Crippled by cheap imports and weak R&D, the survival of the Indian machine tools industry is under question.

By Ranju Sarkar

It is a dreadful, and dramatic, denouement. In less than three years, the Rs 2,240-crore Indian machine tools industry, once dominated by domestic players, is threatened by extinction in the face of foreign competition. In the near future, the global majors--based in China, Germany, Italy, Japan, Korea, and Taiwan--may take over the local market with their CNC strategies.

The warning signals are unmistakable. Although the market for machine tools grew by 157 per cent between 1993-94 and 1996-97 to Rs 1,795 crore, the share of imports went up from 52 per cent to 67.40 per cent during the same period of time. Worse, the Indian Machine Tools Manufacturers' Association (IMTMA) estimates that imports will grab a 70.62 per cent share of the domestic market by 2001-02.

In fact, the domestic players have realised that survival could hinge on their becoming selling- or servicing-agents for foreign companies. For instance, while the Rs 121.28-crore Mysore Kirloskar has entered into service-contracts with the $545.20-million Toyada Machine Works and Toyota Tsusho Corporation of Japan, trading now accounts for 60 per cent of the Rs 239.85-crore Batliboi's Rs 50-crore turnover from machine tools.

Many of the domestic manufacturers have undertaken restructuring exercises to compete with the cheaper, and technologically-advanced, import. For instance, the Rs 1,023.35-crore HMT--which has a marketshare of 40 per cent--is cutting costs by reducing the number of components and features offered by its models. Similarly, the Rs 80-crore Ace Group is standardising the features of its low-end products--like CNC lathes--while simultaneously offering customised high-end products--like vertical and horizontal machining-centres--to increase its margins.

For once, the machine tools industry--a subset of the capital goods sector, which is facing a similar threat from imports--has only itself to blame for its travails. Even as the global players were introducing technologically-advanced machines on the shopfloor, the local majors refused to either invest in R&D or alter their high-cost operations. In fact, the smaller players in the unorganised sector--based in Ludhiana (Punjab) and Rajkot (Rajasthan)--continued to be competitive owing to their lower labour costs.

However, the proverbial nail in the industry's coffin came in the form of the steep reductions in the Customs duties on machine tools in the 1990s, which opened the floodgates to foreign competitors. Little did the domestic manufacturers realise that, unless they sharpened their strategic tools, they would steadily lose the battle against the global majors. Which could, perhaps, impact the country's industrial growth since machine tools are the mother machines for the engineering industry.

Despite the tariff protection provided by Budget 98 through a 4 per cent Special Additional Duty, can the machine tools industry rejuvenate itself to effectively compete with imports? BT analyses the pressure-points in the industry, and presents a prognosis:

"The prices of the Indian machine tools are at least 25 per cent higher than those of the imported ones." Arun Firodia, CEO, Kinetic Engineering

THE IMPORT THREAT. In the last three years, imports have surged, and the share of the domestic manufacturers has fallen from 52 per cent in 1994-95 to 42.60 per cent in 1996-97. For instance, exports from Germany and Japan--the largest machine-tool exporters to India, with a combined turnover of Rs 680 crore in 1996-97--shot up by nearly 172 and 213 per cent, respectively, in 1996-97 compared to the previous year. Other countries, like Italy (141.34 per cent), the UK (70.21 per cent), and the US (88 per cent), were not far behind.

According to the IMTMA, the Rs 963.37-crore Daewoo Motors alone spent Rs 400 crore to import machine tools for its plant in 1995-96. And the other major importers included auto-component manufacturers like the Rs 1,578-crore Kalyani Group, and auto-makers like the Rs 694.32-crore Bajaj Tempo and the Rs 223.35-crore Kinetic Engineering (Kinetic). While Kinetic purchased 40 Taiwan-made machining-centres and CNC-turning lathes for Rs 9 crore between 1995-96 and 1996-97, Bajaj Tempo imported 40 machines worth Rs 20 crore in 1996-97.

The reasons: lower price-tags, the better quality of imported machines, the high-cost structure of domestic companies, and the non-availability of high-speed, high-precision machine tools required for the machining of auto-components. And the reduction in import duties--from an average of 40 per cent in 1992-93 to 25 per cent in 1997-98--helped the Chinese, Korean, and Taiwanese manufacturers price out their inefficient counterparts.

Couple that with the fact that the Government Of India allows duty-free imports of capital goods for sectors like refineries and power as well as for imports under the Export Promotion Capital Goods (EPCG) Scheme (and the import of second-hand machinery)--and the conclusions are obvious. Agrees Arun Firodia, 53, CEO, Kinetic: "The prices of Indian machine tools are 25 per cent higher than those of Taiwanese or Korean machine tools."

For instance, the landed price of a Taiwanese vertical machining centre with an axis travel of 860 mm, 440 mm, and 630 mm--denoting the X, Y, and Z axes, respectively--is Rs 33.11 lakh. Which assumes a basic Customs duty of 25 per cent and a countervailing duty of 13 per cent. By contrast, HMT sells a similar machine for Rs 35 lakh (pre-excise). Besides, companies in some countries, like Taiwan and China, are willing to offer cut-throat prices in a bid to capture marketshares.

For instance, Chinese companies are selling second-hand general-purpose machines--including conventional lathes, boring, milling, and grinding machines--at rock-bottom prices. Says Nirmal Bhogilal, 48, CEO, Batliboi: "The Chinese prices are political, and have nothing to do with (actual) costs." Obviously, to survive, the domestic manufacturers have to become cost-competitive. But that is easier said than done in this high-cost industry.

THE LACK OF FOCUS. Historically, the lack of quality vendors forced the bigger domestic players to build in-house facilities for manufacturing the full range of components--from the foundry to forging to machining and assembly--and products. Unfortunately, that resulted in an in-built high-cost structure, which makes these units uncompetitive against imports. Admits Jamshyd Godrej, 52, the CEO of the Rs 635-crore Godrej & Boyce: "There is a realisation that we have to be focused. There's no other way out."

For instance, to demarcate components-making from finished products, the Ace Group has set up associate (satellite) units for backward integration. While they will help cut costs, it will also reduce the lead times taken for assembling machines. The Rs 1.31-crore Ace Multi Axles Systems, set up in 1995-96, does the machining of heavy prismatic parts which are used in the final products--like CNC lathes and multi-slide auto-hydraulic lathes--made by the Rs 35.22-crore Ace Designers. Similarly, HMT encouraged its staff to float ancillaries to supply accessories, like dividing heads and vices. The result: the public sector unit outsources 25 per cent of its components.

In Taiwan too, almost 70 per cent of all components are outsourced. Apart from local vendors, they are also imported from China--low-value components, like castings and forging parts--or from Japan and Germany-- high-precision parts, like controls and drives. Concludes C.R. Swaminathan, 49, president, IMTMA: "If you have to be cost-competitive, you have to buy more and make less." One company has followed this advice to the A: the Rs 200.16-crore Widia India, which sells specialised CNC machines for gun-drilling applications, but outsources almost every component.

Simultaneously, the domestic manufacturers are restructuring their operations. For instance, the Ace Group has divided its business areas among its companies to retain focus: the Rs 5.26-crore Pragati Engineering makes sub-systems, the Rs 6.80-crore Ace Manufacturing Systems manufactures machining-centres, and the Rs 2.64-crore Auto CNC Manufacturing acts as an in-house customer for testing out the machine tools.

In fact, some companies have shrunk their portfolios, and are concentrating only on specific ranges. For instance, pmt Machine Tools Automatic--the manufacturing arm of the Rs 35-crore Perfect Machine Tools--now focuses only on specialised grinding machines. And the Rs 742.37-crore Premier Automobiles' machine tools division (the erstwhile Cooper Engineering) now makes only CNC machines for gear-manufacturers. However, mere restructuring will not reduce costs sufficiently for the local players to become globally competitive.

THE NEED FOR NEW MARKETS. Paradoxically, the machine-tool manufacturers will find it difficult to cut costs beyond a point because of the low volumes in the domestic market. For instance, only 70 vertical machining-centres were sold here in 1997-98 compared to the 1,000 sold by an average Taiwanese manufacturer every year. The solution: exports, which, at Rs 45 crore in 1996-97, were only 6 per cent of the domestic production of Rs 810 crore. Agrees Batliboi's Bhogilal: "There has to be some focus on exports of machines, and sub-assemblies." Echoes S.B. Deshpande, 47, president, Mysore Kirloskar: "Unless we look at exports, we can't increase volumes or reduce costs."

However, such attempts must be backed by market research. For example, India, a traditional exporter to the erstwhile Soviet Union, should concentrate on smaller, neighbouring countries. Many units in the unorganised sector export machine tools to countries like Nepal and Bangladesh. That's true of the large manufacturers too; the Rs 552.48-crore Lakshmi Machine Works (LMW), for instance, is the only Indian supplier of boring and milling machines to the Swiss major, Mikron. No wonder exports accounted for 25 per cent of LMW's income from machine tools in 1996-97.

However, pin-pointing new markets should be coupled with attempts to manufacture products that are in demand. Explains Mysore Kirloskar's Deshpande: "We must also rationalise the designs of various products to standardise the elements to be imported, such as controls, drives, ball screws, and hydraulics. This will give us more bargaining power."

THE GAPS IN TECHNOLOGY AND QUALITY. On the technological curve, the Indian machine tools industry finds itself at the lower- and middle-ends since companies manufacture conventional lathes, CNC machines, and machining-centres. In comparison, both the Japanese and German machine tools industries manufacture higher-end machines, like flexible manufacturing systems and robotic systems. Admits Arvind Gupta, 41, the general manager (manufacturing engineering) of the Rs 3,435-crore Bajaj Auto: "There is still a big gap in our technology when compared to the Japanese or European machines."

Although certain products are not manufactured locally, can this gap be bridged? Not really, especially since the industry has not invested in technological upgradation. For instance, the average annual R&D expenditure in the business has been around 2-3 per cent of total sales. Compare that to a global major like the $1.16-billion Japanese company, Fanuc, where almost a third of its engineers work at developing new products and technologies all the time.

During the protected 1980s, the local manufacturers had little incentive to either upgrade their technology or source it from the global majors. In the 1990s, it has become critical. However, even though Batliboi has bought technology from the $371-million Cincinnati Micron and the $228-million Bridgeport Machines of the US, such alliances can only be struck by some companies.

For three reasons: the transnationals are not interested in parting with technology; even if they are, technology is expensive; and the majority of companies, owned by small-scale entrepreneurs, are not comfortable with joint ventures. The solution? Reverse engineering. That is, strip down an imported machine, copy it, and add new features--like the Taiwanese do.

GOVERNMENT POLICIES. Unfortunately, the machine tools industry also has to deal with a multiplicity of duties and an irrational Customs duty structure. For instance, multiple (direct and indirect) taxes--like Excise (13 per cent), Octroi (2-3 per cent), and Sales Tax (4-10 per cent)--create a 10-15 per cent price disadvantage for domestic manufacturers.

Similarly, the Customs duty on components is 25 per cent while the imports of machine tools are allowed under the EPCG Scheme at 0-15 per cent duty. Agrees S.N. Mishra, 62, the CEO of the Rs 41-crore Bharat Fritz Werner: "The cascading effect of all these taxes, and the duty anomalies play havoc with us." Obviously, the IMTMA, in its pre-budget memorandum, demanded a host of fiscal measures, including a seven-year tax holiday, and that the industry be given the infrastructure sector status.

However, although the government acknowledges the problems of the machine tools industry, redressal measures are initiated too late. Nor are the domestic manufacturers proactive. Shrikrishna G. Kulkarni, 34, the CEO of the Rs 46-crore Fanuc India, agrees: "While noises are heard about the role of government, little is evident by way of proactive measures by the industry itself."

In that sense, the reference point for the Indian machine tools industry has changed: compared to the slow-moving giants, like HMT, technocrat-owned groups, like Ace, will find it easier to respond to the new challenges of the business. And there will be many--as is proved by Budget 98, which did not accede to any of the industry's demands, did not remove any anomalies, and only provided 4 per cent of additional protection against imports. That will not, however, erase the writing on the wall for the domestic machine tool-makers, whose survival is still in question.

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