There are challenges that the equipment manufacturing industry, with almost Rs 160,000 crore in annual turnover, must tackle to make the most of emerging opportunities, says Kaushlendra Tripathi. Worldwide, the percentage of electrical energy consumption continues to grow as an overall percentage of total energy consumption. The share of energy consumed by developed countries is shrinking. In India we will not only consume more energy both per capita and total but also consume more of it as electricity. As per Planning Commission projections, installed capacity for electrical power generation is likely to grow by 80,000 - 100,000 MW from 2012-2017. The domestic power equipment industry has grown and today represents almost Rs 160,000 crore in annual turnover. The growth, however, has not been painless and there are challenges that the industry must tackle to make the most of emerging opportunities. Globally, the equipment industry is dominated by large industrial houses and most have their presence in India. Representing the emerging nature of the economy and the fact that barrier for entry in sector is low, small and medium enterprises have a significant presence in the sector in India. Government plays a dominant role in the power sector in regulation and policy-making and the Indian equipment manufacturer has to deal with ministries of power, heavy industries, and commerce to name a few. Government utilities are also a large customer of electrical equipment both at the central and state level. Challenges
The Indian power equipment manufacturing industry has been moving along a high growth rate trajectory over the last few years. In order to sustain such momentum, it is essential to have the necessary growth enablers. The right kind of regulatory and policy framework will ensure the industry's competitiveness against its global counterparts. At present, the industry is crippled with systemic disadvantages such as meagre testing facilities, non-standard procurement guidelines in terms of prequalification criteria and technical specifications, gap between Indian and international standards, variations in raw material prices and constraint availability and lastly tax-related issues. 1 Lack of physical infrastructure: Inbound and outbound supply chain that depends on roads and trucking industry to electric power, lack of which leads to distraction of arranging captive power continue to make mundane activities bottlenecks that are to be overcome on a routine basis. The continued demand supply -gap in power and execution and policy delays in other physical infrastructure projects imply that these constraints will remain in the near future. 2 Standard bidding documents: Central government projects have evolved to standardisation in the bidding process and documents including prequalification criteria but at the state level utilities, large variations still exist. Bid participants face a challenge in terms of quality mandates, the bidder being necessarily an original manufacturer, necessary registration with the procurer, historical background in similar kinds of assignments, financial status of the bidder etc. Restriction of certain bids to only state-based suppliers further hinders competitiveness for buying utility and market size for bidders. 3 Impact of imported raw material: Like any other manufacturing industry, the equipment manufacturing industry is also exposed to fluctuations in global raw material prices. Absence of a suitable price variation clause in contracts leads to manufacturers having to bear the brunt of swinging commodity prices. Moreover, availability of certain critical imported raw materials like CRGO steel, CRNGO steel and amorphous steel has often been a point of concern for the domestic industry, which leads to delays in manufacturing and supply cycle. 4 Quality issues: Variation in manufactured output coupled with sometimes poor quality of input and non-standard testing processes has produced variable quality leading to low reliance manufacturers' quality certification. This coupled with duplication of testing during installation and commissioning lead to increased time from order booking to final installation of products further aiding perception of poor quality.5 Logistics and time cost on manufacturers due to inadequate testing infrastructure: High testing turnaround time and absence of adequate testing facilities as per international standards are proving to be a hindrance in India's path to establish itself as a low-cost power equipment manufacturing hub. Testing facilities are inadequate in terms of testing capacity and testing depth i.e., the range of testing that can be done. Central Power Research Institute (CPRI) has 7 units concentrated around south and east India. 6 Orders booked in excess of capacity: Burgeoning order books have led to slippage on timely delivery of products. Current phase of growth in the power sector has led to orders being booked in excess of capacity to service them. This is one of the reasons for some project owners shifting to imported products which have been able to maintain timeliness of delivery.7 Budget 2011 impact: The key issue is inverted duty with certain finished products attracting lower duties than the raw materials required for manufacturing them thereby discouraging domestic production. For manufacturing units located in SEZs, there have been two key changes. The first is imposition of Minimum Alternate Tax. The second is removal of DDT exemption for any dividend distributed on or after 1 June 2011. 8 Lack of qualified resources: The sustained rise of the economy on the basis of growth in the service sector has continued to offer opportunities to graduates. The not-so-happy consequence is an increasing struggle for the manufacturing industry to hire and retain talent for jobs which are considered blue collar. Quality technical education is expensive and manufacturing is not the first port of call for fresh graduates. Equipment manufacturers have to give increased in-house focus for re-skilling talent hired from the market which adds further burden on the manufacturing organisation. 9 Impact of monetary tightening: Continued tightening of interest rates by RBI, which has raised the repo rate by 275 basis points in the last 17 months, has resulted in the rising cost of finance for the industry. At the same time, increased capacity utilisation and improved order books may call for fresh capacity addition from a longer term perspective. Together, these factors will make the industry feel the pinch of the hardening capital cost in the years to come. Recent positives and opportunities
The rapid pace of growth of the Indian economy has seen its reflection in increased capacity utilisation for domestic power equipment manufacturing industry. The industry maintains a positive outlook on capacity addition and hiring. Emerging economies continue to see a strong correlation between per capita GDP growth and per capita electricity consumption. Table 1 shows that India's per capita consumption of electricity has increased five-fold and the per capita GDP has risen seven-fold in 35 years till 2005. A similar correlation can be seen for other emerging economies like China and it is believed that in these countries the predicted rise of per capita GDP will continue with increase in per capita consumption of electricity.The coming decade will bring large opportunities for Indian equipment manufacturers. Chart 1 shows the increasing rate of growth in the per capita consumption of electricity in India. Supply of electricity to hitherto uncovered population, increasing urbanisation and need for better quality of living will continue to drive demand.
Strong growth in power generation: Strong domestic growth has created a number of opportunities for Indian equipment manufacturers. Planning Commission draft note for the 12th Plan points at a possibility of addition of 100,000 MW in the Plan period of 5 years. This will be accompanied by proportional investments in transmission and distribution sectors. The next 10 year period presents a window of unprecedented opportunity for the manufacturing sector. New capacity addition: Large areas of unmet domestic supply of equipment are leading to either establishment of new capacity or import of equipment. Entry of multinationals in setting up manufacturing capacity leading to increased opportunities of component supply and collaboration for manufacturing using new technologies. Opportunities for export: Regional growth in South-East Asia has presented Indian manufacturers with an opportunity to grow. Beyond the immediate neighbourhood in the Middle East, the economy is recovering from the downturn. FTAs and opening and growth in non-traditional markets like Africa present additional opportunities that need to be studied for potential and unique challenges that such markets present.Equipment manufacturing has registered strong growth in spite of bottlenecks and issues that have formed the backdrop of industry for a long time. Organisations will need to recognise large opportunities for growth and have to put in place a customised plan linked to their objectives to make the most of this opportunity. The author is Senior Manager, Energy, Utilities & Mining, PwC India. Views expressed are personal.
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