TERM PAPER PROJECT REPORT ON ENGINEERING SECTOR SUBJECT: GROWTH PROSPECTS OF THRUST AREAS OF INDIA

SUBMITTED TO: DR.HARENDRA KUMAR

SUBMITTED BY: VIPIN TITORIA MBA-IB

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 semiskilled workers (direct and indirect).

The sector can be categorized into heavy engineering and light engineering segments. Heavy engineering 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 of manufacturing 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.

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 as a 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.

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 production of 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.

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 lowvalue 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.

Growing trend of engineering exports:

50 40 30

Exports ( $ billion ) for a five year period

40.51 33.3 26.5 20.34 Exports ( $ bn ) 32.73

20 10 0

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

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.

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

 De-licensing, removal of tariff protectio

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 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, thereby ensuring a steady supply of qualified manpower for the sector.

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

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, which focuses on industrial IT development and deployment. It also helps maintain and support a range of software intensive products and partners with the ABB R&D centers as well as business areas within 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 the engineering industry. Key raw materials required by the engineering sector - ferrous and nonferrous 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.

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 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. 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 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. Indias engineering industry has significant support from Indias 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. 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.

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

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 nonelectrical 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.

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 electrical equipments (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.

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.

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

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.

Source: Ministry of Heavy Industries, Annual Report; (Rs mn) 5. Electrical Furnaces Electrical furnaces are used in Metallurgical and engineering industries such as forging and foundry, machine tools, automobiles, etc.

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

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

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 the manufacture 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

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.

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 of work 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 :-

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 strategy became 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 foreign collaborations (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

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)

GRAPH 1

COMPOSITION OF ENGINEERING EXPORTS (1960-61)

Management & Consultany Services 0% Capital Goods 12%

Consumer durables 44%

Nonferrous metals 13%

Primary Steel 31%

COMPOSITION OF ENGINEERING EXPORTS (1996-97)

Consumer durables 22% Nonferrous metals 7% Management & Consultany Services 4%

Capital Goods 33%

Primary Steel 34%

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 Asia Africa Europe N. America Total Others) 1956-57 3.76 (73.9) 1.2 (23.3) Neg Neg. (incl. 5.16 (100) 1990-91 975 (27.9) 351 (10.0) 1410 (40.3) 40.00 3500 (100) 1998-99 5681 (30.8) 1410 (7.64) 2009-10 22041.68 (29.87) 3195.21 (4.33)

4017.07 (21.7) 16680.99 (22.60) 308.34 (1.67) 834.82 (1.13)

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, engineering exports 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.

DESTINATION OF ENGINEERING EXPORTS (1956-57)

N. America 0%
Australia 0% Others 4%

Europe 0% Africa 23%

Asia 73%

DESTINATION OF ENGINEERING EXPORT (2009-10)

Others 26%

Australia 1%

N. America 16%

Europe 23% Asia 30% Africa 4%

The important countries that account for the major chunk of our engineering exports in 200910 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.

ENGINEERING SERVICES - THE EYE OF OPPORTUNITY

Indian IT industry was evolving from 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.

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 engineering services 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 Engineering The 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 entails the use of computational tools and techniques at the plant design stage to optimise expenditures Capital or Operational and

Process Engineering

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-today 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 Traditionally asset management services have been (EAM) restricted 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, Enterprise Asset Management process assessment and re-engineering, interface (EAM) 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.

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.

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, but reliability 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 out to be around 10 per cent of total export earnings.

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

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 and cost. 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 Diversification Till 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,

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 engineering items 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 Services For 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 our protected 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.

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

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.

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 valueadded 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,

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 Share of India's exports in the Country's Imports of Thrust Products

Thrust Countries

Share of India's exports of Thrust Products

Share in World Imports (%)

Thrust Countries

Share in World Imports (%)

India's Share (%) in imports of that country

Thrust Countries

Country share in world imports of thrust products (%)

USA China UK

29.19% 13.16% 12.20%

20.58 2.65 5.65

USA Germany UK

20.59 7.7 5.65

0.26 0.18 0.39

Philipinpines Chile UAE Saudi Arabia Singapore Malayasia Thailand China Australia North Korea Turkey Hong Kong Iran Indonesia UK

0.00 0.01 0.55

6.03 4.2 3.23

UAE Germany Thailand Italy Singapore Japan Netherlands France Malayasia Belgium Hungary Mexico

9.92% 7.68% 4.14% 3.96% 3.67% 2.76% 2.24% 2.09% 1.57% 1.54% 0.86% 0.85%

0.55 7.70 0.66 3.26 0.33 1.69 1.05 4.62 0.19 1.81 0.49 0.92

France Canada Italy China Belgium Japan Spain Netherlands Mexico Thailand UAE Hungary

4.62 3.83 3.26 2.65 1.81 1.69 1.38 1.06 0.92 0.66 0.65 0.49

0.08 0.04 0.22 0.9 0.15 0.3 0.08 0.38 0.17 1.13 3.23 0.32

0.04 0.33 0.19 0.66 2.65 0.07 0.00 0.07 0.26 0.04 0.15 5.65

2.25 2.03 1.46 1.13 0.9 0.69 0.67 0.66 0.50 0.48 0.39 0.39

Canada
Other Thrust Markets Total Thrust Markets

0.77% 0.00% 100.00%

3.83 0.00 55.98

Singapore
Other Thrust Markets Total Thrust Markets

0.33 0 57.29

2.03 0.5 0.31

Netherlands
Other Thrust Markets Total Thrust Markets

1.05 0 11.72

0.38 0.19 0.31

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 combination of 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.

CONCLUSIONS AND SUGGESTIONS

The Indian engineering sector has grown by leaps and bounds with engineering exports accounting for over 20% of Indias total exports Of 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% of Indias 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 developing the 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. The majority 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, cotton sugar 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 1956 57 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

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 desired extent. 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.