive Destination Punjab.

Mrs Kamna Raj Aggarwalla Chairperson, CII Destination Punjab 2012

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Message by Ms Sandeep RiatChairperson, CII Ludhiana Zonal Council

It is a matter of great privilege for me to extend a very warm welcome to all the stakeholders & participants of the 2nd edition of Destination Punjab being organized at Ludhiana.

Our focus in this years’ edition is to revive & reenergize the engineering sector in the state by showcasing the potential and opportunities existing in this sector to our business fraternity across the country & globe.

As Ludhiana has traditionally been known as the hub of engineering entrepreneurship in this region & country, through Destination Punjab 2012 we have also endeavored to expose local entrepreneur to newer clients, latest technologies & practices through a focused exposition and concurrent sessions with experts and leaders from industry.

Besides these, CII & Valcon Management Consultants have together compiled a report which highlights the tremendous opportunities waiting to be tapped in engineering sector in the state. I am sure our stakeholders will find this report informative & useful.

I would also take this opportunity to thank the state Government and other stakeholders who have put in their sustained efforts and helped us in building a successful Destination Punjab 2012.

Wishing everyone a pleasant & fruitful stay at Destination Punjab 2012, Ludhiana.

Ms Sandeep Riat Chairperson, CII Ludhiana Zonal Council

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Message by Mr Deepak MittalChairman, CII Punjab State Council

On behalf of CII Punjab State Council, I take this opportunity to personally welcome you all to the 2nd edition of Destination Punjab at Ludhiana.

After successfully organizing the 1st edition in Amritsar last year, this time we have adopted a more focused approach to highlight the strengths & opportunities existing in the engineering sector in the state.

At Destination Punjab 2012, besides an exposition, an extensive schedule of Knowledge Sessions, Vendor Development Programs and a Conference on Automation have been scheduled over a period of 3 days which I am sure would help our business fraternity to expand its horizons by interacting with their prospective partners besides learning newer concepts, technologies & practices.

I am also delighted to share that CII and Valcon Management Consultants have compiled a holistic report which aims to provide a bird’s eye view of the tremendous opportunities that exist for engineering Industry in Punjab as also it suggests the way forward to realize the full potential of this sector in the state.

This momentous effort would not have been possible without the unflinching support provided by Government of Punjab, colleagues from Industry and other stakeholders in this endeavour. I thank each and every one for their contribution.

Wish you all a very fruitful Destination Punjab 2012.

Mr Deepak Mittal Chairman, CII Punjab State Council

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The engineering sector in Punjab is going through a tough phase – challenging business environment coupled with traditional working style is a double whammy for many of the home grown companies. Growth – in these conditions – is possible only through a holistic approach of analysing the status quo, taking steps to consolidate and diversify and leveraging the strengths to tap the potential in this sector.

In this backdrop, I believe that there could not have been a better time than now to present this report to the industry. This report by Valcon and CII attempts to create a holistic view of the current status of Punjab’s engineering industry and its growth vis-a-vis the Indian engineering sector. Further, we have also provided the possible way forward for Punjab’s engineering industry to make the next big leap forward.

This report also highlights the sunrise sub-sectors in the industry with long term potential that are likely to emerge as key drivers for the engineering sector. The potential of the various sub sectors has been looked into both in terms of profitability and return on investment, thus providing a quantified assessment for the reader. The objective has been to make the reader aware of the emerging opportunities and possibly trigger interest for further study and action.

We have also tried to identify and understand the strengths of Punjab’s companies that have helped them survive and fend off challenges as also their weaknesses that have kept them from growing faster. Our learning has been complemented by views of industry experts and by Valcon’s view points on leading practices that needs to be implemented to ride the next curve of growth. As is the case in any study, the views expressed pertain primarily to majority of the population studied. We realise that there are a number of companies who stand out from the general and have outperformed others. In many ways, these companies also set examples of the good practices to be emulated by others.

With a strong domestic market, untapped export potential and large infrastructure investment plans by the government, there is an immense growth opportunity waiting for the companies. I hope that CII and Valcon’s attempt in sharing the collective insights benefit the readers and enables the sector to drive long term growth in this sector.

In short: Taking you further.

Message by Mr Krishnan NaganathanCEO, Valcon Management Consultants

Mr Krishnan Naganathan CEO, Valcon Management Consultants Pvt. Ltd

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Punjab’s economy 7Engineering sector and its relevance to growth of Punjab’s economy 8Opportunities in engineering sector 11 Engineering sector overview in India 11 Classification of engineering sectors 11Engineering sub-sectors 15 Medical equipment 15 Farm, construction and mining machinery 17 Metal fabrication 21 Industrial equipment and components 23 Auto components 27 Aerospace and defence - Sunrise sector with strong long term potential 32 Overall sector outlook 32

Potential for Punjab’s engineering industry 33 Strengths and weaknesses 33 Capability assessment 38 Skills 40 Marketing capabilities 43

SWOT analysis of Punjab’s engineering industry 46Key success factors for growth 48Hurdles and roadblocks 49Valcon’s view 50Information sources & acknowledgements 52About CII & About Valcon 53

Table of contents

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Demographics: Punjab has been one of the richest states in India since independence. With a population of approximately 2.8 crores1 spread over a fertile area of 50,362 km2 Punjab today is not only responsible for 15% of India’s wheat and rice production2 but also contributes 2.5% of India’s industrial output.

Size and growth: The net industrial production in Punjab is nearly INR 30,000 crores. While agriculture and allied activities contribute 31% of state’s domestic product (2009-10), industrial activities and services contribute nearly 18% and 51% respectively. The annualised growth in these sectors for last five years had been 13.1%, 18.7% and 16.3% respectively indicating growing prominence of industrial activities in overall economy of Punjab4.

Major industrial sectors: Registered factories contribute 56% of the industrial output in Punjab. They accounted for around INR 17.5 thousand crores of gross value added in 2009-105. The major industry contributing to this output was engineering, accounting for 41% of gross value added while textiles, leather and apparels accounting for another 21%.1 Provisional Population Totals at a Glance Figure : 2011: Punjab (Census of India)2 RBI Handbook of Statistics 20113 Annual Survey of Industries 2009-20104 RBI Handbook of Statistics 2011. Growth rates have been calculated on Current Prices5 RBI Handbook of Statistics 2011 and Annual Survey of Industries 2009-10 Average

2004 - 05 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

Industry Agriculture Services Industry growth trend

Stat

e do

mes

tic p

rodu

ct in

Rs

1,00

0 Cr

at c

urre

nt p

rices

0

10

20

30

40

50

60

70

80

90

100

Figure 1: Growth trends for components of economy in Punjab


Punjab’s economy

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Engineering sector and its relevance to growth of Punjab’s economy

Figure 2: Share of total output by industry sectors in Punjab

20%

22.4%

26.4%

8.4%

Source: Annual Survey of Industries 2009-2010

22.9% EngineeringTextiles & leather

Food & beverages

Chemicals & pharmaceuticals

Others

Engineering sector is a major contributor to the economy of Punjab. Over the last decade (2000 to 2010) it has grown at 16.4 % annually (CAGR). Today, while it represents about 23% of total industrial output of Punjab it only forms 2.9% of engineering industry contribution at the national level. This is in contrast with engineering output from neighbouring states like Haryana and Uttarakhand which share some of the same geographical advantages and disadvantages as Punjab but have raced ahead due to supportive industrial policies, availability of suitable infrastructure and better industrial climate in these states.

In the last decade (2000 to 2010) the growth in Punjab’s engineering industry has been behind the national average of 17.0% (CAGR)6. Nevertheless it has

Figure 3: Engineering sector contribution from Indian states 2012

6.9%

7%

7.9%

21.2%

11.6% 2.4% 2.4%

Source: Annual Survey of Industries 2009-2010

17%

West BengalRajasthan

Punjab

Andhra Pradesh

Uttarakhand

KarnatakaUttar Pradesh

Gujarat

Haryana

Tamil Nadu

Maharashtra

Others

2.9%3.2%

4.7%

12.6%

6 CAGR (Compounded Annual Growth Rate) is the constant annually compounded rate of growth which would lead to output in 2010 starting from the respective industrial output in year 2000. These rates have been calculated using data from Annual Survey of Industries 2009-2010.

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� While engineering sector accounts for nearly 23% of Punjab’s industrial output, its share is a meagre 2.9% amongst all states

� Engineering industries in nearby states like Haryana and Uttarakhand are seen to be doing better than Punjab in their contribution to national output

� Most of engineering industrial output in Punjab is from low margin industries

Figure 4: Respective size of engineering related industries in Punjab

0.78%

25.74%

5.63%

38.26%

Source: Annual Survey of Industries 2009-2010; Valcon analysis

21.71%

0.03%

Aerospace & defence

0%2.98%

4.88% Medical equipment

Automotive & auto components

Industrial equipment & components

Consumer electrical & electronic eqpt.including appliances

Industrial electrical & electronic eqpt.

Heavy vehicles & transportation

Special purpose machinery

Castings, forgings & fabrication

Figure 5: Respective profit contribution of engineering related industries in Punjab

0.35%

41.93%

27.67%

Source: Annual Survey of Industries 2009-2010; Valcon analysis

2.11%

0.03%

Aerospace & defence

0%

2.63%6.82%

Medical equipment

Automotive & auto components


Consumer electrical & electronic eqpt.including appliances

Industrial electrical & electronic eqpt.

Heavy vehicles & transportation



18.46%

The second largest engineering subsector is castings, forgings and fabrication. This sector supplies to customers in metal and mineral processing, heavy vehicles and transportation, industrial equipment manufacturing, construction, automotive and other diverse industries. Customers are spread across the country as well as several businesses have significant exports. Poor profitability

been responsible for a big proportion of the industrial growth in Punjab in past 10 years due to its relative size.

More than 90% of the engineering Industry output from Punjab is from three subsectors. Automotive and auto components have the largest contribution with large number of component manufacturers supplying to OEMs around Delhi and in Uttarakhand. Several of the components manufacturers also supply to the local tractor and farm equipment industry (classified under special purpose machinery). Profitability of the sector is relatively poor with average profits being 5% of total industrial output.


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Prof

itabi

lity

Industrial equipment &components

Consumer/businesselectrical &electronics

Special purposemachinery

Castings forgings& fabrication

Industrial electrical &electronic equipment

Automotive & autocomponents

Heavy vehicles &transport

Medical equipment

Growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Figure 6: Status of growth versus profitability of engineering sector in Punjab

Source: Annual Survey of Industries Data 2008-2009 and 2009-2010, Valcon analysis

In summary, majority of engineering industry output from Punjab has poor profitability and hence there is significant opportunity to improve the sector performance.

At this stage, we take a look at the performance of engineering sector in the country and the opportunities for growth available in various sub-sectors of the industry.

(5% of output) in this large sector is due to the low value adding nature of the subsector.

The third largest sector, special purpose machinery, is responsible for 23% of Punjab’s engineering sector output and has a high profitability (13% of output). It is responsible for nearly 43% of the profits from Punjab’s engineering sector making it the major source of profitability for Punjab’s engineering industry. This sector includes tractors and other farm equipment; machine tools, metal forming machinery, machinery for mining, quarrying and construction; machinery for processing of food and beverage, textile, apparel, leather, paper, rubber and plastics. Many of the machinery manufacturing businesses are profitable due to local prominence of their customer industries like agriculture; textiles and apparel manufacturing; leather, food, beverage, and rubber processing, etc.

Consumer electronics, including household appliances, is the only other notable subsector contributing 7.2% of engineering industry profits in Punjab despite being responsible for less than 4% of output. This is due to high profitability of 13% generated by this sector.

* The growth scale has been made linear between the lowest and median values and median and highest values. The bubble position indicates the relative rank of the sub-sector on this scale. The size of the bubble indicates the size of the sub-sector in terms of its gross output.

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Opportunities in engineering sector

Engineering sector overview in IndiaThe engineering sector is the largest segment of Indian industry and employs more than 40 lakh1 skilled and semi-skilled workers. It forms a significant part of the manufacturing industry and is very diverse in nature.

India is also a major exporter of engineered products and services which is estimated to touch ~USD 68 billion (~INR 360 thousand crores) by FY 20152. This is primarily due to its comparative advantage of lower design, research & labour cost. The engineering sector is 100 per cent de-licensed and has accounted for 8.9% of FDI inflow2 since April 2000.

Classification of engineering sectorsThe key engineering sub-sectors which are part of the manufacturing sector in India and have been focused upon in this report are:

� Aerospace and defence � Medical equipment and appliances � Industrial electrical and electronics � Special purpose machinery

y Farm and construction machinery y Other process equipment y Metal forming and machine tools

� Heavy vehicles and transportation � Industrial equipment and components

� Castings, forgings and fabrication

y Castings and forgings y Metal fabrication

� Automotive and auto components � Consumer and business electrical and electronics

Some of these sub-sectors are inputs to others while some of them cater to the consumers directly.

In terms of the gross output from these engineering industries we find that automotive and auto parts and industrial electrical and electronics contribute more than 50% of the output. These sectors are also among the oldest sectors along with the castings, forgings and fabrication sectors. Some of the newer sectors like aerospace and defence as well as medical equipment and appliances are seeing a lot of impetus from both private and public enterprises.


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Figure 7: All-India engineering industry output by sub-sector in 2009-2010

33%

15%

19%

12%

Source: ASI 2009-2010

10%

1%Aerospace & defence

0%

2%8%

Medical equipment & appliances

Consumer/business electrical &electronicsAutomotive & auto parts



Industrial electrical & electronicsHeavy transport vehicles


In order to evaluate the business attractiveness of these sectors we have analysed them on the following business parameters:

� Net profit profitability � Growth � Return on gross fixed asset (only plant and equipment). This measure is a

ratio of net profit to gross value of plant and machinery (RoGFA). � Investment requirements. It has been evaluated using the measure of

average capital deployed per factory.

Evaluating the various sub-sectors for their performance on growth and profit-ability, we find that the following stand out as more attractive than others, in India:

� Heavy vehicles and transportation � Medical equipment � Farm and construction machinery � Automotive and auto components � Metal fabrication

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Prof

itabi

lity

Aerospace & defence


Consumer electrical &electronics

Other process equipment

Metal fabrication

Castings & forgings

Metal forming & machinetools

Industrial electrical &electronics


Heavy transportvehicles

Medical equipment

Farm & constructionmachinery

Growth

Figure 8: Growth and profitability of engineering sub-sectors in India

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

In order to understand the attractiveness in terms of entering certain sub-sectors, we have compared on return on gross fixed assets† vs. average capital employed per factory. As can be seen from the graph (see figure {9} the most attractive sectors where the return on gross fixed assets is high while the average capital employed per factory is low are:

� Farm and construction machinery � Heavy vehicles and transportation � Industrial equipment and components � Other process equipment � Medical equipment � Metal fabrication

† It only includes plant and equipment



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Some of these sub-sectors such as farm and construction machinery and automotive and auto components have a strong resonance to Punjab’s engineering sector

The following section delves deeper into each of these sub-sectors and their typical characteristics.

Sub-sector


Growth rate Profitability RoGFA

Avg. capitalemployed per

factory

Heavy vehicles &transportation

Medical equipment

Industrial equipment& components

Metal fabrication

High

High

High

Medium

Medium

Medium

High

Medium

Medium-high

Medium

High

Medium-High

Medium-Low

Medium-High

Medium-High

Medium

Medium-Low

Medium-High

Medium

Low

Note: Lower avg. capital deployed per factory lowers the entry barriers for firms

Avg.

cap

ital d

eplo

yed

per f

acto

ry

Figure 9: RoGFA vs. avg. capital deployed per factory

Aerospace & defence


Consumer electrical &electronics

Other process equipment

Metal fabrication

Castings & forgings

Metal forming & machinetools

Industrial electrical &electronics


Heavy transportvehicles

Medical equipment


RoGFA

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

In addition to the above parameters, it is also important to consider the size of the sectors since it indicates more opportunity. Automotive and auto components which is the largest sub-sector under engineering with a strong growth trajectory is an important sector to consider.

Considering all the above mentioned parameters simultaneously and giving higher weightage to profitability and RoGFA, we identified the following sub-sectors for detailed study:


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Medical equipmentIndia’s medical equipment market – valued at $4.9 billion (INR 25.8 thousand crores) – is Asia’s fourth-largest (behind Japan, China, and South Korea) and is projected to reach $8 billion (INR 42200 crores) by 2015, as health insurance becomes more widely available and the country’s middle-class consumers continue to demand better healthcare services.

India’s rapidly growing healthcare market is providing significant trade opportunities for medical device firms. An estimated three-quarters of India’s demand for medical devices is currently met by imports, nearly 30% of which are supplied by the United States

By 2050, India is expected to overtake China as the world’s most populated country, with a projected population of 170 crores. By 2025, India’s elderly population (aged 60 and above) is expected to reach nearly 200 million.

2006 2009 2012

US $

bill

ion

0

1

2

3

4

5

6

Figure 10: Medical devices market

Source: FICCI report

Key segmentsMedical instruments and appliances, orthopaedic and prosthetic appliances are the key segments in this category with 25.10% and 20% share. The consumables such as bandages, medical supplies and syringes contribute close to 20% to this category.

An estimated three-quarters of India’s demand for medical devices is currently met by imports, nearly 30% of which are supplied by the United States.

Engineering sub-sectors


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The Indian medical technology industry is highly competitive and fragmented, with domestic firms primarily manufacturing low technology products such as disposables/medical supplies, and MNCs primarily importing high end medical equipment. MNCs seeking to enter the industry typically form joint ventures with local manufacturers, establish subsidiaries or employ local agents to distribute their products.

Key growth drivers � Faster upgradation of existing technology and global new product innovation

� Availability of advanced and sophisticated medical technology

� Medical tourism is being promoted by the government and stimulated by the corporate boom in medical care driving private care providers to upgrade their medical technology infrastructure

� Increased penetration of health insurance leading to increased coverage of high cost treatment

� Rising disposable income/purchasing power

Key challenges � Penetration is very low in rural/towns/smaller towns due to affordability.

Rural healthcare providers would want a cheaper and cost effective solution and don’t opt for high end products

� Unclear government regulation coupled with ambiguous quality standards is also a key challenge faced by this sector

Way forward � Financial engineering along with product sales can dramatically enlarge the

market

Figure 11: Key segments of medical equipment

9.5%

20%

10.20%

25.10%

Source: www.aimedindia.com

12%

15.20%

7.6%

Medical instruments & appliances

X Ray apparatus

Bandages & other medical supplies

Orthopeadic, prosthetic appliances

Syringes, needles

ElectromedicalOthers

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� Use of technology to reduce cost, increase penetration such as telemedicine, remote monitoring etc.

� Sound regulatory framework is a key enabler for the growth of the medical technology

Innovation is the keyCompanies need to innovate and invest in R&D to come out with cost effective solutions and think of economies of scale so that they can reach more customers with the right pricing.

TractorsLevelersPloughs

SeedersPlantersTransplanter

HarrowTillerSprayerDuster

HarvesterThresherReaper

Seed extr.DehuskerMillDryer

Tilling & seedingpreparation Sowing

Weeding& plant

protectionHarvesting Post harvest

processing

Fig. 12: Agricultural value chain

Farm, construction and mining machineryThis sub-sector caters to two significant sectors of the Indian economy; Agriculture and infrastructure which together contribute more than 25% to India’s GDP. Currently the farm and construction machinery sub-sector accounts for only about 4% of the engineering sector output but has seen a growth rate of over 18% over the period FY2009 to FY2010.

The farm machinery segment consists of diverse set of products across the agricultural value chain:

Amongst all the products, tractors are the largest segment in India and is also one of the main categories of products exported. Several Indian companies like Tractors & Farm Equipment Ltd. (TAFE), Mahindra & Mahindra, Escorts Agri Machinery Group, etc. have built successful business with tractors as their main product category. India is the world’s largest producer of tractors and accounts for a third of the world’s production. India is a net exporters of tractors, which has grown at a CAGR of 17% over the last 5 years. The domestic market has grown at a CAGR of ~15% over the last 5 years with North India being the largest market.


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CII – Valcon report on enginnering industry in Punjab

10%

19%

36%

13%

21%

Central

West

EastSouth

North

Figure 13: Region wise tractor sale FY 2008 and FY 2009

8%

26%

38%

9%

Source: CMIE Prowess

Central

West

EastSouth

North

18%

The tractor industry is very organised and also fairly consolidated as can be seen from the market share trends below:

Sub sector

Mahindra & Mahindra Ltd. (M&M Ltd.)

FY 2008 FY 2011 FY 2012

Tractors & Farm Equipment Ltd. (TFEL)

Escorts Ltd.

John Deere Equipment Pvt. Ltd.

International Tractors Ltd.

34%

13%

21%

8%

8%

39.6%

12.1%

21%

9.8%

8.5%

39.2%

10.3%

24.0%

9.2%

8.3%

Sources: CMIE Prowess, IAS

Key drivers

� Increasing need for mechaniation. The difficulty in getting manual labour due to urbanisation and the need to improve productivity are driving the use of machinery to enable sustainable farming

� Emergence of corporate sourcing from farmers. This has led to an increase in margins available to the farmer enabling the drive for greater productivity

� Better financing and credit schemes in rural areas. Government subsidies and also organised money lending by co-operative banks has given avenues to the farmer to procure farm machinery

Increased mechanisation and lower labour availability is driving the domestic demand for farm equipment. In addition, cost pressures in the international markets are forcing global players to source components and assemblies from India in growing volumes.

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The government has estimated that investment worth INR 40 lakh crores will be made over the 12th five year plan period in Infrastructure development in the country. The key areas of infrastructure are rail, road, power, ports and airports which contribute about 66% to the construction sector in India while residential and commercial account for 27% and 7% respectively. Private participation in the infrastructure sector is set to rise to 50% of the total infrastructure investment. This growth is one of the primary drivers for the construction equipment sub-sector.

Construction and mining equipment consists of machinery such as hydraulic excavators, backhoe loaders, bull dozers, dump trucks, pavers, wet mix plants, cranes, fork lifts, dozers, etc. with an estimated market size of INR 14,740 crores.

A classification of this equipment is as shown below:

Backhoe loadersWheeled loadersExcavatorsTrenchersBulldozersDumpersGradersCompactorsScrappers, etc.

ConveyorsForkliftsAutomated storageAutomated guided vehicleCranes & hoistsRobots, etc.

Concrete mixersRoad rollersPaversSpraying & plastering M/CHot mix plantsCrushersPumps (heavy duty)Slurry seal machinesTunneling & drillingMachinesTippers, etc.

Source: Industry sources, D&B Research

Construction & mining equipment

Earth moving equipments Other machineriesMaterial handling

equipments

Backhoe loader is the largest segment in the sector, in terms of volume followed by hydraulic excavators and mobile cranes.

The Indian construction and mining equipment industry is estimated to have presence of about 200 players, though can be considered as organised as players in the organised sector are estimated to account for about 80-85% of the revenue and the top four player s together account for ~85% of total market share. JCB India Ltd. is the market leader in the Indian construction and mining equipment market, accounting for ~30% of total market share, followed by BEML Ltd (~18%).

Infrastructure growth has slowed down but it is an imperative if growth in India needs to be sustained. Increasing number of international firms are setting up manufacturing and sourcing operations in India to cater to domestic as well as international demand.


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Raw material expense is the largest operating expense component in the sector, accounting for ~56.7% of total sales in FY 2012. Iron and steel are the two main raw materials used in the segment.

CII – Valcon report on enginnering industry in Punjab

Figure 14: Major players

9.3%

18.3%

16.3%

30.6%

Source: Industry Sources, CMIE Prowess, D&B Research

12.1%

JCB India Ltd.BEML Ltd.

Tecpro Systems Ltd.

Mcnally Bharat Engg. Co. Ltd.

L&T Komatsu Ltd.Others

13.6%

Auto components

Auto components



Product complexity

Prec

isio

n le

vels

Prod

uct v

alue

add

Product size

Low High

Low

Hig

h

Light Heavy

Low

Hig

h

Figure 15: Product complexity and product size

Evaluating the farm and construction equipment sector on some of the operational parameters gives a better perspective of the governing factors for success in this sector. Here we have compared this against auto components to give greater clarity on their relative requirements. As we can see here the farm, construction and mining machinery industry has relatively similar product complexity but has a lower requirement for precision. Also given that on an average this sector has a larger product size it implies a higher value product.

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Metal fabrication This is a highly fragmented and labour intensive sector with medium and small scale industries heavily dependent on job work. Fabrication applies to the building of machines, structures and other equipment, by cutting, shaping and assembling components made from raw materials by using various mechanical processes such as welding, soldering, forging, brazing, forming, pressing, bending and stress removal. Welding is a major process input in most fabrication jobs.

Since the demand for fabrication sector comes from the engineering sector, especially capital goods, the growth of fabrication industry largely depends on the overall industrial scenario. The fabrication industry caters to many sectors such as transportation, construction and structures, industrial and heavy equipment, packaging, consumer products, etc. The major user industry for the fabrication sector is the general structural fabrication followed by the railway and shipping, machine building and construction.

Raw material is the primary cost driver of this industry and is easily available in India, only special steel needs to be imported. However, with prices of steel increasing on global and domestic level, slowing demand and manufacturers in the engineering sector planning a reduction in production capacity, the growth of this industry is likely to undergo a moderation in the near term.

Figure 16: Cost structure [%] (2011)

5.8%

61.9%

2%

10.4%

7.1%

Source: Ecotrends

9.6%

Raw materials

Power generation and distribution

Miscellaneous expenses

Depreciation

Other manufacturing expenses

Employee cost

Selling and administration expenses

3.1%

0%

0%

Increase in stock

Other operational expenses

Steel availability coupled with labour availability enables Indian firms to deliver fabricated products which are competitive globally. Domestic demand for structural steel (on-site and off-site) is driven primarily by the core infrastructure segments and construction segments (residential and commercial).


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Key drivers � Project based – core industry sector plays a major role and effects upstream

and downstream fabricators

� Medium and small scale industries heavily dependent on job work

� More power dependant compared to a machining industry

� Growth also dependent on growth in the engineering sector, especially capital goods industry

� Construction industry will drive the demand for small units and also on site fabrication for structural elements

Future growth outlook � General structural fabrication will continue to grow (example: cement, power,

two-wheeler frames, etc.)

� Housing sector growth will affect performance of small and medium fabricators

� Electrical and power projects – major impetus for future success

Evaluating the metal fabrication sector on some of the operational parameters, shows us that the precision requirements are far lower than auto components and also has lower product complexity. On the other hand it is more labour intensive and requires higher skill level since there are more manual intervention as compared to auto components. This gives a fair indication of the cost drivers and importance of skilled labour in this sector.

Auto components

Auto components

Metal fabrication

Metal fabrication

Product complexity

Prec

isio

n le

vels

Labo

ur in

tens

iven

ess

Operator skills

Low High

Low

Hig

h

Light Heavy

Low

Hig

h

Figure 17: Product complexity and operator skills

23

In terms of their profit contribution to the sector the main segments are engines and turbines, pumps, compressor and valves and refrigeration and air conditioning.

Industrial equipment and components This sector consists of varied set of equipment with application across all major industries including power, automotive, construction, capital goods, etc. The various categories which form this sub-sector are as shown below with engines and turbines (33%) forming the largest category. Refrigeration, air-conditioning equipment (19%), pumps and compressors (14%) and bearings and gears (13%) constitutes the other key categories.

Figure 18: Revenue share by segment

14%

8%

19%

10%

3%

13%

Engines & turbines

Hydraulics & pneumatics

Lifting & handling equipment

Pumps, compressions & valves

Bearings & gears

Heating equipment

33%0%

Power driven hand toolsRefrigeration, air-conditioning, fire extinguishers & weighing machinery

Figure 19: Profit share by segment

6%

11%

7%

10%

2%

14%

Engines & turbines

Fluid power equipment

Lifting & handling equipment

Pumps, compressions & valves

Bearings & gears

Heating equipment

50%

0%

Power driven hand toolsRefrigeration, air-conditioning, fire extinguishers & weighing machinery


24

It is expected that about 40% increase in thermal power capacity will be seen in the 12th five-year plan period. Most of the equipment for the projects under execution is being supplied by Chinese OEM’s with BHEL and L&T MHI being the other significant player.

Figure 20: Revenue share by segment

63%

10%

27%

Boilers

Turbines

Generators

Source: IBEF Report on Elecrical Machinery

Figure 21: Share of OEMs for super-critical projects under execution

57%

15%

12%

Source: ICRA Research

16%

Others

China-based OEMs

BHEL

L&T-MHI

With many bilateral nuclear agreements in place, India is expected to become a major hub for manufacturing nuclear reactors and associated components. The Indian Government proposes to add 3,380 MW of nuclear power capacity by 2012.There is a huge opportunity for players to re-orient and focus their efforts to develop technology for higher capacity thermal units and nuclear reactors.

Engines and turbinesThe main sector that this segment caters to is the power generation sector and generally grouped under the boiler-turbine-generator (BTG) segment.

25

Pumps, compressors and valvesThis category of products is used across multiple sectors like oil and gas and agriculture and power generation. Pumps and valves comprise of more than two-thirds of this INR 12,000-14,000 crore sector while compressors is the other category.

The key challenge facing the sector is the delay in project execution which impacts the order flow and cash flow. Also transport of this equipment faces major issues due to the absence of good quality infrastructure.

Raw material is the primary cost driver followed by employee cost.

Figure 22: Cost structure [%] (2011)

2.2%

70.2%

12.7%

5.4%

1.1%

Source: Ecotrends

5.5%Raw materials

Power generation and distribution

Miscellaneous expenses

Depreciation

Other manufacturing expenses

Employee cost

Selling and administration expenses

2.9%

0%

0.1%

Increase in stock

Other operational expenses

Key drivers � Increasing demand for energy and large investments in the energy sector

� Civilian nuclear deals between India and other nations will encourage growth in the nuclear power generation sector

The BTG as well as pumps and compressor segments are driven by the growth in power and oil and gas sectors. Technology capabilities play an important role in the high value/performance sectors and there is a need for domestic companies to invest in R&D to build more profitable businesses.Some of the major players in the Indian market are:

Table 10 Pumps valves compressors

Pumps

Kirloskar Brothers Ltd.

Valves Compressors

CRI Pumps

Crompton Greaves

KSB

Bharat Bijlee

Flowserve Corporation

L&T Audco

Tyco Flow

Fisher Sanmar

BHEL

BHEL

Ingersoll Rand

Siemens

Atlas Copco

Dresser Rand


26

Compressor design complexity implies a fewer number of domestic manufacturers while pumps and valves market has a significant unorganised segment. In India the Rotary compressors dominate the market with 85% share.

Figure 23: Pumps market share - organised vs unorganised

Unorganised Organised

56% 44%

Source: Netscribes – Pumps Market 2011

Key drivers � Growth in oil and gas sector with large number of projects

� Irrigation projects with the government’s increased focus on agriculture

Refrigeration and air conditioning equipmentThis sector is seeing a boost in its growth with increased need for cold chains to be established. The process of storing, transporting and displaying food at appropriate temperatures will gain more significance. Refrigeration segment is expected to grow at about 10-15% over the next 3 years while the air conditioning segment is poised for a 15-20% growth over the same period.

Figure 24: Market share by segment

Air conditioning systems

Commercial refrigerationAC&R servicing

14%

8%

78%

Source: AIACRA

Organised retail and processed food sectors will drive a wave of growth in the cold chain infrastructure across the country. A large number of domestic and international players are gearing up for it.

27

There are large number of Indian and international firms which have a strong presence in this sector such as Blue Star, Carrier, Haier, Voltas. The key component of refrigeration and air conditioning systems are compressor which has been described in the previous section.

Key drivers � Growth in organised retail

� Growth in processed food sector

� Increased need for air conditioned commercial establishments

Auto components Growth in automobile sector has been one of the key drivers of the economic growth of the country. However, Indian auto components industry has been witnessing a moderation in its revenue growth to 16% in FY 2012 as compared to the average growth of above 30% in previous two fiscal on the back of slowing automobile sales.

Figure 25: Comprehensive product range

9%

10%

12%

31%

12%

Source: www.acmainfo.com

19%

Electrical parts

Equipment

Engine parts

Others

Suspension & braking parts

Body & chassis

Drive transmission & steering parts

7%

As compared to the auto component market overseas, India focuses primarily on the ancillary and equipment segments rather than engine and suspension parts, due to its developing R&D capabilities. Contribution of suspension and braking parts and Equipment is going to improve in the years to come due to use of 4 wheel drive and increase in replacement market.

India is one of the largest auto components market with a production turnover of INR 226 thousand crores in FY 2012. It has grown at a CAGR of ~18.7% over FY 2008-12. Growth in domestic auto industry and demand from export market led to the growth of auto component industry.


28

2007 - 08 2008 - 09 2009 - 10 2010 - 11 2011 - 12 2015 - 16(E) 2020 - 21(E)

Year

INR

(bill

ion)

0

1000

2000

3000

4000

5000

6000

7000

Estimated growth 13% E

1378 11961565.2

2074.8 2262

3447.6

5876

Figure 26: Growth of Indian auto components industry

Source: www.acmainfo.com

As per industry estimates, out of the total turnover of the Indian auto components industry, around 60% is derived from sales to domestic OEMs, around 25% comes from sales to the domestic replacement market and around 15% is derived from exports

Competitive scenario Indian auto components industry apart from being categorised into OEMs and replacements market is organised but highly fragmented in nature.

Indian auto component industry comprises of round 600 companies in the organised sector which account 85% of the production whereas more than 6,000 companies involved in the unorganised market.

Table 11 Competitive scenario

Companyclassification

Medium

Turnover range (INR Bn) Number of companiesin organised sector

Small

Mini

Micro

> 10

0.50 - 2.50

2.50 - 10

< 0.50

14

200

85

305

Indian auto component industry comprises of round 600 companies in the organised sector which account 85% of the production whereas more than 6,000 companies involved in the unorganised market.

29

Altogether top five players account for ~9.24% of the market while top ten companies corner ~11.93% of the market. Low share of leading companies indicate the fragmented nature of the industry.

India has been a net importer of auto components during FY 2008-12 and while imports continue to grow at 25%. However, exports continue to be the beacon of hope despite the slow-down in the global economy.

Export-import dynamicsExports to European region accounted for highest share in auto component exports from India of 39% in FY 2012, followed by America region (30%), Asia (19%). However, the exports to Africa region recorded highest y-o-y growth of about 55% followed by over 39% growth in exports to European region during the similar period.

Source: crisil.com & www.acmainfo.com

Figure 27: Growth of exports vs imports

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012 14

237.1387.6

160306.8

312.8184

260.4159.6

50

28334

Exports

0 100 200 300 400 500 600

514.4 Imports

India remained a net importer of auto components during FY 2008-12. Imports continued to grow at 25%, exceeding USD 10.5 billion compared to USD 8.5 billion in the previous year as compared to growth of exports at 18%.

Key drivers � The performance of auto component industry is totally dependent on the

performance of automobile sector. The future outlook is still better with auto component mirroring the auto industry growth at a rate of 13-15%

� Increasing focus on localisation of vendor base

� Sourcing of auto components by international automobile companies to cut costs

� Increasing focus towards quality certification which has now led to increased purchase of parts from the organised market


30

Key challegensThough in the long term, auto component’s growth prospects are strong, it is facing challenges and bottlenecks to growth:

� Financial viability in face of ever increasing cost pressures

� Tier 2/3 companies also face challenges of low return on investment which prevents scaling up of operations

� Economic condition. High interest rates coupled with inflation and weakening of the rupee

� Work force management

� Government’s move to push for more multilateral and bilateral trade

Government initiatives to promote growth and innovation

� The government has proposed to formulate a sequel of AMP II (2018-27) to put in place a framework for the long term growth trajectory for auto and auto ancillary sector

� Creation of Technology Up-gradation & Development Scheme (TUDS) for auto components and setting up of Auto Component Technology Development Fund (ATDF) which will help auto component companies in accessing loans at reduced rates of interest for research and development activities, upgradation of process and technology acquisition

� Auto Component Manufacturers Association (ACMA) has identified the long term investment requirement by auto component industry during 2012-16 of about ~INR 15,000 crores of which ~INR 7,500 crores are proposed to be financed through soft loans with interest subvention

2009

- 10

2010

- 11

2011

- 12

2015

- ...

2020

- ...

Source: CMIE IAS

% g

row

th

Auto component Auto industry

0

20%

40%

Figure 28: Growth of auto components relative to growth of auto industry

31

� The government has allowed 100% foreign equity investment in the sector, through the automatic route, without any minimum investment criteria

Future growth outlookThere is no doubt the medium to long-term growth story of India remains intact, however auto component industry will have to get used to such transient ups-and-downs arising from the difficult economic situation. Significant opportunities exist to enhance share in the global automotive market. Industries need to invest in design and development to move up the value chain.

Currently, the auto components industry in India is around two-thirds the size of the OEM segment. This proportion is around one to two times in mature markets of Europe, America and Japan. This indicates:

� Higher proportion of imports of auto components in India by OEMs and

� Lower replacement market sales

Other sub-sectorsThe following sub-sectors also appear to have a larger scope for business growth over the medium term:

Electronics (engine-side and body-side) – The localisation proportion of electronic components in Indian cars remains low as of now. Given the growing need to offer driver information systems, engine management systems and emission control systems in cars to meet the advancing safety and emission regulations, the use of electronics in Indian cars is likely to see a proliferation in the times to come. This should translate into strong growth for auto ancillaries having capabilities in this segment.

Plastics – Although this segment is already quite competition intensive, considering OEMs’ focus on adopting light-weighting technologies and already several instances where material of components has been changed by OEMs from sheet metal to plastic; it augurs well for auto component manufacturers having strong capability in the plastics space. Sheet moulded composites, bulk moulded composites and long fibre thermoplastics are some of the new materials being used to replace metal and conventional plastics.

Aluminium die-casting – In the boom period of 2009-10 and 2010-11, the auto industry had experienced significant capacity constraints for aluminium die-cast components. The capacity shortage was more severe at tier-2 suppliers’ end and this had prompted few tier-1 players to backward integrate not just for captive consumption but also for selling to other customers. Also, for select engine components, OEMs are likely to demand tighter product tolerances to meet the stringent emission control norms which in turn is likely to increase per unit realisation for auto ancillaries manufacturing such components (although at the cost of higher capital investments).

The auto components industry in India is around two-thirds the size of the OEM segment. This proportion is around one to two times in mature markets of Europe, America and Japan.


32

Aerospace and defence – Sunrise sector with strong long term potential

OverviewThis sector is currently in its nascent stages in India but presents a large opportunity. Until now, most projects are executed by PSU or government research agencies which have the R&D and technological expertise. But with more private players acquiring technological capability by way of JV’s, acquisitions or talent inflow have begun to play a more significant role not just domestically but also on the international stage.

Key drivers

� 100% private sector participation with defence having a restriction of 26% FDI

� Offset policy from large defence spend

� Strong maintenance, repair and overhaul (MRO) capabilities

� Continued growth of civil aviation

� Investments in the Indian space programme – INR 40,000 crores during the period 2007-2012

Key challenges

� Moving up the value chain from being tier 2-3 suppliers to tier 1 suppliers

� Building design and integration capabilities

� Availability of highly skilled workforce

� High import duties on imported components

� Access to funding for high initial capital investment

Overall sector outlookDemand in the engineering sector is expected to remain healthy primarily on account of the government increased thrust on infrastructure development in turn having positive impact on various sub-sectors. Favourable government policies and regulations would enable the sector to scale up its growth potential.

Increased spend in defence, improving medical infrastructure, indigenisation of auto components to tap export potential, farm and construction equipment are going to be critical drivers for growth of this engineering industry.

The next section analyses Punjab’s strength in leveraging the growth potential.

33

Potential for Punjab’s engineering industryStrengths and weaknessesThough Punjab has been an agriculture dominated economy since Independence, the state occupied an important position in the engineering sector of the country. The industrial towns like Ludhiana, Amritsar, Jalandhar, Mohali, etc. host several small, medium and large industrial units. Dominated by small and medium enterprises, Punjab excels in production of leather goods, textiles, machine and hand tools and paper packaging.

Local availability of raw material, skills and market demand have contributed to significant growth of these industries. All of this was adequately supported by the enterprising spirit of Punjab’s businessmen who instilled flexibility in running their operations to meet diverse customisation requests and customer expectations.

The success of the engineering industry is primarily due two reasons: the spurt of agricultural growth that aided the manufacturing to move out of infancy through sustained local demand, and the ability of the businessmen to think ahead of time and ahead of competition.

Examples of such forward thinking include use of automation in textile manufacturing, development of machine tools industry, leadership in high volume bicycle market and so on.

However, it would not be prudent to say that all local companies have adopted innovative thinking and best practices. Companies have usually focussed on one or two strengths that would set them apart from the competition. This is also reflected by inputs received during our discussions across industries in Punjab (see figure {29}).


34

This is also reflected in the views of the industrialists:

I think one of the strengths for our company is that we are a single source to most of our customers because of our lower prices than our competition. This has been possible because we bought the right technology at a very early stage and today the competition is incurring high capital costs for the same technology. COO of an automotive parts supplier.

For a long time the availability of raw materials, vendors and skilled manpower for the machine parts that we manufacture has remained in Punjab. That ecosystem gives us the advantage of being present in Punjab. Partner of a machine manufacturing company.

We have been successful because of the shorter lead times of product development and the high service levels. The customers have never had any complaints regarding the quality of our products and are always satisfied with the design we provide them. Senior mnagement member of an electrical firm.

Figure 29: Factors perceived as competitive strengths by Punjab based engineering sector industries

Supe

rior q

ualit

y

Cost

adv

anta

ge

Lead

tim

e

Desi

gn &

dev

elop

men

t

New

pro

duct

tech

nolo

gy

Nic

he p

rodu

ct

Loca

tion

Proc

ess

tech

nolo

gy

Tale

nt &

ski

lls

Gove

rnm

ent p

olic

ies

NoYes

Source: Primary research, Valcon Analysis

0%

75%67%

58%50%

42%33% 33%

25%17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

35

Starting a business

We invested in automation of our processes and technology much before the competition to mitigate low productivity and improved quality. Today, 80% of our sales is in exports. MD of automotive parts company.

Ease of doing businessAccording to the World Bank, “Doing Business in India report 2012”, Ludhiana is ranked the best in the Indian cities in ease of doing business.

7 Doing Business in India (World Bank Report), 20128 Deceleration of Economic Growth in Punjab – Lakhwinder Singh, Sukhpal Singh, Economic and Political Weekly, Vol 37, No. 6, (Feb9 -15, 2002)

7

KochiBangaloreRanchiGuwahatiBhubaneshwarPatnaKolkataAhmedabadChennaiGurgaonLudhianaHyderabadIndoreNew DelhiJaipurMumbaiNoida

Procedures(number)City

Time(days)

Cost(% of income

per capita)

1313121312111313131212121311121312

4140383837373635343333333232313030

47,2%64.7%51.5%40.5%39.9%38.5%39.6%46.3%40.3%50.7%48.0%41.6%43.8%41.1%45.5%70.9%52.5%

The literacy rate in Punjab is 76.7% which is much higher than the national average of 74%. But there is a sense of stagnation in the industry post the liberalisation era. The agricultural sector dwindled first and dropped to growth of 2.16% per annum as compared to 5.15% per annum in the 1980s8. This perhaps had a domino effect on the manufacturing industry as well. If we compare the rate of growth of different states post liberalisation period, it shows Punjab losing the edge.


36

Table 09

Table 02: Relative economic performance of Indian states during the 1980s and 1990s

State

BiharRajasthanUttar PradeshOrissaMadhya PradeshAndhra PradeshTamil NaduKeralaKarnatakaWest BengalGujaratHaryanaMaharashtraPunjabSDP of 14 statesGDP (national accounts)

1980-81to

1990-91

1991-92to

1997-98

1980-81to

1990-91

1991-92to

1997-98

Annual rate of growth ofSDP (per cent)

Annual rates of growth ofper capita SDP (per cent)

4.666.604.954.294.565.655.383.575.294.715.086.436.025.325.245.55

2.696.543.583.256.175.036.225.815.296.919.575.028.014.715.946.89

2.453.962.602.382.083.343.872.193.282.393.083.863.583.333.03

-

1.123.961.241.643.873.454.954.523.455.047.572.666.132.804.02

-

Source: Ahluwalia (2000)

Relative economic performance of Indian states during the 1980s and 1990s

The scale of industries tended to remain small and medium which meant the productivity remained low. There were not many large scale industries that could help the accompanying small and medium scale industries grow. Small scale industries struggled with financing new projects and could not keep pace with the modern technology and advanced methods of production and modern forms of organisation adopted by industries in other states. Adding to the handicap was the competition for the raw materials and markets. Punjab found itself isolated and away from the source of raw materials and markets. The logistics costs made some industries unviable to operate from Punjab. The low turnover and localised nature of most of the companies also meant that Punjab did not remain a attractive destination for talent. Youth started to emigrate to other states and countries for better opportunities. The lack of skilled managers meant, the working experience of managers in companies was more than in the other states. The skills set got dated due to lack of exposure to new best manufacturing practices and management8.

“What you find here in Punjab is commitment in the workforce, but not professionalism”, says HR Vice President of tractor manufacturer.

8

37

In a survey with the companies in the region, they feel the rising manufacturing and material costs will hurt cost competitiveness in the future. Already, Punjab is far from the sources of raw material, any increments in the logistics costs and prices of raw materials may make the businesses unviable. Out of the various reasons highlighted, Punjab is grappling with low productivity and lack of skilled talent and labour.

High

mat

eria

l cos

ts

High

man

ufac

turin

g co

sts

Lack

of s

kille

d ta

lent

/labo

ur

Low

pro

duct

ivity

Lack

of b

est m

anuf

actu

ring

prac

tices

and

qua

lity

cont

rol

Drop

in c

usto

mer

/mar

ket d

eman

d

Risi

ng in

tere

st ra

tes/

finan

cing

Lack

of R

&D

capa

bilit

y

Curre

ncy

fluct

uatio

n

Lack

of n

ew te

chno

logy

and

prod

ucts

Glob

al e

cono

mic

inst

abili

ty

No, it is not a major challengeYes, it is a major challenge


Figure 30: Punjab’s engeneering industry’s major challenges as identified by business leaders

0%

83%75%

58%50% 50%

42%

25% 25%17% 17% 17%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Apart from these factors, industry leaders are pressing in their demands for government incentives, infrastructure and pro-industry policy.

Cost is the major focus of Punjab’s engineering industry. While it has been a key success factor for industries here in the past squeezing it further is also the toughest challenge today.

Some excerpts from interviews:

The land availability for expanding our facilities is low and since it is becoming very expensive to buy land here we have to look beyond Punjab to seth-up new facilities at reasonable costs. Senior Management Member of an auto electrical parts firm.

Buying new land in and around Mohali will make my new business plan unviable. Countries like Luxembourg have cheaper land rates than in Punjab and they specifically invite us to set-up facilities in tax-free zones there. MD of auto parts manufacturer.


38

Capability assessmentIn this section, we look at some specific capabilities that are necessary for supporting growth of engineering companies, amongst many others. We have also tried to assess how the engineering companies in Punjab fare on these, on the basis of our interactions with their top management, visits to facilities and comparing with similar companies in other regions.

Systems and processesThe best in class engineering industries across India are focussing on technology upgradation across the manufacturing lines through intensive automation, newer process technology, precision tooling, shorter change over times and tighter process controls to match up their global competition and gain the confidence of both Indian and foreign customers. These companies work the tight line in staying ahead of the technology curve and still continuously reducing costs. The customers have started looking beyond only costs and now focus on value.

A majority percentage of companies in Punjab admit that they are not using the latest generation of machines/equipment, technology and process standards. It

A lot of tax incentives given by neighbouring states pulled away big multinational companies that could have changed the manufacturing landscape in Punjab. On the other side, why do you think the Mittals and Munjals have moved out their majority of businesses out of Punjab? President of a textiles firm.

The location poses a major challenge for Punjab, away from sea-ports and airports, landlocked with a hostile neighbour. My customers are not willing to come down 350Kms to visit my plant. President of a textiles firm.

The government must focus on improving infrastructure – mainly in areas of power generation, road connectivity and airports and inland ports. The already disadvantage in location makes it worse if the infrastructure in not good. Partner of a machine manufacturing firm.

Drug addiction is a challenge due to which the Punjabi youth does not want to work. With migrant labour becoming scarce our machines are lying idle without operators. General Manager of a hand tools manufacturer.

Law enforcement agencies ask us for equipment as they do not have funds. The road infrastructure is miserable due to lack of investment from the government. The government doesn’t even have money to pay salaries to its employees so can we expect it to invest for us?

Small industries will become extinct in Punjab as it is impossible to run a profitable business.

39

was noted in the study that while Punjab was a pioneer in the technology adoption in the 1980’s, it has gradually fallen behind its competitors in the last decade. The underlying reasons for this technology and process stagnation are multi-fold:

� Almost 95% of companies think that they don’t see the need to upgrade their technology and processes until they are ‘necessary’ to meet the customer requirements.

� Most of the companies in Punjab invariably think that the depreciation of their machines/equipment adds to their cost advantage over the competition; thus investing into technology upgradation will hurt the cost competitiveness.

� Even if the companies are interested in investing into technology upgradation, systems and processes, they face roadblocks in form of lack of exposure and technical know-how, impending change management on the shop-floor and lack of skilled labour to operate the new equipment and machines.

Figure 31: Is your company using the latest generation machines and process standards

Yes

No

86%

14%

Inadequate technology upgradation by the companies due to these reasons has associated side-effects:

� Almost 70% of the companies feel that their current technology and processes are only sufficient to meet the existing customers’ requirements. The lack of high process standards, effective controls and advanced manufacturing techniques incapacitate the companies to enter new and profitable sectors such as medical devices, defence and aerospace or even gain new customers in the existing sectors.

“If I have to rate our technology on the scale of 10, it will be 7. We know we are not best on the technology and our manufacturing lines are not the latest, something that explains why we are not able to move up the value chain and serve customers like BMW & Audi”, says senior management member of an auto electrical parts company.


40

SkillsThe engineering industry has moved ahead from the days where success was based on workmanship to a new era where it is as necessary to have the hard skills like design and development capabilities and manufacturing expertise to soft skills such as project management and leadership skills.

As the industry becomes more competitive, the companies have the onus on constantly reinventing themselves to stay ahead of the curve. This is the very same reason the best in class engineering companies feel that their people are the most valuable resources in order to maintain competitive advantage. The companies diligently invest time in hiring the best talents and train them for multitude of roles. As a departure from the past trend, employees are expected to have multiple skills so that the company retains the flexibility in changing demand situations.

The engineering industry in Punjab faces challenges of its own when it comes to hiring, retaining and imparting the skills across the management and working levels.

� Punjab has emerged as the education hub in North India. There are 10 universities/deemed universities in addition to exclusive technical universities with 100 plus professional colleges. 10,000 technicians and 20,000 skilled craftsmen are trained every year in 55 polytechnics and over 200 ITIs/ITCs9. And yet, Punjab faces a shortage of skilled labour across the levels.

� On the shop floor, companies face labour shortage in the range of ~20%-40%10 across high, medium and low skilled labour. Following reasons have been attributed to the shortage of labour:

a) Migrant labour moving back to homelands on account of the NREGA scheme

b) Local labour migrating to other states and countries for better opportunities

c) Local labour opting for other sectors such as health care and trading over manufacturing

The engineering sector companies in Punjab have fallen into a stagnation loop when it comes to adopting technology which puts them at serious disadvantage not only due to their reduced competitiveness vis-a-vis other states but also the risk of obsolescence in the wake of continuous technology evolution.

9 Investment Climate in Punjab, CII Report, 200910 Valcon Survey

41

Labourattitude & work

culture

Labourproductivity

Labourskills

Labourincentives

Labourbackground &

education


Figure 32: Perception of challenges with labour in Punjab’s engineering industries

No, it is not a major challengeYes, it is a major challenge

0%

79%71%

29%21%

14%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

� Across the engineering sector in Punjab, labour skills are not the only issue but also labour work culture and productivity. There is general sense of belief among the industrialists that the work culture in their companies is not a progressive one and is shackled by old paradigms.

� At the managerial level, the managers are mainly local bred talent with lesser exposure to best in class practices as compared to their counterparts in other world class engineering companies.

Improving the labour productivity and work culture will take conscious efforts in lot of areas. This has to be done with a lot of the exposure of the labour to best in class practices, training and incentives.

In order to illustrate the gaps in skill levels, in general, of engineering companies in Punjab, we did a comparison of the levels for critical organisational skills with neighbouring state Haryana, which has been highly successful in developing the sector:

Lack of availability of local working people has been the result of historical economic prosperity from agriculture, industry and financial success of NRI Punjabis sending money back home.


42

In the current scenario where the best in class engineering companies are expected to be highly skilled in production, IT, procurement, etc. the companies in Punjab need to come upto the mark on these competencies as also on soft skills, supply chain and marketing skills.

The general split of the trainings imparted in the engineering companies is given on page 43.

PlanningInventory and RM planningSales planningInventory managementProduction planning

Soft skillsLeadership Project managementTeam workNegotiation skills

ManufacturingLeanTPM, TQM, Quality CirclesKaizen, 3M, 3G,5S

Supply chainDistribution managementNetwork planningLogistics planning

ITERP/SAP systems

Skill set/capability

MarketingProduct managementBusiness developmentSales and order managementDemand forecastingCustomer engagement

ProcurementCost reduction targetsVA-VEProcurement systems and processesSupplier development, management and upgradationCosting

Haryana Punjab

Medium

Medium-high

Low

Low

High Low-medium

High Medium

Medium Low

High Low

High Medium

Comparison of the levels for critical organisational skills

43

TQM

and

rela

ted

qual

ity tr

aini

ngs

Qual

ity c

ircle

Kaize

n w

orks

hop

TPM

and

rela

ted

mai

nten

ance

Visu

al m

anag

emen

t

Lean

man

ufac

turin

g

Prod

uctiv

ity im

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Figure 33: Trainings imparted in last two years by Punjab’s engineering companies

0%

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As can be seen, the companies in Punjab are primarily focussing on imparting training in the areas of manufacturing whereas training for other skills related to management would also be necessary to build competitive organisations.

Marketing capabilities Often the design and development prowess, manufacturing technology, operational performance and talent and skills are the key determinants to separate the best performers in the engineering industry from the worst. But this has drastically changed as the supply chains become even more agile and the value chains are increasingly becoming integrated. The key determinants are becoming commoditised as the best performing companies are increasingly improving their standards and surprisingly marketing is becoming increasingly important in the engineering industry. While it can be said that there has been some spill-over effects of the importance of marketing and branding from the FMCG industry, the customers in the engineering space are increasingly becoming demanding and seek more value. The best performing companies have moved from the model where the finance or manufacturing team was a make-shift marketing team to having a full time professionally qualified marketing team in place. The marketing team is ever in constant touch with the


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Gain more marketshare with the

current customers

Gain more marketshare in the current

regions

Gain new customersand enter new

regions

Diversify into newsectors such as

defence, aerospace,medical instruments,

etc.

NoYes


Figure 34: Focus for business development in Punjab's engineering industries

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customer right from the pitching for new business to day to day sales and order management. Customers expect suppliers and other engineering companies to work closely with them, seek more customisation for its products and services, expect short turnover times for requests/orders and operational flexibility from suppliers/engineering companies. The engineering companies that have been able to anticipate and act quickly on customer demands are the ones who have progressed and have a strong relationship with customers.

In terms of the share of revenues by geographies, there is contrast among the engineering companies in Punjab. While on one hand, the larger, much successful companies have understood the importance of marketing capabilities and a have distributed market portfolio – Domestic (Punjab), Domestic (Rest of India) and Exports, the smaller and medium companies are struggling to move and expand their presence in newer regions and gain new customers.

On probing the aspirations of the Punjabi companies for growing their business, most of the companies are focussed on gaining more business with the current customers and gain more market share in their current regions while the more progressive companies mentioned that they are focussed on gaining new markets such as exports and gaining new customer accounts.

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It can be seen that very few companies are focussing on diversifying into the new attractive sectors we have mentioned previously in the report. Through our interviews it was found that companies felt handicapped on two broad parameters:

� Inability to reach out to new customers in the domestic and export markets due to lack of networking opportunities

� Lack of the market knowledge and customer expectations in order to diversify into new sectors

Most of the companies in Punjab have very small marketing teams to handle customer accounts. In addition, the managers are inexperienced when it comes to scouting and developing connections with potential customers, lack knowledge of handling customer expectations and skills for product/portfolio management. In contrast, the more successful engineering companies have dedicated marketing/sales experts who understand the intricacies of the market, the customer expectations and relationship management.

In our view, the role of marketing is also limited by the state of the engineering companies in Punjab. Most of the medium and small companies are not on par with the best in class companies on operational performance, technology and design and development thus limiting the role and confidence of marketing teams when pitching for new businesses and clients.


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SWOT analysis of Punjab’s engineering industryA comprehensive view of the current strengths and weaknesses of the engineering sector in Punjab and understanding of the opportunities that exist for the engineering sector in general led us to create a SWOT table for Punjab’s engineering industry. We have done this along five key areas of business:

Strengths

STRATEGY, CUSTOMERS & MARKETS

Weaknesses

Opportunities Threats

• Fast changing business environment could have adverse long term impacts if not addressed well• Continuation in low return sectors could affect viability of the businesses• Growing presence of foreign players setting shop in the country

• High growth potential - India poised to be an engineering hub for many critical sectors• Opportunity to diversify into newer emerging high profitability/high return sub-sectors of engineering

• Absence of clear strategies and business plans with most SMEs/MSMEs affecting growth• Local or nearby customer centric business models of most of the companies

• Entrepreneurial spirit and risk taking approach support has strongly supported growth of the sector in the past

Strengths

MANAGEMENT

Weaknesses


• Growing presence of professionals towards new sectors like retail, IT, etc. could significantly impact supply of managerial talent

• Younger generation with professional management education joining the team could rev up the businesses

• Prevalent owner driven culture with their high involvement leading to poor leadership bandwidth creation• Management at SMEs/MSMEs lacks professionalism, strong ambitions and exposure to opportunities

• High ownership and commitment due to family involvement in many businesses• Family type management style has created

loyal empolyee base over years

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Strengths

SYSTEMS, PROCESSES, TECHNOLOGY

Weaknesses


• Lack of effective systems and processes can put companies out of favor with customers via-à-vis some other states where companies have taken significant lead

• Technology tried and tested by other companies in the country can be adopted

• Low focus on implementing best practices due to lack of awareness of benefits and low management bandwidth• In majority of SMEs/MSMEs, systems and processes are unstructured and non-scalable

• Some companies across sectors have taken lead in using latest technology and implementing systems

Strengths

PERFORMANCE, INNOVATION

Weaknesses


• High dependence on migrant labour for skills• Economic growth of traditional ‘labour supplying states’ expected to further reduce labour and skill supply

• Opportunities exist to extend offerings to higher value added services like design, R&D, etc. for both domestic and export markets

• Low asset utilisation and quality levels lead to higher 'real costs'• Management lacks ability to innovate. Lack of technical expertise also hampers improvement of current products and development of new ideas• Workforce productivity is lower than in some other states

• Strong cost focus make the business cost competitive

Strengths

BUSINESS ENVIRONMENT

Weaknesses


• Severe shortage of power and poor road and air connectivity hamper businesses from operating efficiently• Reduction in import duties on certain critical products leading to preference for imports instead of domestic production

• Thrust on infrastructure – Government plans to spend close to US$ 1 trillion investment in developing infrastructure

• Most companies do not have any strong plans to handle changes in business environment

• Ranks highest on ease of doing business index (World Bank report)• Cordial labour relations as compared to other states


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Key success factors for growth

While opportunities exist for companies in engineering sector to grow, both in the domestic and export markets, the sector study and future outlook indicates that following factors would remain key to achieving success:

� Ensuring their presence in the emerging and relatively more attractive sub-sectors would be important for tapping the newer growth opportunities being created

� Moving towards higher value added products

� Focus on innovation, design, research and development to gain competitive edge

� Strong collaboration and partnership with customers to develop products by understanding their needs proactively

� Creating professional managements with robust systems

� Strong cost focus to support margins

� Focus on operational excellence to ensure continued improvements in operational and business performance parameters

� Attracting, developing and retaining skill by running systematic skill management programs with long term perspective

� Focus on untapped markets

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Hurdles and roadblocks

Power: While there is the recognition of national power deficit, in Punjab it has reached an alarming proportion. In June 2012 for example, industrial units in Punjab suffered 50% industrial production loss due to power cuts11. As a substitute, the industry uses expensive petroleum generated power but for businesses with thin margins this is quite unsustainable. Going forward sustainability of businesses in Punjab is going to depend heavily on continuous availability of energy supply.

Surface transport: Surface transport is the key to moving industrial output to the destination markets. While there has been good progress on the national highways, local infrastructure in industrial areas is poorly maintained. Better investment in focal point infrastructure is likely to contribute to state revenue growth.

Air connectivity: Poor air connectivity limits the flow of business into the state since time critical man and material movements are not possible. Development of international airports in the state will allow faster movement.

Government investment: Punjab’s public expenditure is under severe debt stress. Nearly 75% of its revenue income is consumed by committed expenditure including interest payments. The annual interest liability is more than about 20% of the revenue receipts. This level of debt is clearly un-sustainable12. While the attempt is to relieve the state from fiscal stress, it is difficult to see the government finances recover to a sustainability level and allow large investments in industry and infrastructure.

High cost of funds: While one result of poor public fiscal situation is deferral of tax refunds for the companies, rising interest rates have not helped their cause either. With current cost of debt hovering around 15% annually, it is almost impossible for companies seeking growth to raise significant finances from the debt market.

Shortage of labour: With the implementation of social schemes in backward states, immigrant labourers are starting to move back to their states of origin. Local labour is in short supply due to large scale international emigration of Punjabi youth as well as their general unwillingness to work. Drug and alcohol abuse is emerging as one of the major problems in the state. Without active participation from the local youth and immigrant labour moving back to their states it is likely that there will be a long term labour shortfall.

11 Times of India Report 25 Jul 2012: Double Whammy for Punjab Industry: Power Cuts and Tariff Hike12 Punjab Economic Survey 2011-12


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Valcon’s view

Engineering sector would continue to play a key role not only in growth of industrial output in Punjab but also providing employment and livelihood. It is imperative, therefore, to make planned efforts to improve its competitiveness and enhance its growth rate.

A holistic assessment of the engineering sector and the prevalent opportunities along with the current performance of the sector in Punjab has led us into formulating the following set of views and recommendations for the sector in Punjab.

� Identify and tap new opportunities. In the past decades, the engineering industry in Punjab has grown around some specific sectors. As opportunities appear in newer sectors which promise better business prospects and growth possibilities, Punjab’s industry would need to assess these opportunities and venture into the viable ones. Competing states have already taken a lead in grabbing these opportunities like Gujarat for automotive sector, Karnataka for aerospace, etc.

� Explore beyond local markets. Companies in Punjab appear to be primarily focused on customers in nearby states. They need to come out of this frame and start exploring additional opportunities in the rest of the country as well as export markets. Limiting to customers in nearby states has ensured limited growth opportunities on the one hand and aloofness from the emerging developments in the sector on the other. A large proportion of the companies appear to have been stunted by their growth to the MSME and SME segments for long.

� Low cost alone would not sustain competitiveness. While a high focus on keeping costs in control has helped keep the companies instead for long, for many of them, it has been done at the cost of improvising quality, developing robust systems, developing innovation and design abilities, developing skills or creating professional management teams. All of these would be necessary if these companies aspire to grow to the next phase.

� Adopting best practices is not an option but a necessity. Progressive companies have taken a lead in adopting global best practices and implementing operational excellence initiatives like lean, six sigma, TPM, integrated business planning, etc. in the last decade. These have not only resulted in improved business performance for them but also led to implementation of systems for continued improvement. It is necessary for companies in Punjab too to adopt the best practices before the gap with the competitors becomes insurmountable.

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� Innovate to lead growth. The companies must incorporate focus on innovation, design, research and development in their strategies if they aspire to keep pace with the industry and tap the emerging growth opportunities.

� Adopt a long term perspective to addressing problems. A long term perspective and joint approach to addressing many current problems like skilled manpower unavailability, power shortage, poor infrastructure, etc. may be more beneficial and viable as compared to short term solutions.

� Government and industry cooperation is necessary. The government and the industry bodies have to play a significant role in not only exposing the companies to the emerging opportunities but also making them aware of the stringent performance expectations necessary to succeed in them. Additionally, providing stable policies by the government for the industry would help support growth.

The enterprising nature of Punjab’s industry and the undying spirit of its entrepreneurs are akin to country’s folklore. While this has helped the state grow and create riches over years, the time has now come to adopt the changes necessary to ride the next curve of growth. Valcon believes that a heady mix of management vision and strategy and robust execution of organisational transformation plans would just do the trick for Punjab’s engineering industry.


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In the process of creating this report, we have interacted with many owners, directors and chief executives of organisations in Punjab and other states to seek their opinion, understand their views and capture outlook for the industry. We express our sincere gratitude to all of them for sparing time to interact with us and provide their valuable opinions. This report would not have been possible without the inputs received from all of them.

This report has also been possible due to the efforts and contribution of certain individuals at Valcon. This team worked from different offices of Valcon to research the industry, interact with many owners and chief executives of organisations across cities to understand and capture their views and finally compile everything into this comprehensive report. This team comprised of Birgitte Dahl Skaaning, Moulik Mahesh Kumar, Pavan Ponnappa, Rishabh Bhandari, Satish Munoth and was guided by Anirban Mazumdar.

Information sources

� Planning Commission report � Department of Heavy Industry, Ministry of Heavy Industries & Public Enter-

prises report � Capital Goods and Engineering sector report � ASI report 09-10 � Aero strategy � Industry reports by CII � Automotive Component Manufacturers Association of India � Sectoral risk outlook – Auto components by D&B � Medical technology report by CII and Deloitte � ICI Engineering Sector Report � www.defense-aerospace.com � www.aiacra.com � www.securities.com � www.dnb.co.in � www.ibef.org � www.aimedindia.com (Association of Indian Medical Device Industry) � www.cmie.in � www.icra.in � www.rediff.com � www.articles.economictimes.indiatimes.com � www.business-standard.com

Acknowledgements

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About The Confederation of Indian Industry (CII)CII works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India’s development process. Founded over 117 years ago, it is India’s premier business association, with a direct membership of over 7000 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400 national and regional sectoral associations.

CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few.

The CII Theme for 2012-13, ‘Reviving Economic Growth: Reforms and Governance,’ accords top priority to restoring the growth trajectory of the nation, while building Global Competitiveness, Inclusivity and Sustainability. Towards this, CII advocacy will focus on structural reforms, both at the Centre and in the States, and effective governance, while taking efforts and initiatives in Affirmative Action, Skill Development, and International Engagement to the next level. With 63 offices including 10 Centres of Excellence in India, and 7 overseas offices in Australia, China, France, Singapore, South Africa, UK, and USA, as well as institutional partnerships with 223 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

About ValconValcon is a global management consulting firm having footprints in India, Denmark, Sweden Norway, China and Czech Republic. We help you manage both strategic and operational challenges within growth, efficiency, innovation, globalisation, and transparency.

Valcon = Value consulting. Creating value is the starting point for all our efforts. You will always be assisted by a team of highly skilled and experienced management consultants – as well as seasoned subject matter experts. Every one of them is thoroughly competent within their area; a competence built through impressive careers on the other side of the desk – and in the field. Consequently, we are the only consulting company capable of taking you all the way. We will not only tell you what needs to be done – but also how. And if necessary we can do it for you as well.

We believe that the best results are created by direct and straightforward dialogue. By openness and co-operation. And by having an unfailing focus on creating real solutions to real challenges.

In short: Valcon will take you further.

Read more: www.valcon.in

CII address:Confederation of Indian Industry

Sector 31-A, Dakshin Marg, Chandigarh 160030

Valcon address:Valcon Management Consultants Pvt. Ltd

No. 608A, 6th Floor, Spencer Plaza, 768/769, Annasalai, Chennai 600 002


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Krishnan [email protected]+91-97910 33967

Anand NergunamDirector & COO [email protected]+91 95000 01946

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Prasanna Sai [email protected]+91-98400 39505

Valcon Management Consultants Pvt. LtdNo. 608A, 6th Floor, Spencer Plaza, 768/769, Annasalai, Chennai, India-600 002

Anirban MazumdarAssociate [email protected]+91-98104 76116

Valcon Management Consultants Pvt. Ltd001, U & I Corporate Center, Plot 47, Sector 32, Gurgaon, India-122 001

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