india mfg sector report1!03!30 04
TRANSCRIPT
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EXECUTIVE SUMMARY
Indian Manufacturing sector signals growth
After a slowdown in the last five years, the Indian manufacturing sector is showing
clear signs of turning around. The manufacturing sector grew at a 4% CAGR during
FY97-FY02. But in FY03 the sector registered a 6% growth.This growth has been
predominantly led by exports which grew 19% in FY03 compared with a 5.4%
CAGR between FY97-02. Going forward, we believe exports will continue to drive
growth in select sectors.
Mindset focused on global markets
Lower growth in domestic markets and liberalisation have stimulated companies to
focus on international markets for growth. In unprecedented moves, companies are
setting up capacities and changing production lines keeping global markets in mind.
They are also investing in international marketing networks and in infrastructure.We
believe this change in mindset of Indian managements is the most significant
factor.
Competitive edge in skill intensive industries
Although overall opportunity and potential for India are immense, we believe that all
industries will not benefit equally. Industry dynamics and the China factor will have
a major role in determining the beneficiaries of this opportunity. We believe Indian
companies engaged in skill intensive industries like Agro-chemicals, Auto components,
Engineering, Pharmaceuticals and Specialty chemicals have sustainable competitive
advantages in international markets. This is also vindicated by the performance of
industries like Pharma and Auto ancillaries which have reported 15% and 24% growth
in export revenues from FY99 to FY02.
Companies with direct sales model to benefit more
We have classified the export sales models followed by companies into five categories
to evaluate long term sustainability of export revenues and profit margins. We believe
companies selling directly to end customers will have higher sustainabilityof revenues
and margins in the long term. This sales strategy calls for significant investments in
international marketing and distribution networks. These factors give the direct sales
model an edge over the contract manufacturing and outsourcing models in the long
term.
Our Picks
Our key sector picks are Agro-chemicals, Auto components, Engineering,
Pharmaceuticals and Specialty chemicals. We have identified two sets of companies
in these sectors. The first set of companies includes those that are at an advanced
stage of export initiative. These companies have in place the necessary ingredients
needed for success in export markets. In this category, our picks include ABB,
Aurobindo, Bharat Forge, Crompton Greaves, Cummins, IPCA, Jubilant,
Shasun, Thermax and United Phosphorus. Companies in this basket are expected
to witness maximum impact of exports on their financials and market capitalisation.
The companies identified in the second set are either at an early stage of export
initiative or are small market cap companies. Our picks in this set are Camlin, Elgi
Equipment, Hindustan Inks, Igarashi Motors, Lupin, Motherson Sumi and Sundaram
Brakelinings.
EXECUTIVE SUMMARY
Executive Summary
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CONTENTS
Executive Summary .................................................................................................................................................... 1
At a Glance .................................................................................................................................................................4
Indian Manufacturing Sector - Waiting In the Wings .................................................................................................6Indian Manufacturing - Shifting Focus to Exports. .................................................................................................... 8
Growing Manufacturing Exports.............................................................................................................................. 10
Advantage India ....................................................................................................................................................... 11
The Time Is Now ..................................................................................................................................................... 15
Evaluation of Export Sales Model ............................................................................................................................ 20
Concerns and Risks ................................................................................................................................................. 23
Annexure 1 .............................................................................................................................................................. 24
Annexure 11............................................................................................................................................................. 26
Annexure 111 ........................................................................................................................................................... 27
Annexure 1V ........................................................................................................................................................... 29
INDUSTRIES AND COMPANIES
Agro-Chemicals Industry ................................................................................................................................... 33
United Phosphorus ............................................................................................................................................... 35
Auto Components Industry................................................................................................................................ 42
Bharat Forge ........................................................................................................................................................ 45
Engineering Industry .......................................................................................................................................... 51
ABB..................................................................................................................................................................... 53
Crompton Greaves ............................................................................................................................................... 58
Cummins .............................................................................................................................................................. 63Thermax............................................................................................................................................................... 68
Pharmaceutical Industry ..................................................................................................................................... 74
Aurobindo Pharma ............................................................................................................................................... 77
IPCA ................................................................................................................................................................... 82
Shasun Chemicals ................................................................................................................................................ 87
Specialty Chemicals............................................................................................................................................. 92
Jubilant Organosys............................................................................................................................................... 95
Emerging Export Stories .................................................................................................................................. 100
Camlin ................................................................................................................................................................ 101Elgi Equipment ................................................................................................................................................... 102
Hindustan Inks ................................................................................................................................................... 103
Igarashi Motors .................................................................................................................................................. 104
Lupin .................................................................................................................................................................. 105
Motherson Sumi ................................................................................................................................................. 106
Sundaram Brakelinings ...................................................................................................................................... 107
MANUFACTURED EXPORTS
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MANUFACTURED EXPORTS
CHARTSCHARTS
Chart 1: Percentage change in manufacturing industry output .................................................................................. 8
Chart 2: Percentage of manufacturing in Indias GDP .............................................................................................. 9
Chart 3: Composition of Indias merchandise exports ............................................................................................. 10
Chart 4: Indias manufactured exports..................................................................................................................... 14
Chart 5: Category-wise CAGR during FY96-FY02 ................................................................................................ 14
Chart 6: Days taken for clearing at ports ................................................................................................................ 15
Chart 7: Contribution of SEZs to total exports in select countries ........................................................................... 16
Chart 8: QS Certified plants in India ........................................................................................................................ 19
Chart 9: Risks v/s Margins of different export sales models ................................................................................... 21
Chart 10: Long term impact of different export sales models ................................................................................. 21
Chart 11: Top twenty internationally traded products by factor intensity - 1980-2000............................................. 25
Chart 12: Growth of world exports by product categories....................................................................................... 28
Chart 13: United Phosphorus Revenue break up in FY03 ....................................................................................... 36Chart 14: Bharat Forge Revenue break up in FY03 ................................................................................................ 46
Chart 15: ABB Revenue break up in CY02 ............................................................................................................ 54
Chart 16: Crompton Revenue break up in FY02 ..................................................................................................... 59
Chart 17: Cummins Revenue break up in FY02 ...................................................................................................... 64
Chart 18: Thermax Revenue break up in FY02 ....................................................................................................... 69
Chart 19: Aurobindo Revenue break up in FY02 ..................................................................................................... 78
Chart 20: IPCA Revenue break up in FY02 ............................................................................................................ 83
Chart 21: Shasun Revenue break up in FY02 .......................................................................................................... 88
Chart 22: Jubilant Organosys Revenue break up in FY03 ....................................................................................... 96
TABLES
Table 1: Compensation for manufacturing workers ................................................................................................. 11
Table 2: Availability of skilled labour ........................................................................................................................ 12
Table 3: Availability of qualified engineers ............................................................................................................... 12
Table 4: Major MNCs having sourcing offices in India ........................................................................................... 17
Table 5: The role of foreign affiliates in the exports of six select economies .......................................................... 17
Table 6: Export sales model Plotting companies according to the business model followed.................................... 22
Table 7: International trade in motor vehicle parts and accessories ........................................................................ 44
Table 8: Major Auto MNCs having sourcing offices in India .................................................................................. 44Table 9: International trade in non-electrical machinery parts and accessories ....................................................... 52
FIGURES
Figure 1: Critical success factors in each category ................................................................................................. 13
Figure 2: Select MNCs outsourcing plans for India................................................................................................ 18
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AT A GLANCE
MANUFACTURED EXPORTS
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All nos for FY04E (INR mn)
Companies Sector Revenues Exports Exp/Rev EBIDTA PAT EPS EV/EBIDTA EV/Sales
(%) (%) (INR) (x) (x)
ABB Engineering 14,080 1,917 13.6 10.7 1,098 25.9 6.9 0.7
Aurobindo Pharma 14,170 7,486 52.8 17.7 1,425 58.9 4.6 0.8
Bharat Forge Auto Components 7,953 3,780 47.5 31.7 1,217 32.3 5.4 2.0
Crompton Engineering 17,915 3,366 18.8 10.5 647 12.4 3.6 0.4
Cummins Engineering 11,738 2,210 18.8 13.9 1,231 6.3 6.7 0.9
IPCA Pharma 5,902 3,349 56.7 22.0 838 67.0 2.8 0.6
Jubilant Specialty Chemicals 8,333 2,552 30.6 17.8 637 45.5 3.9 0.7
Shasun Pharma 2,952 2,161 73.2 19.7 241 29.4 3.1 0.6
Thermax Engineering 7,848 2,370 30.2 11.6 515 20.9 2.0 0.2
UPL Agro Chemicals 10,926 5,958 54.5 24.3 1,165 45.7 2.7 0.7
* CY03
At a glance
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AT A GLANCE
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RoE CAGR 02-05E(%) Sales Model Price(INR) Market Cap P/E(x) Reco
(%) Revenues Exports PAT
19.4 17.6 51.3 30.7 Sales to Parent 340 14,391 13.1 VALUE BUY
22.0 15.7 19.7 33.9 Direct Sales/Contract Mfr 273 6,361 4.6 VALUE BUY
47.6 32.8 76.1 108.5 Sales to OEMs 299 11,263 9.3 VALUE BUY
13.8 10.0 29.7 33.8 Direct Sales 62 3,255 5.0 VALUE BUY
16.7 9.8 1.4 14.4 Sales to Parent 70 13,840 11.2 VALUE BUY
29.0 19.2 27.0 42.8 Direct Sales 243 3,038 3.6 VALUE BUY
30.2 18.6 35.6 49.2 Direct Sales/Contract Mfr 178 2,492 3.9 VALUE BUY
25.5 18.0 25.0 37.9 Contract Manufacturer 135 1,110 4.6 VALUE BUY
12.6 12.0 25.5 33.3 Direct Sales 178 4,235 8.5 VALUE BUY
22.5 13.9 25.5 82.0 Direct Sales 163 4,153 3.6 VALUE BUY
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INDIAN MANUFACTURING SECTOR WAITING IN THE WINGS
Export growth of Indian manufacturing sector picks up
The Indian manufacturing sector is showing clear signs of turning around, re-emerging
from a five-year phase of a slowdown. The sector registered a 6% growth in FY03 alone
as against 4% annually from FY97-FY02. We believe exports will play a significant rolein driving the growth of the manufacturing sector.
In FY03 alone, Indias merchandised exports surged 18% to USD 51.7 bn. The
composition of Indian exports too has changed. For instance, in the past, primary products
i.e natural resources that were raw materials for manufacturing products, dominated
exports. The contribution of manufactured products to exports has increased from 46%
in FY82 to 76% in FY02.
Skill-intensive sectors will grow fast
We believe that select skill-intensive manufacturing sectors like Pharmaceuticals,
Engineering, Agro-Chemicals, Auto ancillary and Specialty chemicals will play a key role
in driving this export-led growth. During the last three years, Pharmaceutical andEngineering industries reported a 15% and 14% CAGR in export revenues respectively,
where as overall export revenues have grown at a 9% CAGR.
India enjoys a distinct advantage of having abundant skilled manpower. The Indian IT
sector has already displayed the benefits of leveraging this advantage. India has the second
largest pool of scientific talent in the world. The country adds around 0.14 mn engineers
every year apart from 1 mn polytechnic diploma holders. According to The World
Competitiveness Yearbook published by the International Institute for Management
Development (IMD), India ranks first in the availability of qualified engineers and second
in the availability of skilled manpower.
Since the Pharmaceutical, Auto ancillary, Engineering and Specialty chemicals sectors
predominantly employ skilled and technically competent manpower, we believe that this
advantage will be one of the triggers in an environment conducive to export-led growth.
Changing business environment
Liberalisation has had a positive impact on the Indian manufacturing sector. Companies
that operated for decades together in regulated markets could now operate in a free
environment with the government acting as an enabler. The earlier mindset of seeking
protection from imports was replaced by a new confidence to take on global competition.
The slowdown at home acted as a catalyst in bringing about an attitudinal change
of focussing on global markets. In a reversal of roles, companies across sectors that
were hither to more inward looking in a protected regime have emerged major exporters
after the slowdown in late nineties.
The change in mindset of Indian managements is reflected in the fact that over the last
five years, Indian companies rationalised work force, modernised and upgraded shopfloors,
consciously imparted a focus on quality and invested in international markets for business
development. All this, complemented by improved infrastructure and simplified
procedures, has made exports a more attractive option for Indian companies. We believe
Indian companies will leverage the overriding advantages offered by India to establish
themselves as global players.
Manufacturing industries
have grown at 6% in FY03
as against a 4% CAGR fromFY97-FY02
However, merchandised
exports rose 18% to
USD 51.7 bn in FY03
Skill-intensive industries
like Pharma and
Engineering reported 15%
and 14% CAGR in export
revenues respectively in the
last three years
MANUFACTURED EXPORTS
Perceived change seen in
managements attitude
towards exports
INDIAN MANUFACTURING SECTOR
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The new business environment has brought about vibrant changes. For instance Telco
has indigenously designed the Indica car at one-fourth the cost of developed countries
and recently signed an agreement with Rover of the U.K to export over 100,000 cars for
the next five years. From its manufacturing base in India, Ford India manufactured
50,000 cars in CY02, of which 28,915 cars were exported, clearly indicating India as a
chosen outsourcing destination.
A number of large and mid-sized players emerging
The phenomenal success of the Indian pharmaceutical and engineering companies in the
global arena is now well recognised. For instance, the success of Ranbaxy and
Dr Reddys in the global markets is quite well known and documented and their current
market capitalisation also reflects this.
We believe that there are numerous other large-cap and mid-cap Pharma, Engineering
and Auto ancillary companies that are pursuing the export-led path to growth. We have
selected companies which will see maximum impact of exports on their revenues and
market capitalisation going forward.
Bharat Forge, a company in our universe for instance, has captured 25% of world market
share of front axle beams for heavy commercial vehicles. United Phosphorus has emerged
the fourth largest global player in the agro-chemical generic category. Jubilant Organosys,
yet another company in our universe, is a world leader in the manufacture of a range of
Specialty chemicals. Our attempt has been to pick up companies across sectors that
display the capability to translate potential into performance in the global marketplaces.
Evaluating export business models
We have identified and analysed different export business models of companies and their
impact on long-term sustainability of revenues and profit margins. For instance, Cummins
and Thermax, two companies in our universe, are expected to report 30% and 25%
CAGR in export revenues respectively over FY03-FY05. Thermax has invested in
marketing infrastructure and is out to win direct sales opportunities. Cummins, however,
benefits from outsourcing by its parent. While both these translate into export-led growth,
we believe that the Thermax model is more dynamic, offering possibilities of exponential
growth and in turn is rated higher than the Cummins model.
While evaluating export business models of companies, we have also taken into
consideration whether the company is at an advanced stage of the export business model
or whether it has just made an export foray. There are risks and rewards associated with
each of these. We have considered further the export business models followed by these
companies. The two sets of companies we have selected also factor in above criteria.
Ford India exports 30,000
cars from its Indian
manufacturing facility
Numerous emerging mid-
sized players will see
maximum impact of exports
on revenues and market cap
Direct sales to customers as
a model has long term
advantages over contract
manufacturing and
oursourcing
INDIAN MANUFACTURING SECTOR WAITING IN THE WINGS
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Source: CMIE
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INDIAN MANUFACTURING - SHIFTING FOCUS TO EXPORTS
Impact of liberalisation
The Indian business scenario underwent a seachange following liberalisation in 1991. In
the period prior to this, the Indian economy was primarily supply driven with shortagefor everything from steel to scooters. From FY93 to FY97, the impact of liberalisation
resulted in a buoyant 10% CAGR in manufacturing output (see Chart 1), 8% CAGR in
Index of Industrial Production and 6.7% CAGR in GDP. This period was characterised
by strong domestic demand. De-licensing of industries, additional investments and FDI
inflows led the rapid growth of industrial production in the early nineties up to FY97.
Chart 1: Percentage change in manufacturing industry output
4.14
8.49
11.95
14.9
9.66
1.512.72
4.24
6.66
2.83
0
2
4
6
8
10
12
14
16
1992-93
(%)
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
A CAGR of 10% in
manufacturing output, 8%in IIP and 6.7% in GDP
seen during FY93-97
immediately after
liberalisation
But, a slowdown in growth from FY98 and increased
capacities impacted
companies....
MANUFACTURED EXPORTS
A marked slowdown in the domestic market
However, from FY98 onwards, a slowdown in demand for industrial products andincreased capacities led to lower revenues and pressure on realisations and margins (See
Annexure II). As shown in Chart 2, the share of manufacturing in Indian GDP declined
from 17.7% in FY98 to 16.8% in FY02. As per Centre for Monitoring Indian Economy
(CMIE) data, Indian manufacturing industry sales grew at a 17.6% CAGR from FY90-
FY95 and a 13.8% CAGR from FY96-FY01. This growth too was driven primarily by
the petroleum industry. Net profits of the Indian manufacturing industry grew at a 34.5%
CAGR from FY90-FY95. But, this declined to 14.3% annually during FY96-FY01.
Similarly, net profit margin, which improved from 1.8% in 1992 to 4.2% in 1996, slipped
to 0.8% in FY00. Some sectors like Auto and Industrial machinery reported a decline in
sales in FY98-FY99 and flat revenues in FY00.
Slowdown engenders shift in focusSlack demand and oversupply at home motivated companies to focus on international
markets. This called for structural changes requiring companies to focus on costs,
enhance quality and initiate global marketing efforts. This entailed redesigning plants,
rationalising workforce, automating processes, streamlining vendors network and
eliminating wastages.
Compelling them to look at
international markets for
growth
INDIAN MANUFACTURING - SHIFTIChart 1: Percentage change in
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Manufactured product exports accelerateIndian exports have grown faster than the GDP in the last three decades, registering an
11% CAGR during FY72-FY02 to USD 43.7 bn. From FY93-FY02, Indian exports
recorded a 9.3% growth annually compared with world export growth of 5.5%.
However, Indias share in world trade is still a negligible 0.7%. Traditionally, primary
products and handicrafts dominated Indian exports. But a gradual yet definite shift
towards export of manufactured products is discernible since the eighties as India
progressed towards industrialisation.
Chart 2: Percentage of manufacturing in Indias GDP
15.7
16.1
16.8
17.9 18.317.7
17.1
16.8
17.2
16.8
14.0
14.5
15.0
15.5
16.0
16.517.0
17.5
18.0
18.5
1992-93
(%)
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Source: CSO
INDIAN MANUFACTURING - SHIFTING FOCUS TO EXPORTS
Indian exports grew faster
than the GDP, at an 11%
CAGR during FY72-FY02
Chart 2: Percentage of manufac
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In FY02 manufactured products accounted for 76% of total merchandised exports. Twenty
years ago this share was 46%. In the last ten years, manufactured exports have grown at
a 10% CAGR as against a 6% CAGR in primary products. From FY99-FY02, the trend
is strikingly in favour of manufactured products with a 9% CAGR compared with a 1%CAGR in primary products. In spite of the increasing share of manufactured products as
a percentage of the export pie, the top ten products are primarily from labour-intensive
categories. Going forward, we see this composition changing significantly.
GROWING MANUFACTURED EXPORTS
Chart 3: Composition of Indias merchandise exports
Source: DGCIS
0
1970-71
(USDbn)
Primary Products
1973-74
1976-77
1979-80
1982-83
1985-86
1991-92
1994-95
1997-98
2000-02
1988-89
510
15
20
25
30
35
40
45
Manufactured Products Others
During FY99-FY02
manufactured products
grew at a 9% CAGR
compared with a 1% CAGRin primary products
Engineering sector reported
a 25% export growth in
FY03
MANUFACTURED EXPORTS
Gaining prominence of skill intensive manufactured exports
We firmly believe that India enjoys a strong advantage in skill-intensive products. In the
last decade (FY92-FY02), Drugs and Pharmaceuticals (13% CAGR) Engineering goods
(12% CAGR) and Chemicals (11%CAGR) led the growth of manufactured exports. The
last three years (FY99-FY02) data of Director General of Commerce and Intelligence
(DGCIS) of the government of India clearly shows acceleration of exports from these
sectors. Engineering goods reported a 15% CAGR in exports and Pharmaceutical and
Chemicals exports registered a 14% CAGR during this period. As per the preliminary
numbers released for FY03 by the DGCIS, the engineering sector reported a 24.7%
growth and basic chemicals reported an 18.2% growth in exports.
GROWING MANUFACTURED EXPORTSChart 3: Composition of India
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These dormant and
unexploited factors are now
acting as catalysts for future
growth
Availability of a large
labour force at low cost,
skilled manpower and rich
natural resources have
historically been positives
for India
Employee cost as a
percentage of revenues is
6% in India
ADVANTAGE INDIA
ADVANTAGE INDIA
Leveraging traditional advantages
India offers a host of advantages that could directly and indirectly drive export growth of
manufacturing companies. These include availability of inexpensive labour, availability of
skilled manpower, low labour costs, a rich natural resources base and availability of
metal-based raw materials at lower prices.
India has historically had these advantages. However, in the absence of favourable
business policies, these advantages remained dormant and unexploited. Following
liberalisation, in the new changed business scenario, these advantages emerged as factors
that could catalyse Indias export growth.
In this section, we review the advantages offered by India. We attempt to position India
vis--vis other emerging markets including China and identify niches in which India
emerges strong (See Annexure IV - India vis--vis China). These niches, we believe will
trigger export-led growth of manufacturing companies going forward.
a) Availability of labour and low labour costs
This advantage, an attractive feature of developing countries, is typically characterised
by huge populations with a majority of them still engaged in agriculture work.
In India, 62% of the workforce continues to be employed in the agricultural sector. For
such agricultural labourers, shifting to factory jobs would be an improvement in standard
of living, a steady income job replacing a low income seasonal employment, which too is
subject to the vagaries of nature. Given high unemployment and underemployment rates
and low standards of living, wages in India are much lower than in developed countries.
Low labour cost also works in favour of Indian manufacturers. The average hourly
wages for a graduate/skilled worker in India are USD 7 as against USD 3050 in most
developed countries and USD 15-40 in developing countries. Table 1 below gives a per-
hour comparison of wages across countries. India is closer to China and is well poised to
exploit this advantage. Though India ranks low on labour productivity, wages, as a
percentage of sales, are around 5-9% vis--vis 25-35% in Europe and U.S. for similar
industries. Low labours costs will continue to remain a major advantage for the Indian
manufacturing industry.
Table 1: Compensation for manufacturing workers (in 1999)
Country USD per hour
Germany 22.7
USA 19.2
Brazil 6.7
Mexico 2.1
India 0.6
China 0.5
Source: IMD
Average hourly wages for
Indian graduate/skilled
worker are USD 7 vis-a-vis
USD 30-50 in developed
countries and USD 15-40 in
developing countries
ADVANTAGE INDIATable 1: Compensation for manu
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India ranks first in
availability of engineersand second in availability
of skilled labour
Lower cost of skilled labour
reduces employee expense
as a percentage of revenues,
making Indian companies
cost competitive globally
MANUFACTURED EXPORTS
b) Availability of skilled manpower
India has the second largest pool of scientific talent in the world. The country adds
around 0.14 mn engineers every year, apart from 1 mn polytechnic diploma holders.
According to The World Competitiveness Yearbook published by the International
Institute for Management Development (IMD), in availability of skilled manpower rating,Indian ranks second with 7.4 points, the first being Germany as shown in Table 2 below.
However on availability of qualified engineers (see Table 3), India ranks first with 8.5
points followed by Brazil. India has 0.8 mn engineering graduates who are in the working
age category. Importantly, the working age group will continue to be favourable to India
vis--vis other countries.
Table 2: Availability of skilled labour (in 2000) Survey results 1=low, 10=high
Country Score
Germany 7.5
India 7.4
USA 7.2
Brazil 6.4
Mexico 6.3
China 4.8
Source: IMD
Table 3 : Availability of qualified engineers (in 2000) Survey results 1=low, 10=high
Country Score
India 8.5
Brazil 7.5
USA 7.4
Mexico 6.6
Germany 6.6China 4.2
Source: IMD
The advantage of availability of skilled labour at lower costs has a multiple impact on a
firms cost structure which comprise capital, product design and production costs. Also
a significant aspect is that expenditure on design, including product design and related
activities would be lower. Manufacturing today involves a significant amount of designing
work that uses the latest software programs. These programs require skilled design
engineers. Companies like Bharat Forge, Telco, BHEL and L&T have in-house design
centres with capabilities on par with global companies. The result is that employee
expenses as a percentage of revenues would be lower compared with other countries.This gives Indian corporates a strong edge when pitching in global markets.
Table 2: Availability of skill
Table 3 : Availability of qual
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c) Availability of metal-based raw materials at lower prices
India is endowed with rich natural resources, a major plus for a number of metal-based
industries. Leveraging this advantage, Tisco and Hindalco have emerged the lowest cost
producers of steel and aluminium respectively in the new business scenario.
UNCTAD classificationTo identify Indias competitive advantages in various categories of manufactured products,
we have used the UNCTAD classification of products as a basis. (See Annexure I and
Annexure III).
UNCTAD has classified products according to industrial upgrading based on factor intensity
relating to resources, skill and technology. Thus all products have been classified under
five categories.
1) Non-fuel primary products (Vegetables and Fruits, Minerals and Tobacco)
2) Labour and resource-intensive products (Textiles, Leather, Toys and Clothing)
3) Low skill technology-intensive products (Iron and Steel, Metal products)
4) Medium skill and technology-intensive products (Motor vehicles, Electrical and non
Electrical Machinery and Plastic products)
5) High-skill and technology-intensive products (Computers, Communication equipment,
Chemicals Pharmaceutical and Scientific instruments)
Factors that determine success in these categories
We have analysed critical factors required for being successful in each of these categories
in the Figure 1. We have considered categories 2,3, 4 and 5 from the above since they are
relevant to our study.
Figure 1: Critical success factors in each category
Labour intensive
Availability of labour (uneducated,
labour with no technical training)
Productivity of Labour
Favourable Labour laws
Medium- tech intensive
Availability of skilled labour
(Engineers, Chemists etc.)
Customised production
Production in batch quantities
Low tech-intensive
Availability of medium skill labour
(Diploma holders)
Economies of scale
Long product life cycles
High-tech intensive
Availability of highly skilled work force
(Scientists)
Environment for innovation (patent laws,
risk capital, rewards for innovation)
High R&D investment
Large domestic market (ability to identify
trends)
Source: Edelweiss
ADVANTAGE INDIA
Using Indias rich iron ore
and aluminium resources
Tisco and Hindalco have
emerged globally
competitive
Our analysis uses the
UNCTAD classification of
products as a base
Figure 1: Critical success fac
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India has a competitive
advantage in medium and
high skill- intensive
products
India emerges strong in the skill intensive category
Considering the above factors and India-specific advantages, we believe that India has an
edge in medium and high skill-intensive products. Our discussions with Indian managements
and industry experts also corroborate our view that India has a competitive advantage in
manufactured products which require:- Engineering and design capabilities
- Low volume not involving mass production
- Skilled manpower
We have identified the following sectors which fit into the above categories, considering
their competitive global advantages. We believe these industries will report faster export
growth rates in the coming years and our effort has been directed towards identifying
companies in these sectors with maximum growth potential. The industries identified are:
1. Agro-chemicals
2. Auto components
3. Engineering4. Pharmaceuticals
5. Specialty chemicals
Recent performance validates this
We have mapped Indian manufactured exports as per UNCTAD product classification
using the DGCIS data on commodity-wise exports from India. DGCIS categorises total
exports into 100 products. Of these 70 products are under the manufactured exports
category. We have mapped data for these products from FY96-FY02.
As can be seen from Chart 4 below, in India labour and resource-intensive industries
accounted for 60% of total manufactured exports of USD 34.5 bn in FY02. The growth
rates clearly indicate the shape of things to come. High skill and technology-intensiveproducts have grown at a 13% CAGR during the last six years primarily led by
pharmaceuticals and medical equipment industries. Compared with this, labour-intensive
products have grown at a 5% CAGR during the same period.
Pharmaceuticals and medical instruments are part of high skill-intensive products while
electrical and non-electrical machinery like diesel engines and auto components form part
of medium skill-intensive products.
High skill-intensive product
exports grew at a 13%
CAGR during FY96-FY02
Chart 4: Indias manufactured exports
Source: DGCIS & Edelweiss
0
5,000
10,000
15,000
20,00025,000
30,000
35,000
40,000
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
USDM
n
Labor-intensive and resource intensive Low skill-technology-capital
intensiveMedium skill-technology, capital
intensive High skill-technology
Chart 5: Category-wise CAGR during FY96-02
Source: DGCIS & Edelweiss
0
(%)
2
4
6
8
10
12
14
Labor-
intensive
and resource
intesive
Low skill-
technology-
capital
intensive
Medium
skill-technology,
capital
intensive
High skill-
technology
MANUFACTURED EXPORTS
Chart 4: Indias manufacturedChart 5: Category-wise CAGR du
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THE TIME IS NOW
In the earlier sections, we have listed the various India-specific advantages and factors that
engendered a conducive business climate. We had also stated that the single most important
factor that we believe will drive export-led growth of Indian manufacturing companies is
the change in the mindset of the Indian management. We wish to argue that a newbusiness environment has emerged in which the government is more a facilitator than an
impediment to business. There have been other business enablers as well. We believe this
has had a tremendous positive impact on Indian companies. We have categorised these
business enablers into Industry/economy level enablers and company level enablers. Going
forward, these enablers will catalyse export-led growth for manufacturing companies.
I) Economy/Industry level enablers
a) Improving regulatory issues and policies: Today, the governments role in export
promotion is more of a facilitator than a regulator. The governments efforts to boost
exports are directed at i) Simplifying procedures to eliminate administrative and legal
hassles ii) Announcing policies and incentives aimed at increasing exports.
i) Simplification of procedures:Over the last five years, the government has simplifiedprocedures for exports tremendously. Our interactions with industry indicate that today,
enterprises spend around two days clearing their consignments with customs officials
compared with around fourteen days in CY96 and seven days in CY99 as shown in Chart
6 below. In some cases goods are cleared in less than 24 hours from the time they arrive
at the ports. All 32 offices of the Director General of Foreign Trade (DGFT ), the nodal
agency for foreign trade, have been computerised and exporters can transact with DGFT
online. In the new EXIM policy for FY03-FY04, the government has announced 50%
lower transaction fees for applications filed online. Customs officials are available at
ports at any time of the day as against past practice of working to a clock.
ii) Encouraging policies: The Government has been improvising its export policies in
the post-liberalisation era. Some measures include setting up of new Special Economic
Zones (SEZs), launching special export promotion programmes, conducting market
studies and identifying special products for export promotion. Up to 100% foreign equity
is permitted without requirement of an approval in construction and maintenance of ports
and harbours and in projects providing support services to water transport, such as
operation and maintenance of ports and loading and discharging of vehicles. These initiatives
are helping in reducing infrastructure bottlenecks.
New business enablers are
acting as triggers of growth
Goods are cleared at ports
within 24 hours against 14
days earlier
Companies can transact
online with the DGFT
THE TIME IS NOW
Chart 6: Days taken for clearing exports at ports
Source: Edelweiss
0
2
4
6
8
10
12
14
16
1996 1999 2002
No.ofdays
Days for clearance
Governments role as an
enabler is increasing
SEZs along the lines of
China are emerging
The Time is NowChart 6: Days taken for clear
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b) Improved infrastructure: During the last five years, India has made significant
progress in improving infrastructure. This is noticeable in port capacities and in telecom
and road infrastructure. Average ship turnaround time at major ports has reduced from
7.5 days in CY97 to 3.4 days in CY02. In the telecom sector, a near-monopoly scenario
characterised by years of waiting to secure a telephone connection, old technology and
very low penetration levels are things of the past. The changes have been dramatic. In thelast seven years, the country has moved from this (penetration levels of two per hundred)
to a scenario of multiple operators competing vigorously, (80% drop in domestic long
distance tariffs in the last three years), state-of-the-art technologies in telecom, fibre
optic network connecting all major towns and penetration levels reaching 4.3 per hundred.
The road infrastructure has also seen improvement with the commissioning of expressways
(Mumbai-Pune, Bangalore-Hosur). Implementation of the Golden Quadrilateral project
and national highway projects are well underway.
c) Emergence of SEZs and EOUs: The effectiveness of SEZs in generating export
production is already well established by the performance of such Zones worldwide (see
Chart 7). Exports in the year 2000 from these Zones were USD 850 bn, representing
15% of the total world exports. These Zones are also increasingly being perceived as amajor source of attracting FDI.
At present there are 2700 SEZ/EOU units in India. In FY02 they contributed INR 270 bn
in exports revenues, a growth of 15% YoY. The units also provide employment to 700,000
people. The EOUs/SEZ units cover major industrial sectors like textiles, garments and
yarn, food and agro products, electronics and software, chemicals, engineering, minerals,
and granites. The Export Promotion Council (EPC), with the support of EOUs/SEZs, has
an ambitious road map to achieve and contribute 25% of the national exports through
manufacturing exports by FY08. In the next two years this segment is looking at achieving
USD10 bn worth of exports.
Significant improvements
seen in Road and Telecom
infrastructure
Interest rates have reduced
considerably in recent
times, helping Indian
companies
Chart 7: Contribution of SEZs to total exports in select countries
Source: KPMG
0
10
20
30
40
50
60
70
80
90
1992 1993 1994 1995 1996 1997 1998
Philippines China Dominican Republic Indian
EPC targets a 25%
contribution to national
exports through SEZs and
EOUs
MANUFACTURED EXPORTS
d) Lower interest rates: The steady decline of interest rates has led to lower cost of
capital and companies becoming more competitive in global markets. Over the last four
years, India has seen a decline in real and nominal interest rates. Corporates can now
borrow at 8-9% compared with 14-15% four years ago. This is mitigating the disadvantages
the Indian corporates faced while competing internationally.
(%)
Chart 7: Contribution of SEZs
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THE TIME IS NOW
Favourable policies and
improving infrastrutureluring MNCs to set base in
India for catering to global
requirements
e) Increased outsourcing by MNCs: Multinational corporations (MNCs) have played a
major role in globalisation and exports of developing countries. The barriers to international
transactions are falling, spurred by liberalisation, technological innovations and speedier
transportation. This is intensifying competition urging MNCs to internationalise production
systems. Thus, different activities can be performed in locations that offer the best
conditions in terms of costs, resources, logistics and market access. The MNCs mentionedin Table 4 below have established sourcing offices in India with an aim to increase sourcing
and develop the vendor market.
Table 4: Major MNCs having sourcing offices in India
Volvo Ford
General Motors Delphi
GE Cummins
Hyundai Toyota
Daimler Chrysler
Source: Edelweiss
Multinationals have played a major role in contributing to the export growth of various
countries in which they have established a presence (see Table 5). In China, the share offoreign affiliates in exports rose from 17% in CY91 to 50% in CY01.
The affiliates of five multinational auto manufacturers contributed USD 27 bn to total
exports of Mexico. In India, until late nineties, the role of MNCs was very limited.
Favourable policies and improving infrastructure have attracted many MNCs to set up
and expand operations in India to cater to global requirements. In CY00, MNCs accounted
for 5% of Indias total exports.
Table 5 : The role of foreign affiliates in the exports of six select economies
Economy Total exports Share of foreign Top three MNC Exports
(Year) CY00 affiliates in total exporters in CY00
(USD bn) exports (%) CY00 (USD bn)
China 279.6 50.0 IBM 1.5
(CY01) Samsung Electronics 1.5
Nokia 1.1
Costa Rica 6.7 50.0 Intel 1.7
(CY00) Dole Food 0.2
Del Monte 0.1
Hungary 25.5 80.0 Volkswagen 3.2
(CY99) IBM 2.2
Philips Electronics 2
Ireland 52.5 90.0 Intel (CY98) 4.8
(CY98) Dell Computer (CY98) 4.3Microsoft (CY98) 2.4
Mexico 180.4 31.0 IBM 9.6
(CY00) Daimler Chrysler 6.9
General Motors 6.7
Republic of Korea 150.4 15.0 Amkor Technology 4.7
(CY99) Nokia 2.4
Chip Pak 2.4
Source: UNCTAD
Table 4: Major MNCs having souTable 5 : The role of foreignTable 5 : The role of foreign
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GE is among the foremost to declare intentions to use India as a manufacturing base for
medical equipment and motors. In CY02 General Electric (GE) exported INR 10 bn
worth medical equipment and is expected to scale this up to INR 25 bn by CY05. In the
Fig.2 below, we present examples of MNCs who have displayed strong intentions of
outsourcing from India.
Over the last five years numerous MNCs have opened dedicated offices called international
purchase office (IPO) or global procurement divisions (GPD) in India to identify and
expand their sourcing operations.
GE takes the lead in
outsourcing to India....
Thrust on exports entails
focus on quality and
structural changes
Companies spending more
on increasing visibility and
developing and nurturing
international markets
Figure 2: Select MNCs outsourcing plans for India
Unilever sources around INR 8 bn worth FMCG productsfrom HLL, which is expected to touch INR 50 bn over the
next three-four years.
Ford India exports to Brazil, Mexico and South Africa. In CY02,it exported 28,915 passenger cars, while it sells only half of
that in India. Whirlpool plans to increase contribution of exports in totalrevenues from present 12% to 25% in the next three years.
Clariant India is amongst the three global sourcing bases ofthe parent company.
Toyota is sourcing propeller shaft and rear and front axles.Soon it will be sourcing transmissions for seven SUV plants
located worldwide
Techumseh of U.S. has invested USD 100 mn in India sinceCY97 and is expanding capacities to increase its export business
from current 30% to 50-70% in the coming years.
Sourcing from Indian suppliers by Daimler Chrysler hasincreased from Euro 6 mn in CY98 to Euro 63 mn in CY02.
MANUFACTURED EXPORTS
II) Company level enablers
a) Focus on exports: Competing in the global marketplace is a totally different ballgame.
Indian managements that hitherto thrived in a protected regime had to take on the challenges
of international competition. Focus on export markets called for companies making
structural changes. Companies needed to improve their cost structure, enhance quality
and establish a dynamic marketing infrastructure. It also called for redesigning plants,
rationalising workforce, automating processes and streamlining vendors network. To
supplement the above efforts, companies also upgraded systems and sought accreditionslike QS9000 and QS 14000. Chart 8 captures this scenario, showing how the number of
accredited plants increased from virtually zero in CY91 to 8000 in CY99 in the post-
liberalisation phase.
During the same period, companies made vigorous efforts to explore and improve their
visibility in international markets. This is evident from the foreign travel expenses of BSE
500 companies for the manufacturing sector. This expense reported an 11% CAGR during
FY99-FY02.
Source: Industry
While numerous others are
following suit
Figure 2: Select MNCs outsour
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Chart 8: QS certified plants in India
Source: ISO and Edelweiss estimates
0
500
1,000
1,500
2,000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001E
2002E
Incrementalplants
0
2,000
4,000
6,000
8,000
TotalNo.ofplants
Incremental Total in India
Indian companies are
establishing international
marketing facilities
THE TIME IS NOW
b) Strategic initiatives: Until a few decades ago, India was perceived as the land of
snakes and elephants. Though this perception has undergone a dramatic change since
the advent of liberalisation, we believe that foreign players still harbour reservations about
dealing with India. We have said elsewhere in the Report that the Indian software industryhas established a comfort level of dealing with a number of Fortune 500 companies. This
is a major plus. But the process of establishing global presence is time-consuming.
We believe that the entrepreneurship displayed and strategies deployed by Indian
corporates will play a major role in acceleration of exports. Some of these strategies are
outlined below.
i) Acquiring front-end companies: Indian companies face a major challenge of
selling themselves, especially in high skill-intensive products. The lead times
for initiating discussions and ramping up are high. To counter this many firms
like Ranbaxy, Dr Reddys and Bharat Forge have acquired local marketing and
distribution companies in their key markets of U.S. and Europe. Some companies
like Sun Pharma have acquired firms with manufacturing facilities, where finalpackaging is being done.
ii) Investing in a marketing and distribution network: This involves sustained
investment in sales and marketing and distribution network in the initial years though
benefits will accrue over a period of time. Companies like Crompton Greaves have
invested heavily for establishing their presence globally.
iii) Leveraging existing clientele: A well-reputed client base can be leveraged
for increasing customers. For instance, Bharat Forge, with clients like Daimler
Chrysler, Volvo and Cummins, will find it much easier to attract new clients in
international markets. Indian software companies offer a very good example of
leveraging existing clientele to attract new clients. A fine example would be that of
Satyam leveraging its relationship with GE and Dun & Bradstreet to become a
leading software services player.
This entails acquiring
front-end companies.....
investing heavily in a sales
and distribution network
Chart 8: QS certified plants i
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EVALUATION OF EXPORT SALES MODELS
In this Report, our attempt has been to identify companies with potential for export-led
growth. We believe companies in Pharmaceuticals, Engineering, Auto Ancillaries and
Specialty Chemicals are likely to show robust overall growth in export revenues going
forward. But we believe profit margins over the long term would also depend on theexport sales model of the company.
We define an export sales model as a strategy used by a company to reach its clients.
We have identified different export sales models followed by companies to achieve
export growth and have analysed their impact on long-term sustainability of revenues and
profit margins.
i) Direct Sales Model: This comprises:
1) Sales to retail and wholesale customers
2) Original Equipment Manufacturers (OEMs)
This model entails establishment of a global distribution network to reach end
customers.
ii) Outsourcing Model: Outsourcing is defined as the contracting of one or more of a
companys businesses/products to an external firm. This is sub-divided into three
categories:
1) Supplying to the parent
2) Outsourcing for a third party
3) Contract manufacturing
We attempt to show how the export sales model of the company will drive margins and
long-term sustainability of revenues. For instance, we believe that companies following
the Direct Sales Model will see high sustainability of revenues and profit margins in thelong run. The risk here is in investing in companies which are at the early stage of adopting
the direct sales model. During the initial phase of two to three years, overheads will be
high, impacting profits.
On the other hand, Outsourcing by the parent will show fast growth in the short term,
with least effort (no S G & A expenses). However, in the long term, the margins could be
under pressure considering the parents interest in maintaining its profit margins.
We believe contract manufacturing is a good model for a company as an entry strategy
and as a means of achieving faster growth in the initial period. It also offers high revenue
sustainability. It is a good foot-in-the-door strategy offering sustained revenues since a
contract usually stretches over five years. The underlying danger is that, as in case ofsales to parent mode the buyers here too would be well aware of the cost structure and
would constantly work towards cutting prices.
Chart: 9 shows how each business model is positioned in terms of risks and margins
across different categories and sub categories. Chart 10 shows the long term impact of
these sales models on sustainability of revenues and profits of companies.
MANUFACTURED EXPORTS
22 Edelweiss
Sales strategy followed by
companies will be
crucial in determining
revenue sustainability
High initial marketing
expenses in case of a direct
sales model
Evaluation of Export Sales Mod
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Explanation for terms used in the charts above
Parent : Exports to parent
Cont : Contract manufacturing
DS : Direct Sales
T P : Third party manufacturing
OEM : Original Equipment Manufacturers
Chart 9: Risk vs Margins of different export sales models
Source: Edelweiss
Margins
Risk
Cont
TP
Parent
OEM
DS
Low
Low High
High
Chart 10: Long term impact of different export sales models
Source: Edelweiss
Sustainability of Earnings
Parent
Low
Low High
High
Cont
TP
OEM
DS
SustainabilityofRevenues
EVALUATION OF EXPORT SALES MODELS
23Edelweiss
Risks higher, but margins
higher too in case of a
direct sales model
Sales to parent model offers
high revenue sustainabilitybut low margins
Returns low in contract
manufacturing but a good
foot-in-the-door policy
Chart 9: Risk vs Margins of diChart 10: Long term impact of
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MANUFACTURED EXPORTS
24 Edelweiss
Companies covered
Our objective is to identify companies that are likely to benefit from export growth and
see maximum market cap expansion. Our focus has been on the following industries:
a) Agro-chemicals
b) Auto components
c) Engineering
d) Pharma
e) Specialty chemicals
We have identified companies from the above industries considering factors such as
export potential, the export phase in which company is at present, the degree to which
current market price reflects potential from export business and share of export revenues
to total revenues and size. Based on these we have categorised companies likely to benefit
from exports into three categories.
1. Large market cap companies, where current market cap factors in the companys
international presence. This category includes companies who will report faster
export growth but this will not have a significant impact on their revenues.
2. Companies that will see a major impact on market capitalisation due to increased
exports. In most cases, these companies have just entered a high growth phase.
This is our primary focus area of this report.
3. Companies that are at an early stage of initiative in exports and small cap companies
having good potential going forward. We have presented these companies in a
separate section under the category Emerging Exports Stories.
Thus, we have not considered in this Report large corporations like L&T, BHEL or HLL
who are aiming at aggressive export growth since we believe that overall contribution of
exports to their revenues will be insignificant. We have also not covered companies likeRanbaxy and Dr Reddys whose export forays are largely factored in to current market
price.
Table 6: Export sales model followed by companies
Direct Sales Outsourcing
Direct OEM Parent Contract Third Party
Manufacturing Outsourcing
Agro. Chem UPL
Auto Comp. Sund. Brake Bharat Forge Igarashi Motherson Bharat Forge
Engineering CG Cummins
Elgi ABB ABB
Thermax
Pharma IPCA, Shasun
Lupin,
Aurobindo
Spl. Chem Jubilant Camlin, Hind. Inks
Table 6: Export sales model fo
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CONCERNS AND RISKS
CONCERNS AND RISKS
Delays in closing existing businesses
The business Indian firms will be getting in the coming years will be increasingly from
replacing existing manufacturers than from additional or new demand. The present
requirements of these firms are being met by a) in-house manufacturing facilities andb) outsourcing from other firms in the same region.
While a slowdown in demand and need to cut costs are pushing companies to look for
low cost suppliers, it entails closing down in-house manufacturing facilities or reducing
offtake from existing suppliers. Both the decisions are sensitive and involve issues of
laying off employee and relationships with suppliers.
As a result, though there is a compelling need for sourcing their requirements from
countries like India, implementing the measures to outsource or relocate manufacturing
bases could take time.
Anti-dumping duties and non tariff barriers
In the nineties most developed countries saw growth and economic expansion. But in the
last two years, growth rates have slowed considerably resulting in recessionary trends.
In this scenario a foreign entity taking away business from local supplier is a sensitive
issue. Apart from anti-dumping cases, there will be many non-tariff barriers that Indian
companies will encounter. For instance, to sell their products in the U.S., auto
manufacturers will have to get registered with local authorities in the respective cities,
which is a time-consuming process.
Rigid labour laws and low labour productivity
Archaic labour laws and low productivity levels are concerns. We believe countries like
China have advantage over India in labour intensive products. Foreign companies who
believe in paring payrolls to remain cost competitive view the rigid Indian labour laws asa major impediment.
Power, infrastructure and regulatory problems
Apart from high tariffs, Indian industry is dogged by power shortages and poor quality of
power. India continues to have 14% peak power deficit. Though road and port
infrastructure improved considerably in the recent past, we believe we have a long way
to go to match standards of developing countries, especially our East Asian neighbours.
China
China has clear advantage in products, which are either labour intensive or scale intensive.
Judged from todays point of view, China does look as though it could out-compete other
economies in the manufacturing of almost anything labour-intensive. This is substantiatedby the fact that 70% of Chinas exports today are of garments, toys, shoes and furniture.
In Annexure IV, we have attempted to present a head-on of India vis-a-vis China. As
reiterated in this Report in earlier sections, our analysis clearly points out that India has a
distinct advantage in skill-intensive areas.
25Edelweiss
Initiating outsourcing
measures or relocating
manufacturing bases aretime-consuming processes
Indian companies could
encounter anti-dumping
duties and non-tariff
barriers
Rigid Indian labour laws a
dampener
Infrastructure needs
vigorous changes for
companies to be in the
reckoning
China has clear advantages
in labour-intensive
categories
Concerns and Risks
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ANNEXURE I
What is manufacturing?
Manufacturing is defined as a process that combines machinery, tools and manual labour
to bring material closer to a final state. It consists of a set of processes, materials, and
systems (including people) that transforms a limited range of materials into products of
increased value.
Manufactured products can be classified in numerous ways. For the purpose of our
study in this Report, we have used UNCTADs Standard International Trade Classifica-
tion (SITC). The SITC groups all products in three categories.
a) Primary products consisting of agricultural products, mining products, fuels
and non-ferrous metals.
b) Manufactured products - This segment has seven sub segments:
1) Iron and Steel
2) Chemicals
3) Other Semi-Manufactures
4) Machinery and Transport equipment
5) Textiles
6) Clothing
7) Other Consumer Goods
c) Other products - consists of commodities and transactions not classified
elsewhere.
UNCTADS CLASSIFICATION OF PRODUCTS
UNCTAD has classified products according to industrial upgrading based on factor in-
tensity relating to resources, skill and technology. Thus all products have been classified
under five categories.
1) Non-fuel primary products
2) Low skill and technology-intensive products
3) Medium skill and technology-intensive products
4) High-skill and technology intensive products
Relevance of UNCTAD classification to our study
Since our study is focused on manufactured products, we have considered the last four
categories of UNCTADs classification in this Report. In Chart 11 we attempt to showthe top products in each category, their market share in international trade and their
growth rates in the last twenty years.
MANUFACTURED EXPORTS
26 Edelweiss
ANNEXURE I
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ANNEXURE I
27Edelweiss
Chart 11 Top twenty internationally traded products by factor intensity - 19802000
Animal oils and fats
Crude rubberHides and skins
Textile fibres
Crude fertilizers and mineralsCereals
Oil-seeds
Tropical beverages & spicesSugar
Live animals
Metalliferous oresPulp and waste paper
Feeding stuff for animalsDairy products
Cork and wood
Fixed vegetable oils and fatsMeat
Non-ferrous metals
Vegetables and fruitsProcessed animal and veg oil, etc
Crude animal & vegetable mat.
TobaccoFish
Beverages
Misc. edible products
Computers & office equip.
Comm. equip. & semicond.
Chemical and Pharm. productsAircraftScientific instruments
El. machinery excl. semicond.Rubber and plastic products
Road motor vehiclesNon electrical machinery
Clothing
Wood and paper productsToy and sporting goods
LeatherNon metallic mineral products
Textiles
FootwearSanitary and Plumbing equipment
Simple transport equipment
Fabricated mental productsIron & Steel
Ships and Boats
15 10 5 0 5 10 15 20
Non-fuel primary commodities High technology-intensive manufactures Medium technology-intensive manufactures
Labour- and resource-intensive manufactures Low technology-intensive manufactures
Share in world non -fuel ex po rts, 20 00 Ave rag e an nu al exp ort valu e g ro wt h, 19 80 2 00 0
(%) (%)
Source: UNCTAD
Chart 11 Top twenty intern
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ANNEXURE II
The Indian manufacturing sector - A perspective
The share of manufacturing in Indian GDP in FY02 was 16.8%. This share has reduced
from 17.7% in FY98 primarily due to faster growth of the services sector. Significantsigns of a turnaround however seem to be emerging, with the manufacturing sector
posting 6% growth in FY03.
According to the Annual Survey of Industries, conducted by the government of India, at
the end of FY00, Indian manufacturing sector comprised of 131,558 factories, invested
INR 5,666 bn and reported INR 8,979 bn in revenues. According to the Economic
Census, which is the most comprehensive study on enterprises, including the unorgan-
ised sector, there were 65 mn people employed in enterprises at end of FY98.
The manufacturing sector plays a significant role in productive use of labour and transi-
tion of agricultural workforce to manufacturing workforce. The sector employs only
14% of the total workforce in India. Agricultural sector accounts for 62% and services
sector for 24%.
According to CMIE, which maintains financials of over 5,000 corporates, Indian manu-
facturing industry sales grew at a 17.6% CAGR in the first half of the nineties and 13.8%
CAGR in the second half. This growth too was primarily driven by petroleum industry.
Aggregate revenues of these companies were INR 8,882 bn in FY01.
MANUFACTURED EXPORTS
28 Edelweiss
ANNEXURE II
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ANNEXURE III
Trends in global trade
In the last twenty years, the value of world merchandise exports has grown at an 8%
CAGR compared with less than 6% CAGR in global output. In FY02, international trade
in merchandised goods was at USD 6.1 trillion. Of these manufactured goods accounted
for 75% at USD 4.6 trillion.In the changing international trade scenario, some products
have registered much higher growth than others for a number of reasons. It is easy to
achieve export growth and gain market shares through focus on these products.
Growing share of developing countries
The share of developed countries to total world exports was 64.1% in CY01, a decline
from 71.5% in CY90. The steady growth in world trade has been attributed to a)
Increasing integration of national economies b) Deepening of international division of
labour c) International production networks.
Since the early eighties, most developing countries have rapidly liberalised trade and
are working towards increasing Foreign Direct Investment (FDI). This implies openness
to international market forces, thus altering the pace and pattern of international trade
of developing countries. These countries currently account for one third of
world merchandise trade. Manufactured products account for 70% of developing
countries exports.
The increased mobility of capital has led to international production networks where
production chains can be split up and located in different countries For example, U.S.
based pharmaceutical majors source incipient and other basic chemicals from China,
which are then transported to India. The end product i.e. the bulk drug is then sourced
from India. The final formulation is manufactured in the U.S. This spread of production
sharing networks is also facilitated by reduced transport and communications costs and
falling trade and regulatory barriers.
Products that have participated maximum in international production sharing arrange-
ments during last two decades are categorised in three distinct groups:
a) Components and parts for electrical and electronic goods
b) Labour intensive products like clothing
c) Goods with high R&D content
.
Shifting manufacturing bases to low cost countries
In the U.S, the number of jobs in manufacturing at present is same as it was CY91.
During the same period, the U.S. economy grew at a 4% CAGR. The average U.S.manufacturing worker is paid USD14.35 per hour. Comparative wages for workers in
India and China are USD 0.6.
In developed countries, standards of living are much higher compared with developing
countries. This along with limited populations and low unemployment rates is putting
pressure on availability of unskilled or factory labour. In the U.S., employment growth
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has been primarily led by the services sector. In the first nine months of 2002 alone,
the manufacturing industry in U.S. lost 332,000 jobs while the services sector added
506,000 jobs.
Non-availability of workforce, high wages and higher overheads are forcing companies
to shift manufacturing bases to developing countries like China and India.
Source: UNCTAD
50
150
250
350
450
550
650
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
All products Non-fuel primary commodities
Labor- and resource-intensivemanufactures
Low technology-intensivemanufactures
Medium technology-intensivemanufactures
High technology-intensivemanufactures
MANUFACTURED EXPORTS
Fast growing trade in skill-intensive products
As can be seen from Chart 12 above, the difference in growth rates of world exports in
these five product categories during FY80-FY98 is dramatic. The high skill and technology-
intensive products category reported the strongest growth with a five-fold increase in
exports during this period. Significantly, developing countries reported stronger
growth in high skill and technology-intensive products with a 14 times increase in exports
during this period. This category now accounts for the highest share in world non-fuel
exports category.
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Chart 12: Growth of world exports by product category
(Index numbers, 1980 = 100)
Chart 12: Growth of world expo
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ANNEXURE IV
China vis--vis India
We have argued in this Report that Indian companies in select industrial sectors will
leverage the India advantage and report exponential growth. We have also enumerated
how export growth will come from direct sales, outsourcing and contract manufacturing.
Given a number of similarities, it is inevitable that parallels are drawn between India and
China. In this Annexure, we list factors that give China its pre-eminent status. We go on
to compare India with China and show that Indias core competence is in skill intensive
sectors.
China gains pre-eminence in exports
China is amongst the top five players for eight out of the 20 dynamic products in world
trade. China has emerged as an outsourcing destination and manufacturing base for the
world in several products and has captured a large share of world trade. Manufactured
exports from China have registered a 16% CAGR in the last ten years to USD 280 bn in
FY01. Today China accounts for 29% of world trade in bicycles, 28% in toys, 25% infootwear, 20% in readymade garments and 14% in electric power machinery. In con-
trast Indias total manufactured exports were USD 34 bn, of which USD 7.4 bn are from
gems and jewellery business. The only other product categories where India has a
noticeable share are readymade garments (3.8% market share), bicycles (2.15% market
share) and pharmaceuticals (2% market share).
A new trend is emerging
We believe that China will continue to enjoy leadership in labour-intensive and mass
production categories. In these categories, Indian companies will not be able to compete
with China. Instead, as seen in case of our basket of companies, Indian companies will
increasingly use China as an outsourcing or contract manufacturing base, perform the
value addition in India and export to a third country. As current trends indicate, at onelevel, the Indian manufacturing sector is identifying opportunities to win a slice of the
burgeoning Chinese market. At another, it is leveraging China as a source for components
and finished goods to cut costs for its own products and stay competitive at home
and internationally.
Some of the companies like Aurobindo have already begun the process. In a new emerging
trend, companies like Bharat Forge and Tisco have started exporting to China. Bajaj
Electricals stopped manufacturing table, pedestal and wall fans and started importing
these from China. Thus, we believe, in the new scenario, with a changed mindset, cross-
border trade between India and China is showing a positive trend.
Factors that give China its overriding advantage
China has a clear advantage in products, which are either labour-intensive or
scale- intensive. About 70% of Chinas exports today are of garments, toys, shoes,
furniture and other such labour intensive products. We believe, it would be difficult for
India to match Chinese labour productivity in the medium term.
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The Chinese success has mainly been due to the following factors:
a) FDI China received USD 336 bn FDI inflows in the last ten years. Exports of
multinationals now account for 49% of total Chinese exports of USD 280 bn.
This was only 4% in CY91. Comparitively, India has attracted a cumulative FDI
of USD 38 bn during the same period.
b) SEZs: Over the last twenty years, China has created over 500 special economic
zones in the country. All these zones provide several benefits like quick approv-
als, ready office and plant infrastructure, flexible labour policies, attractive fi-
nancial incentives and ready to access domestic market. These SEZs have been
instrumental in the growth of Chinese manufacturing industry. In FY01, these
SEZs accounted for 75% of total FDI inflows into the country. The Indian
government is working on setting up SEZs along these lines.
c) Manufacturing employment: The employment by agriculture in China reduced
from 68% in CY81 to 54% in CY99. This has played a major role in improving
purchasing power of people, apart from increasing availability of labour for manu-
facturing industry. In India however, agricultural employment has fallen from69% to 62% only during this period. China has achieved a 12% annual labour
productivity growth during the last ten years, whereas during the same period
productivity growth in Indian manufacturing was 2.2%.
d) Lower duties and taxes: Average import duty in China is 17% compared with
24% in India. In indirect taxes, China has a flat 17% value added tax, whereas in
India these taxes account for 25-30% of retail prices. This leads to higher raw
material prices and products being expensive overall.
MANUFACTURED EXPORTS
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INDUSTRIES
AND
COMPANIES
INDUSTRIES
AND
COMPANIES
industries
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AGRO
CHEMICALS
AGRO CHEMICAL INDUSTRY
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An INR 45 bn industry
Agro chemicals is an INR 45 bn industry in India. Insecticides account for 75% of the
market, Fungicides 14% and Herbicides 9%. In terms of chemical compounds, Synthetic
Pyretheroids account for 50%, Organophosphates 16%, Organochlorines 19% and
Carbonates 35%. Exports from India are around INR 10 bn.
The Indian market is the thirteenth largest in the world with a 2.5% share. In the domestic
market, the industrys fortunes depend on the monsoons with most consumption happening
during the Kharif (September-March) period.
The composition of the industry indicates that it is still largely unorganised.There are 80
organised players as against 500 unorganised players in the segment.
Major Indian players are United Phosphorus (INR 10 bn), Rallis (INR 10 bn) and Excel
industries (INR 4 bn). Multinational companies having a major presence in India are
Bayer (INR 6 bn), Syngenta (INR 4 bn) and Monsanto (INR 3 bn).
A USD 30 bn global market
The global agro chemicals market is USD 32 bn in size. It has grown at a 2-3% CAGR in
the last five years. Of this, the generic opportunity is approximately USD 24 bn. Globally,
share of Herbicides is the highest (48%), followed by Insecticides (29%), Fungicides
(17%) and others.
Key markets for agro-chemicals are North America (30% share), Western Europe (22%),
Asia Pacific (25%) and Latin America (16%). In the last three to four years sales growth
of these markets have been depressed due to the entry of generic products and slow pace
of new introductions. The global market is highly consolidated with the top ten companies
commanding a 70% marketshare. In North America and Europe, the markets are highly
regulated. Players here have to comply with stringent environmental safety tests. It takes
approximately 12-18 months for generic companies to get approvals for their products
due to rigorous regulatory requirements.
Leading global players are Bayer Crop Science (USD 6 bn), Syngenta (USD 5 bn), BASF
(USD 3 bn) and Monsanto (USD 3 bn).
Key growth drivers
Key growth drivers for the industry are a) Increased domestic consumption b) Global
opportunity.
AGRO CHEMICAL INDUSTRYGlobal generics a massive opportunity
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I. Increased domestic consumption. In India, pesticides are used for 36% of the area
under cultivation. Further, this is confined to a few crops and a few states. The farming
industry in India is getting corporatised gradually. Growth of the food processing industry
and entry of corporates into commercial agriculture are expected to provide the necessary
fillip to the sector.
II. Attractive export opportunity
Of the USD 30 bn, global industry, generics accounts for 80%. For competitive Indian
companies, this is a vast opportunity. Companies like United Phosphorus and Rallis have
just begun to enter the export markets. Indian companies enjoy cost advantages due to
high level of integration in operations and low labour costs. An added attraction is the
absence of intense competition in the generic category where costs of registrations are
prohibitive and act as an entry barrier. Indias share in the global pie is less than 1%. We
expect companies that have already ventured into exports to show over 30% CAGR in
the next three to four years.
Key success factors
Key success factors for agro chemical companies intending to tap export opportunitiesare:
- Integrated manufacturing facilities
- Active product pipeline for export markets
- Plants and facilities that meet global environmental norms
- Availability of skilled R&D people with experience in global companies
Outlook
Indian agro-chemical manufacturers have invested in building integrated facilities, lowering
cost structures and enhancing R&D in the last five to six years. These companies have
also built an active product pipeline for registrations in the global markets. Companieshave now begun to make significant investments towards branding of products and
building a strong distribution network across markets.
We believe that the USD 24 bn generic market place provides a good opportunity to
Indian companies who have marketing infrastructure and globally compliant manufacturing
facilities in place. Exports currently do not form a sign