engineering sector report

8/2/2019 Engineering Sector Report

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TERM PAPER PROJECT REPORT

ON

ENGINEERING SECTOR

SUBJECT: GROWTH PROSPECTS OF THRUST AREAS OF INDIA

SUBMITTED TO: SUBMITTED BY:

DR.HARENDRA KUMAR VIPIN TITORIA

MBA-IB


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Introduction

The engineering sector is the largest segment of Indian Industry

The engineering sector is the largest segment of the overall Indian industrial sector. India has a strong

engineering and capital goods base. The important groups within the engineering industry include

machinery & instruments, primary and semi finished iron & steel, steel bars & rods, non-ferrous metals,

electronic goods and project exports. The engineering sector employs over 4 million skilled and semi-

skilled workers (direct and indirect).

The sector can be categorized into heavy engineering and light engineeringsegments. Heavyengineering segment forms the majority of the engineering sector in India. In the year 2003-04,

out of the total engineering production of US$ 22 billion, the heavy engineering market

contributed over 80 per cent with the light engineering segment accounting for the remaining.

India has a well-developed and diversified industrial machinery/capital base capable ofmanufacturing the entire range of industrial machinery. The industry has also managed to

successfully develop advanced manufacturing technology over the years. Among the

developing countries, India is a major exporter of heavy and light engineering goods, producing

a wide range of items. The bulk of capital goods required for power projects, fertilizer, cement,

steel and petrochemical plants and mining equipment are made in India. The country also

makes construction machinery, equipment for irrigation projects, diesel engines, tractors,

transport vehicles, cotton textile and sugar mill machinery.

The engineering industry has shown capacity to manufacture large-size plants and equipment

for various sectors like power, fertilizer and cement. Lately, air pollution control equipment is

also being made in the country. The heavy electrical industry in India meets the entire domestic

demand.

A large number of multinational companies like Cummins, Alfa Laval, Sandwik Asia, etc. have also

entered the engineering industry in India.


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The Engineering sector is the largest in the overall industrial sectors in India. It is a diverse

industry with a number of segments, and can be broadly categorised into two segments,

namely, heavy engineering and light engineering. The engineering sector is relatively less

fragmented at the top, as the competencies required are high, while it is highly fragmented at

the lower end (e.g. unbranded transformers for the retail segment) and is dominated by

smaller players.

The engineering industry in India manufactures a wide range of products, with heavy

engineering goods accounting for bulk of the production. Most of the leading players are

engaged in the production of heavy engineering goods and mainly produces high-value

products using high-end technology. Requirement of high level of capital investment poses asa major entry barrier. Consequently, the small and unorganised firms have a small market

presence.

The light engineering goods segment, on the other hand, uses medium to low-end technology.

Entry barrier is low on account of the comparatively lower requirement of capital and

technology. This segment is characterised by the dominance of small and unorganised players

which manufacture low-value added products. However, there are few medium and large

scale firms which manufacture high-value added products. This segment is also characterised

by small capacities and high level of competition among the players.


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THE ENGINEERING SECTOR IS EXPERIENCING ROBUST GROWTH

Domestic performance

The Indian engineering industry has emerged as a dynamic sector in the countrys

industrial economy and has made the country self reliant in key areas. The total productionof the Indian engineering industry was approximately US$ 22 billion in 2010.

The performance of the engineering sector is linked to the performance of the end user

industries for this sector.

The user industries for engineering include power utilities, industrial majors (refining,

automotive and textiles), government (public investment) and retail consumers (pumps and

motors).

The engineering sector has been growing, driven by growth in end user industries and the new

projects being taken up in the power, railways, infrastructure development, private sector

investment fields etc.

The production of industrial machinery increased from US$ 192 million in April September

2009-10 to US$ 256 million in April September in 2010-11. The production of machine tools

increased from US$ 231.9 million in April September 2009-10 to US$ 256 million in April

September in 2010-11. Many factors contribute to growth of engineering sector in India.

The key growth drivers are:-

The growth of the key end user sectors in India. For example, the domestic sales of

automobiles have grown at the compounded annual growth rate of around 14 per cent

over the past four year.

Governments emphasis on power and construction sector has increased for the past

few years and thus increasing the demand for capital goods.

Further, India is being preferred by global manufacturing companies as an outsourcing

destination due to its lower labour cost and better designing capabilities. Engineering

companies thus have a huge potential for direct exports and outsourcing.


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Indian engineering goods are gaining acceptance in overseas markets

Engineering exports crossed the US$ 10 billion mark in 2009-10, up 28.33 per cent over the

previous year. The engineering sector accounted for 14 per cent of the countrys total exports.The nature of Indian engineering exports is also changing with time. India is moving from low-

value goods exported to developing countries to sophisticated goods targeted at developed

countries. Capital goods now account for 26 per cent of total engineering exports. The

engineering exports to the European Union countries accounted for 15 per cent and to North

America accounted for 14 per cent in 2010. Engineering goods worth US$ 1.34 billion were

exported to USA alone in 2009-10. Germany, known for its engineering capability, imported

engineering goods worth US$ 400 million from India in 2004. Engineering exports to UK,

Netherlands and France are also on the rise.

A key driver for increased engineering exports is the trend towards shifting of global

manufacturing bases to low cost countries like India. This trend is expected to boost exports of

engineering goods from India over the next five years. According to Engineering Exports

Promotion Council (EEPC), engineering exports could touch US$ 30 billion by 2014-15. In such a

scenario, India, driven by the engineering sector, would emerge as a key global manufacturing

hub.


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Growing trend of engineering exports:

Exports of engineering goods from India have also been growing rapidly :

40 percent of exports are from Small and Medium Enterprises (SMEs)

Capital goods account for 37 percent of exports in the sector

Exports to technologically advanced countries such as USA, UK and Germany have been

increasing.

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26.5

33.3

40.51

32.73

0

10

20

30

40

50

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

Exports ( $ billion ) for a five year period

Exports ( $ bn )


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Key factors enabling growth in exports:

Indias labourcost advantage

Growing capabilities of Indian engineering firms

Availability of raw materials, supplier base and labourpool

Government support:

SEZ policy

Infrastructure development


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De-licensing, removal of tariff protectio


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COMPETITIVE ADVANTAGE

Indias competitiveness in engineering industry can be assessed through following chart:

FACTOR CONDITIONS

Among developing countries, India offers the best combination of low costs, availability andskills and capabilities of manpower for the engineering sector. In terms of availability and skills,India produces over 500 PhDs, 200,000 engineers, 300,000 non-engineering postgraduates and2,100,000 other graduates each year, thereby ensuring a steady supply of qualified manpower forthe sector.


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India also has a significant labour cost advantage over other countries, as shown in the figurebelow:

Several companies in the engineering sector have leveraged Indias advantages in labour

effectively.

In order to leverage Indias intrinsic technology strengths and the vast pool of highly qualified

software professionals, ABB has set up a global corporate R&D centre in Bangalore, whichfocuses on industrial IT development and deployment. It also helps maintain and support a rangeof software intensive products and partners with the ABB R&D centers as well as business areaswithin the group. This was the first such centre to be established outside the US and Europe.

The combination of ABBs global know-how and Indias highly qualified people enables the

Indian subsidiary to produce world-class products. The Indian subsidiary is a global factory for

high voltage 72.5 KV circuit breakers, medium voltage outdoor circuit breakers and magnetic

actuators. It also exports several other products including transformers.

Cummins, taking advantage of Indias technical know-how has opened a new R&D centre in

Pune, Cummins Research & Technology India Pvt. Ltd., which would offer engineering design

and analysis capabilities for the companys technical centres worldwide.

Apart from skilled labour, India also has the raw material resources to meet the demands of theengineering industry. Key raw materials required by the engineering sector - ferrous and non-

ferrous metals such as mild steel and aluminium are available in India. Ready availability of

these materials gives India a major cost advantage, as materials account for nearly 50 per cent

of the industrys operating costs.


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Competitive industry with well developed capabilities:

The Indian engineering industry is highly competitive with a number of players in each segment.A large number of multinational companies such as Cummins, ABB and Alfa Laval have alsoentered the industry.

The intense competition has led to Indian players developing improved capabilities that have

made them more competitive. Companies have become more quality conscious and upgraded

their technology base, besides diversifying their manufacturing range in tune with global

market requirements. For example, more than 2500 firms in the engineering sector in different

areas such as casting and forging, automobile parts, machine tools, electrical machinery,

pumps, textile machinery, etc. to name a few, have acquired ISO 9000 accreditation. Other

areas where firms are becoming more competitive include R&D, Product Development and

Service.

This has resulted in MNCs increasingly leveraging their Indian arms to support their global

operations.

Growing demand

The user industries of engineering products and services include power utilities, industrial majors

(refining, automotive and textiles), government (public investment) and retail consumers (pumps

and motors). Thus, the performance of the engineering sector is linked to the industry which in

turns depends on the overall economy. Capacity creation in sectors like infrastructure, power,mining, oil & gas, refinery, steel, automotive, consumer durables drives the engineering industry.

Industrial growth (measured in terms of the Index of Industrial Production) recorded a rate of

7.9 per cent during the April September 2010-11 compared with 6.2 per cent during the same

period the previous year.

Sectors such as automotive and textiles have benefited from the changing demographic profile

of the Indian consumer. Key demographic changes include:

Increasing income levels and greater propensity to spend.

Lifestyle changes, driven by trends like increase in nuclear families, working women andexposure to global trends. These changes have been driving consumption in end-user

sectors such as consumer durables. This, in turn, has facilitated growth in the

engineering sector.


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Related and supporting industries

The presence of supporting industries provides a conducive environment for the engineering

sector to grow and prosper. Indias engineering industry has significant support from Indias

well-established IT sector, as well as institutions of higher education. India has a well-developedtechnical and tertiary education infrastructure of over 250 universities, 1500 research

institutions and over 10,000 higher education centers, which support the engineering sector

not only by supplying a steady stream of qualified manpower, but also in areas of research and

development.

India has a well-developed vendor base for supporting engineering industries. Industries such

as machine tools, textile machinery, auto components, etc., provide ample support to the

engineering sector. Some of these sectors have developed global capabilities and help the

engineering sector achieve global competitiveness.


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Classification of the Engineering Sector in India:

Key Growth Drivers of Indian Engineering Sector :

The engineering sector in India has been growing on the back of growth in the user industries

and several new projects being undertaken in various core industries such as railways, power,

infrastructure, etc. Capacity creation in sectors such as infrastructure, oil & gas, power, mining,

automobiles, auto components, steel, refinery, consumer durables, etc, is driving growth of

the engineering industry.

Growth of the key user-industries

Governments thrust on the power and construction industries

India being preferred by global companies as an outsourcing destination as it enjoys

lower labour cost and better designing capabilities


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FDI Inflows in the Engineering Sector Aug 91 to Dec 06:

Heavy Engineering Sector

The heavy engineering sector can be classified into two broad segments capital

goods/machinery (which is further classified as electrical machinery/equipment and non-

electrical machinery/equipment), and equipment segments.

Electrical machinery includes the following: power generation, transmission and distribution

equipments such as generators and motors, transformers and switchgears. Non-electrical

machinery includes machines/equipments used in various sectors such as material handling

equipments (earth moving machinery, excavators, cranes, etc), boilers, etc.


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Heavy Electrical Industry

The fortunes of the heavy electrical industry have been closely linked to the development of

the power sector in India. The heavy electrical industry has under its purview power

generation, transmission, distribution and utilisation equipments. These include turbo

generators, boilers, turbines, transformers, switchgears and other allied items. These electricalequipments (transformers, switchgears, etc) are used by almost all the sectors. Some of the

major areas where these are used include power generation projects, petrochemical

complexes, chemical plants, integrated steel plants, non-ferrous metal units, etc.

The existing installed capacity of the India heavy electrical industry is 4,500 MW of thermal,

1,345 MW of hydro and about 250 MW of gas-based power generation equipment per annum.

The industry has the capability to manufacture transmission and distribution equipment upto

400 KV AC and high voltage DC.

FURTHER UNDERSTNDING OF THE SECTOR

The Heavy Electrical Industry can be classified into the following product categories:

1. Turbines and Generator Sets

The Indian industry has established a manufacturing capacity of various kinds of turbines of

more than 7,000 MW per annum. The PSE Bharat Heavy Electricals Ltd (BHEL) has the largest

installed capacity. There are units in the private sector also which manufacture steam and

hydro turbines for power generation and industrial use. Domestic manufacturers of AC

generators are capable of manufacturing AC generator from 0.5 KVA to 25,000 KVA and above.

2. Boilers

The Indian boilers industry has the capability to manufacture boilers with super critical

parameters upto 1,000 MW unit size. BHEL is the largest manufacturer of boilers in the

country, with a market share of over 60%. It has the capability to manufacture boilers for

super thermal power plants, apart from utility boilers and industrial boilers.


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Source: Ministry of Heavy Industries, Annual Report; (Rs mn)

3. Transformers

The domestic transformer industry has the capability to manufacture the whole range of

power and distribution transformers. Special types of transformers required for furnaces,

rectifiers, electric tract, etc, and series and shunt reactors as well as HVDC transmission upto

500 KV are also being manufactured in India.


The Indian transformer industry exports to over 50 countries including the US, Europe, South

Africa, Cyprus, Syria, Iraq, and Far East countries. During FY05, exports of transformers rose by

15.4% to Rs 8,983 mn, which came on top of the sharp 39% jump in exports during the

preceding year.

4. Switchgear and Control Gear

The switchgear and control gear industry in India is a fully developed one, producing and

supplying a wide variety of switchgear and control gear items required by the industrial and


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power sectors. The entire range of circuit breakers from bulk oil, minimum oil, air blast,

vacuum to SF6 are manufactured to standard specification. The range of products produced

cover the entire voltage range for 240V to 800KV, switchgear and control gear, MCBs, air

circuit breakers, switches, rewireable fuses and HRC fuses with their respective fuse bases,

holders and starters.


5. Electrical Furnaces

Electrical furnaces are used in Metallurgical and engineering industries such as forging and

foundry, machine tools, automobiles, etc.



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6. Shunting Locomotives

Shunting locomotives for internal transport facilities are essentially used in railways, steel

plants, thermal power plants, etc.

Trend in Production of Various Categories of Heavy Electrical Machinery

Source: Ministry of Heavy Industries, Annual Report FY06; (Rs bn)

Leading Players in Heavy Electrical Industry

Source: Prowess; Compiled by D&B Research


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Light Engineering Industry Capabilities/capacities of Indian manufacturers:

Welded Steel Pipes & tubes: There are currently 123 units engaged in the Tubes manufacture

of welded steel pipes & tubes in the organized sector. There is adequate capacity of themanufacture of these types of pipes & tubes.

Process Control Instrument: There are 26 units in the organized sector manufacturing process

control instruments & systems, out of which seven units are capable of taking up complete turn

key projects for the entire instrumentation system including software required by process

industries. The industry is in a position to meet approximately two-thirds of the countrys

demand.

Medical & Surgical: Indigenous manufacturers are currently

Equipment: in a position to manufacture a wide variety of electro-medical equipments such as

electro-cardiograph (ECG machine), X-rays scanner, CT scanner, short-wave physiotherapy unit,

electro surgical units, blood chemistry analyzer etc. The indigenous industry is capable of

supplying about 40 per cent of the demand and the rest is met by imports.

Industrial Fasteners: Industrial fasteners cover high tensile and mild steel bolts, nuts, screws,

studs and pins. All types of fasteners except high tensile and special type fasteners are reserved

for SSI Sector.

Industrial Gears: The Industry is de-licensed as per the current Industrial Licensing Policy and is

eligible for automatic approval for Foreign Direct Investment.

Antifriction Roller Bearing: The Indian bearing industry has grown rapidly during the last few

years. Today the industry is meeting around 70 per cent of its demand for common varieties

and sizes of bearings while rest is being imported. At present there are 19 units in the organized

sector manufacturing both ball and roller bearings. The industry has established a highly

diversified product range of around 500 types of bearings.

Plain Paper Copier : There are, presently, 12 units manufacturing plain paper copiers. The

major manufacturers have technical collaboration with reputed foreign companies.

Sewing Machine: The major source of production of sewing machines in the country is from

small scale sector as manufacture of conventional hand operated sewing machine is reserved


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for this sector. The demand for conventional domestic machines is being fully met indigenously.

The industry has potential to undertake export to developing countries.

Bicycle Industry: The bicycle industry is mostly in the small scale sector. Large-scale units have

been permitted to manufacture bicycle frames, chains and rims for captive consumption only.

The bicycle manufacturing is an established industry in the country with well accepted quality

standards in the international market. The export for the year 2007-08 was to the tune of US$

33.9 million (Rs 1620 million) and import was negligible.

Steel Forgings: This industry is well established in the country having modern manufacturing

facilities. Besides meeting the requirement of domestic market, it is well established in export

market also.

Characteristics of the Indian Capital Goods Sector:

Fortunes of the sector linked with that of the overall industry

Manufacturing sector is the key end-user sector of capital goods

Labour is highly cost-competitive

Inputs/raw materials used are mainly local/domestic in origin

It suffers from low technological competitiveness

Relative lack of sub-contracting arrangements, despite large scale SME presence in

engineering sector High incidence of indirect taxation (excise duty, octroi duty/entry tax), central sales tax,

sales tax, service tax, etc), as compared to other nations

Lags in strong institutional mechanisms for export credit and promotion

Public Sector Enterprises (PSE) have dominance in heavy engineering, machine tools,

boiler manufacturing. On the other hand, private firms prevail in industrial machinery

segments such as cement, sugar and most other non-electrical machinery

Output concentrated with top few companies in most product groups, generally with

large PSEs, followed by a middle layer of companies comprising large private sector

players and multi-national companies, followed by a large number of small units at the

bottom of the pyramid

Presence of a large width of products, with almost all major capital goods being

manufactured locally

Indian companies, in general, lack export thrust, as the focus is largely on the domestic

market

Most items produced compare functionally with those manufactured elsewhere in the

world, but lag behind as far as finish is concerned

Focus/investment in branding and marketing and customer orientation is low.


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Source: IAS (CMIE) & D&B Research

FUTURE OUTLOOK

The engineering sectors future outlook is promising. Drivers like infrastructure development,

industrial growth and favourable policy regulations will ensure growth in manufacturing.

Emerging trends such as outsourcing of engineering services can provide new opportunities for

quantum growth. Engineering and design services such as new product designing, product

improvement, maintenance and designing manufacturing systems are increasingly getting

outsourced to countries like India. It has been estimated that the present market potential for

outsourced engineering services is between US$ 7 billion and US$ 12 billion, while the value ofwork currently undertaken by vendors in India is estimated between US$ 400 million and US$

500 million. Indias engineering sector has a significant potential for future growth, both in

manufacturing as well as services.

Some of the latest trends in the Engineering sector are as below :-


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PROGRESS AND PROSPECTS OF INDIAN ENGINEERING GOODS EXPORTS

INTRODUCTION

The importance of exports to economic development has been well documented in empirical as

well as theoretical literature. A number of studies have examined how exports are beneficial

for economic development of an economy. A common point among them is that, exports may

lead to greater capacity utilization, economies of scale, incentive for technological

improvement and efficient management due to competitive pressure abroad. The interest in

the relationship between exports and economic growth has led to emergence of two schools of

thought, namely export led growth (higher export leads to higher economic growth).

Although India has been following an import substitution strategy for long, exports promotion

has always got the attention of the policy-makers and planners. Export promotion strategybecame more pronounced in India particularly after the new economic policy (NEP) of 1991. It

is a fact that although Indias share in world exports is less than 1 per cent today, its share in

total GDP of the country is more than 11 per cent which is a substantial percentage that can

play an important role in ushering faster economic development to the country.

Exports from India constitute agricultural and allied commodities (10.10%), ores and minerals

(5.29%), manufactured goods (73.40%) (Such as engineering goods, gems & jewellery, chemical

products and so on), crude oil and petroleum products (8.5%) and others (2.64%). Engineering

industry has significance to the economic development of the country. Engineering goods

industry constitutes the prime mover of industrial growth in Indian economy as it has played a

pivotal role in industrial resurgence of India since the advent of independence, especially after

the adoption of the Mahalanobis capital goods oriented strategy from the second plan

onwards. The following facts highlight the very significance of the Indian engineering industry

in Indian economy.

The engineering goods industry enjoys 30.5 per cent weight in the index of industrial

production, 29.9 per cent share of total investment in all industry, 33.5 per cent share in the

value of output of all industry, 37.1 per cent share in valued added by all industry. 30.6 per

cent share in employment of all industry, and 62.8 per cent share in number of foreigncollaborations (EEPC). Further more, recently it has emerged as a major exporting sector and

also provides technical know-how and consultancy services to a number of African and Arabian

states. As per the data available for the year 2010-11, engineering industry has emerged as the

single largest item of total Indian exports pushing aside gems & jewellery export which had

been dominating Indian export basket as the single largest item for some time now. Thus


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engineering industry is reckoned as an engine of economic development and one of the

dynamic sectors of the Indian economy.

ITEMWISE DISTRUBITON OF COMPOSITION

Engineering exports now consist of a wide variety of items such as iron & steel, machine tools,machinery & instruments, manufacture of metals, project goods, Ferro alloys, aluminium

products, transport equipment, residual engineering items, management & technical services.

During the initial period, Indias engineering exports consisted mainly of steel, pig iron based

items, consumer products like casting, buckets, drum, tubes, trunks, hand tools, builders

hardware, lock, pad lock, steel furniture, aluminium, brass & copper utensils, electric fans and

batteries. However, over the years there has been substantial diversification in the export of

engineering products, especially after the mid seventies. A close look at the change in

composition of engineering exports during 1960-61 to 1996-97 highlights the forward march of

engineering industry exports. Table 3.a and Graph 1 depict the changing composition of Indian

engineering exports during 1960-61 to 1996-97.

TABLE 3.a

CHANGE IN COMPOSITION OF ENGINEERING EXPORTS (1960-61 TO 1996-97)


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GRAPH 1

Management &Consultany

Services0%

Capital Goods12%

Primary Steel31%Nonferrous

metals

13%

Consumerdurables

44%

COMPOSITION OF ENGINEERINGEXPORTS (1960-61)

Management&

ConsultanyServices

4% Capital Goods33%

Primary Steel34%

Nonferrousmetals

7%

Consumerdurables

22%

COMPOSITION OF ENGINEERINGEXPORTS (1996-97)


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DESTINATION OF INDIAN ENGINEERING EXPORTS

Indian engineering products are exported to a large number of developed and developing

countries of the world. A close look at the destination of Indian engineering exports shows that

there has been substantial diversification in the destination of exports. Up to 1980s, the major

destinations of Indias emerging exports were Asia and Africa. However, in the early eighties,the trend has changed substantially with share of Europe, Australia and North America

increasing substantially. During the eighties, East European countries emerged as a big market

for Indian engineering products, whose share has declined after the disintegration of erstwhile

Soviet Union. Fortunately, this shortfall has been compensated by larger exports to developed

countries. Region wise / Country wise export of Indian engineering goods between 1956-57

and 2004-2005 is shown in Table 4 and Graph 2.

TABLE 4

DESTINATION OF ENGINEERING EXPORTS : REGIONWISE (1956-57 TO 2010-2011)

(Rupees Crore)

Region 1956-57 1990-91 1998-99 2009-10

Asia 3.76 (73.9) 975 (27.9) 5681 (30.8) 22041.68 (29.87)

Africa 1.2 (23.3) 351 (10.0) 1410 (7.64) 3195.21 (4.33)

Europe Neg 1410 (40.3) 4017.07 (21.7) 16680.99 (22.60)

N. America Neg. 40.00 308.34 (1.67) 834.82 (1.13)

Total (incl.

Others)

5.16 (100) 3500 (100) 18444.14 (100) 73800.39 (100)

Note:- Figures in the brackets show percentage shares

Table 4 reveals that there is a steady decline of Indian engineering exports to Asia and Africa

from 96.2 per cent in 1956-57 to 34.20 per cent in 2009-10. At the same time, engineeringexports to Europe and North America which were less than once per cent in the mid fifties now

account for 39 per cent. This is a pointer to the diversification of market for Indian engineering

products and growing acceptability of our products in he developed world.


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The important countries that account for the major chunk of our engineering exports in 2009-

10 are: USA (16.4%), UAE (6.60%), UK (5.23%), China (4.80%), Singapore (4.52%), Germany

(4.2%), Italy (3.76%), Sri Lanka (2.67%) and Belgium (2.65%). These countries account form

more than 50 per cent of Indian engineering exports.

Australia0%

N. America0%

Europe0%

Africa23%

Asia73%

Others4%

DESTINATION OF ENGINEERING EXPORTS (1956-57)

Australia1% N. America

16%

Europe23%

Africa4%

Asia30%

Others26%

DESTINATION OF ENGINEERING EXPORT (2009-10)


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ENGINEERING SERVICES - THE EYE OF OPPORTUNITY

Indian IT industry was evolvingfrom a low-cost, back office, destination into a preferred

supplier of high-end engineering services. And firing the imagination of the Indian IT industry is

the huge market opportunity that makes a compelling business case for companies to seriously

evaluate the engineering services domain. With the market potential for outsourced

engineering services estimated at between $ 7 and 12 billion, Indian vendors have barely

scratched the surface. The value of work currently undertaken by these players is estimated to

be a mere $ 400-500 million, according to Nasscom.

Demystifying engineering services

In simple terms, engineering services augment or manage processes associated with the

creation of a product or service, as well as those associated with a product or asset.

This not only includes design elements of the product or services itself, but also infrastructure,

equipment and processes engaged in manufacturing or delivering them. Engineering services

outsourcing is the practice of sourcing some or all of a engineering services find applications in

verticals such as automative, aerospace, minerals and metals, F&B, plastics and paper. Newer

verticals are likely to emerge strongly in near future. These include utilities, chemicals,

pharmaceuticals and medical equipment.

Showing the way

Four categories of stakeholders are seeking to exploit the opportunities thrown up by the

engineering services market.

Engineering services is not just design. Engineering services offers end-to-end services,

including conversion, drafting, modelling for product definition, modelling for analysis, product

design, analysis, prototyping, testing and validation, tooling and even limited manufacturing of

prototypes. PLM refers to the entire product life cycle management after production to see if

there are bugs or errors. The errors are then removed.

Industry estimates peg the market potential for process engineering, asset management and

industrial embedded systems at over $5 billion, taking the total outsourced / offshore market

potential to a whopping $ 12 billion. Automative design accounts for a bulk 65-70 per cent of

the market, followed by aerospace at 15 16 per cent, and electric/electronic machinery design

at 10-12 per cent. Other key vertical segments considered good targets for outsourced

engineering services include utilities and pharmaceutical companies.


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The biggest opportunity within engineering services is the automative segment where the

potential offshore outsourceable components close to $ 4. 8 billion. This is followed by

aerospace segment with a market potential of $1 billion, construction and heavy machinery

space where the potential stands at $ 800 million. The opportunity in the medical segment is

about $ 300 million.

India leads the outsourcing market when it comes to auto-sourcing with 24 per cent of auto

manufacturing giving it the thumbs up for outsourcing. Bigger automotive markets such as

China and Mexico lag behind at 15 per cent and 13 per cent respectively, while other locations

such as Brazil, Thailand and Philippines corner less than 10 per cent, of the actual outsourcing

markets.

Opportunities and challenges:

India is a significant player in the overall offshorable outsourcing market for engineeringservices in the Asia-Pacific region today, China and Taiwan could emerge as formidable rivals in

coming years.

Indias advantage lies in its reputation and ability to deliver technology services to global

customers at great value and high speed. India also has a tremendous pool of engineering and

scientific talent, which can be tapped for the sector. Access to cutting edge technology

through global alliances with product companies, availability of prototyping and testing

facilities, and sourcing domain skills through collaboration with the domestic industry are some

of the advantages Indian vendors will have.

Engineering services involves significant investments in software and design tools, making more

investment intensive than vanilla IT services

Some areas of application

Product EngineeringThe services offered extend from the early stages of

idea generation, through engineering analysis and

design, virtual simulation, documentation and

conversion, prototyping and production, testing,

knowledge based engineering and PLM solutions.

Process Engineering Process engineering entails the use of computational

tools and techniques at the plant design stage to

optimise expenditures Capital or Operational and


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achieve efficient production of products and services.

Plant automation Plant automation broadly comprises engineering

design and development of automation systems that

facilitate the management and execution of day-to-

day production activities and their associated

information to be shared across the organisation in

real-time for analysis and decision purposes.

Specific services offered include Control System

Integration; Process and Production Optimisation;

Manufacturing Execution Systems.

Enterprise Asset Management(EAM)

Enterprise Asset Management(EAM)

Traditionally asset management services have beenrestricted to managing the life-cycle cost of assets.

However, technology now enables integration of

maintenance activities and functions with plant

control systems, MES, CAD/CAM, ERP and SCM.

Today, EAM services comprise product

implementation, monitoring and maintenance,

process assessment and re-engineering, interface

development and system integration. EAM helps

companies manage physical assets production

plants, capital equipment, vehicle fleets, and facilities

complexes over the complete asset life cycle.

In conjunction with powerful reporting and analysis,

EAM capabilities enable you to reduce operating

costs, better manage capital expenditure, and

improve asset utilisation.


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PROBLEMS OF ENGINERING EXPORTS

So far as the paper has dealt with a general scenario of the engineering goods exports that does

not mean that engineering goods exports are free of problems. Like any other item of export,

engineering goods are also facing a number of problems, prominent among them are discussed

below.

Stiff Competition

Indian engineering exports have been facing stiff competition from other countries. China,

Mexico, Hungary, Czechoslovakia and Korea which have emerged as the fastest growing

engineering export countries provide formidable challenges and fierce competition to Indian

engineering exports. And recently, the South East Asian financial crisis which was under way

since mid 1997 had put our exports at receiving end due to overvaluation of Indian Rupees,

curtailment of Indian import by these countries (this is because 15% of total engineering

exports is accounted for by these countries). Therefore, it has reduced the competitive edge of

Indian exports in the world market. However, recently there has been tremendous

improvement in export performance. This may be attributed to the revival of South East Asian

economies, increase in the world export demand, etc.

Technological problems

Technological competitiveness of Indian engineering goods sector is low. Some of the Indian

exporters are still at disadvantage in International market vis-a-vis their counterparts in terms

of product design, finish, specific features, performance and raw materials substitutes. India

can be product of having the second larges scientific and technical manpower in the world. But

his advantage due to high availability of quality engineers and scientists is lost partly due to

brain drain and partly due to stagnation of skill sets of scientists and engineers within India.

Although Indian firms are capable of achieving high levels of precision, they are unable to

provide high quality products due to lack of supporting process, technologies such as precision

measuring, material engineering and process control.


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High cost of Industrial Inputs

The engineering industry mainly uses raw materials of domestic origin. The raw materials price

index has risen faster than the machinery price index. It is difficult of engineering

manufacturers to pass on the rise in prices to the consumers thereby impacting their

profitability. Similarly the quality of raw materials is also not up to the international standards

and it in turn affects the quality of final products.

Barriers

Another major problem is protectionism by developed countries. Developed countries have

always tried to block the products from developing countries through barriers both tariff and

non tariff. Recent hike in the tariff of Indian steel by the US is a case in point. This will definitely

affect the steel exports from India.

Infrastructural Bottlenecks

A recent study by CII and World Bank has found that although India has the advantage of cheap

labour, this advantage is nullified by infrastructural bottlenecks. Infrastructural bottlenecks are

the major problem hindering both domestic and exports production. The quality of

infrastructure (transport, communication, and power) is poor, thus affecting competitive

delivery schedule and increasing operating costs. The delivery time of locally made engineering

goods in many cases is 1.5 to 2 times longer than in industrialized countries. Companies tend to

lose orders on delivery schedule. The inland transport is slow although the rail road density is

the highest in the world. The cost of electric power is comparable to that in other nations, butreliability is poor. Overall infrastructure inadequacies are estimated to translate into 5 per cent

cost disadvantage of Indian engineering manufacturers vis--vis foreign manufacturers.

High Transaction Cost

The export transaction costs for Indian engineering goods industry are among the highest in the

world. Heavy transactions costs not only increase the prices of the final export products, but

also result in inordinate delay in export fulfilment, thus affecting export competitiveness.

According to available studies, total cost of transaction of engineering goods in India works outto be around 10 per cent of total export earnings.


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STRATEGY FOR EXPORT PROMOTION

In the light of the discussion of numerous problems faced by engineering exports, it is

necessary to evolve a scientific strategy, which should aim not only at consolidating the gains

achieved so far but also in promoting higher exports of engineering products. Formulation of

such strategy will enable engineering industry to sustain the extreme competition in

international market. Various measures envisaged under this strategy are listed below:

Engineering EPZs and SEZs

There is strong need for establishing separate engineering exports processing zones and export

oriented units. A few engineering items with highest potential have to be selected for

development in these special processing zones. The locations of the export processing zones

are to be identified where there is a large concentration of these items. We have already

established general export processing zones as well as agricultural export processing zones.

Establishment of separate zones for engineering products will enable them to overcome the

problems of infrastructure and raw material shortage. In addition it can attract more foreign

direct investment into the production and export of engineering products.

Technological Upgradation

Up gradation of technology and modernisation of plant and equipment are prime requirement

for export oriented units. New industrial policy (1991) and various announcements there after

as well as export import policy provide a number of incentives such as automatic permission for

foreign technology agreements in high priority industries, no permission needed for hiring of

foreign technicians, foreign testing of indigenously developed technologies, liberal import of

capital goods, raw materials and components, liberal import of second hand capital goods with

a minimum life of 5 years without license etc. Further, a number of other steps like offering

these units a deferred payment facility for purchase of capital goods and machinery (as this

would reduce much of the burden of modernization), partnership with technical institutions like

IITs for product adaptation and technological up gradation, accreditation of testing laboratories

in India by overseas agencies to enable them to offer test inspection certificate / marking of

products etc. can be thought of.

Selectivity approach

While most of our competitors export a few selected products, we have concentrated on too

much products. For instance, China, Mexico, Korea, Hungary, Czechoslovakia which have

emerged as fastest growing engineering export countries, it is observed that 85 per cent of


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engineering export were contributed by fewer product categories as compared to that of India.

In 2002, the number of categories contributing to 85 per cent of engineering export for these

countries was Mexico 10, Hungary 13, Korea 18 and China 20 while that of India was 26. Facing

numerous problems due to lack of raw material and infrastructural deficiencies, most of

engineering units can hardly match overseas requirement in terms of technology, quality andcost. In the light of the above, we must concentrate on selected or thrust products and give

them a full policy package and incentives and other contemporary inputs required for exports

production. The Engineering Export Promotion Council Strategy Paper for growth to

engineering exports from 2011-12 to 2014-2015 prepared by A. F. Ferguson & Co. had

identified 19 engineering products as thrust products for export development. These include :

commercial vehicles (luxury buses and high horse power trucks), electric power equipment and

parts (transformers and static converters), automobile parts (part of motor vehicles),

instruments (medical. surgical instruments, optometry instrument and X-ray equipment), prime

iron and steel (flat rolled products of stainless steel), other industrial machinery (printing and

processing machines, transmission shafts, electric furnaces), IC engines and parts (compression

ignition and electrical ignition type IC engines), electric manufactures (electric filament or

discharged lamps), aluminium products (alloyed and unalloyed aluminium ingots, aluminium

plates and sheets and strips including electrolytic grade aluminium ingots, aluminium foils, etc),

other non-ferrous metal and products (primary copper, FRC cooper, oxygen free copper, high

dimension CC rods [16 mm and above ]), other chemical plant (centrifuge including centrifugal

dyers, machinery for working rubber or plastics), electric wires and cables (insulated wires,

electric conductors and optical fibre cables, wires and cables of oxygen free copper), heating

and cooling equipment (refrigeration and air conditioning including commercial and industrial),

tractors and agricultural equipment (tractors, trailers and agricultural machinery), cranes, lifts

and winches (parts suitable for pulley tackle, hoists and construction, excavating machinery),

industrial casting (moulding boxes for metal foundry, transmission shafts), steel pipes and tubes

(seamless pipes and tubes of iron and steel), cutting tools and tubes (seamless pipes and tubes

of iron and steel), cutting tools (hand saws and blades for saws of all types, grinding stones and

grinding wheels), bicycles and parts (high end bicycle and high end bicycle parts).

Market DiversificationTill early 1980s, the main destination of engineering exports (about 70%) was Asia and Africa

and since then Europe and America emerged as a major destination. And there are a number

of markets with high potential for engineering goods exports. EEPC strategy paper has

identified 28 thrust markets for those selected thrust products. These are : China, Hong Kong,

Indonesia, Iran, Japan, Malaysia, Oman, Philippines, Russia, Saudi Arabia, Singapore, South

Korea, Turkey, UAE (Asia), Austria, Belgium Czechoslovakia, France, Germany, Italy,


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Netherlands, Norway, Poland, Sweden, Switzerland, UK (Europe), Australia, South Africa

(Africa), Canada, Mexico, USA (North America), Argentina, Brazil, Chile (Latin America). We

must rigorously follow these markets so that a recession in one market would not affect overall

export. This may not be an easy task, more so in sophisticated areas like engineering goods. In

addition to the visits of delegations abroad for market studies, manufactures of engineeringitems should actively participate in international fairs aboard, introduce our manufactured and

semi manufactured products to the customers, distributors, dealers, and importers of Indian

engineering goods may be invited to visit our engineering factories at as frequent interval as

possible. These visits can be arranged by the Engineering Promotion Council and various sub

associations of engineering goods / products like Machine Tools Manufacturers Association etc.

The Government should render helping hand by extending financial assistance for such visits.

Sales Promotion Effort, Prompt Delivery and After Sales ServicesFor furthering the export of engineering products, India must evolve an aggressive sales

promotion effort. It can be done through advertisement, trade fairs, specialized trade fairs,

brand promotion (Made in India brand), distribution of technical catalogues (giving

comprehensive information about our products). Further, commercial intelligence should be

made available to Indian exporter as frequently as possible so that they keep updated of the

current trends and requirements. The activities of various agencies that provide market

intelligence such as EEPC, CII, ITPO, etc. should be coordinated and centralized so that better

results are possible.

Along with the sales promotion effort, strict adherence to delivery schedules is crucial for the

success of Indian engineering exports. As foreign buyers have option to procure their

requirement from anywhere in the world, we must ensure that we are accurate more than 100

per cent in timely delivery of our products. The arguments of failure of delivery due to the

disrupted sailing, power cuts, strikes or lockouts do not count or provide any leverage to the

affected party in a competitive world. Warehousing and total logistic support in overseas

market to be provided for timely delivery of our products.

Further, after sales services and customer care effort is highly indispensable for the smooth

growth of engineering exports. This has been one of the neglected areas in India due to ourprotected market. Of course, now the environment has changed under the forces of

globalisation and liberalization and foreign companies are rigorously following after sales

services and provide customer care support. Therefore, Indian engineering exporters have also

to rigorously follow the after sales services and customer care support. This can be

accomplished by customer care centre and providing incentives to overseas collaborations.


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Support to Small Scale Units

Small scale engineering exports still constitute around 40 per cent of total engineering exports.

For the continued contribution of these units to the exports sector, they must be provided with

the production and exports incentives, support for adoption of latest technology, advisory

services, and market support to sustain the competition in the international market. Increasing

the investment ceiling and dereservation of major small scale units can go a long way in

overcoming the hurdles in the way of modernization and faster growth of these units and

hence higher contribution to total engineering exports. Further, adequate finance must be

made available to these units. Due to the high risk involved in lending to these units, banks

were reluctant to lend to them.

Involvement of Large Scale Units

Just to reap the economies of scale in production, we must look beyond the domestic market.Although exports can be increased by providing incentives to small scale industrial units (SSI)

units, there is limit to growth. There is a need for involving large units in exports activities. The

exports intensity figure is still very low in India especially for large units. Hence, it is necessary

to gradually increase the exports intensity ratio of Indian products by involving more and more

large scale units and exporting more from the existing units.

Free Trade Area / Preferential Trade Agreement (FTA / PTA)

We must explore the possibility of setting up Free Trade Area / Preferential Trade Agreement

with other countries where our exports have largest concentrations. For instance, FTA / PTA

with Brazil and Mexico as Latin America represent a fairly large latent market for Indian auto

components which will provide a fillip to our engineering exports. Out effort to establish free

trade area with ASEAN countries will be a big boost to engineering exports. We have to identify

some potential engineering products in these markets and vigorously export them.

Joint Venture and Foreign Direct Investment

Another area which needs special emphasis is establishment of joint ventures and foreign

collaborations in engineering production. It is also imperative to attract more foreign direct

investment into the engineering sector. This will enable attraction of more sophisticated

technology (which is of utmost importance of high technology products like engineering

products), better management technique, modern marketing strategy and exploration of more

foreign markets. Penetration of engineering products in developed countries would require


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good dealer networks, availability of range of products, after sales services etc. This is possible

only if MNCs and joint venture units have presence in India on their own or in collaboration

with Indian companies. FDI is therefore essential to promote export of engineering products.

Indias engineering export basket

If we compare China, Mexico, Korea, Hungary, Czechoslovakia which have emerged as fastest

growing engineering export countries, it is observed that 85% engineering exports were

contributed by fewer product categories as compared to that of India in 2008. The number of

categories contributing to 85% of the engineering exports for theses countries was:-

Mexico (10 categories, relatively medium technology/ value addition)

Hungary (13 categories, relatively medium technology/ value addition)

Korea (18 categories, relatively low to medium technology/ value addition) China (20 categories, relatively low technology/ value addition)

While in case of Indias engineering exports, top-26 categories accounted for about 85% of

Indias exports in year 2008. This is primarily attributed to low value and some medium value

and fragmented engineering export product base for our country.

Value added products

Engineering exports from India currently suffer from low value addition. Typically, exports of

engineering products fall in low-value addition category.


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As seen from the above, currently most of the engineering products exported from India fall in

low and low to medium value addition, which leads to thin margins in export markets. As a fall

out of this, it can be seen that most of the product categories have reported exports less than

US $ 500 Mn. in 2009-10. Of all engineering export categories,

Only 2 product categories have exports exceeding US $ 500 Mn. and they are;

Prime Iron and Steel (incl. Pig Iron), and

Commercial Vehicles

The key focus of Indias engineering exports should be to increase exports of higher value -

added products instead of intermediate goods/ low-value items. For example, most of the

aluminium exports from India are of Ingots and to some extent rolled products. However,exports of value added products like Aluminum Foils, Aluminium rolled sheets of low thickness,

and Aluminium Alloy Wheels are insignificant.

Degree of value addition is medium to high in certain Capital Goods categories like Commercial

Vehicles (especially, in Passenger Cars), Tractor and Agriculture Equipment, Two/ Three

Wheelers, Auto Parts, Engines, Compressors and Pumps. In most other categories value

addition is low. Focusing on value added products would increase realization of exporters in

export markets. Indias objective should be to move towards higher value-added products with

focus on increasing total value of exports of the product category in next 5 years viz. 2005-06 to

2009-10.

Share of thrust products in Indias engineering products exports:

In year 2009-10, Indias engineering exports were about US $ 13.29 billion. Of this, share of

thrust products (mostly existing thrust products) was about 36% (about 35% in 2008) while

other products (i.e. non-thrust products and management/ technical services) accounted for

the rest, viz. about 64% of Indias total engineering

Hence, in future to achieve significant position in engineering export domain and enhance

Indias export performance in this sector, it is important to focus on exports and put significant

effort on Thrust Products (about 19 product categories), which are finite in numbers. This

would also help in channeling efforts of all stakeholders on various aspects like technology and

quality improvement, enhancing scales of operations, creating adequate supply capacity,


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attracting private investment (including FDI), cluster development, etc. and would enable

harnessing true potential of engineering sector in export markets.

Snapshot of India's share of exports to identified thrust and current markets

Top Descriptions for India's exports of

Thrust Products

World's top importing countries of

Thrust Products

Countries where India has highest share of

Thrust Products Imports

Thrust

Countries

Share of

India's

exports ofThrust

Products

Share

in

WorldImports

(%)

Thrust

Countries

Share in

WorldImports

(%)

India's

Share (%)

in importsof that

country

Thrust

Countries

Country share

in world

imports ofthrust products

(%)

Share of

India's

exports in

the

Country's

Imports ofThrust

Products

USA 29.19% 20.58 USA 20.59 0.26 Philipinpines 0.00 6.03

China 13.16% 2.65 Germany 7.7 0.18 Chile 0.01 4.2

UK 12.20% 5.65 UK 5.65 0.39 UAE 0.55 3.23

UAE 9.92% 0.55 France 4.62 0.08Saudi

Arabia 0.04 2.25

Germany 7.68% 7.70 Canada 3.83 0.04 Singapore 0.33 2.03

Thailand 4.14% 0.66 Italy 3.26 0.22 Malayasia 0.19 1.46

Italy 3.96% 3.26 China 2.65 0.9 Thailand 0.66 1.13

Singapore 3.67% 0.33 Belgium 1.81 0.15 China 2.65 0.9

Japan 2.76% 1.69 Japan 1.69 0.3 Australia 0.07 0.69

Netherlands 2.24% 1.05 Spain 1.38 0.08 North Korea 0.00 0.67

France 2.09% 4.62 Netherlands 1.06 0.38 Turkey 0.07 0.66

Malayasia 1.57% 0.19 Mexico 0.92 0.17 Hong Kong 0.26 0.50

Belgium 1.54% 1.81 Thailand 0.66 1.13 Iran 0.04 0.48

Hungary 0.86% 0.49 UAE 0.65 3.23 Indonesia 0.15 0.39

Mexico 0.85% 0.92 Hungary 0.49 0.32 UK 5.65 0.39


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Thrust products and thrust markets matrix

The analysis of thrust products and their corresponding thrust markets in the above sections has

indicated that Indias engineering exports could grow at a higher rate, by focusing on the correct mix of

products and markets. Thus, going ahead, the strategy should be built on the appropriate combinationof products and markets.

A thrust product and thrust market matrix, for the existing and new products and existing and new

markets for the years 2010-11 and 2014-15.

Canada 0.77% 3.83 Singapore 0.33 2.03 Netherlands 1.05 0.38

Other Thrust

Markets 0.00% 0.00Other Thrust

Markets 0 0.5Other Thrust

Markets 0 0.19

Total Thrust

Markets 100.00% 55.98Total Thrust

Markets 57.29 0.31Total Thrust

Markets 11.72 0.31


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CONCLUSIONS AND SUGGESTIONS

The Indian engineering sector has grown by leaps and bounds with engineering exports

accounting for over 20% ofIndias total exportsOf the overall industrial sector in the country,theengineering sectorcomprising machinery and instruments, steel bars and rods,

electronic goods etcis by far the largest. The contribution of the sector to the countrys

GDP stands at 4% and in2005-06, the total net value added by the industry was US$25

billion. If the latest Annual Survey of Industries Report 2007-08 is to be believed, the

engineering sector accounts for25.98% of the total factories in India and

employs28.86% of the total Indian workforce. Moreover, engineering exports account for

over 20% ofIndias overall exports. In2008-09, exports of engineering goods stood

at US$41.5 billion, as compared to US$35 billion during 2007-08. It is for this reason

that a slowdown in the engineering segment and exports not only affects industrial

investment and growth but also employment scenario in the country.

India has an intense and diversified industrial machinery/capital base competent of rolling

out an entire range of industrial machinery. The industry has been successful in developingthe latest manufacturing technology over the years. India holds a strong position among the

developing nations as a major exporter of heavy and light engineering products. Themajority of capital goods mandatory for various power projects, steel and petrochemical

plants and mining tools are rolled out in the country itself. India also specialises in

manufacturing construction equipment, machinery for various irrigation projects, cottonsugar and textile mill machinery, among others.

Engineering industry thus is making substantial contribution to the national development by

way of value addition, employment and export. Not only the share of engineering exports has

jumped from 0.5 per cent in 195657 to 39.12 per cent in 2009-10 but also there has been a

marked shift in commodity composition and direction in the engineering exports. It is observed

the engineering exports have recorded a much higher growth rate than total exports in almost

all decades. Another noteworthy feature is that importance of capital goods and technical and

services has gone up while that of non-ferrous metals and consumer durables has come down.

Analysis of destinations of export shows that shares of Asia and Africa have dwindled while that

of Europe and North America has increased over the last four decades. Important problems

that the engineering exports are facing are: Competition, poor technology, infrastructural

bottlenecks, high transaction costs, etc.

A few suggestions that may be in order are : Providing more incentive for exports by way of tax

exemptions through both tariff and non-tariff measures, diversification of products as well as

markets, instilling more competition through liberal import of capital goods and raw materials,

developing technological capabilities and adoption of more advanced technology, more active

role by EEPC, greater attention to marketing brand building and customer services , improving


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the quality of the engineering products, timely delivery, setting up of more engineering joint

ventures, reduction in transaction cost, strengthening and upgrading of the production

potential and export orientation of engineering SSI sector by developing SSI export industry in a

dereserved manner, more liberal and flexible labour laws, improved dissemination of

information and extension of regional focus in boosting engineering exports to the desiredextent. Last but not the least the spirit of understanding and cooperation between captains

of industry and government officials is the need of the hour in the changed business

environment under globalisation and liberalization. To compete internationally, there should

be strict check over quality and prices and careful monitoring of changing requirement, cost

control through constant R & D, prompt delivery of schedule and follow-up actions.


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engineering sector report

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