How capex flow can help engineering
With capital expenditure on the rise across mega infrastructure and industrial projects, India’s heavy engineering units have much to cheer for
The heavy engineering industry is in a buoyant mood. With a spate of mega projects on the anvil, capital expenditure – particularly with regard to infrastructure building and capital intensive manufacturing sites including metro rail, highways, expressways, seaports, airports, refineries, and oil & gas installations – is on the rise. Naturally, the positive impact of this is being seen across the heavy engineering industry, with demand growing at a steady pace. And heavy engineering manufacturers are responding rather well.
More importantly, the industry has matured a great deal in recent years. Traditionally viewed as the barometer of any vibrant economy, the Indian heavy engineering industry feeds the demand of many critical, growing sectors of our economy. Over the past five years, it is said to have grown at an average rate of 12% due to a variety of factors like a steady rise in infrastructure development, growing industrial production, as well as a slew of government initiatives like liberalisation of FDI participation to 100% in select industries, and rationalisation of the indirect tax structure and customs levies.
Favourable conditions have attracted many foreign players to this industry, with the purpose of meeting unfulfilled or new domestic demand, in addition to taking advantage of India’s ideal location when it comes to exporting their products to other markets around the world. This has also encouraged local players to diversify and also engage in new technological developments. Further, the appointment of the Engineering Export Promotion Council (EEPC) as the nodal agency to spearhead the export efforts of Indian engineering units, coupled with a comparatively weaker rupee, has helped increase the exports of engineering goods. Even more encouraging is the fact that more than half of such exports are to developed countries like the US and others in Europe.
Key players in India’s heavy engineering industry are optimistic about future growth prospects. This is evident from the intent of most units to invest in R&D, in turn adding value to customer projects. These investments have only increased with the entry of international players, who bring their global technologies into play, forcing domestic players to indulge in quality improvement initiatives and diversify with new production capacities, rather than stay behind in this competitive race. There are examples of domestic majors leading this way with the likes of L&T and Thermax entering the power equipment and power utility segments. With so much happening, India’s heavy engineering industry is expected to grow by around 25% in the next few years, capitalising on the favourable investment climate within the country.
GK Pillai, MD & CEO, Walchandnagar Industries, states, “Over the last 40 years or so, the heavy engineering industry has graduated to a level where we, as a country, have created the capability to manufacture heavy engineering equipment required for all the core strategic sectors like defence, power, nuclear power, automobile, steel and mining. Various critical manufacturing technologies have been indigenised coupled with countless advances in metallurgy and we are near the goal of self-reliance.”
Sounding upbeat about what the future holds, Pillai adds, “In the coming few years, the demand for the heavy engineering industry is expected to have double digit growth, primarily driven by the localisation of more items in the strategic sectors like defence, nuclear and aerospace. The Government’s push for Make in India is going to bear more fruits in the coming few years.”
Going forward, stakeholders are expecting the economic climate to be conducive for robust growth. The steady flow of demand coming from most user industries is a definite indication of the same. Leading the way is the infrastructure segment, with fresh investment coming in industries like petrochemicals, automotive, power, mining etc.
As Vikram Amin, executive director (sales & marketing), Essar Steel India, says, “The turnover of India’s capital goods industry is expected to increase to over $115 billion by 2025. This remarkable growth in the last few years has been driven by increased investments in infrastructure and industrial production. In addition, the Make in India policy is being carefully pursued to achieve greater self-sufficiency in the area of defence equipment including aircrafts. India’s engineering R&D market is expected to increase from $28 billion in FY18 to $42 billion by FY22.”
Explaining that favourable conditions like robust demand and encouraging policy support have created an environment for a higher investment in the heavy engineering space, Sudhir Rao, MD, India, Bombardier Transportation, professes, “Bombardier aims at investing in India with a long-term perspective in manufacturing facilities, local talent, developing local supplier base, new technologies as statutory in the projects which Bombardier is pursuing in the Indian market. We believe in the Indian workforce and continuous training and share our in-depth, cutting-edge knowledge and global expertise with our partners in India.”
Paired with Positive Policies
During 2016, the Government announced the National Policy on Capital Goods with the laudable intention of trebling the production of capital goods and raising employment opportunities in this industry by 2025. This is closely linked to other major Government initiatives like Make in India, Heavy Industry Export and Market Development Assistance Scheme, and Skill India, and has proved to be a tremendous encouragement for the heavy engineering OEMs.
The above has not only benefitted domestic players, but also attracted global companies to make investments with regard to the setting up of production facilities in India. Alluding to this, Rao suggests, “Bombardier is actively collaborating in the Make in India programme by delivering rail vehicles, products and solutions that are developed locally, for both Indian and foreign markets. Bombardier also supports the Indian Government’s vision on Skill India with locally-grown talent now delivering projects for both India and export, as well as supporting the Clean India Movement by regularly arranging clean up drives in Vadodara, India.”
Export promotional policies are another form of encouragement for the industry. Pillai states, “Though the Indian engineering industry has opened up for the global markets, the scale of operations is still very low. The exports are yet to ramp up. However, with more foreign companies coming to India and setting up manufacturing bases in the country, the possibilities of exports increasing from these manufacturing companies is definitely going to rise. At Walchandnagar Industries, we are equally buoyant about this development and are hopeful of getting into reputable partnerships, which will enhance the manufacturing capability, quality and, in effect, increase our export potential for heavy engineering products.”
In order to take advantage of emerging opportunities in the market, and also to meet their own as well as various stakeholders’ targets, OEMs in the heavy engineering industry have to face many challenges. First and foremost on the list is adapting to new technologies and process automation, which foreign counterparts are working with and eager to introduce in India. These are vital for achieving internal targets of cost reduction, risk management and, more importantly, for profit enhancement, which is necessary for further R&D and investment. High cost of financing is another challenge that the industry is faced with, and the Government – with various fiscal and monetary measures – would like to support the players.
Product development is time consuming, yet an important challenge that needs to be addressed in the wake of all of the above. However, with the assistance of computer-aided design solutions and simulation techniques, time involved in product development has been cut down and early market introductions are possible.
Speaking about the product development cycle, Pillai points out, “Certain projects for core sectors such as defence take longer due to developments, try-outs, establishing the process parameters, etc. However, once the development is complete, the cycle time is established for repeat orders. Through continual improvement in processes, augmentation of resources, and close project management, the cycle time reduction is achieved.”
Acknowledging the contribution of their standard processes and skill-sets, Rao proclaims, “Our employees in India, which is our biggest strength, are fully trained on special tools and processes to ensure standard quality across Bombardier. What started as rail engineering experts from across the globe moving to India to set up a manufacturing site, has rapidly evolved into a truly Indian production and engineering hub with high international standards.”
Amin makes a point about the importance of the right materials by saying, “The steel industry has undergone a major metamorphosis over the last decade. While, on one hand, it has to meet the changing demand of the customers, on the other, it has to contend with the competition from the alternative materials set to replace steel. Hence, it is a continuous challenge for the steel industry to continuously evolve and remain ahead in the learning curve.”
The Road Ahead
With the entry of many foreign players, the heavy engineering industry is surely getting crowded. Therefore, it is encouraging that domestic players have started considering partnerships, while also diversifying their portfolios. Also, it may prove to be profitable for OEMs to acknowledge each other’s relative strengths in these partnerships, so as to consolidate their product platforms in a manner that will bring value to their customers.
The Government, on its part, could certainly help OEMs with tariff benefits like indirect levies, SEZ and FDI policies, so that they can take their businesses to the next level. Given the heavy engineering industry’s importance to the economy at large, this would be a welcome move.
Having said that, all the concerned stakeholders seem to already be doing their best to keep the current momentum going. As a result, things are certainly looking up for this all important industry.