CRISIL SME Tracker: Time for MSMEs in the machine tools sector to rejig

Micro, small and medium enterprises (MSMEs) in the machine tools industry need to enhance their production capabilities if they are to grab a higher market share and grow, a CRISIL analysis indicates. The analysis, covering over 100 rated MSMEs, highlights challenges such as lack of access to advanced technology, low investment in product development, smaller capacities, and high concentration in the automobile and auto ancillary sector.

The industry logged a healthy compound annual growth rate of 11 per cent in the past five fiscals, and is expected to continue growing at a healthy pace, given investments in end-user industries such as automobiles, consumer durables, defence, railways and infrastructure.

However, MSMEs, which make up three-fourths of the units in the sector, have not benefitted significantly from this growth. Large players and imports account for roughly 90 per cent of the '11,200 crore-a-year market, leaving MSMEs with barely 10 per cent. The analysis reveals there is very low investment in product development and limited skill-sets for customisation among MSMEs. Only one in every six spends on new product development, and that too a meagre one per cent of their annual revenue. 

Given this, at least three imperatives emerge for MSMEs. First, they should improve competitiveness and quality through adoption of new technologies via global tie-ups. Second, they need to invest in capacity addition in order to grow, as most are operating close to optimal capacities. But, limited financial flexibility tends to restrict this. Joint ventures can help bring in necessary funds to expand capacities in line with demand, though this is not a favoured option for MSMEs, given fears of losing management control. Third, lack of diversity impedes MSMEs’ consistency in growth, as the end-user industries, especially automobiles, are highly cyclical in nature. Diversification beyond automobiles can help tap demand from other sectors, thereby sustaining growth over a long period.