Running Out Of Steam

The heavy engineering industry is struggling against shrinking orderbooks and pinchec margins as industrial growth slows.

In the eighties, Indias protected and monolithic heavy engineering industry liked to identify itself as the engine of economic growth, servicing a wide range of important industries from power and petrochemicals to automobiles and white goods.

In the nineties, the engine is sputtering weakly. There is no escaping the fact: the heavy engineering industry essentially works on derived demand. The demand for Siemens CNC machines, for instance, is dependent on the automobile industrys need to add capacity. Similarly, the fate of ABBs boilers and turbines venture is tied closely with the number of power projects the government clears.

And as its clients struggle against shrinking orderbooks, pinched margins, growing competition from feisty global corporations and uncertain government policy, the heavy engineering industry has turned a second-hand sufferer. Let alone benefits, the government does not even treat the domestic players at an equilibrium plane with the international players, says K S Nalwaya, chief executive officer, ATV Projects.

Broad statistics confirm this. Last fiscal, electrical machinery grew by 2.7 per cent, a huge fall from the heady 22.6 per cent growth recorded in 1995-96. Production trend turned sharply negative in the second half of the year.

The performance of the non-electrical machinery group was worse. The slowdown began much earlier, in the second quarter, and the year ended with a growth of only 0.5 per cent compared with 20 per cent registered in 1995-96.

The slowdown in the other sectors of the economy is now filtering down to this industry too, albeit with a lag. Last year, order books had swelled to unprecedented proportions. This year, most majors are witnessing cancellations or deferment of orders as clients postpone investment decisions.

The trend is most evident in the power equipment sector. The power division was the driving force that fuelled the orderbook growth of most major players till mid-1996, more than making up for the industry equipment division which was already hit by recession. But the governments erratic power policy has forced most private-sector power aspirants to put their projects on hold.

Not unexpectedly, a full five years after economic reform, only one of the eight fast-track independent power producers has actually started generating -- NRI-held GVK Industries plant at Jagurupadu. Most of the others are still struggling with financial closure and fuel linkages.

This kind of speadbreaker has a direct impact on equipment suppliers. As an example Aditya Srinath, research analyst at SSKI Securities, points to public sector Bharat Heavy Electricals (Bhels) predicament. Although Bhels power sector order inflow more than doubled in the last two years, it has not received a single equipment supply contract in the first quarter of this fiscal.

And last fiscal, the World Bank took a decision to stop allocating fresh funds to the Indian power sector until the cash-strapped and mismanaged state electricity boards (SEBs) took concrete steps towards reorienting their operations towards profit-making and efficiency.

Fund flows did continue for another six months on account of previously sanctioned aid, but these have almost stopped for the last two months. This too could have an adverse impact on equipment suppliers since it puts a brake on fresh investment by SEBs, which would have been the biggest buyers of power equipment in the absence of the private sector.

The evidence of the protracted slump is all too clear. For the first time in the decade ending 1996-97, the electrical machinery industry recorded a negative growth in profit before depreciation, interest and tax (PBDIT) of -4.0 per cent. This has affected the giants and the midget. GEC Alsthom recorded a 66 per cent fall in profits, Siemens saw its PBDIT fall by a whopping 66 per cent and reported a loss in its India operations for the first time.

The machine tool industry, which had been riding on a revival, is also looking at hard times, given a slowdown in user sectors like automobiles, defence, power generation and transmission, railways and farm equipment.

Steel equipment manufacturers, too, are currently going through a harrowing time. The main user segment -- the steel industry -- is facing poor demand at home and some stiff competition from cheaper imports.

For steel equipment makers, the dependence on imports of critical raw materials, coupled with the poor import infrastructure, has hampered the equipment manufacturers ability to meet project deadlines. Says M S Krishnamoorthy, general manager, Larsen & Toubro, In India, it is impossible to chart out definite time tables as the imports are totally at the mercy of the ports."

The lack of supply of quality intermediates have also pincered growth in this segment. Says an industry analyst: All these troubles point towards a shakeout in the steel equipment manufacturing industry. Though none of the manufacturers have closed shop yet, the next one year should witness this trend.

Even as everything seems to be falling apart around them, industry insiders are hopeful about the prospects of the process plant sector which services industries as varied as oil and gas, petrochemicals, fertilisers and food processing. Not that it has been spared the stick last year; in fact, the segment has witnessed far lower growth than expected. But in view of a slew of new projects coming up, analysts expect this sector to grow at a fairly healthy clip of 15 to 20 per cent in the next five years.

A recessionary environment and increasing competition is throwing up new challenges for companies, especially domestic players who find themselves up against the financial might of the MNCs (see page 3). For the first time, domestic players are having to look seriously at costs and quality. Says Ranjan Dasgupta, president, power division, Cromton Greaves: We cannot compete with MNCs in giving the best quality at the lowest price.

As defence, the industry has seen a major realignment as clients have been looking for turnkey contracts and total integrated solutions. Domestic companies too have started spreading their wings. Larsen and Toubros energetic foray into the telecom and power sectors (as an EPC contractor) is a bid to position itself as a complete infrastructure company.

One index of how manufacturers are reacting to future competition can be had from the machine tools industry. Last fiscal, machine tool imports grew by a phenomenal 41 per cent during 1996-97 (this is in the face of electrical machinery and non-electrical machinery imports falling by 17 per cent and six per cent respectively). This is the area from where the threat looms large. More than half the domestic demand is being supplied by imports.

For the moment, domestic majors say they are satisfied with their market share -- even as erstwhile competitors tie-up to look at ways of cutting costs (see page 2).

With the opening up of the Indian economy, erstwhile technology providers have become fierce competitors, for example Komatsu of Japan, which has a technology tieup with Bharat Earth MoversLltd is now entering into a joint venture with L&T to market their latest earthmoving equipment. And domestic players are awake to that threat. SSKIs Srinath predicts that this shouldnt be a major problem. Few other countries can match Indias shopfloor engineering. But in the pre-liberalised environment a lot of equipment could not be imported, which forced engineers here to put their act together to become self sufficient. Indian companies should therefore be able to overcome the technology access barrier, he says.

At present, while Indian heavy engineering giants like BHEL boast of adequate hardware, there is a glaring deficiency in automation software, the cutting edge of technology today. Domestic companies will have to wake up to the imperatives of rigourous R&D. A pointer: the Siemens global expenditure in R&D is more than the R&D spend of the entire heavy engineering industry in India!

For all the bad news, heavy-hearted industry players say there is hope. Says Krishnamoorthy: Though the different industrial segment face growth problems, none of them has reached a saturation point -- per capita offtake is the amongst the lowest in the world in many cases. So India will always be an exciting market, provided government policies are favourable.

Krishnamoorthy points to tightening environment norms, which is creating spectacular opportunities for the industry; even in a tough year Thermaxs pollution control sector grew by over 20 per cent.

Till this growth impulse spreads to other segments, industry players are keeping a stoic watch. Their immediate challenge, though, is keeping the engine running.