CHAPTER-III

OVERVIEW OF AUTOMOBILE INDUSTRY AND

HEAVY ENGINEERING INDUSTRY
This chapter will cover the aspects relating to growth, size and structure of both
Automobile and Heavy Engineering Industries. To study the size we have shown
various trends like production, turnover, domestic sales, export etc over a period
2001-02 to 2007-08. We have also made use of CAGR and percentage growth rate to
assess the growth. Bar charts and pie charts have been used to depict the growth trend.
This chapter is classified into two sections, section A and section B. Section A
concentrates on Auto Sector, which includes Auto Component as well while section B
focuses on the Heavy Engineering Sector.

SECTION A - AUTOMOBILE INDUSTRY

Automotive Industry globally is one of the largest industries and is a key driver of
economy. A sound transportation system plays a pivotal role in the country’s rapid
economic and industrial development. The trade facilitated by transportation has been
a growing component of national income all over the world. Needless to say that
transport sector is equally important for the developed and under developed
economies. The automobile industry is a major constituent in the road transportation.
Automobile as a commodity includes passenger cars, multi-utility vehicles,
commercial vehicles and two and three wheelers.

Auto Industry Development in India

Before Independence, the assembling of cars brought in from General Motors and
other leading carmakers had started. Yet India was more of a market for imported
vehicles than a serious player in the sector.

The current Automobile sector in India has evolved in four main phases namely, as
shows in figure 3.1.
1. Introduction phase (pre-1983) - Protectionism Policies of the Indian Government

2. Reformation phase (1983 to 1990) - Liberalized policy and entry of intense

competition
3. Deregulation & Growth phase (1991 to 2000) - Second phase of Liberalization
and formation of joint ventures.

4. Export oriented phase (the new millennium)

55
Manufacturing in the automotive sector began only in the decade after 1947. Until
then entrepreneurs focused on servicing, dealerships, financing, and developing

expertise in handling any problem to do with the vehicle. The growth path of the

Automotive Industry was far from smooth. Manufacturing capacity was limited by

licensing and could not be increased.

Between 1970 and 1984, cars were considered a luxury product; there were
quantitative restrictions (QR) on import and a tariff structure design to restrict the
market. The market was dominated by six manufacturers: Hindustan Motors, Premier
Automobiles, Telco, Ashok Leyland, Mahindra & Mahindra and Bajaj Auto.

The decade of 1985 to 1995 saw the entry of Maruti Udyog in the passenger car
segment and Japanese manufacturers in the two wheelers and light commercial
vehicles segments. Economic liberalization, started in 1991, led to the de-licensing of
the passenger car segment in 1993. QR on import continued. This decade witnessed
the emergence of Hero Honda as a major player in the two wheelers segment and
Maruti Udyog as the market leader in the passenger car segment.

Between 1995 and 2000, several international players entered in the market.
Advanced technology was introduced to meet competitive pressures, and
environmental and safety imperatives. Automobile companies started investing in the
service network to support maintenance of on-road vehicles. Auto financing started
emerging as an important driver for demand.

Starting in 2000, several landmark policy changes like removal of quantitative

restriction and 100 percent FDI through automatic route were introduced. Auto
companies started collaboration with the financial firms to provide auto financing and
insurance service to customers. In 2003, core group on automotive R & D (C.A.R.)
was set up to identify priority areas for automotive R& D in India.72

72 Facts and Figures, Automotive Mission Plan 2006-2016, A Mission For Development of Indian
Automotive Industry.

56
 INDIAN AUTOMOBILE INDUSTRY EVOLUTIONARY PHASES
Figure-3.1

1. Introduction Phase (Protectionism policies)

• First car imported in 1928
• HM incorporated in 1942
• Premier Automobiles in 1944
• 1953 Govt, decrees operate only firms with local
manufacturing units - only 7 firms approved.
• 1960s & 1970s - 2/3 wheeler segment establishment and
growth

2. Reformation Phase (Liberalized policy and intense

competition)
• First phase of liberalization of Govt.’s protectionism
policies.
• Entry of new foreign collaborations.
• 1983 - Maruti Udyog Ltd. Started in collaboration with
Japanese firm Suzuki
• By end of 1980, 5 passenger car manufacturers in India -
MUL, HML, PAL, SMPIL and Sipani Automobiles.

3. Deregulation & Growth Phase (Second phase of liberalization)

• Introduction of new industrial policy in 1991 - death of “License
Raj”
• Introduction of Mass Emission Norms - in 1991 for petrol vehicles
& in 1992 for diesel vehicles
• Significant reductions in import duty on automobile components in
1993
• Since 1993, automotive industry experienced growth rates of above
25% till the end of century
• 1997 National Highway Policy announced
• Formation of many new joint ventures between Indian and Global
automobile companies

4. Export oriented Phase

• Some Indian manufacturers have joint ventures with foreign firms to
export vehicles to other Asian countries and Europe
• E.g.: Tata’s Telco and Range Rover are selling Indica cars in the United
Kingdom
• Hero Honda and Bajaj export 2- and 3-wheelers to foreign markets,
including Latin American University
• Indian roads need to be improved considerably for a surge in passenger
vehicle demand
• Companies such as Maruti are losing market share to MNCs such as
Hyundai
• Domestic consumers are gradually upgrading from 2-wheelers to compact
cars, economy to mid-size vehicles, and from mid-size to luxury cars

57
Auto Industry and Linkages

Owing to its deep forward and backward linkages with several key segments of the
economy, Automotive Industry has a strong multiplier effect on the economy and
hence its indirect contribution is much higher. All over the world, it has been treated
as a leading economic sector because of its extensive economic linkages.

Backward linkages exist when the growth of an industry leads to the growth of the
industries that supplies it raw materials. Forward linkages exist when the growth of
the industry leads to the growth of the industries that use its output as input, or when
the output of an industry helps propel another industry. There can be two types of
linkages direct linkages and indirect linkages. The Auto Industry has direct backward
linkages to the industries like metal like steel, aluminum copper etc, plastic, rubber,
textiles, paint, glass, machine tools, electronics, ball bearing, capital equipment,
trucking, warehousing and logistics and an indirect linkage to the coal and iron
industries (since coal & iron are inputs to steels production).

Among the forward linkages73 the key generators of employment and value services
are the oil industries, distribution, after sale service network, finance and supply of
spare & replacement by the auto component industry. It is estimated that over 3
million persons are employed in the distribution and after sale industry. Other forward
linkages include the auto finance and leasing industry (estimated at Rs. 70 billion) and
insurance (estimated at Rs. 35 billion). The biggest impact is on auto-component
industry, which today has become a key sector in the Indian economy, its turnover
around US $18 billion. Indirect forward linkages include increasing agricultural
productivity through farm mechanization and the needs of agricultural product
transportation.

It is due to these multiplier effects on the manufacturing and service industries that the
Auto Industry is viewed as the engine of growth by the developed economies. These
multiplier effects are most pronounced in developed economies, for example, 1 out of
every 6 persons employed in Germany is in automobile or related industry as
compared to India’s 1 in 40 persons.

73 Anjali Bhatnagar (2006), Working Capital Management in the Automobile Industry in India, PHD
Thesis, Delhi University

58
 Structure of Automobile Industry
Figure 3.2

The Indian Automotive Industry comprises automobile and auto components sectors.

The automobile industry constitutes the four categories vis-a-vis passenger vehicles

(passenger car and utility vehicles), commercial vehicles (light, medium and heavy),

three wheelers and two wheelers (motorcycles, scooters and mopeds) as seen in figure

3.2. It is significant to assess the relative market share of each segment for

understanding their relative importance. Two wheelers, which constituted the largest

market, share in the automobile industry. In terms of volume, two wheelers dominate

the sector, with nearly 75 per cent share, followed by passenger vehicles with 16 per

cent. There are in place 15 manufacturers of passenger cars & multi utility vehicles, 9

manufacturers of commercial vehicles, 16 of two/three wheelers and 14 of tractors

besides 5 of engines.

As seen from Table 3.1 during the year 2007-08, the composition of the market share

was 75.13 percent two wheelers as against passenger vehicles, which constituted only

16.4 percent. Three wheelers and commercial vehicles had about equal share in the

market. Figure 3.3 depicts Table 3.1 pictorially.

59
 Figure-3.3

Category Wise Market Share

Three Wheelers CVs Passenger

4% 5% Vehicles

Two Wheelers
75%

Table-3.1
Market Share of Component of Automobile Industry for 2007-08
Category Market Share
Commercial Vehicles (CVs) 5.05%
Passenger Vehicles (PVs) 16.40%
Two Wheelers 75.13%
Three Wheelers 3.78%

Source: SIAM

Production Trend

The Indian Automotive Industry is the second fastest growing industry in the world.
About 10.8 million vehicles are produced in the country. The production of vehicles
has been growing at the rate of 12.45% CAGR for the past seven years as seen from
Table 3.2 and production has increased almost 2.3 times from 2000-01 to 2007-08
from 4759392 vehicles to 10833948 vehicles as reflected in table 3.3. Production of
vehicles increases over a period of study, although at a decreasing rate. Year 2002-03
show highest growth rate (18.13%) while lowest recorded in the year 2007-08
(-2.29%).

The total investment in productive assets in the Automobile Industry has risen from
roughly Rs. 40 million to Rs. 400 million that is a tenfold increase during the nine-
year period from 1991 to 2000. India ranks second in the world in the production of

60
the two-wheelers only after China, fifth in the production of commercial vehicles and
eleventh in the production of passengers cars. India is the largest tractor and three
wheeler manufacturers in the world and holds fourth largest position in the world
truck-manufacturing sector.74 The production of the cars has been increasing at a very
fast rate. The cars statistics indicate that India will soon become one of the top 10 car
manufacturing countries.

Table-3.2
Production Trend in the Automobile Industry

(Number of vehicles, in thousand)

Category 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

PVs 641 670 723 990 1210 1309 1545 1762

CVs 157 162 204 275 354 391 520 545

3 Wheelers 203 213 277 356 374 435 556 501

2 Wheelers 3758 4271 5076 5623 6530 7609 8467 8026

Grand Total 4759 5316 6280 7244 8468 9744 11088 10834
Source: SIAM

Table-3.3
Growth Rates in Auto Sector Production

(In %, based on Number of Vehicles sold)

Category 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 CAGR

PVs 4.49 8.00 36.81 22.26 8.22 18.02 14.04 15.54

CVs 3.70 25.35 35.02 28.60 10.57 32.96 4.85 19.50

3 Wheelers 4.68 30.07 28.73 5.12 16.02 28.01 -9.99 13.74

2 Wheelers 13.64 18.84 10.77 16.13 16.52 11.28 -5.20 11.45

Total Vehicles 11.70 18.13 15.34 16.90 15.06 13.80 -2.29 12.45
Source: Calculations from SIAM Statistical Profile and SIAM Press Release

74 Facts and Figures, Automotive Mission Plan 2006-2016, A Mission For Development of Indian
Automotive Industry.

61
 Figure-3.4
Growth Rate in Auto Sector Production

Sales of Automobile

The domestic sales and exports statistic of Indian Automobile are given below.

Domestic Sales Trend

The domestic sales of the automobile in India have been growing strongly. Domestic
sales increased from 4.6 million units in 2000-01 to 9.6 million units in 2007-08. Two
wheelers, which constitute the major part of total automobile sales, have been
growing at a rate of 10.3 per cent, three-wheelers at a rate of 10.4 per cent and
passenger vehicles at a rate of 12.2 per cent CAGR as seen in table 3.5. Commercial
vehicles have been growing at a higher rate nearly 19.9 per cent CAGR. Sales of
Indian Automobile Industry that has been growing at approximately 11% CAGR
during last 7 years witnessed a growth of -4% in sales in 2007-08.

Table-3.4
Automobile Domestic Sales Trend
(Number of vehicles)
Category 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
PVs 690,560 615,116 707,198 902,096 1,061,572 1,143,076 1,379,979 1,547,985
CVs 136,585 146,671 190,682 260,114 318,430 351,041 467,765 486,817
3 Wheelers 181,899 200,276 231,529 284,078 307,862 359,920 403,910 364,703
2 Wheelers 3,634,378 4,203,725 4,812,126 5,364,249 6,209,765 7,052,391 7,872,334 7,248,589
Grand Total 4,643,422 5,165,788 5,941,535 6,810,537 7,897,629 8,906,428 10,123,988 9,648,094
Source: SIAM

62
 Table-3.5
Growth Rates in Auto Sales

(In %, based on Number of Vehicles sold)

Segment 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 CAGR
PVs -10.93 14.97 27.56 17.68 7.68 20.7 12.17 12.22
CVs 7.38 30.01 36.41 22.42 10.42 33.25 4.07 19.91
3 Wheelers 10.1 15.6 22.7 8.3 16.9 12.22 -9.7 10.45
2 Wheelers 15.67 14.47 11.47 15.76 13.56 11.62 -7.92 10.37
Total Vehicles 11.25 15.02 14.63 15.96 12.77 13.67 (4.70) 11.07

Source: Calcu ations from SIAM Statistical Profile and SIAM Press Release

Figure 3.5

Passenger Vehicles

Passenger vehicles consist of passenger cars and utility vehicles. Growth in sales of

passenger vehicles was 12.17 in 2007-08. This segment continued to move ahead at a

good pace, with total car sales rising by 11.82 per cent.75 Rising income, improvement

in standard of living and 50 new models gave a push to the sales of passenger cars.

A major development in the car segment is the unveiling of Nano, the world’s

cheapest car by TATA Motors in January 2008.

75
Facts and Figure; Corporate India May 15, 2008.

63
Commercial Vehicles

Growth rates in CV segment and its sub-segments are the highest among all auto
segments, except in year 2007-08, as shown in table 3.5. Light commercial vehicles
(LCVs) are expanding their sales in the commercial vehicles segment, though heavy
and medium commercial vehicles segment are still dominant this sector. Light
commercial vehicles, especially the sub-3.5-tonne segment, did end the year with 19
per cent growth in sales76. However, the medium and heavy commercial vehicles
segment saw a fall in volume, putting an end to the strong growth seen in last few
years. This is largely due to increased interest rates.

Growth in the commercial vehicles sector is dependent on the general economic trend,
development of infrastructure projects, transport economics and availability of freight,
replacement period of vehicles, easy availability of credit and favorable government
policies.

Three Wheelers

The three wheelers segment in India is currently small in size, but growing rapidly.
The domestic sales have increased at a CAGR of 10.4 per cent for the last seven year
from 181,899 vehicles in 2000-01 to 364,703 vehicles in 2007-08. The three-wheelers
segment reported a decline of 9.7 per cent (2007-08) in number of vehicles sold. The
growth of three wheelers was adversely affected by the paucity of model and the sub-
one tonne light commercial vehicles (LCVs). An increased cost of financing owing to
the interest rate hike also hit demand.

Two Wheelers

The domestic sales of two wheelers in India increased from 3.6 million vehicles in
2000-01 to 7.2 million vehicles in 2007-08. Two wheelers sales have grown at
10.37% CAGR during the last seven years. Motor cycle account for around 80 percent
of two-wheeler sold in country. Over the years, while the sales of motorcycles have
increased, sales of scooters and moped have stagnated. The two-wheelers segment
reported a decline of 7.92 per cent (2007-08) in number of vehicles sold. The lack of
new models, sluggish performance, stringent finance and banks tightening the credit
norms contribute to low performance.

76 Facts and Figure; Corporate India May 15, 2008.

64
Export Trend

Indian Automotive Industry is now finding increasing recognition worldwide. While

the domestic sales of automobile have been increased at a significant rate, exports
have taken a quantum leap in recent years. The exports of automobile from India have
been growing at the rate of 33% CAGR for the past seven years as shows in table 3.7.
Exports of all kind vehicles have gone up by 7.3 times from 168283 vehicles in 2000-
01 to 1238499 vehicles in 2007-08. Passenger vehicles have shown an increase in
export to the tune of 8 times while commercial vehicles have grown 4.3 times as
reflected in table 3.6.
Table-3.6
Automobile Exports Trends
(Number of Vehicles)
Category 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
PVs 27112 53165 72005 129291 166402 175572 198452 218418
CVs 13770 11870 12255 17432 29940 40600 49537 58999
3 Wheelers 16263 15462 43366 68144 66795 76881 143896 141235
2 Wheelers 111138 104183 179682 265052 366407 513169 619644 819847
Grand Total 168283 184680 307308 479919 629544 806222 1011529 1238499
Source: SIAM

Table-3.7
Growth Rates in Automobile Export
(In %, based on Number of Vehicles)

Category 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 CAGR

PVs 96.09 35.44 79.56 28.70 5.51 13.03 10.06 34.73

CVs -13.80 3.24 42.24 71.75 35.60 22.01 19.10 23.10

3 Wheelers -4.93 180.47 57.14 -1.98 15.10 87.17 -1.85 36.18

2 Wheelers -6.26 72.47 47.51 38.24 40.05 20.75 32.31 33.04

Total Vehicles 9.74 66.40 56.17 31.18 28.06 25.47 22.44 33.0
Source: Calculations from SIAM Statistical Profile

As seen from the table 3.7 passenger vehicles exports grew by 10.06 percent,
commercial vehicles exports increased by 19.10 percent, three wheelers exports
reduced by -1.85 percent and two wheelers exports grew by 32.31 percentages in the
year 2007-08. Passenger vehicles have grown at the rate of 34.75%, commercial
vehicles at 23.1%, three Wheelers at 36.18% and two wheelers at 33.04% CAGR.

65
During the year 2007-08, the export of automobile industry registered a growth rate of
22.44 per cent to 1.23 million vehicles because of strong demand from Africa and
South America. Currently around 10% of production is exported. The industry
exported 15% of its passenger cars production in 2006-07, 10% of commercial
vehicles production, 26% three wheelers and 7% two wheelers.77 Among the category
of two wheelers, motorcycle exports accounted for the maximum.

Figure-3.6

Growth Rate m Auto Sector Export

ft si
o o o c o^ o o o
Growth Rate
^ Vi
W
M

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Year

As seen from figure 3.6 there was a sharp increase in growth rate of Auto Sector
exports from 9.74% to 66.4% in 2001-02 to 2002-03. After that export is increasing
but at a declining rate and it is continuously declining. In the year 2007-08, the
growth rate of Auto Sector export was 22.44 per cent.

Europe is the biggest importer of cars from the country while African nations
predominantly import buses and trucks. The Association of South East Asian Nation
(ASEAN) region is the primary destination for Indian two wheelers.78 Maruti Udyog,
Tata Motors and Hyundai Motor India are key exporters for passenger cars; Mahindra
& Mahindra and Tata Motors for light commercial vehicles, medium and heavy
commercial vehicles, Mahindra & Mahindra for MUVs, Bajaj Auto for two and three
wheelers and TAFE for tractors.79

77 Ministry of Heavy Industries and Public Enterprises, Government of India, DHI, Annual Report
2007-08.
78 Automotive India, 2006, Indian Brand Equity Foundation
79 Automotive Mission Plan 2006-2016 A Mission for Development of Indian Automotive Industry.

66
 The government has decided to implement the Rs. 1718 crores on National
Automobile Testing and R & D Infrastructure Project (NATRIP) to improve the
global competitiveness of the Indian automotive sector. The project would help usher
in better safety, emission and performance standards, which will improve its export
potential. World class testing centers will be set up Manesar and Chennai and the
existing facilities at ARAI in Pune and VRDE in Ahmednagar will be upgraded. A
state of art proving ground or testing tracks will also be set up in due course. All this
is likely to boost the current exports by increase of ten fold within next five years.

SWOT Analysis of Indian Export

Strengths Weakness
• Cost competitiveness in terms of labor and • Perception about quality.
raw material. • Infrastructure bottlenecks.
• Established manufacturing base. Economics
of scale due to domestic market.
• Potential to harness global brand image of
the parent company.
Threats Opportunities
• China, Malaysia, Thailand, etc. Huge export markets such as Europe,
• Many other countries also have strategies America, Africa, and others for Indian
for export promotion. cars.

Gross Turnover of Auto Sector

The size of gross turnover has shown an impressive jump of overall 70 percent over a
period of five years (2000-05) for the entire industry from Rs 0.49 million to Rs 0.83
million as gathered from table 3.8.

Table-3.8
Gross Turnover in Automobile Industry

Year 2000-01 2001-02 2002-03 2003-04 2004-05

Rs.(In Million) 492,024 499,136 595,184 661,769 835,851

Source: SIAM

Auto Component

Automotive components refer to all those parts and components that are used in
making automobiles, except the chassis and body. An automobile consist of more than
20,000 components, each performing different functions. These components differ not

67
only functionally but also in terms of the materials, they were made of such as plastic
components, rubber parts and metal components. The Auto Component Manufactures
association (ACMA) classifies these components into six categories depending on the
broad type of function they serve in an automobile. These include engine parts,
electrical parts, drive transmission and steering parts, suspension and braking parts,
equipment and others.

Figure-3.7

A Comprehensive Range of Products

Others
Electrical Parts
7% Engine Part
9%
31%
Equipment
10%

Suspension &
Braking Parts Drive
12% Body & Chassis Transmission &
12% Steering Part
19%

Indian auto component industry is wide (over 500 hundred in the organized sector
account for the 77% of the value added in the sector and more than 6000 firms in
small unorganized sector) and has been one of the fastest growing segments of Auto
Industry.80 The industry crossed a total turnover of over US $15 billion (Rs. 64,500
crore) during the year 2006-07.

Table-3.9
Auto Component Industry - Statistics
(Value in US Million)
Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Turnover 3,965 4,470 5,430 6730 8700 12000 15000
Export 625 578 760 1274 1694 2492 2893
Investment - 2,300 2,645 3100 3750 4400 5400

Source: ACMA

80 Source: ACMA, 1MCS Analysis

68
Auto Component industry's growth was only 9% in between 1997-00. However,
during 2000-05 it has grown to 20%. It is projected 17% in between 2005-14. Auto
component exports from India grew from US $625 in 2000-01 to US $2893 in 2006-
07. Exports of auto components achieved a growth of 15% in 2006-07, doubling in
the last four years from the level of about Rs. 6000 crore in 2003-04 to more than Rs.
12,000 crore in 2006-07. Investment in the industry also grew from US $ 2,300 in
2001-02 to US $ 5400 in 2006-07 as the industry continued to invest in capacity
enhancement and new Greenfield sites to cope with the increased demand.

Key export destinations include Europe (36 per cent), US (26 per cent) Asia (16 per
cent), Africa (10 per cent) Middle East (10 per cent) and others (2 per cent). It has
been estimated that the export of auto components from India could be around US $
20-25 billion by 2015.81 The performance of the auto component sector in term of
turnover, export, and investment during last six years (2000-07) is as follows:

Table-3.10
Growth Rates in Auto Component Industry

Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Turnover 12.7364 21.4765 23.9411 29.2719 37.931 25
Export -7.52 31.4879 67.6316 32.967 47.1074 16.0915
Investment - 15 17.2023 20.9677 17.3333 22.7273

Figure-3.8

Auto Component Industry Turnover Growth Rate Trend of Last 7 Year

CAGR of 7 Years 24%

40.00
35.00
30.00
25.00
20.00

15.00
10.00

5.00

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Year

8l
Automotive Mission Plan 2006-2016 A Mission for Development of Indian Automotive Industry.

69
Competitive Advantages of Automobile Sector

India has several competitive advantages in the automobile sector, which have been
analyzed using the following framework.

Availability ofSkilled Manpower with Engineering and Design Capabilities

India has a growing workforce that is English speaking, highly skilled and trained in
designing and machining skills required by the automotive and engineering industries.

Competitive Industry with Global Players

The Indian automobile industry is highly competitive with a large number of players
in each industry segment. Most of the global players present in the passenger vehicles
and two wheeler segments. In component industry too, global players such as Visteon,
Delphi and Bosch are well established, competing with domestic players. The
presence of global competition has led to an overall increase in capabilities in Indian
Auto Sector. Increase in competition has led to a pressure on margins, and players
have become increasingly cost efficient.

Large Market with Significant Potential for Growth in Demand

India offers a huge growth opportunity for the automobile sector - the domestic
market is large and has the potential to grow further in the future due to positive
demographic trend and current low penetration levels.

Large Consumer Base and Rising Income Levels

India has nearly 23 per cent of the global population and is one of the most attractive
consumer markets in the world today. Income levels across population segment have
been growing in India. The rise in income levels of the Indian and the emergence of
the consuming class that has higher propensity to spend offers great opportunities for
growth to companies across various sectors.

Changing Lifestyles, Driving Demandfor New Segment

Consumers in India are now more informed, sophisticated and demanding. Consumer
has been especially exposed to western lifestyles through overseas. An increase in the
number of working women and prevalence of nuclear double income families,
especially in urban areas, are trends shaping lifestyles.

70
 These changes are driving an increased need for personal transport, especially in
segments like working women, young executives and teenagers. This has led to the
growth in demand for motorcycles, automatic scooters and compact cars.

Presence of Strong Industry Association and Supporting Industries

The Indian Automotive Industry is well served by the two-industry association -

Society of Indian Automobile Manufacturers (SIAM) that represents the OEMs and
Automotive Component Manufacturers’ Association (ACMA) that represent the
component industry. Both associations actively engage with industry, government and
other stakeholders to promote the interests of the industry and improve
competitiveness. Indian automotive manufacturers are well supported by the
automotive component industry.

Figure-3.9
Competitive Advantages in Indian Automobile Industry

- India’s comparatively cheaper and - A large number of domestic

skill workforce can be effectively
utilized to setup large low-cost
production bases.
Firm Strategy,
Structure and Rivalry
k
l as well as multi-national
players.
- Highly competitive industry
- Huge investment from the companies
for capacity expansion, R&D etc.

Factor Condition Demand Conditions

----------------- z------
.....................
Government - High demanding
consumers.
- Liberalized policy regime. - Rapid urbanization,
- Automatic approval for up to Relating and Supporting increase literacy and rising
Industries per capita income, have
100% FDI.
- The customs duty on input caused rapid growth and
and raw materials has been - Strong industry association to changes demand patterns.
reduced from 20% to 15%. promote the industry’s interests.
- Well established components
industry supports OEMs

Indian Auto Policy 2002

(a) Low Entry Barrier

> Automatic Approval for Foreign equity investment up to 100%

> No Minimum Investment Criteria

71
 (b) Investment Incentives
> Investment Incentives by the Local State Governments: Most States
Customize incentives for Large Investments.

(c) Emphasis on R&D

> Weighted Tax Deduction up to 150% for in-house research and R&D
activities.

(d) Concern for Emissions

> Government’s intention on harmonizing the regulatory standards with the
rest of world.

(e) Anti- dumping duties to be put in place.

(f) Production of small cars of length less than 380 cm to be encouraged with the
aim of making India an Asian hub for export of small cars.

(g) Fiscal incentives to be provided to MUV sector.

(h) Rebate in the excise duties to be considered as an incentive for expenditure on

R&D.

These government policies reflect the priority government accords to the automobile
sector. A liberalized overall policy regime, with special incentives, provides a very
conducive environment for investment and exports in the sector.

Indian Auto Associations

Different associations serve different purposes. Automobile Association looks after

the different phases of automobile industry. Some checks the wellness of automobile
associates in different regions where as others keep the auto component industry
healthy. Few automobile associations in India are:

• Automobile Association of Upper India (AAUI)

• Automotive Research Association of India (ARAI)

• Automobile Association of Southern India (AASI)

• Society of Indian Automobile Manufacturers (SIAM)

• Western India Automobile Association

• Automotive Component Manufacturers Association of India (ACMA)

72
Future Outlook of Indian Automotive Sector

The outlook for India’s automotive sector is highly promising. In view of current
growth trends and prospect of continuous economic growth of over 5 per cent, all
segment of the Auto Industry are likely to see continued growth. Large infrastructure
development projects underway in India combined with favorable government
policies will also drive automotive growth in the next few years. Easy availability of
finance and moderate cost of financing facilitated by double income families will
drive sales in the next few years.

In recent years, India has had a growing market potential for automobiles due to rise
in demand; as a result, there is an increased production to tap the growing demand
both at home and in the foreign markets. A large number of joint ventures and
technical collaboration of world-renowned manufacturers have been approved for
production of automobile and their components within the country for domestic and
internal needs. This is likely to further increase the investment and market
employment. India is also emerging as an outsourcing hub for global majors.
Companies like GM, Ford, Toyota and Hyundai are implementing their expansion
plans in the current year. While Ford and Toyota continue to leverage India as a
source of components, Hyundai and Suzuki have identified India as a global source
for specific small car models. As the same time, Indian players are likely to
increasingly venture overseas, both for organic growth as well as for acquisitions. The
automotive sector in India is poised to become significant, both in the domestic
market as well as globally. However, on the flip side our volumes are low, firms
spend very little on R&D, the industry is fragmented, design capabilities are limited
and labor productivity is low. The future challenge for Indian Automobile Industry
would be to develop a supply base with emphasis on lower cost and economies of
scale, develop technical and human capabilities, overcome infrastructural bottlenecks,
stimulate domestic demand and exploit export and international business
opportunities. . The key to success is to achieve the critical mass that would make
a*)

India competitive and profitable for sustained investment.

SECTION-B HEAVY ENGINEERING INDUSTRY

The Indian Engineering Industry forms the crucial backbone of the economy and is
intricately linked with umpteen other core sectors for its demand. The Engineering
Industry derives its demand from capacity creation in core sector viz. power,

82 Automotive Mission Plan 2006-2016

73
infrastructure, mining, oil and several other sectors including general manufacturing
sector, consumer goods industry, automotive and process industries. The engineering
sector is the largest segment in the overall industrial sector in India. It is diverse
industry with a number of segments, and can be broadly categorized into two
segments, namely, heavy engineering and light engineering. The share of heavy
engineering is about 80 percent of the value while rest was contributed by the light
engineering sector. The engineering industry in India manufactures a wide range of
products, with heavy engineering goods accounting for bulk of production. Most of
leading players are engaged in the production of the heavy engineering goods and
mainly produces high-value products using high-end technology. Requirement of high
level of capital investment poses as a major entry barrier. In this study, we have
concentrated only on the heavy engineering segment.

Indian Heavy Engineering Industry Evolutionary Phases

The tremendous strides that the sector has made over the past four decades have
primarily been possible because of the government’s support in providing a conducive
policy environment. The first attempt was to de-license 24 industries as far back as
1975. Among the industries de-licensed were industrial machinery, machine tools and
other equipment.

Broad banding of the machine tool industry in 1983 followed this. The year 1985 saw
a further delicensing of 25 broad groups of industries including several items of
industrial machinery for non - MRTP, non - FERA companies. Industrial machinery
sector was also broad-banded covering chemical, pharmaceutical, petrochemical and
fertilizer machinery subsequently. In August 1987, a Technology up gradation Fund
was launched for five groups of capital goods industries.

The decade of the nineties was marked primarily for the dismantling of the high tariff
walls. After having to adjust in the initial years, this sector in fact responded very
positively and successfully retooled, restructured, reengineered, and clocked very
healthy growth rates in the years 1995-96 and 1996-97.

1991-92 to 1995-96: The period from 1991-92 to 1995-96 actually saw the tariffs on
capital goods falling sharply by a significant 70 per cent and on an average the
reduction each year was above 30 per cent.

74
Classification of Heavy Engineering Industry

The Engineering Industry covers a large number of heterogeneous, but closely inter­
connected groups of industries. The Engineering Industry is primarily a metal-using
industry, though other materials like plastic, nylon, rubber etc. are also used as inputs.
The main function of the Engineering Industry is to process the end products of iron
and steel and non-ferrous metal industries, and assemble the processed parts into final
products. Heavy Engineering Industry requires such a large capital investment that
they are usually confined to a small number of giant enterprises.

The Heavy Engineering Industry comprises83 of capital goods/machinery and

equipment and transport equipment sub-segments. In capital goods/machinery and
equipment sub-segment, there are two sub segments namely electrical and non­
electrical machinery. The electrical machinery comprises power generation and
transmission and distribution equipment like motors and generators, switchgears,
transformers and energy meters. The non-electrical machinery segment comprises
engines of all types, material handling equipment, machine tools, textile machinery,
printing machinery, earth moving machinery boilers, turbines, high-end industrial
pumps, high-end industrial compressors, environmental control equipment and fire
protection systems. Transport equipment segment comprises of passenger cars, HCVs,
LCVs, MUVs, two wheelers and three wheelers.

Figure-3.10
Classification of Heavy Engineering Industry

Source: Department of Heavy Industries and Public Enterprises

1. Heavy Electrical Industry

Heavy Electrical Industry encompasses important industry sectors including power

generation, transmission and distribution equipments. This also covers turbo

83 India infoline.com, Indian Engineering Sector, April 2004

75
generators, boilers, turbines, transformers, switchgears and relays. The performance
of this industry is closely linked to the power programme of the country.

2. Textile Machinery Industry

The textile machinery industry in India manufactures machinery required for sorting,
cording, processing of yams/ fabrics and weaving, along with the components, spares
and accessories. As per the Ministry of Heavy Industries, there are over 600 units
engaged in the manufacture of machinery and spares, and out of these, about 100 units
are manufacturing complete machinery. As per the Ministry’s estimates, the industry
has an installed capacity of Rs 30.5 bn, with a capital investment of Rs 15 bn. Table
3.11 depicts the Indian textile machinery industry’s performance during 2000-01 to
2006-07.

Table-3.11
Trends in Production & Exports
(Rs. in crore)

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Production 1308 1078 1175 1339 1685 2212 2733
Export 427 427 406 535 457 476 500
Growth in
- -17.58 9.00 13.96 25.84 31.28 23.55
Production
Growth in
- 0.00 -4.92 31.77 -14.58 4.16 5.04
Export
Source: Ministry of Heavy Industries Annual Reports

Figure-3.11

i fl 11 gl;jB IP8: 8 I
(Rs. in crore)

With the buoyant outlook on textile exports, the Indian textile machinery industry is
gearing itself to take advantage of the vast opportunities of supplying machines

76
required to cater to export target of garment manufacturers, post the Multi Fiber

Arrangement (MFA).

3. Cement Machinery Industry

The Indian cement machinery industry manufactures complete cement plants, based

on dry processing and pre-calcinations technology, for capacities up to 7500 TPD.

The existing installed capacity of the industry is estimated to be Rs 6 bn/annum.

According to the Ministry of Heavy Industries, presently there are 18 units in the

organized sector for the manufacture of complete cement plant machinery. As per the

available data, the industry has made no imports or exports during the last four years.

4. Sugar Machinery Industry

As per the estimates of the Ministry of Heavy Industries, there are presently 27 units

in the organized sector for the manufacture of complete sugar plants and components.

The industry’s installed capacity is estimated to be Rs 200 crore. The industry can

manufacture sugar plants for a capacity up to 10,000 TCD (tonnes crushing per day).

India is a net exporter of sugar machinery except year 2006-07. Table 3.12 shows the

growing exports during 2000 to 2007:

Table-3.12
Trade in Sugar Machinery
(Rs. in crore)

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Import 305 3 1.7 427 1259 905 2511

Export 548 253 852 1139 2682 3767 1252

Growth in Import - -99.02 -43.33 25017.6 194.85 -28.12 177.46

Growth in Export - -53.83 236.76 33.69 135.47 40.45 -66.76

Source: Ministry of Heavy Industries Annual Reports

77
 Figure-3.12

5. Rubber Machinery Industry

The rubber machinery industry in India manufactures inters-mixer, tyre curing

presses, tyre moulds, tyre building machines, tumet servicer, bias cutters, rubber

injection moulding machine, bead wires, etc. According to the Ministry of Heavy

Industries, currently there are 19 units in the organized sector for the manufacture of

rubber machinery mainly required for tyre/tube industry. The Indian rubber

machinery manufacturing industry is a net exporter. Table 3.13 shows the trend in

India’s trade in rubber machinery during 2000 to 2007:

Table-3.13
Trade in Rubber Machinery

(Rs. in crore)

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Import 15.41 11.35 12.81 25.91 36.75 12.02 34.79

Export 4.3 11.04 15.25 22.29 46.15 50.32 98.16

Growth in Import - -26.35 12.86 102.26 41.84 -67.29 189.43

Growth in Export - 156.74 38.13 46.16 107.04 9.04 95.07

Source: Ministry of Heavy Industries Annual Reports

78
6. Material Handling Equipment Industry

The Indian material handling equipment industry manufactures a range of equipments

including crushing and screening plants, coal/ore/ash handling plant and associated
equipment such as stackers, reclaimers, ship loaders/unloaders, wagon tipplers,
feeders, etc. The industry caters to the requirement of a host of core industries such as
coal, cement, power, port, mining, fertilizers and steel plants. The Ministry of Heavy
Industries estimates the presence of 50 units in the organized sector for the
manufacture of material handling equipments. Apart from the organized players, there
are a number of units present in the small-scale sector. Imports of material handling
equipments exceed their exports. Though comparatively much smaller than imports,
exports have recorded buoyant growth in the recent years. Table 3.14 depicts the trend
in trade in material handling equipments:

Table-3.14
Trade in MH Equipments

(Rs. in crore)
Year 2002-03 2003-04 2004-05 2005-06 2006-07

Import 175.96 242.58 261.44 545.54 1552.97

Export 22.21 41.54 80.16 77.91 124.27

Growth in Import - 37.86 7.77 108.67 184.67

Growth in Export - 87.03 92.97 -2.81 59.50

Source: Ministry of Heavy Industries Annual Reports

79
 Figure-3.14

(Rs. in crore)

7. Oil Field Equipment Industry

The petroleum industry in India is undergoing a major change. With the ongoing
process of liberalization, the industry has been thrown open for private sector in all
major areas of exploration, production, refining and marketing, and this has resulted
in increased demand for the oil field and related equipments. The oil field equipment
manufacturing industry manufactures drilling rigs for on-shore drilling. Offshore
drilling equipments like jack-up rigs, etc are not manufactured indigenously. The
industry however manufactures offshore platforms and certain other technological
structures domestically. Bharat Heavy Electricals, Hindustan Shipyard, Mazagon
Dock and Bum & Co. are some of the leading producers. The recent couple of years
have witnessed a surge in exports of oil field equipments. However, the industry
remains a net importer, the Table 3.15 shows.

Table-3.15
Trade in Oil Field Equipments
(Rs. in crore)

Year 2002-03 2003-04 2004-05 2005-06 2006-07

Import 63.03 142.49 638.2 352.84 411.73

Export 15.56 165.81 300.47 71.87 72.51

Growth in Import - 126.07 347.89 -44.71 16.69

Growth in Export - 965.62 81.21 -76.08 0.89

Source: Ministry of Heavy Industries Annual Reports

80
 (Rs. in crore)

8. Metallurgical Industry
According to the Ministry of Heavy Industries, currently there are 39 units in the
organized sector, which are engaged in the manufacture of metallurgical machinery.
Metallurgical machinery includes equipments for mineral beneficiation, ore dressing,
size reduction, steel plant equipments, foundry equipments and furnaces.

Table-3.16
Trade in Metallurgical Machinery
_________ ___________________ _________ _______ (Rs. in crore)
Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Import 386.49 191.8 244.18 495.28 454.4 1200.65 1843.27
Export 128.9 126.6 267.96 434.23 370.7 535.04 643.68
Growth in Import - -50.37 27.31 102.83 -8.25 164.23 53.52
Growth in Export - -1.78 111.66 62.05 -14.63 44.33 20.31

Source: Ministry of Heavy Industries Annual Reports

Figure-3.16

(Rs. in crore)

81
There being a technological gap in the basic design and engineering for plants and
equipments in the ferrous and non-ferrous sector, the domestic manufacturers depend
on imported technological know-how.

9. Mining Machinery Industry

The various type of mining equipments include Long wall mining equipments, road
header, side dischargers loader, haulage winder, ventilation fan, load haul dumper,
coal cutter, conveyors, battery locos, pumps, friction prop, etc. The Ministry of Heavy
Industries estimates the presence of 32 manufacturers of mining machinery in both the
public and private sector for underground and surface mining equipments. Out of
these, 17 units manufacture underground mining equipments. Exports of mining
machinery were observed to be negligible, as compared to their imports except year
2006-07.

Table-3.17
Trade in Mining Machinery
(Rs. in crore)

Year 2002-03 2003-04 2004-05 2005-06 2006-07

Import 70.52 16.8 39.01 41.99 76.71

Export 0.11 1.15 1.55 5.9 48.47

Growth in Import “ -76.18 132.20 7.64 82.69

Growth in Export - 945.45 34.78 280.65 721.53

Source: Ministry of Heavy Industries Annual Reports

Figure-3.17

(Rs. in crore)

82
 tf

10. Dairy Machinery Industry

The Indian dairy machinery manufacturers produce a range of equipments including

stainless steel dairy equipments, evaporators, milk refrigerators and storage tanks,
milk and cream deodorizers, centrifuges, clarifiers, agitators, homogenizers, spray
dryers and heat exchangers (tubular and plate type), etc. As per the Ministry of Heavy
Industries, presently there are 16 units manufacturing dairy machinery and equipment
in the organized sector, both in private and public sector. The technology gap exist for
handling equipments such as self cleaning cream, separator, aseptic processing
systems, and for the equipment required for manufacture of yoghurt and Traditional
Indian sweets etc. India is a net importer of dairy machinery. Table 3.18 shows the

same.

Table-3.18
Trade in Dairy Machinery
(Rs. in crore)

Year 2002-03 2003-04 2004-05 2005-06 2006-07

Import 7.29 18.15 21.05 52.36 68.97

Export 4.44 10.54 8.08 9.95 10.27

Growth in Import - 148.97 15.98 148.74 31.72

Growth in Export - 137.39 -23.34 23.14 3.22

Source: Ministry of Heavy Industries Annual Reports

83
11. Machine Tools Industry

Machine Tool Industry is in a position to export general purpose and a standard

machine tool to even industrially advanced countries. During last four decades, the

machine tool industry in India has established a sound base and there are around 160

machine tool manufacturers in the organized sector as also around 400 units in the

small ancillary sector. The Indian industry has good design capability and the

production of CNC machines has increased to about 4000 no. per annum.

After analyses, all sectors’ export and import size and growth we can conclude that

most Indian equipment manufacturers in the sector are not globally competitive. Nor

are they likely to contribute substantially to exports in future. That is largely because

of poor design capabilities. In addition, the high dependence on raw material imports

with its inventory carrying costs and high import duties is a drag on their

performance. The ability to procure contracts, execute them on time and offer a large

product base is, then, the key to success. As infrastructure development is inevitable,

and demand for oil, petroleum products, polyester, power, cement and steel are

steadily growing, heavy engineering industry are gearing up for another long innings.

Growth of Heavy Engineering Industry

The engineering sector, popularly known as the mother of all industries is the largest

industrial segment and is reckoned as the engine of economic development. Out of the

total engineering production, the heavy engineering market contributed over 80 per

cent with the light engineering segment accounting for the remaining. According to

IIP, capital goods sector posted a growth of 15 per cent during April-October 2006-

07. Growth rate in capital goods industry was 1.7 per cent in 2000-01 and fall in

2001-02 to -3.9 per cent. It registered a smart recovery in 2003-04 to 10.4% although

on small base. However, the following year there was a further growth of 13.3 % in

84
2004-05, 17.7 % in 2006-07 and subsequently 20.9% in 2007-08. The growth rate of

capital goods sector is continuously increasing from -3.9% in 2001-02 to 20.9% in

2007-08.

Figure-3.19

25

20
15

10

5
0

-5
-10

Export

The engineering sector a key foreign exchange earner for the country. The

engineering sector accounted for 20 per cent of India’s total export84. Sixty six per

cent of the heavy engineering companies are involved in export. Capital goods now

accounted for 27% of total engineering export.85 During the last five years,

engineering exports have achieved an average growth of over 24%. The growth rate

was particular high at 32.40% in 2004-05 and 27.5 % in 2005-06. In the year 2007-08,

this sector has registered a growth of 25%. Engineering exports have already crossed

US $ 30 billion in the year 2007-08. Among the developing countries, India is the

major exporter of the heavy and light engineering goods, producing a wide range of

item. At present about 40% of the total engineering exports are made to developed

countries with USA as biggest market for Indian engineering product.

84 The Financial Express, 6 May 2009, Engineering Export Growth Down 13.7%.
85 Indian Sector Presentation (2007) Engineering, IBEF:feb29, 2008

85
 Figure-3.20

Analytical Profile of Heavy Engineering Industry

Competitive Advantage of Heavy Engineering Industry

India has several competitive advantages in Heavy Engineering Sector, which have
been analyzed using following framework.

Factor Condition

Among developing countries, India offers the best combination of low costs,
availability and skills 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 and 2,100,000 other graduates each year,
there by ensuring a steady supply of qualified manpower for the sector.

Apart from skilled labor, India also has the raw material resources to meet the
demands of the engineering industry. Key raw materials required by the engineering
sector-ferrous and non-ferrous metals such as mild steel and aluminum - 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 industry’s operating costs.

Competitive Industry with Well-Developed Capabilities

The Indian engineering industry is highly competitive with a number of players in

86
each segment. A large number of multinational companies such as Cummins, ABB
and Alfa Laval have also entered 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.

With most firms being focused on becoming globally competitive, India has the
potential and the ability to become a major global sourcing hub in the engineering
sector.

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.

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 and exposure 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.

Related and Supporting Industries

The presence of supporting industries provides a conducive environment for the

engineering sector to grow and prosper. India’s engineering industry has significant
support from India’s well-established IT sector, as well as institutions of higher
education. India has a well-developed technical 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.
87
 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.

Government Policy

Government of India has reviewed its Foreign Direct Investment (FDI) policy
constantly, in a bid to attract more investment. 100 per cent FDI has been permitted in
construction and development projects. India has opened up to private sector
participation and FDI in infrastructure projects for power, roads, ports, mining sector
and pharmaceutical sector.

India’s competitiveness in engineering industry can be assessed using the following

illustration.
Figure-3.21
India Competitiveness in Engineering Industry
- India’s comparatively cheaper and - A large number of
skilled workforce can be effectively domestic as well as
utilized to set up large cost production multi-national players.
bases for domestic and export markets. Firm Strategy, Structure - Highly competitive
- Huge investments from the and Rivalry industry.
companies for R&D etc.

Factor Conditions Demand Conditions

-Consumers include power

utilities, industrial major
Government Related and Supporting (refining, automotive and
Industries textiles), government and
retail consumers.
-Liberalized overall policy - Highly demanding
regime. -India has well- developed
consumers.
- Import duties on a range of technical and tertiary education - Demanding linked to the
equipment have been reduced. institutions. industry growth.
- Heavy Electrical industry has - Well developed vendors’
been de-licensed with 100 per base.
cent FDI allowed.
- The focus to develop road, ports
improve power generation etc

Source: KPMG Analysis

88
Some specific initiatives by the Government, which have had a positive impact on the
engineering sector, are:

• SEZ policy and industrial corridor development across centre of development

• Removal of tariff protection on capital goods

• Delicensing of heavy electrical industry and allowance of 100 per cent FDI.

• The reduction of custom duties on various equipments

• Incentives for R&D activities

• Various initiatives focused on infrastructure development and construction,

initiatives to increase power generation and improve quality of power supply.

• Import duties on a range of equipment have been reduced.

The above initiatives are aimed at creating a facilitating environment wherein the
engineering sector can thrive and have been beneficial in helping the sector become
competitive.

Future Outlook of Engineering Sector

The Engineering sector’s future outlook is promising. Drivers like power projects,
other infrastructure development activities, industrial growth and favorable policy
regulations will drive growth in manufacturing. The Indian engineering industry has
been witnessing significant level of capability enhancement over the years. As export
markets open up, this will help India develop a strong presence in global engineering
exports.

The demand in the engineering sector is expected to be maintained primarily on

account of the government’s focus on infrastructure development in the country,
which is expected to continue in the medium term. Stable sales growth has been
observed in the heavy engineering industry in light of the existing demand. Net profit
margin of heavy engineering industries has improved and adverse changes in the same
are not expected in the medium term in light of the stable demand. However,
operating profit has stagnated due to rise in raw material costs and reduction in import
duties. Any further reduction in peak import duties in the short to medium term will
lead to increased imports and higher competition in the industry.

The rapid rise of the heavy engineering industry has fuelled industrial sector growth,
which recorded an expansion of 10.3 per cent (measured in terms of the Index of

89
Industrial Production or IIP) during April-October of last financial year (2006-07) as
compared to 8.6 per cent achieved during the corresponding period in the previous
fiscal. Capital goods sector, which posted a robust growth of 16.9 per cent in 2005-06,
has maintained its growth momentum last year as well. According to the IIP, capital
goods sector posted a growth of 15 per cent during April-October 2006-07.

Power sector contributes the largest to the engineering companies’ revenues. Major
players in this sector like ABB and BHEL derive 60 per cent and 69 per cent of their
revenues from supplying equipments to the power sector. Going forward, with the
Government clearing the blueprint for adding 100,000 MW in the tenth (2002-07) and
eleventh (2007-12) five-year plans, the potential is high for the engineering majors.
India plans to add 150,000 MW power generation capacities over the next 10 years.
This will generate substantial demand for heavy electrical equipments.

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 and China.

India’s engineering sector has significant potential for future growth, in

manufacturing as well as services. With development in associated sectors like
automotive, one of the largest evolving markets for engineering and industrial goods,
and a well-developed technical human resources pool, India is poised to make
significant strides in all segments of engineering.

To summarize this chapter as the title suggests provides an overview of the Auto
Industry and Heavy Engineering Industry. The various stages of evolution of the
industries and their linkages with other industries are charted out in the chapter
followed by the classification of the two industries. Chapter also covered various
trends over the past few years relating to production, sales and exports. Lastly, we
have also mentioned several competitive advantages, challenges and future scenario
of the industries.

Chapter IV discusses the methodology used and examines corporate governance

compliance by sample companies.

90