The Indian casting and forging industry is witnessing a metamorphosis, thanks to increased outsourcing by the West from the Asian region, particularly China and India. Given the enormous potential, frontline domestic players have started building up world-scale capacities by either putting up greenfield projects or acquiring sick global facilities and turning them around.
For instance, Bharat Forge (BFL) is actively explore opportunities for inorganic growth, which will be synergistic with the company’s plans and add value as well as help the company in increasing the overall share in the business.
El Forge is setting up a new plant at Appur near Sriperumpudur with an installed capacity of 5,000 tonnes. The capital outlay for expansion of capacity by setting up new plant at Appur and consolidation and modernisation of existing plants at Chennai in Appur is Rs 21 crore. The expansion plan is in advanced stage of completion and expected to start operation by September 2006 and achieve its optimal production levels by March 2007.
Steelcast is raising capacity to 9,000 tonnes per year. The shell molding casting capacity is being expanded from the existing 1,000 tonnes to 3,000 tonnes per year. The production capacity will be 9,000 tonnes in FY 2008 and 12,000 tonnes in FY 2009.
Castings and forging is one of the key engineering segments supplying various components to end user industries such as railways, automobiles, defence, aerospace, material handling, construction equipment, and mines. FY 2006 was a good year for the forging industry, whose revival, which started in October 2002, picked up momentum in the last couple of years. Traditionally, the automobile sector is the major user industry of casting and forging. The automobile sector has witnessed enormous technological growth in the last decade as a result of foreign participation. The industry’s continuous efforts in upgrading technologies and diversifying product range have enabled it to expand its base of customers to foreign markets.
Within the auto segment, the demand for commercial vehicles is racing ahead, due to ban on overloading of trucks by the Supreme Court. After witnessing a low single-digit growth in production in FY 2006, medium and heavy commercial vehicle (M&HCV) volumes picked up in the first quarter of FY 2007. Another promising segment is passenger vehicles. Rising disposable income, penchant of existing owners to move up the value chain higher-end models, and increased penetration across urban and semi-urban areas are bolstering demand. India’s automobile sector will see annual sales of $145 billion by 2016, more than 10% of the county’s gross domestic product.
The Indian casting and forging sector is equipping itself to retain its prowess to accelerate revenue from the auto sector. Heavy expansion by way of organic and inorganic growth has been playing an important role in this industry. The overall production of forgings increased by about 27% to reach about 9,29,000 tonnes in the year 2006. Capacity utilisation also improved considerably from 40-50% in the past few years to 85% of the additional capacity added in the last two years inclusive of overseas acquisitions.
At the same time, forging players are taking initiatives to acquire technology, knowledge, experience and expertise in the requirement of the non-auto sector across the entire value chain — be it high-tech aircraft or commonly required forgings for power transmission towers. Steelcast has a full pledged R&D section recognised by the Department of Science & Technology, Government of India. The best specification and manufacturing practices are developed in the R&D lab in consultation with our customers, keeping end use of the castings in mind, says Steelcast.
Similar changes are also happening in the casting sector. Tata Metaliks, a pig iron producer, is planning to enter into the casting business as well as evaluating proposal of making DI pipes, independently or in collaboration with partners. Other companies moving up from pig iron to castings include Adhunik Metaliks and KIC Metaliks.
Briefly, the composition of the Indian forging industry can be categorised into four sectors: large, medium, small and tiny. In line with global trend, a major portion of this industry is made up of small and medium enterprises (SMEs). Only about 5% large companies in terms of number. Out of the 330 odd units, the large sector consists of about nine-10 units, the medium and small sectors about 100 units. In the tiny sector, the units functioning are far too many and the number is difficult to estimate. But the industry structure is fast changing, with accelerated pace of growth of frontline companies and massive global consolidation.
China still occupies a dominant position in the global casting market. "Chinese manufacturers enjoy certain advantages over their competitors from other parts of the world. They have huge reserves of quality raw materials, which are available within the vicinity of their work area. Hence they need not keep idle inventory. Again, adequate testing facilities are available in each foundry. As you are aware, government rebate/subsidy is also available for exports. The average productivity per worker is also high," says Krishnaraj Samraj, Managing Director, Magna Electro Castings.
The Indian forging industry is increasingly addressing opportunities arising out of the growing trend among global automotive original equipment manufacturers (OEMs) to outsource components from low-cost countries. The current size of the global auto component industry is US$ 1.2 trillion. The auto industry purchases auto components worth US$ 45 billion from low cost countries, which can zoom to US$ 225 billion in next 10 years. As a result, the Indian auto component industry, by virtue of its low cost and high quality supplies, is witnessing accelerated and rising exports to global OEMs.
The woes of global auto majors have only brightened outsourcing opportunities for the domestic auto component industry. Global auto majors are facing relatively low growth in sales, cost pressures, legacy costs, pension costs, competition, which compel them to accelerate outsourcing from low cost but high quality bases, including India. The wage cost as a percentage of sales in Indian forging companies is 8% compared to 38% in the US and 24% in the Europe.
The structural changes have resulted in a scenario where the earning upside for Indian players is more from the global markets. The domestic industry’s exports recorded a growth of almost 27% in FY 2006 and reached US$ 310 million. The major markets are the US, Europe and China. Exports of forgings are projected to surge to US$ 5 billion by 2015. Steelcast exported 30% of its products in FY 2006 and is aiming to export minimum 35% of its products in FY 2007.
But low labour cost is not the only factor. Indian forging players have acquired scale, expertise and sharpened their engineering and quality control and overall management. As a result, now they are trying to replicate their domestic success by acquiring sick companies abroad and turning them around.
BFL has two lakh tonnes of domestic capacity. But it acquired about four lakh-tonne facilities across the world. Many of these facilities are loss-making entities. But the company has been able to steer them to profitability due to its expertise and also its penchant to move up the value chain. The consolidated entity’s net sales were 91% more than the standalone entity’s net sales, but the consolidated entity’s net profit was only 21% higher than standalone entity’s net profit in FY 2006.
Primarily these overseas facilities were available at a relatively low cost. But they also bestowed domestic players with huge capacities, ready market, extensive distribution network, and local advantage to take care of just-in-time procurement. El Forge acquired Shakespeare Forgings to gain knowledge about the European market. As a result, El Forge has been able to approach consumers of forgings in the UK and Germany and has also been visited and audited by these European players. The Indian company expects about Rs 2 crore worth of bulk shipments through Shakespeare Forgings this fiscal.
Though Shakespeare and El Forge operate in the same range of forging products, the European company’s major disadvantage was not being cost competitive compared with China and India, as it is based in the UK — a high cost location. Thus, the marriage with El Forge will help it to be more competitive in its market by way of outsourcing.
Shakespeare caters not only to the automotive sector but also to the mining industry in the UK. Once outsourcing starts in full swing, part of the plant will be shifted to India. Even then, manufacturing operations in the UK will be continued at a reduced level to cater to sectors such as mining and contingency supplies that has to be made at a short notice to the European market.
Overseas acquisitions also give Indian companies access to world-class product design and development, which would otherwise take a very long time to build on their own. Not surprisingly, domestic players have committed over US$600 million in acquiring forging capacities across the world including Europe, and the US.
But when will these acquisitions pay off? To improve its operating profit margin at its units abroad, BFL plans to innovate new products, processes, which have intellectual property as it can have better margin on these products. Second, it plans to improve its operational efficiency by reducing manpower and increasing the degree of automation by using fewer people to do the same thing. Third, the company will use its collective synergies and scale to get better leverage on the raw materials, which it procures. BFA (Bharat Forge America), which was under chapter 11 bankruptcy proceedings before acquisition, has been successfully turnaround in two quarters and is expected to contribute significantly by FY 2007. The capacity utilisation is 50%, and there is still room for improvement.
Meanwhile, to safeguard against the cyclical nature of the auto sector, forging companies are de-risking the business model and using opportunities in the non-auto segment; aerospace, defence, railways, and mining. India is in the midst of massive capacity addition to bolster its infrastructure. This presents enormous opportunities for the forging sector. Frontline players BFL and Ramkrishna forgings are set to benefit from increased investment in aerospace manufacturing aircraft, guided missiles, space vehicles, aircraft engines, propulsion units, and related parts, for both commercial aircraft and defence aircraft and helicopters.
More than a third of the current Indian fleet is less than five years old and approaching the 6,000-hour/18-month cycle for major service, signaling a fillip for maintainence repair and overhauling (MROs) over the next year. Asia’s commercial aircraft MRO market was worth about US$ 8.7billion in revenue in 2005, of which India’s share was US$ 714 million, according to Frost & Sullivan, a consultancy. The Indian market is forecast to grow at least 10% to 2012 in this segment.
Currently, massive fleet expansion is creating an aircraft-services industry, where none existed before. Big fleet expansion by Kingfisher and Jet Airways, together with US$ 13.2 billion worth of recent new purchases by Air-India and Indian Airlines, will more than double India’s aircraft population to 500 by 2015. Boeing and Airbus are due to set up US$ 100-million MRO centres under contracts that require them to bring to India projects equivalent to 30% of the value of the orders won from Air India and Indian Airways (now renamed Indian) which is a indirect benefit to the domestic aero-component manufacturers.
The first of Air-India’s 68 deliveries is expected to be made in November and manufacturers’ warranties will expire three years later, opening the door for independent MROs and domestic players manufacturing aero-components. "As aircraft manufacturing requires considerable amount of forged components, BFL stands to gain significantly," said Baba Kalyani, Chairman & Managing Director, BFL, recently.
Incidentally, Eurocopter, a unit of the European Aeronautic Defence and Space Co (EADS), is expected to invest over US $1 billion in India over the next two years. Eurocopter is also planning to hire a qualified workforce for its India operations, based in Bangalore, as per market sources. Eurocopter has put in bids to manufacture over 500 helicopters for the Indian defence services. The company is bidding along with India’s Hindustan Aeronautics (HAL) for light and 10-tonne helicopters for the Indian army, navy and air force. It also has further plans to set up an Indian subsidiary, a helicopter training school, and maintenance, repair and overhaul centre for helicopters.
Forging companies have identified these as high growth areas, expected to offer significant opportunities for supply of critical, highly engineered, high value-added components. The primary driver will be the aviation industry and the large orders expected from India.
BFL, which has been predominantly focussing on supplies to the auto industry, has of late started focusing on increasing the non-auto business. The company will market its existing business and related design, engineering and manufacturing capabilities to substantially scale up the operations in the non–automotive business, currently contributing 17% of its revenue, with a target of 25% in the near future. The company has already entered into long-term contracts with global customers for products that will be made in this facility to partly pre-sell the capacity.
Many other forging companies including El Forge and Amtek Auto, too, are eyeing the non-automotive business for growth. As a result, the Indian forging sector is not only enriching product and geographical mix, but even the user profile.
Ramkrishna Forgings is one of the very few Indian forging companies, with significant share of revenue coming from the non-auto business. It has one of the biggest forging and integrated machined plants in the eastern region of India, with a major contribution of 41% from the non-auto segment. The company currently caters to defence, railways, mining and earthmoving equipment of Indian companies.
Despite robust projections, the industry faces impediments such as inadequate overseas marketing support facilities, inadequate testing and validation facilities for smaller forging units, reluctance of overseas buyers to compensate for the increased input cost in India which are around 1 to 1.5 times more than international prices, and volatile forex market. For any forging company, value addition is roughly 40-50% excluding machined components. And as 60% of steel forging is cost of steel/raw-material, buyers will invariably not negotiate as they do it for high value-added products. Buyers will support the basic price increase as they don’t want to kill the goose that lays golden eggs, contend forging manufacturers.
Domestic players are establishing strong global footprint by acquiring technology, capacities and markets across the globe. They are in the process of enriching their product as well as geographical mix.
Within supplies to the auto sector, the margin is lower for forgings but much higher for machined components. Hence, players are aggressively moving up the value chain to enhance the share of revenue from machined components. While the auto sector gives huge volume and low margin, the non-auto business brings in incremental, but relatively low volume and much higher margin.
While the transition is quite painful due to the relatively wafer thin margin in global facilities, players are confident of successfully turning around those facilities and ensure a strong foundation across the world.
India has become a very good outsourcing hub across information technology, pharma, and textiles. Now, it is the turn of the forging sector to have global ambitions and capacities. It has achieved both. But the success will hinge on faster turnaround of global capacities acquired to derive maximum operational, marketing and financial synergies.
Says K V Ramachandran, Managing Director, El Forge, "The future looks encouraging for the forging industry in terms of expected surge in global demand. More business opportunities are being opened for the Indian forging industry with more MNCs entering the domestic automobile market."