route to the indian market: opportunities for uk ... · route to the indian market: opportunities...

www.pwc.com

Route to theIndian market:Opportunities for UKmanufacturing SMEs

March 2013

Route to the Indian market: Opportunities forUK manufacturing SMEs

PwC Contents

ContentsIntroduction 1

Foreword by UKIBC 2

Section 1: Overview of the SME sector in India 4

Manufacturing enterprises: 4

Service enterprises: 4

Section 2: Aerospace and defence 9

The Indian aerospace and defence (A&D) industry 9

The policy regime governing the A&D sector 12

Partnering with Indian MSMEs in the A&D sector 15

Conclusion 15

UK Aerospace and defence sector 17

Overview of UK Aerospace and Defence Sector 17

Major companies 18

Key SME Clusters 18

Government policy towards SMEs 18

Growth Outlook 19

Case study: Rolls-Royce in India 20

Case study: AgustaWestland in India 21

Case study: BAE India 22

Section 3: Automotive components 23

The Indian automotive components industry 23

Industry dynamics and structure 25

SMEs in the auto components industry 27

Challenges faced by automotive component SMEs 30

Conclusion and recommendations 31

Recommendations for collaboration between UK & Indian SMEs31

Case study: Jaguar Land Rover in India 33

Case study: GKN Driveline in India 34

Section 4: Clean energy 35

The Indian clean energy industry 35

Key policy and regulatory changes 36

Solar energy 38

Bio-energy 40

Wind power 41

Small hydro power 43

Energy efficiency 44

Summary – Clean energy in India 46

Route to the Indian market: Opportunities for UK manufacturing SMEs

PwC 1

Indian Governments have stressed publicly that smalland medium-sized enterprises (SMEs) need to beencouraged to boost the manufacturing sectors in UKand India. However, the goals the two countries aredriving towards may not be quite the same.

In general, SMEs in the UK are more R&D andinnovation-orientated and technology driven thantheir counterparts in India. Many are also part ofglobal supply chains–not only of leading UKcorporations, but also of other global OEMs in theirspecific subsectors. The UK Government wants toencourage them to expand into high-growth marketssuch as India and increase their global footprintsalongside the bigger players, thereby making themmore sustainable and resilient to economic cycles.

Meanwhile, Indian SMEs – especially the medium-sized ones – are raring to internationalise, and eagerto access to cutting-edge technology and goodpractices to help them become globally competitive.Having the cost advantage of domestic production,they are keen to collaborate and invest in technologiesthat will help them move to the next stage.

Given the respective priorities and positioning of UKand Indian SMEs, there is clear potential for them torealise significant synergies through working together– and that doing so could help SMEs in both countriesachieve their ambitions.

To help them realise this potential, the UKIBC – incollaboration with PwC – has produced this ‘route tomarket’ report on engineering and manufacturingSMEs in India. Our joint aim in this report is toinform UK SMEs about some key opportunities theIndian market offers and potential areas ofcollaboration, along with issues to be aware of andrisk mitigation strategies.

Since the advanced engineering and manufacturingsector is a huge one, we have decided in this report toconcentrate on three key subsectors:

Aerospace and Defence Automotives Low Carbon Technologies

“We hope that readers of this reportfind it interesting and informative.And we look forward to helpinggrowing numbers of SMEs in Indiaand the UK collaborate and createvalue together in the years to come.”

Mukesh Rajani

Mukesh RajaniPwC UKLeader of India Business Group

Direct: +44 (0)20 7804 2709Email: [email protected]

Introduction


PwC 2

Richard HealdUKIBC,Chief Executive


In his most recent visit to India in February 2013, UK Prime Minister David Cameron highlighted the need toenhance collaborations between UK and Indian industry, across the value chain of both countries’manufacturing sectors to improve our mutual economic performances.

Certainly, we at the UK India Business Council (UKIBC) fully endorse this view. We feel strongly that there issignificant scope for increased collaboration not only in manufacturing but in many areas including for exampleR&D, training, design, process, efficiency improvement, quality control, cost optimisation, internationalbenchmarking and the sharing of good practices, and so on.

How this collaboration should work is exemplified within Milton Friedman’s The World is Flat. Upstreamactivity will remain the preserve of Western economies, with ‘more sophisticated tasks being done in thedeveloped world and less sophisticated tasks in the developing world’. Such views are outdated in today’s worldas the relative ‘sophistication’ between the developed and developing economies converges. As NirmalayaKumar and Phanish Puranam described in their excellent Inside India, India is credibly poised to become aglobal innovation hub. It’s inexorable rise as an economic power will cause innovation to migrate from the so-called ‘developed’ economies to the Sub-continent. And this innovation may be based on frugal engineering inexisting industries or it may be of the leapfrog variety in new technologies.

With this in mind an understanding of the India market – its strengths and capabilities becomes ever morecritical. The MNCs from both countries are already engaged in each other’s markets and the learning process isin hand. However, given the magnitude of the opportunity and the complexity of the operating environment, westrongly feel that UK MMEs and SMEs need to explore the opportunities and assess the potential benefits fromengaging in these diverse markets.

India offers an abundance of opportunities in advanced engineering, including aerospace, defence, automotiveand clean energy and these are areas where the UK has expertise in spades. British-made components,equipment and machinery currently remain in high demand because of their quality, reliability and design.

Long-standing trading links might provide a welcome backdrop for British manufacturers exporting to Indiaand there is still some residual respect for British strengths in research & development, manufacturing, processcontrol, technology and skills in India and Indian businesses are keen to access these.

But such ‘good-will’ is already near the end of its shelf life, being eroded by the changing nature of what is Indiatoday as well as the competitive environment. The needs and requirements of India are evolving fast and areconstantly changing with the exponential growth in the acceptance of new technology. To be successful in Indiatoday, UK businesses need to understand the changing manufacturing and engineering ecosystems withinIndia, the developing research capabilities which support these and the increasingly value-consciousness of theIndian customer.

Foreword by UKIBC


PwC 3

UK companies are encouraged to establish production facilities, supply chains and distribution hubs in India.At the same time, Indian manufacturers are keen to access technology and expertise developed in the UK tobolster their production and provide them with the international edge either through partnership, licensingagreements or outright investment.

But, let us admit, the UK has no ‘divine right’ to such relationships. Other nations in the West and in the FarEast are actively engaging with the Indian market. Moreover, access to India continues to improve as restrictiveregulations and barriers to entry are removed.

We, in the UK, need to accept that we have no ‘divine right’ to Indian commerce. Nor should we.

Now is the time to engage, to create dialogue and to allow objective assessment of risk and opportunity withinIndia to make UK PLC the partner of choice for Indian companies and investors alike.

We, at the UKIBC, have already been working with a number of niche, technology-rich UK engineering andmanufacturing businesses keen on accessing opportunities in the Indian market and in forming partnerships,joint ventures, technology tie-ups, new product development, collaborations to service global markets,and others.

In this report PwC, in conjunction with UKIBC have identified some of the potential areas of opportunityspecifically for medium and small businesses, both those operating on a stand-alone basis and Tier 2 and 3suppliers to the multinationals. It targets companies in the engineering and manufacturing sector – focusing onaerospace, automotives and clean energy. We hope the report will provide a clearer idea to UK SMEs forengaging better with India. The opportunities in India, unfortunately, are time limited and becoming ever morecompetitive both from international and increasingly domestic companies.

I very much hope that this report forms a core part of your plans for India.


PwC 4

Looking across the world, SMEs make up over 90% oftotal enterprises in most economies, are credited withgenerating the highest rates of employment growth,and account for a major share of industrial productionand exports. India – where the SME sector isgenerally characterised as Micro, Small and MediumEnterprise (MSMEs) – is no exception, having athriving SME community that plays a pivotal role inthe country’s overall industrial base.

In recent years India’s MSME sector has consistentlyregistered higher growth rates than the country’sindustrial sector as a whole. With its agility anddynamism, the sector has proved to be admirablyinnovative and adaptable in surviving the recenteconomic downturn.

Under India’s Micro, Small & Medium EnterprisesDevelopment (MSMED) Act, 2006 the country’sMSME are categorised into two classes:

Manufacturing enterprisesThe enterprises engaged in the manufacture orproduction of goods pertaining to any industryspecified in the first schedule to the industries(Development and regulation) Act, 1951). TheManufacturing Enterprise are defined in terms ofinvestment in Plant & Machinery.

Service enterprisesThe enterprises engaged in providing or rendering ofservices and are defined in terms of investmentin equipment.

Current legislation states that the upper limit for investment in plant & machinery for manufacturingenterprises, and in equipment for service enterprises, are as follows:

Classification Manufacturing enterprise Service enterprise

Micro Rs 2.5 million/(US$ 50,000) Rs 1 million/(US$ 20,000)

Small Rs 50 million/(US$ 1 million) Rs 20 million/(US$ 0.4 million)

Medium Rs 100 million/(US$ 2 million) Rs 50 million/(US$ 1 million)

Size and importanceAccording to the 4th All-India Census of MSMEs, forreference year 2006-07, the number of MSMEs inIndia is estimated at about 26 million companies,providing employment to an estimated 60 millionpeople. Of these 26 million MSMEs, only 1.5 millionare in the registered segment, while the remaining24.5 million (94%) are unregistered. In terms of theirdistribution across different Indian states, more than55% of all MSMEs in India are located in just sixStates: Uttar Pradesh, Maharashtra, Tamil Nadu,West Bengal, Andhra Pradesh and Karnataka.Furthermore, about 7% of MSMEs are owned bywomen, and more than 94% of the MSMEs areproprietorships or partnerships.

In terms of their economic impact, MSMEs contribute8% of the country’s GDP, 45 % of manufacturedoutput and 40% of exports. The labour and capital

ratios in MSMEs and the overall growth rates in theMSME sector are much higher than among largercompanies. The sector’s sheer diversity in terms of itsrange of products and services as well as in terms ofsize of industry adds to its dynamism.

All of these attributes mean India’s MSMEs areimportant for the national objectives of growth withequity and inclusion. In recent years the MSME sectorhas come gradually into the limelight, with increasedfocus from government, corporate bodies and banks.It is viewed as one of the greatest agents of growth. Asa result, a combination of policy changes, investmentsinto the sector; globalisation and India’s robusteconomic growth have opened up several previouslyuntapped business opportunities for this sector.

The sector itself has also started taking itselfseriously. Initiatives from within the MSMEcommunity to lobby for more favourable policies and

Section 1: Overview of the SMEsector in India


PwC 5

increased credit availability are credible. The sectorhas also taken on board the need for technologicaland modernisation initiatives.

However, with economic liberalisation and changes intrade policy, MSMEs have now also started facingincreased competition from foreign companies. Thereis a huge global market out there in which many othercountries such as China, South Korea and Thailandare well established. As global competition intensifies,MSMEs are transitioning to a new businessenvironment characterised by the emergence of globalsupply chains. Since MSMEs form an integral part ofalmost every value chain, there is a symbioticrelationship between the large corporations and theirrelatively smaller sized suppliers.

Even the Indian domestic market is no longer aninsulated zone in a controlled economy; thecompetitive pressures of a free market economy arecatching up in India. The domestic market has beenflooded with many low-cost, bulk-produced productsof reasonable quality, giving tough competition toMSMEs. With the opening-up of the economy, theMSMEs have to catch up with global standards ofexcellence in order to remain competitive andprofitable. MSMEs are increasingly having to adapt tonew standards in technology, quality and pricing to beable to survive in the marketplace.

To gain a competitive edge, enhance efficiency andmanage communication, this sector is now lookingvery seriously for ICT enablement. Currently, small-scale industries face limited needs for ICT on accountof their organisational size and structure, butcompanies in the medium-scale sector have startedrestructuring themselves to accommodate thesechanges. The possibility of international trade hasforced many to build an online presence as well asimplementing e-mail facilities. E commerce andenterprise management solutions are also beenlooked at by many.

Government policy and regulation inthe SME sectorThe Indian government appreciates the role played byMSMEs in the economic and social development ofthe country, since the employment potential andoverall growth in the MSME sector are much higherthan among larger companies.

The government is also committed to preserving,protecting and promoting MSMEs to accelerate theexpansion of productive employment in the country.The government is seeking to fulfil its mission byformulating policies, designing and implementingsupport measures in fields including credit

availability, technological upgrades, marketing, andentrepreneurship development. The main thrust ofthe efforts to increase the competitiveness of MSMEsis focused on areas such as technology (includingquality), procurement, skills developmentand finance.

The Indian government has announced policymeasures to foster easy and adequate availability ofcredit for the MSME sector. In addition to thesepolicy packages, the Indian government has alsointroduced measures including the credit guaranteescheme and the performance and credit rating schemeto ensure better availability of credit to MSMEs.

The role of government policies, technologyinterventions and financial measures for creating acompetitive MSME sector is discussed in detail in thefollowing sections.

FinanceIn recent years, India has witnessed an increased flowof capital in the form of primary and secondarysecurities markets, venture capital, private equity,external commercial borrowings, factoring servicesand other sources.

The prime minister’s task force set up in February2010 has recommended several steps to encouragemany MSMEs.

The task force has asked for a target of 6% formicro enterprises under priority sector lending.The panel also recommended that in case there isa shortfall by banks in lending to SMEs, thedeficit should be put in a separate fund with theSmall Industries Development Bank of India(SIDBI), to ensure the required assistance toMSEs in one way or the other.

Interest subvention will help MSMEs gain accessto the credit they need at a better rate than hasbeen previously available to them.

The SME exchange will allow MSMEs to acquireequity or risk capital. To date, the sector has beenrelying heavily on debt capital.

A uniform application form common to all bankssimplifies the process of loan application of up toRs 25 lakh. Banks should also open more MSME-focused branch offices located in different MSMEclusters, which can also act as counselling centresfor MSMEs. Banks may also be persuaded toadopt the banking code for MSMEs to bringabout uniformity in operations.

The office of the development commissioner (MSME)has also done a lot to improve the financial


PwC 6

environment for MSMEs through many ofits schemes.

The credit guarantee fund scheme for micro andsmall enterprises provides collateral-free loans ofup to Rs 50 lakh.

The micro finance programme contributestowards security deposits required from themicro finance institutions (MFIs) or NGOs to getloan from SIDBI. The scheme is being operatedin underserved states. As of 31 March 2010, acumulative loan amount of Rs 1299.68 crore hasbeen provided to MFIs and NGOs under thescheme, benefiting a large about of people. Morethan 80% of these beneficiaries are thought to bewomen.

Reserve Bank of India RBI/(CentralBank) initiativesThe RBI has taken several measures to make creditavailable to the employment-intensive sectorof MSMEs.

In June 2011, the RBI asked banks to ensure thatlending to SMEs grows at a decent pace. According tothe data provided by the RBI, bank credit to SMEsgrew by 13% in May, as compared to 14.8% growthrecorded in the same month last year. Banks weregiven instructions to step up credit to micro and smallunits to 55% of the total SME financing by 2012 and60% by 2013. Also, the number of accounts needed togrow by 10% every year.

A 2% interest subsidy effective from 1 April 2011 onrupee export credit to the labour-orientated and SMEsectors prevented them from slowing down in themajor markets like the US. And SMEs, together withhandloom and carpet manufacturers, were madeeligible for cheaper bank credit, subject to a minimuminterest rate of 7%, to be available up to31 March 2012.

In August 2011, the RBI cautioned banks that the riskincreases as they move down the hierarchy. Thus,banks need to balance out risk with lending activity.The RBI has suggested stepping up the credit-lendingpolicy at the same time as developing an effective riskmanagement mechanism.

ProcurementThe Micro, Small and Medium EnterprisesDevelopment Act, 2006, stipulates that to facilitatethe promotion and development of this sector, thecentral and state governments should give preferenceto policies with respect to the procurement of goodsand services produced and provided by MSMEs.

The proposed public procurement policy seeks amandatory 20% share for MSMEs in all governmentand public sector unit purchases over a period ofthree years. Also, the Department of Expenditure(DOE) and the Chief Vigilance Commission (CVC)have replaced the procurement mode of all publicsector units from paper-based to electronic. This hasbenefited MSMEs by reducing costs andenhancing efficiency.

ManpowerThe government has realised the importance ofvocational education and upgrading the skills of theexisting workforce. So it has taken initiatives toupgrade nearly 1,390 industrial training institutes(ITIs) in public private partnership mode acrossthe nation.

The scheme supports the entrepreneurial andmanagerial development of MSMEs throughincubators and aims to nurture innovative businessideas that can be commercialised in a year. Under thescheme, various institutions including engineeringcolleges and research labs are provided with funds upto Rs 6.25 lakh for hand-holding each new ideaor entrepreneur.

The incubators provide technology guidance,workshops, lab support and linkages to other agenciesfor the successful launch of business. Further, theyalso guide the entrepreneur in establishing theenterprise. Under the scheme, 25 institutions havebeen approved for nurturing innovative businessideas nearing the commercialisation stage.

Intellectual propertyThe scheme for building awareness of intellectualproperty rights (IPR) was launched to enable IndianMSMEs to gain a global leadership position. The aimwas to empower them to use the tools of IPReffectively for innovative projects.

The Ministry of MSME has set up an intellectualproperty cell which provides a range of IP-relatedservices such as prior art-search, validity search,patent landscape, and studies on technologydevelopment. The implementation of a properintellectual rights regime will help SMEs gain accessto new markets, avoid wasteful investment in R&Dand marketing, negotiate licensing, franchising orother IP-based contractual agreements, and increasetheir market value to lead to other potential benefits.

Information availability‘Udyami helpline’, the call centre of the Ministry ofMSME, has been created as a single-point facility for a


PwC 7

wide spectrum of information and accessibility tobanks and other MSME-related organisations.Udyami provides information to first-generationentrepreneurs regarding project profiles available onthe website of the ministry, the Khadi and VillageIndustries Commission (KVIC) and other ministries.It also gives information on the other formalitiesrequired in setting up an enterprise, for getting loansfrom banks, the availability of subsidies under variousministry schemes, and other needs relevant to MSME.

Design clinicThe design clinic scheme for is a unique andambitious design intervention scheme by theMinistry. The scheme’s main objective is to bring theMSME sector and design expertise onto a commonplatform and to provide expert advice and solutionson real-time design problems, resulting in continuousimprovement and value add for existing products.This model brings design exposure to the doorstep ofindustry clusters for design awareness, improvement,evaluation, analysis and design-related intervention.

The will help MSMEs develop product, process andbusiness expertise through design intervention atmultiple levels of interaction. The goal is to helpMSME manufacturing industries move up the valuechain by switching the production mode from originalequipment manufacturing to original designmanufacturing and hence originalbrand manufacturing.

The total scheme budget will be Rs 73.58 crore, out ofwhich Rs 49.08 crore will be in the form of assistancefrom the Indian government at various stages. Thebalance amount will be contributed by the beneficiaryMSMEs. The scheme aims to reach out to about 200MSME clusters over the next two and half years. Thiswill be achieved by organising about 200 designsensitisation seminars, 200 design clinic workshopsand 400 design projects including 100 studentdesign projects.

National ManufacturingCompetitiveness Programme (NMCP)The NMCP is the flagship programme of theGovernment of India to develop globalcompetitiveness among Indian MSMEs. There are 10components under the NMCP targeted at enhancingthe entire value chain of the MSME sector. It includesprogrammes such as the establishment of new toolrooms, benchmarking of global competitors,enhancing of product and process quality, and costreduction through lean manufacturing techniques.The programme is to be implemented through thepublic-private partnership model with the close

physical and financial participation of theMSME sector.

The first component made operational was‘marketing assistance or support to MSMEs’. Theobjective is to popularise bar code registrationand motivate enterprises to adopt bar codecertification. This will enable them to sell theirproducts worldwide, and result in higher exportprice realisation. It will also enhance domesticwholesale and retail marketing.

‘Enabling the manufacturing sector to becompetitive through quality managementstandards (QMS) and quality technology tools(QTT)’ was launched in order to improve qualityand productivity in the MSME sector.

Lean manufacturing programme (LMP) forMSMEs will help them reduce theirmanufacturing cost through more effectivepersonnel management, better space utilisation,scientific inventory management, improvedprocess flows, reduced engineering time, andso on.

The component on ‘promotion of informationand communication tools (ICT)’ will identifysome of those SME clusters with high-qualityproduction and export potential. It will also assistthem in adopting ICT applications to achievecompetitiveness in national andinternational markets.

The objective of the design clinics scheme forMSMEs is to bring the sector and designexpertise on to a common platform. It also aimsat value-added cost effective solutions.

The ‘marketing assistance and technologyupgradation’ scheme for MSMEs aims to improvethe marketing competitiveness of the MSMEsector by improving their techniques andtechnology for promotion.

The objective of ‘technology and qualityupgradation support to MSMEs’ is to help themanufacturing MSME sector to become globallycompetitive. This includes advances such asupgrading their technologies, usage of energy-efficient technologies, adoption of othertechnologies as per global standards, improvingquality and reducing the costs of production.

Task force to identify challengesA task force was set up by the Prime Minister of Indiain August 2009 to reflect on the concerns and issueswith respect to MSMEs and formulate an agenda fornecessary action.

The task force classified the common issues into sixmajor thematic areas or sub-groups for detailedexamination. These were credit; marketing; labour;


PwC 8

rehabilitation and exit policy; infrastructure,technology and skill development; and taxation. Aseparate sub-group was also constituted to look intothe development of MSMEs in the north-east andJammu and Kashmir. The task force’srecommendations were broadly categorised into thosewhere the action needed to be completed within threemonths, six months to one year, and those wherelong-term measures involving longer time durationwere required.

The recommendations of the task force that havealready been acted upon cover credit and capitalaccess, infrastructure development, marketdevelopment and technology adoption.

Keeping in mind the recommendations of the TaskForce, the government has made many positiveprovisions for MSMEs in the budget for theyear 2012-13.

To improve the availability of equity to theMSME sector, the Government has set up anIndia Opportunities Venture Fund with SIDBIworth Rs 50 bn.

Allocation for the Prime Minister’s EmploymentGeneration Programme increased by 23% fromRs 10.37 bn to Rs 12.76 bn.

Under the Public Procurement Policy for Microand Small Enterprises (MSEs), Ministries andCentral Public Sector Enterprises (CPSEs) arerequired to make a minimum of 20% of theirannual purchase from MSEs. Of this purchase,4% is to be earmarked for procurement fromMSEs owned by SC/ST entrepreneurs.

Increase in the turnover limit from Rs 6 mn to Rs10 mn for SMEs for compulsory tax audit ofaccounts and for presumptive taxation.

Exemption from capital gains tax on sale of aresidential property, if the sale consideration isused for subscription in equity of amanufacturing SME company for purchase ofnew plant and machinery.

A reduction in the basic customs duty to 2.5%with concessional CVD of 6% on specified parts,components and raw materials for themanufacture of medical devices such asdisposables and instruments.

Full exemption from basic customs duty and CVDto specified raw materials for the manufacture ofcoronary stents and heart valves.

A reduction in excise duty from 10% to 6% onmatches manufactured by semi-mechanised units.

Summary: a thriving sectorOverall, it’s clear that India has a thriving andgrowing sector of engineering and manufacturingSMEs that plays a key role in the country’s economicvitality, employment and growth. It is also a sectorthat is receiving increasing help and support fromgovernment and larger corporations in India, in aneffort to enable Indian SMEs to compete and grow onthe world stage. This is an ambition that is fullyshared by Indian SMEs themselves. Put together, allof these factors point to opportunities for UKbusinesses to work and collaborate with SMEs inIndia – creating business benefits and value for bothparties.

We will now go on to examine these opportunities inthree key sectors: aerospace and defence, automotive,and low-carbon technologies.


PwC 9

The Indian aerospace anddefence (A&D) industryThe Indian aerospace and defence industry is one ofthe fastest-growing in the world. In India’s expandingeconomy, growth in civil aviation is being is driven byan expanding consumer base including airlines,businesses and high net-worth individuals (HNIs). Atthe same time, India’s defence sector has beenstimulated by a Government policy to diversify theacquisition of defence assets, increased defencespending to modernise the armed forces, and an offsetprogramme. The resulting rapid growth in thisindustry has attracted major global A&D companiesto India.

Civil aviationIndia’s civil aviation sector has great untappedpotential. A report1 published by the Centre for AsiaPacific Aviation (CAPA) in August 2012 states thatIndia is under-prepared for the growth challengesahead, and will require massive investments of up toUS$40 billion in developing airports by 2025,including the construction of numerous greenfieldairports in non-metro cities.

The scheduled airline fleet is expected to grow fromthe present 430 to about 1,030 aircraft by 2020-21.Boeing and Airbus have both estimated that around1,300 commercial and business jets will be requiredby the country over the next two decades to meet theincreasing passenger traffic, making this a US$150billion market.

The aviation sector has a strong correlation toeconomic growth. A vibrant civil aviation sector isessential for a fast growing economy that hasaspirations to sit at the ‘high table’ of global economicpowers. With this in mind, the Indian Governmentrecently addressed a number of issues that wereimpeding growth. Of these, the decision to allowforeign airlines to invest up to 49% in domesticcarriers is very significant. These measures may havecome a little too late for some market participants, butnevertheless open up opportunities for the future.

1 Source: http://centreforaviation.com/analysis/capa-report-

india-requires-usd40bn-investment-in-50-greenfield-airports-by-

2025-79925

DefenceAs the world’s largest importer, India is expected tospend US$100 billion over the next decade onpurchasing defence equipment. It is expected thatdefence spending will remain in the range of 1.8% to2.0% of the GDP, and – as the nation’s economyrecovers – defence will account for a substantial partof Government spending. India’s Defence Ministerhas stated that the country’s ultimate goal is self-reliance, commenting: ‘We want to produceequipment for the armed forces internally,domestically. We want to strengthen our defenceindustries in India. India needs a strong defenceindustrial base.’

In line with this policy goal, more and more avenuesfor participation in India’s defence procurementprogrammes are gradually opening up for the privatesector. After the introduction of the defence offsetpolicy and ‘Buy and Make India’ category, theMinistry of Defence has issued a Defence ProductionPolicy and a JV policy to facilitate incorporation ofjoint ventures between the private sector and thedefence public sector undertakings (DPSUs). Furtherliberalisation is expected in the near to medium term.With its existing industrial base, India has thepotential to become an R&D and manufacturing hubfor defence equipment, playing an important role inthe global supply chain.

Section 2: Aerospace and defence


PwC 10

Indian defence spending, (2001-2012)

Indian defence capital acquisitionand offset programmesThe Indian A&D sector is poised for a period of highgrowth. The country’s defence spending in the 11thPlan period (2007-12) has grown at a CAGR of 13%,while in 2012-13 the capital expenditure is expected topass US$16.6 billion. In the aerospace sector, Indiahas embarked on a major defence acquisition and

development programme comprised of medium multirole combat aircraft (MMRCA), fifth generationfighter aircraft (FGFA), multirole transport aircraft(MTA), medium lift helicopters (MLH) and lightutility helicopters (LUH). To keep India’s long-termmaritime interests in focus, the Indian Navy has alsoembarked upon an aggressive acquisition programmeto enhance its capacities substantially, both in surfaceand sub-surface combat.

10.0 10.8 11.2 12.015.4 16.2 17.2 18.6

21.0

28.4

36.0

40.5

0

10

20

30

40

50

0

1

2

3

4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Billion USD As % of GDP

4147

5562

6976

8492

102

16.6 20.2 24.2 27.9 31.7 35.7 39.545.1

51.0

0

20

40

60

80

100

120

2012 2013 2014 2015 2016 2017 2018 2019 2020

Estimated spend over the next decade (2012-2020)

Defence expenditure (Billion USD) Capital expenditure (Billion USD)


PwC 11

As far as land systems are concerned, the IndianArmy’s acquisition plan in the next 10 to 15 yearsencompasses a wide range of equipment that includesartillery guns, rockets, missiles, combat vehicles,radars, assault rifles and smart ammunition.

India’s experience to date with offset, though limited,has brought some encouraging trends for the privatesector. So far US$3.2 billion worth of offset contractshave been signed, mainly in manufacturing,infrastructure, engineering design, development andtesting, and simulators. Of these, over 55% are withthe private sector. MSMEs have partnered withvarious foreign entities and OEMs and have delivered24% of these offsets, worth approximately US$ 800million. However, it is important to note that all theoffset programmes executed so far have been for theIndian Air Force and Navy.

Subcontracting or outsourcing byglobal majorsThe Indian A&D industry is emerging as aninternational hub for various services such as CAD,CAM and CAE, manufacturing and designengineering, testing and integration, and technicalpublications. The global aerospace industry spendsabout US$60 billion annually on engineering services,which are increasingly being outsourced to low costdestinations. Presently, the Indian industry accountsfor less than 2% of this opportunity. This is a largeand important opportunity for Indian MSMEsoperating in niche areas.

43%

33%

24%

DPS Us Large indus tries SMEs

53

571

1,092

493

940

0

200

400

600

800

1,000

1,200

2007 2008 2009 2010 2011

Million USD


PwC 12

The policy regime governing theA&D sectorThe Indian aerospace and defence sector is governedby the following five major policies:

1. Defence Procurement Procedure(DPP) and offset guidelinesDefence procurement is governed by the DPP. Firstissued in 2006, the latest policy on defenceprocurement (DPP 2011) was released on 6 January2011. Its aim is to incorporate procedures to expeditedecision-making, simplify contractual and financialprovisions, and establish a level playing field for thepublic and private players. The Indian governmentaims to ensure that the industry is able to build a

credible domestic capability for its defence forces in afair and transparent manner within the next decade.

2. Offset policyThe offset policy is a part of the DPP and hasundergone revisions with the DPP. The latest revisionwas independent of the DPP and became effective on1 August 2012. The policy stipulates an offsetrequirement of a minimum 30% for procurement ofdefence equipment in excess of 3 billion INR. Thecategories of acquisition programmes to offsets areapplicable as follows:

Buy (global) Buy and make with transfer of technology (TOT)

Buy

i.e. Outright purchase from Indian or foreign vendor

Buy and make with ToT

Purchase from foreign vendor followed by licensedproduction

Offset

Offset obligation of 30% to be discharged by

Direct purchasefrom Indianenterprises

FDI in Indianenterprises

ToT to Indianenterprises

Equipment toIndianenterprises

Equipment/ToT togovernmentinstitutions

Advancedtechnologyacquisition byDRDO

• Minimum 70% of total obligation

• Multipliers permitted for SMEs

• Banking allowed

• Multiplierspermitted

The key objectives of the defence offset policy are toutilise capital acquisitions to develop the Indiandefence industry through three priorities:

Fostering development of internationallycompetitive enterprises.

Augmenting capacity for research, design anddevelopment related to defence productsand services.

Encouraging development of synergistic sectorssuch as civil aerospace, and internal security.

The latest revision effective from August 2012 is themost significant and comprehensive revision ofIndia’s offset policy since its inception, and addressesmany issues raised by OEMs and Indian industry. TheIndian MoD must be congratulated for a clear attemptto streamline the offset policy and make it moretransparent. Key amendments are:

1. Defining Objectives – as listed above2. Increasing the avenues for discharge of

offset obligations:


PwC 13

a. Direct purchase of – or executing exportorders for – eligible products manufacturedby, or services provided by, Indianenterprises i.e. Defence Public SectorUndertakings, Ordnance Factory Board andprivate and public sector Indian enterprises.

b. Foreign Direct Investment in joint ventureswith Indian enterprises for the manufactureand/or maintenance of eligible products andprovision of eligible services, subject to theguidelines/licensing requirements stipulatedby the DIPP.

c. Investment ‘in kind’ in terms of transfer oftechnology (TOT) to Indian enterprises forthe manufacture and/or maintenance ofeligible products and provision of eligibleservices. However, the offset credit shall be10% of the value of buy back.

d. Investment ‘in kind’ in Indian enterprises interms of provision of equipment through thenon-equity route for the manufacture and/ormaintenance of eligible products and

provision of eligible services (excludingTOT, civil infrastructure and second handequipment). However, the vendor will berequired to buy back a minimum of 40% ofthe eligible product/service.

e. Provision of equipment and/or TOT toGovernment institutions and establishmentsengaged in the manufacture and/ormaintenance of eligible products andprovision of eligible services, including theIndian Defence Research and DevelopmentOrganisation (DRDO).

f. Technology Acquisition by DRDO in areas ofhigh technology.

Note: A minimum of 70% of the offset obligation shallbe discharged by 2(a) to 2(d)

3. Enlarging the definition of Indian Offset Partner(IOP): The IOP has been defined as Indianenterprises and institutions and establishmentsengaged in the manufacture of eligible productsand/or provision of eligible services, includingDRDO. The agreement between theOEM/vendor/Tier-1 sub vendor and the IOPshall be subject to the laws of India.

4. Increasing Period for Discharge to the period ofthe main procurement contract plus two years.

5. Increasing the validity of Banked Credits to sevenyears, and allowing transfer between the mainvendor and its Tier-1 sub vendors within thesame procurement contract.

6. Introducing Multipliers to encourageparticipation by Indian MSMEs.

a. A multiplier of 1.50 is permitted whereMicro, Small and Medium Enterprisesare IOPs.

b. A multiplier of up to 3 permitted relating totechnology acquisition by DRDO without anyrestrictions including right to export.

7. Enlarging the list of products and services eligiblefor offset credit to include vessels of war, specialnaval systems, equipment andvarious accessories.

8. Defining critical technology areas. A list ofCritical Defence Technology Areas and Testfacilities for acquisition by DRDO through offsetshas been included.

9. Defining responsibility of Organisations:

a. Acquisition Wing: (i) technical andcommercial evaluation of offset proposalsreceived in response to RFPs and (ii)conclusion of offset contracts. All Offsetproposals will be processed by theAcquisition Manager and approved by theDefence Minister, regardless of their value.

b. Defence Offsets Management Wing;formulation of Defence Offset Guidelines,monitoring, banking of offsets.

c. Technical Offset Evaluation Committee:scrutinising the technical offset proposalswithin 4-8 weeks .

d. Technology Acquisition Committee:assessing offset proposals relating to theprovision of technology to DRDO.

3. The industrial licensing policyUnder the Industries (Development and Regulation)Act 1951, an industrial license (IL) is required formanufacturing defence equipment. The applicantmust be an Indian company or partnership and has toapply to the Department of Industrial Policy andPromotion (DIPP). The application is considered byan inter-ministerial committee and the process takesabout six months. There are a number of conditionsimposed, and clarity is currently still awaited on thedefinition of ‘defence equipment’.


PwC 14

4. The Foreign Direct Investment(FDI) policyFDI up to 26% is allowed in an Indian companymanufacturing defence equipment, subject to thecompany obtaining an IL from the DIPP. Theapproval is given by the government through anapplication filed before the Foreign Investment andPromotion Board (FIPB) in the Ministry of Finance.This is also an inter-ministerial committee, andapproval takes about six months.

Detailed guidelines for the FDI and licensing policiesare given in the consolidated FDI policy that is revisedtwice a year, and in press notes issued by DIPP. Thelatest policy was issued in April 2012.

5. The foreign trade policyThe import and export of defence equipment isgoverned by the Director General of Foreign Trade(DGFT) in the Department of Commerce. Barringsome specific items, defence equipment can beexported either after obtaining a license from theDGFT for items in the SCOMET list or after obtaininga NOC from the Ministry of Defence.

The tax frameworkIndia has a federal tax administration regime underwhich the government levies taxes on income, customduties, central excise and service tax, while stategovernments levy taxes such as value-added tax,works contract tax, and so on.


PwC 15

Partnering with Indian MSMEsin the A&D sectorThe liberalisation of India’s A&D sector in the mid-nineties has resulted in a number of private playersentering the sector. However, MSMEs face a numberof hurdles due to the high cost of capital, inadequatecertification and training opportunities, low volumesand long gestation period of projects. Specific to theA&D industry, a CII report on defence estimates thatthe country’s defence sector currently comprises over6,000 SMEs, supplying around 20-25% ofcomponents and sub-assemblies to DPSUs, ordnancefactories, the Defence Research and DevelopmentOrganisation (DRDO) and the armed forces.

Given stringent FDI norms and related ownershipissues faced by most cross border partnerships,foreign entities need to focus on niche technologiesand specific synergies which can navigate andovercome the challenges typical to the Indian A&Dsector. The UK government can play a critical role byusing GTG outreach programmes to proposecollaborations in niche areas.

• Innovative capabilities in niche manufacturing: Abilityto innovate cost-effective methods in manufacturing.

• Ability to absorb new technologies: To boost productionand reduce overhead costs.

• IT skills especially in software and design engineering: Alarge pool of IT and engineering design manpower.

• Lower overhead costs: Lower salaries, wages and cost-effective approach.

• India’s defence spending: Import of defence equipmentsleading to impending offset obligation on OEMs withintroduction of multipliers.

• Offset requirements propel global OEMs to work in closecoordination with MSMEs. The defence sector is thusemerging as a lucrative market for MSMEs.

Strengths and opportunities

A further area of opportunity could be in the revenueexpenditure category – the huge amount of moneythat the government spends in the upkeep andupgrading of existing weapon systems, aircrafts,ships, radars and so on, where British and IndianMSMEs can collaborate to provide solutions. Fromthe viewpoint of foreign OEMs and lower-tiervendors, it is advisable to choose Indian companieswith relevant experience in A&D, as well as with asound technology base and established quality andtraceability systems in place. Partnering with MSMEsalso gives the added advantage of receiving amultiplier of 1.5 for all offsets discharged throughthem. For example, by sourcing US$1 million of work

from Indian MSMEs, a foreign vendor will be able todischarge offset liabilities worth US$1.5 million.

MSMEs from the UK and India can focus on co-production, knowledge-sharing, promoting joint valuepropositions and capability-building in order to berelevant and take advantage of ‘Make’ and ‘Buy andMake’ India opportunities. Some Indian MSMEs aregradually moving up the defence value chain byfocusing on innovation, building intellectual propertyand adopting quality and process standards in orderto offer complete sub-systems or assemblies.Companies in the UK can share domain knowledge orconsider an active industry-academia partnershipwith leading technology institutes, in order toupgrade, design and offer tailor-made courses for theindustry in India. These companies can work withIndian companies to create joint value propositionsand projects including technology transfer and thesharing of best practices. The SEZ policy for the sectorcan play a crucial role by implementing shared facilitymanagement for testing, manufacturing and byproviding developed infrastructure.

• Nature and cost of business: Long gestation periods andcapital-intensive business

• Constraints on funding: Sustaining in a highly regulatedsector without access to funds

• Trained and skilled manpower: Grassroot level resourcesneed re-training

• Access to information and markets: Limited informationshared on long-term defence requirements keepinglarger markets out of reach

• Access to high technology: Reluctance to share cutting-edge technology and limited R&D capabilities

• Institutional challenges: Programmes stuck inbureaucracy and red-tape

• Lack of accreditation

Challenges and threats

Foreign companies need to be aware of the majorchallenges the Indian MSME sector faces. The sectoris capital-intensive and often suffers fromunderdeveloped infrastructure, and its turnaroundtime or product lifecycle tends to be long. The lack ofskilled personnel can add to the problems aroundmanufacturing quality and product lifecycle time.

ConclusionThe Indian Ministry of Defence has set itself a goal ofsourcing 70% of all defence equipment from Indiancompanies – public and private sector – by 2020.This cannot be achieved without a significantcontribution by MSMEs. DPP 2011 clearly articulatesthe Ministry’s agenda of supporting a domestic A&Dindustrial base with a significant role for MSMEs.


PwC 16

The global economic slowdown and cost pressureshave increased the opportunities for Indiancompanies in the outsourcing of development, designand sub-assembly manufacture. Successful IndianMSMEs have innovated and adapted to cutting-edgetechnologies, delivered customised solutions, andmaintained global standards of manufacturing qualityand specifications while also retaining theircost advantages.

Companies in the UK can enter this sunrise sector.The defence offset provisions offer multipliers toforeign vendors engaging with Indian MSMEs.Furthermore, the advantages of Indian MSMEs’innovative capabilities in niche manufacturing,greater flexibility, lower overhead costs and ability tolearn and absorb new technologies make themattractive partners with which to collaborate.

Though the opportunities arising from the globaldefence industry for Indian MSMEs are huge, thereare challenges. To overcome these, MSMEs need toramp up their capability to deal with new issues suchas product development, marketing to a globalisedworld and adopting competitive business practices.Moreover, they need to focus on innovation, buildingintellectual property and adopting quality andprocess standards.

References1. Personal interviews with SIATI, Chivaro,

Pushpak, Government of Karnataka2. Government of India Ministry of

Defence publications3. CII-PwC report – ‘Changing Dynamics’4. SIPRI 2012 yearbook5. Publications by Ajai Shukla, Senior Defence

Correspondent, Business Standard6. IDSA Publications7. Defence Procurement Policies & Defence

Production Policy (2011)8. GoI MSME Annual Report 2011-129. Draft aerospace policy of Government

of Karnataka10. Government of India, Planning

Commission reports

Dhiraj MathurPwC India,Executive Director



PwC 17

UK Aerospace and defence sector

Overview of UK Aerospace andDefence SectorThe Aerospace and Defence sector is a major part ofthe UK economy, being particularly important forhigh value manufacturing. The sector is longestablished in a number of regions with a strongheritage in particular areas. The defence market in theUK is the 6th largest in the world, and the UK is one ofthe largest manufacturers of aerospace products.

1. Sector structureThe US$ 57 billion (source: MoD Defence Budget2011) Bureau for National Statistics defence sector inthe UK is dominated by BAE Systems plc – the UK’slargest manufacturing employer and a key supplier tothe MoD. However, the scale of the MoD’s spendingalso provides scope for a number of other large UKdomiciled second tiers suppliers such as Cobham plc,Chemring plc and Babcock Group plc.

Alongside this, the UK market is one of the mostopen defence markets to foreign contractors, with USprimes such as Lockheed Martin, General Dynamicsand Raytheon, and European companies such asEADS and Thales having a strong presence.

Aerospace has a number of major suppliers to theglobal market, with GKN plc, Rolls-Royce, Meggitt plcand to a lesser extent Spirit AeroSystems all having amajor presence. Rolls-Royce in particular is one of thelargest manufacturers of aero engines globally, andhas a major footprint in the UK.

Over the last few years there has been a trend for largeUK based A&D companies to expand overseas –particularly in America. This has been largelyachieved by acquisition – to the point wherecompanies such as Senior Group plc are a majorsupplier to the aerospace industry, but largelythrough subsidiaries in the US.

Supplying of these companies are a huge network ofSME businesses, many which are family owned andhave developed to supply one or two key customers.

2. Strengths and weaknessesStrengths:

World class companies: A number of the majorUK suppliers are world class companies, withleading market positions – providing the sectoroverall with a strong base and the scale to beself sustaining

Innovation: Many companies, particularly thelarger ones are highly innovative. For exampleGKN is the world leader in composite wingstructures and Roll-Royce incorporates manytechnologies it has developed into its engines.

Export Relationships: Both sides of the sectorhave long experience supplying export markets.The UK has been the largest exporter of defenceequipment globally, with for example SaudiArabia a major customer developed over anumber of years. Similarly, the aerospace sectoris heavily export led with most goods ultimatelysupplied to Airbus or Boeing.

Weaknesses:

Concentration: The UK supply chain is highlyconsolidated – particularly in the Defence sector.This has led to a relative shortage of medium sizesuppliers, a particular problem becausetechnology innovation has become concentratedwithin a few large companies.

Skilled labour: A key consideration across all ofUK industry, but particularly in A&D is theavailability of skilled workers – particularlyskilled technicians and systems engineers. This isparticularly acute in the defence industry whichcannot utilise the many foreign nationalsgraduating from British universities.

3. R&DThe sector continues to be a major driver of R&Dspending in the UK. In the decade from 2000 to 2010spending frequently exceeded £2 billion per year(source: Bureau for National Statistics), which makesit one of the largest constituents of overall spending inthe UK.

This has been sustained in part by having the UKMoD as a highly sophisticated customer, demandingcutting edge equipment on a par with anythingproduced elsewhere, and by generating significantexport sales to help cover the cost of theexpenditure required.


PwC 18

In parallel, this investment has major benefits for thewider UK economy – both in providing high skilledjobs and in the bleed across A&D technology intoother industries and markets.

A key issue with R&D is its concentration amongst thelarger suppliers. Many SMEs, particularly in theaerospace sector are sophisticated in terms of themanufacturing they do but do not own anyIntellectual Property – making them vulnerable tooff shoring.

4. ManufacturingMany UK A&D companies manufacture products inthe UK. In the defence market this is an essential partof retaining national sovereignty meaning that it isunlikely to suffer the same drive to outsource as manyof industries have.

However, the aerospace industry is much lessrestrained by global boundaries and inevitably the UKhas seen a drip feed of manufacturing work movingabroad to low cost geographies such as Mexico andAsia. At this point most of this has been low valuebuild to print type manufacturing, but there is realconcern that Airbus and Boeing will look to allocatemore and more supply chain spending to areas whereaircraft are being bought.

A particularly sensitive topic for both aerospace anddefence is in protecting the Intellectual Propertydeveloped in the industry. The quality of this is a keyselling point for UK companies abroad, and providesprotection against moving production to lower costgeographies. This is a particular challenge in exportmarkets where they are generally very reluctant totransfer technology – especially if the companyinvolved is relatively small.

Major companiesThe UK’s two largest companies involved in A&D areBAE Systems and Rolls-Royce:

BAE Systems (Sales: £17.770m, Operating Profit£1,580m) is the largest UK company involved in thesector, and is purely focused on the defence marketfollowing the sale of its stake in Airbus to EADS in2006. The company is the largest supplier to the MoDand now the sixth largest supplier to the US DoDfollowing a largely acquisitive expansion over the lastfew years.

The company is principally a platform level supplier,with products such as the Eurofighter Typhoon, Type45 destroyer and Astute Submarine in the UK, and theBradley fighting vehicles in the US. Following the

attempted merger with EADS the group now has arenewed focus on its export markets – many of whichhave a long history in such countries as Saudi Arabiaand some which are relatively new, e.g. India.

Rolls-Royce (Sales: £11.124m, Operating Profit:£1,186m) is the second largest supplier of aircraftengines in the world, and is the largest aerospacecompany in the UK. Alongside its well known Trentfamily of commercial aerospace engines Rolls-Roycealso supplies a wide range of other power equipmentsuch as compressors and diesel engines, and is amajor supplier of marine technology.

The company has grown quickly with its successfuldevelopment of engines for the wide body commercialmarket and with an increasing focus on servicing ofits engines, which now accounts for in excess of 50%of revenue.

Key SME ClustersAs previously mentioned, many SME clusters havebuilt up around the major facilities of largemanufacturers. Key clusters would be:

South West: built particularly around the Filtonwing facility are a number of companies involved inaerospace components.

West Midlands: the Rolls-Royce facilities aroundDerby have made the West Midlands a strong regionalsupplier of engine components.

North West: BAE Systems presence at Wartonwhere they manufacture fast jets, and the Barrowsubmarine facility have provided a focus for clustersbuilt around those two facilities.

Glasgow: Glasgow has a strong heritage in shipbuilding, and is where BAE Systems builds the Type45 destroyer.

This provides a strong regional focus on differentareas, but also a makes regions quite vulnerable tochanges in the business cycle or technology shifts inthe industry. This is now being seen in the North Westof England where BAE Systems Warton facility, andthe companies that exist around it will supply fewermanned jets and more UAVs in the future.

Government policytowards SMEsThe Government is currently very focused onincreasing manufacturing in the UK, and in particularsupporting SMEs to grow. Given the low growth andneed to cut Government spending, this is


PwC 19

predominantly focused on export growth. As a majorpart of the UK economy Aerospace and Defence areboth a major part of this drive.

Policy has therefore been very positive, withimprovements sought in areas such as export finance,support for R&D, direct assistance in export marketsand the availability of investment from bodies such asthe Business Growth Fund.

Government has also put in place initiatives such asthe Aerospace Growth Partnership to look atsupporting the industry into the future.

It is worth noting however that the UK Governmentdoes not make any direct interventions, and stops wellshort of the sort of support other Governments areprepared to make in the form of initivites such assubsidised loans, direct grants and tax breaks.

Growth OutlookThe defence industry in the UK faces a challenginggrowth environment. Most companies’ developedmarkets are likely to be flat at best, and they aretherefore looking increasingly to export markets forgrowth. Typically these include Brazil, the MiddleEast, India, Malaysia, Indonesia and Singapore astarget markets – although this is a major challenge atthe SME level where export markets have not been afocus previously.

Aerospace companies are positioned in a growingmarket, with the two main OEMs Airbus and Boeinghaving record order books and increasing build rates.However, the main challenge is the mobility of workto other countries. Therefore, those companies withstrong IP and unique manufacturing capabilities willmost likely grow strongly over the next few yearswhereas weaker suppliers may struggle.


PwC 20

Case study: Rolls-Royce in IndiaRolls-Royce is a world-leading provider of powersystems and services for use on land, at sea and in theair, with a strong position in global markets – civilaerospace, defence aerospace, marine and energy.

As a result of this strategy, Rolls-Royce has a broadcustomer base comprising more than 500 airlines,4,000 corporate and utility aircraft and helicopteroperators, 160 armed forces, more than 4,000 marinecustomers, including 70 navies, and energy customersin more than 80 countries.

Annual underlying revenues were £11.3 billion in2011, of which more than half came from theprovision of services. The firm’s announced orderbook stood at £62.2 billion at 31 December 2011,providing visibility of future levels of activity.

The company employs over 40,000 skilled people inoffices, manufacturing and service facilities in over 50countries. Over 11,000 of these employeesare engineers.

Rolls-Royce invested £908 million on research anddevelopment in 2011, two thirds of which had theobjective of further improving the environmentalperformance of our products, in particular reducing

emissions. Rolls-Royce supports a network of 28global University Technology Centres globally, whichconnect the company’s engineers with the foremostscientific research available. The company alsofacilitates and encourages an environment ofcommercial and technological knowledge transferamong its suppliers through technology sharingpartnerships. This involves pro-actively encouragingsuppliers to visit each other’s plants and holding ‘host’days where suppliers can meet with each other toshare and develop different aspects of workplacebest practice.

Rolls-Royce employs over 400 people in India directlyand through its joint venture companies and servescustomers in each of its market segments. Thecompany also has an established and growingengineering presence in the country and is committedto developing its supply chain and manufacturing inIndia. To this end Rolls-Royce recently invested in anequal joint venture with Hindustan AeronauticsLimited HAL to develop components for gasturbine engines.


PwC 21

Case study: AgustaWestlandin IndiaIndia is a strategic market for AgustaWestland withits expanding commercial helicopter market (oil andgas, offshore support, internal policing, EmergencyMedical Services) as well as military helicopterprogrammes for at least 600 helicopters over the next10-15 years. India also presents Industrial Partnershipopportunities to establish AgustaWestland as a majormanufacturer in India, the first step of which was thesigning of a joint venture agreement with Tata Sons in2010.

AgustaWestland’s has a wholly owned subsidiarycompany, AgustaWestland Pvt Ltd, based in Delhi toco-ordinate its business activities in India. It also hasa branch in Cochin that provides technical support tothe Indian Navy’s Sea King helicopters, which havebeen in operation since the 1980s. The fleet of SeaKing Mk42B helicopters, used for anti-submarine andanti surface warfare, are due for a Mid Life Upgradeprogramme, which is currently being competed and isdue for contract signature in the coming months. TheSea King Mk42C Utility helicopters are also due for aMid Life Upgrade programme. The Indian Navy wantto operate these aircraft until at least 2023.

In February 2010 the Indian Government signed acontract for 12 AW101 helicopters for VIP transport.The delivery of the first three aircraft took place inNovember 2012 to the Indian Air Force in Delhi, withthe rest of the aircraft will be delivered in 2013.

Hindustan Aeronautics Limited (HAL) has a Sea KingMain Gearbox repair and overhaul facility to supportthe Indian Navy, and AgustaWestland signed a LongTerm Business Agreement with HAL in October 2010until 2014.

In February 2010 AgustaWestland signed a jointventure with Tata Sons Ltd for final assembly,completion and delivery of AW119 commercialhelicopters for the worldwide market. This company,Indian Rotorcraft Ltd., will produce the aircraft inHyderabad where a facility is currentlyunder construction.

AgustaWestland also has more than 40 commercialhelicopters operating in India today, the first aircraftwas delivered in 2005, and AgustaWestland has agrowing share of this important market. Customersupport is conducted at two authorised servicecentres, one in Delhi operated by OSS Airmanagement and the other in Mumbai byAirWorks Ltd.

In order to ultimately manufacture helicopters inIndia AgustaWestland has to engage across severaldisciplines from supply chain development totechnology collaboration and sustainablemanufacturing. This will also help AgustaWestlanddischarge its offset obligations from the VVIP contractwon in 2010 and, hopefully, other contracts goingforward. Of course, the opportunities in the Indianaerospace and defence supply chain will equallyenable India to build its indigenous capability throughpartnering with overseas companies

.


PwC 22

Case study: BAE IndiaBAE Systems’ presence in India goes back over 60years. BAE Systems’ strategic vision in this keyinternational market is to become a major andintegral part of the domestic Indian defence andsecurity industry, leveraging our global expertise todevelop technologies and solutions in India for boththe Indian market and for export. Headquartered inthe heart of New Delhi, the company operates twoJoint Ventures in India: Defence Land Systems India,our land systems focused joint venture with Mahindra& Mahindra and BAeHAL, a joint venture withHindustan Aeronautics Ltd based in Bengaluru,focused on providing engineering and businesssolutions services.

BAE Systems’ vision is to create an Indian supplychain for a global company. In order to support ourIndian programmes, this means suppliers working tohelp us meet our offset obligations whilst achievingcost efficiencies. In the long term, we seek to developan indigenous Indian supply chain not only for ourIndian customers but also for potential exportmarkets. BAE Systems India and its joint ventures arealready working to this end with a variety of Indiancompanies from small niche manufacturers tomajor conglomerates.

With a well-established network of small-to-mediumsized suppliers in the UK, BAE Systems would like toharness that world-class capability for thedevelopment of our Indian business and the industryas a whole. With offsets a major driver, the best routeto market for aspiring UK suppliers is through anIndian partner. Many of BAE Systems’ UK suppliers,especially the smaller ones, have long and welldeveloped relationships with the company. Suchrelationships, developed in the UK’s mature andestablished A&D industry, have led to a specialisedbusiness culture with advanced techniques andunique know-how. These skills are invaluable tocompanies starting out in India’s fast growing A&Dsupply chain. At the same time, working with anIndian company can bring UK suppliers opportunitieswith key Indian customers in both public andprivate sectors.

To support this aim, BAE Systems is working toprovide advice and support to our current UKsuppliers looking to work in India. We are also keento support industry initiatives through both the UK-India Business Council alongside the UKTI, as well asworking with ADS and the regional trade bodies. Ourrecommendation to suppliers who are interested inaccessing the opportunities within the Indianmarketplace is to contact these organisations or theirlocal BAE Systems contact, who will be happy to help.


PwC 23

The Indian automotivecomponents industryOver the past decade, the Indian auto componentsindustry has emerged as one of India’s fastest growingand most globally competitive manufacturing sectors.According to estimates in the 12th Five-Year Plan2

working group document, the Indian auto componentindustry has the potential to grow to over Rs 5 lakhcrore (US$110 billion) by the year 2020, primarilydriven by surging in vehicle demand and productionin India. Of this projected total, domestic turnover isexpected to account for nearly Rs 4 lakh crore (US$82billion), and potential exports for of Rs 1.2 lakh crore(US$29 billion).

India’s auto component industry has achieved greatadvances in recent years in terms of quality, spread,absorption of newer technologies, and skilledmanpower, while maintaining reasonable prices andflexibility. Developments in the US, Europe and otherglobal markets have now created significantopportunities for Indian component manufacturers toforge a new identity with clear strategies in R&D,supply chain and product diversification.

India: Auto component industry turnover

2

http://planningcommission.gov.in/plans/planrel/12thplan/welco

me.html

Together, the EU and North America have accountedfor 58% of exports for Indian componentmanufacturers, as shown in the chart below. Thepresence in India of global automakers from Korea,Europe, Japan and US has also enabled global tier 1auto component players to set up IPOs (InternationalPurchasing Offices) and source components fromIndia. As a result, component suppliers who haveuntil now focused on designing vehicles for thedomestic Indian market or other developing marketsare now shifting their priorities towards creatingniche brands that can compete on a global level.

The overall Indian auto component industry haswitnessed a compound annual growth rate (CAGR) ofnearly 15% for the period 2007-11, and is expected togrow at 11% over the period 2011-21. Also, while thegrowth rate of exports has been 11% compoundedannually during 2007-11, exports are expected to growby nearly 19% during 2011-21.

India: Export market size

22

50

85

4

9

28

0

20

40

60

80

100

120

2009 2015(E) 2020(E)

Domestic potential Export potential

In US $ bn

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

5

10

15

20

25

30

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

15

-16

(E)

20

20

-21

(E)

Exported market size

CAGR – 10%

CAGR – 18.8%

In US $ bn

Section 3: Automotivecomponents


PwC 24

India: Export marketSplit by country FY 2010-11

Source: ACMA

At the same time, robust market growth in India hasalso boosted capital investment in the sector, seeing itrise from US$3.8 billion in FY 2005 to US$12 billionin FY 2012, reprensentiung a CAGR of over 21 %.

India: Import market size

India: Import marketsSplit by country FY 2010-11

Source:ACMA

Key segments of the Indian autocomponent marketThe manufacturing expertise of Indian autocomponent suppliers is spread across a wide range ofsegments such as engine components, driveline andtransmission components, braking and suspensionparts, and electrical components. By 2020, it isestimated that transmission and electronics’ sharewill grow to 32% from 20% in 2011.

India: Auto component segment mix2011

23%

36%

28%

5%

1%

7%

North America Europe Asia

South America Australia Africa

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

10

20

30

40

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

15

-16

(E)

20

20

-21

(E)

Imported market size % Growth

In US $ bn

7.08%

35.30%

56.30%

0.63%0.21%

0.48%

North America Europe Asia

South America Australia Africa

40%

10%10%

20%

10%

10%

Body and structural Suspension and braking

Transmission and steering Engine and exhause

Electronics and electricals Interiors


PwC 25

India: Auto component segment mix2020(E)

India: Aggregate capital investment in AutocomponentsIn US $ bn

Source ACMA

Industry dynamics and structureFaced with constant cost pressures, global autocompanies – both automakers and componentsuppliers – are now increasingly shifting their focus toemerging markets in the Asia-Pacific region such asChina and India. This evolving scenario is proving tobe an excellent opportunity for Indian componentsuppliers to expand significantly and makeacquisitions globally. Most of the top globalautomotive manufacturers such as Ford, BMW,Volkswagen, Toyota, Hyundai and Mercedes noweither source and/or have plans to source componentsfrom India. With engineering design and businessprocesses also being outsourced, India is increasinglybecoming a preferred destination on the global autotrade map.

The market entry strategies commonly adopted bycompanies (both vehicle manufacturing andcomponent suppliers) setting up operations inIndia include:

Setting up a small business unit and ramping upoperations gradually. The auto componentssectors in which India enjoys a comparativeadvantage and where this approach is usedinclude manufacturing of engine, drivetransmission and steering components.

Foreign companies setting up joint ventures withIndian component manufacturers to gain accessto the local market and understanding of marketand regulatory requirements.

Signing long-term contracts with SMEs andgaining their confidence for further investmentsin business operations.

Leveraging the Indian focus on delivering valuefor money to produce high quality parts orcomponents at low prices and with lowmanufacturing costs.

Supply chain structureHistorically, Indian auto component suppliers used tosell their products to automakers largely by signingannual contracts that covered only one model year.These contracts were generally elastic with respect toprice and volume deliveries. Today, however,manufacturers normally award contracts for the life ofa vehicle model (spanning 5-7 years), provided thesupplier agrees to specific targets for productivityincreases that offset price inflation for themanufacturer with lower per-unit prices. So thecomponent supply chain is now changing into that ofsub-system integrators and componentmanufacturers whose relationship is defined more by‘risk’ than the previous factor of ‘cost pressure’ (seechart). This shift in the contracting model has also ledto greater integration and collaboration betweenautomakers and component suppliers.

31%

11%

16%

18%

16%

8%

Body and structural Suspension and braking

Transmission and steering Engine and exhause

Electronics and electricals Interiors

5.4

7.2 7.3

9

12

0

2

4

6

8

10

12

14

FY07 FY08 FY09 FY10 FY11

Investment


PwC 26

Past Present

OEM R&D purchasing assembly System integration testing assembly

supplier management

Tier-I supplier Component manufacturing System suppliers R&D on system

module assemble sub supplier

management

Tier-II supplier Sub component manufacturing

Source: SIAM

Co

st

pr

es

su

re

Co

st

pr

es

su

re

Ris

ks

ha

rin

g

Route to the Indian market: Opportunities for UK m

SMEs in the auto componentsindustryAccording to ACMA, the SMEs participatingauto component sector include a large body of nearly5,800 unorganised players, who outnumber by almostten to one the much smaller grouping of nearly 600organised companies. Around 30% of the organisedplayers have revenues above US$25 millionproportion of the market is dominated by only ahandful of players in the organised segment, whereasthe domestic aftermarket is largely dominated by localand foreign players.

Source: Industry Sources, PwC

The Mumbai-Pune region is not only the oldest butalso the largest industry cluster, due to the presenceof companies such as Tata Motors, Fiat, GeneralMotors, Volkswagen and Mercedes Benz in thepassenger cars segment; Tata Motors, Force Motorsand Mahindra Navistar in commercial vehicles; andBajaj Auto in two-wheelers. These are supported bysuppliers such as Tata AutoComp, Bharat FBosch and numerous smallercomponent manufacturers

the Indian market: Opportunities for UK manufacturing SMEs

SMEs in the auto components

According to ACMA, the SMEs participating in India’sauto component sector include a large body of nearly

ho outnumber by almostto one the much smaller grouping of nearly 600

organised companies. Around 30% of the organisedplayers have revenues above US$25 million. A highproportion of the market is dominated by only ahandful of players in the organised segment, whereasthe domestic aftermarket is largely dominated by local

Key automotive component clustersDelhi-National Capital region (NCR), Mumbaiand Chennai-Bangalore are the three majorautomotive clusters in India, driven byboth global and domestic automakers in each region.Most of the significant component suppliers have apresence in these regions. Though there are ongoingchallenges from basic infrastructure issues such aspoor roads, accessibility to ports and availability ofpower, automakers have continued to invest incapacity, and an opportunity to widen their customerbases has attracted suppliers to set up operationsacross these regions.

Pune region is not only the oldest butalso the largest industry cluster, due to the presence

tors, Fiat, GeneralMotors, Volkswagen and Mercedes Benz in thepassenger cars segment; Tata Motors, Force Motorsand Mahindra Navistar in commercial vehicles; and

wheelers. These are supported bysuppliers such as Tata AutoComp, Bharat Forge,

Following the lead set by Maruti in establishing astrong supplier base for its cars in the NCR region,many suppliers in this region have connections withJapan – generally through having Japanese oequity stakes or technical relationships.

PwC 27

Key automotive component clustersNational Capital region (NCR), Mumbai-Pune,

Bangalore are the three majorautomotive clusters in India, driven by the presence ofboth global and domestic automakers in each region.Most of the significant component suppliers have a

these regions. Though there are ongoingchallenges from basic infrastructure issues such aspoor roads, accessibility to ports and availability ofpower, automakers have continued to invest incapacity, and an opportunity to widen their customer

attracted suppliers to set up operations

Following the lead set by Maruti in establishing astrong supplier base for its cars in the NCR region,many suppliers in this region have connections with

generally through having Japanese origins,equity stakes or technical relationships.


PwC 28

The presence of global automotive players such asFord, Hyundai and Toyota, who set up manufacturingoperations in south India (the Chennai–Bangaloreregion) in the late 1990’s, has fostered thedevelopment of component suppliers in that region.Prior to the arrival of these global players, suppliers inthis region were previously dependent on AshokLeyland and Hindustan motors.

Ever since Tata Motors decided to relocate Nano’sproduction to Sanand, automakers such as Ford andMaruti have been queuing up to explore thepossibilities of setting up units in that region. Withadvantages such as good availability of land andaccessibility to ports coupled with the localgovernment’s proactive role and farsighted policies,the Sanand cluster looks set to become the nextDetroit of India.

Other SME clustersThe past decade has also seen new investment in theautomotive sector spread to other emerging clustersin India. To support the development of these clustersand increase their competitiveness at a globalindustry level, the Indian government has takenseveral positive steps, one of them being identificationof SME clusters by industry sector. The foundation forMSME clusters (FMC) was established in 2005 by theEntrepreneurship Development Institute of India(EDI) in Ahmedabad, with technical support from theUNIDO Cluster Development Programme in India.FMC has identified the following locations as autocomponent SME clusters in India:

Name of the

cluster

District State Products No.of SME Units

in the cluster*

Faridabad Faridabad Haryana Rubber and sheet metal

components

2500

Gurgaon Gurgaon Haryana Rubber, plastic molded parts

and sheet metal parts

5000 MSEs (Micro

sized firms about –

3000; Small sized

firms –2000;

Medium sized firms

– 150; Large firms –

4.)

Jamshedpur East Singhbum Jharkhand Engine, transmission,

suspension/braking, electrical

parts

506

Hubli Dharwad Karnataka Auto components and Machine

tools

1000 (both small and

micro)

Ahmednagar Ahmednagar Maharashtra Forgings, castings, electrical

components, motors, jigs and

fixture manufacturing

406 (Small 185 Micro

221)

Aurangabad Aurangabad Maharashtra Engine parts/chassis

assemblies/sub assemblies,

drive transmission/steering

parts, electrical equipment, fan

belts, sheet metal parts, plastic

and rubber components.

650


PwC 29

Name of the

cluster

District State Products No.of SME Units

in the cluster*

Pune Pune Maharashtra Engine and engine parts,

Steering and transmission

gears, braking and suspension

systems, auto electrical and

auto electronics, rubber parts,

plastic molded items etc.,

finished castings and forgings.

6000 ( 70% are micro

and 30 % are small)

Jalandhar Jalandhar Punjab Transmission system parts,

wheel hub assembly parts,

engine parts and suspension

system parts

1500

Chennai Chennai Tamil Nadu Engine parts,

transmission/steering,

suspension/braking, electrical

equipment

6000

Meerut Meerut Uttar Pradesh Rubber, braking, engine parts 4700

shamli Muzaffarnagar Uttar Pradesh Axles wheel rim and hubs 40

Source:

cluster

observatory


PwC 30

Challenges faced by automotivecomponent SMEsAuto component SMEs face many challenges in theirefforts to globalise their business operations andexport to other markets. While the adoption of bestpractices in the production and delivery of qualityproducts has enabled a few of them to increase theircustomer base and acquire global companies, most ofthe companies in the sector face an array ofchallenges. These arise in areas including:

Financial Assistance – SMEs, particularly thesmallest enterprises, have inadequate access tofinance due to lack of financial information andnon-formal business practices. Many of thesefirms also lack access to venture capital and havea very limited access to secondary marketinstruments. The ability of the banks to servicethe credit requirements of the SME sectordepends on underlying transaction costs, efficientrecovery processes and available security.At the same time, venture capital firms aregenerally wary of investing in relatively young orunproven technologies, and banks are also unableto provide debt financing. In addition, there is noformal mechanism for SMEs to raise investmentfrom capital markets. As a result they tend toeither raise money through informal means orscale back on their product and services.

Credit shortage – One of the most significantconstraints that Indian SMEs still face is the lowavailability and high rates charged on credit. Thisis likely to get worse in the current context of theheat being felt by the Indian financial sector dueto the financial meltdown in manyEuropean countries.

Market Orientation – Many SMEs face afragmented market due to their product rangeand are vulnerable to market fluctuations.

Accessibility to markets and technology – SMEslack access to inter-state and internationalmarkets, meaning their ability to gain access toadvanced technology and innovations in theirproduct line is limited. There is also a lack ofawareness of the types of global best practicesthat are being implemented by their counterpartsin other countries.

Operational costs – The rising global cost ofcommodities continues to haunt localmanufacturers. In addition to facing pressures

from inflation, the SME sector has in many waysbecome a ‘talent pool’ from which skilled labourand professionals are often recruited to fillhigher-paying jobs in large domestic andinternational companies. As a result, SMEs facehigher recruitment and training costs while alsohaving to deal with high employee attrition rates.

Export-driven business model – SMEs in thesector lack in-house expertise to analyse hedgingoptions and forecast exchange rate fluctuations.This, coupled with competition from other SouthEast Asian countries (Thailand, Korea, Indonesiaand so on), has forced them to re-think theirbusiness models

Lack of access to global markets – With theliberalisation and globalisation of the Indianeconomy, Indian SMEs now have unprecedentedopportunities on the one hand but face seriouschallenges on the other. While access to globalmarkets has offered a host of new businessopportunities such as the opening up of newtarget markets and the potential to exploittechnological advantages, the challenges createdby the process of globalisation are mainly relatedto scale of operation, technological obsolescence,an inability to access institutional credit, andintense competition in marketing.

Basic infrastructure – To ensure thecompetitiveness of Indian SMEs, it is essentialthat the availability of infrastructure, technologyand skilled manpower are in line with globaltrends. Most SMEs are located either in theIndustrial estates set up decades ago or arefunctioning in the urban areas or have come up inan unorganised way in the rural areas. The stateof infrastructure including power, water, roads,etc in such areas is poor and unreliable.

Branding and marketing – SMEs’ branding andvisibility tends to be very low, due to factorsincluding their small media budgets and relativelack of participation in international buyer-sellerevents. To benefit fully from participating in suchevents, SME experts first need to undertakesignificant research.

Lack of dedicated R&D, testing and designcapabilities – Large number of SMEs do not havethe capabilities needed to design products end-to-end. These firms also lack the necessaryinfrastructure to carry out R&D to match theircustomers’ requirements.


PwC 31

Conclusion andrecommendationsIn summary, market developments in the US, Europeand other global markets have created a significantopportunity for Indian auto componentmanufacturers to forge a new identity with clearstrategies in R&D, supply chain and productDiversification. At the same time, the Indiancomponent industry has made great strides in recentyears in terms of quality, spread, absorption of newertechnologies, and skilled manpower whilemaintaining competitive pricing and flexibility.

However, it is now becoming accepted worldwide thatsustained competitiveness in the automotive industrycomes from R&D and innovation, and in this respectIndian players face a challenge. Indian suppliersspend a relatively low proportion of their totalrevenue on R&D, at around 1.5%, compared to globalstandard in the range of 5% to 6%. Also, Indiansuppliers have until now focused mainly on designingvehicles for the domestic Indian market or otherdeveloping markets, but have not focused on creatingniche brands that can compete on a global level.

As a result, there is now a growing need to initiatecollaborative research and development amongvarious tier 1 and tier 2 suppliers in India, with activeinvolvement from vehicle manufacturers. This willenable the Indian industry to develop intelligentvehicles adhering to international safety standardsand emission norms. They must also focus on R&D ofelectric and hybrid vehicles over the long term.

In India, logistics forms a major part of inventory costestimation, which affects the cost competitiveness ofthe auto component industry. To compete efficientlywith their global counterparts, Indian suppliers needto look beyond supply chain solutions such asEnterprise Resource Planning (ERP) and focus moreon tools and techniques such as just-in-timeproduction processes and e-sourcing.

Recommendations forcollaboration between UK &Indian SMEsIn light of the conclusions highlighted above, ourrecommendations are:

Recommendation 1 – Developsuccessful case studies around bestpractices being adopted by SMEs There is a need to develop detailed case studies

specific to SMEs, based on both inbound andoutbound trade in the automotive sector in bothcountries, to identify target product/componentsegments for SMEs. In order to increase thestrategic value of their partnerships with keysuppliers, companies that apply best practicesshould select suppliers whose geographic,technical, or market strengths complement theirown. They can then forge long-term allianceswith key suppliers (both in India and the UK) todemonstrate their commitment to acollaborative partnership.

Recommendation 2 – Develop robustKPIs to guarantee quality control inkeeping with business goals. In response to competitive pressures and

changing consumer demands, automakers todaymaintain increasingly high standards for quality,and apply these not only to the products theyproduce, but also to the materials andcomponents they accept from suppliers.Achieving rigorously high standards for qualitydoes not happen by chance, especially for SMEs.

Securing high-quality products from Indiancomponent suppliers requires precisemanagement and rigorous monitoring. Socompanies in UK with world-class qualitystandards can help their Indian counterpartsachieve world-class quality standards as well, bydeveloping a robust set of key performanceindicators (KPIs) to ensure rigorous qualitycontrol. UK-based SMEs can also ensure thatthey share information with their Indiancounterparts regarding their corporate objectives,priorities, and new product development. SMEsin both countries can also motivate each otherwith rewards for achieving or exceedingKPI targets.


PwC 32

Recommendation 3 – Identify gapsbetween business strategy andtechnology capability For most UK-based SMEs, the business strategy

they follow is supported by – and linked with –their underlying technology strategies. Incontrast, most Indian SMEs are driven more bytheir business strategies rather than anyadvanced technology. To close such gaps, SMEsshould regularly bring together their businessunit leaders, senior executives, and domainexperts to identify where technology weaknessesexist. They should also establish an ongoingportfolio of joint business initiatives, analysingeach according to its total costs, impact on overallefficiencies, inherent risks, and ability to beintegrated and adopted throughoutthe organisation.

Recommendation 4 – Weigh up thepros and cons of global operationsGone are the days when only large corporations coulddo business internationally. Today, even start-ups andSMEs can advance globally before dominating theirhome markets. However, irrespective of their size,and before defining a path toward global expansion,smart companies first consider the unique set offactors affecting their business choices. Whether theirfocus is on importing, exporting, outsourcing,manufacturing overseas, or forming strategicpartnerships, leading companies consider howvarious strategic drivers affect their businessopportunities worldwide. These driversmight include:

Government factors Trade barriers Regulations affecting product design,

manufacturing, operational, and labour practices Political and economic stability

Production factors Labour costs and productivity across markets Product development and manufacturing costs Infrastructure necessary to manufacture products Adequate distribution networks

Resource factors Access to natural resources necessary to

create products Availability of labour and specialised capabilities Potential alliances, making necessary resources

easier to obtain

Cultural factors Business customs Language Values, customs, and cultural tastes Generational idiosyncrasies of the market

Recommendation 5 – Use contracts toprotect intellectual property (IP)

Long-term cooperation between companieslocated in two different countries increases thelikelihood of company trade secrets being stolen.There is always a concern that rivals may be ableto pirate or reverse-engineer products. So, whileit is essential to know if a country hasconventional legal mechanisms in place toprotect intellectual property (IP) rights, it is evenmore important to know if IP laws are enforced,and what legal avenues are available foraddressing disagreements

Abdul MajeedPwC India,National Automotive Leader

Direct: +91 (0)9840 082943Email: [email protected]

.


PwC 33

Case study: Jaguar Land Roverin IndiaJLR is the UK's largest automotive manufacturingbusiness built around two iconic British car brandswith a rich heritage and powerful consumer appealand loyalty. Additionally, JLR is at the centre of theUK automotive industry’s drive to deliver technicalinnovation in all areas of vehicle development.

Jaguar Land Rover is part of Tata Motors, India'slargest automobile company. The business hasachieved significant global success in recent years as aresult of unprecedented levels of investment in newproducts and supporting technologies, together with afocus on the differing needs of its global customerbase. In the 2011/12 fiscal year, JLR achieved recordprofits of £1.5 billion, an increase of £392m whencompared to the previous year.

Jaguar Land Rover relies upon an extensive networkof suppliers of both parts and services, andincreasingly includes those operating in India. JLR’sglobal footprint has extended beyond the UK toinclude a local facility in its parent company’s base,Pune, Maharashtra where the popular Freelander 2vehicle is assembled for the local market, from partsimported from the UK.

JLR's strategy to enhance global sourcing will enableit to take advantage of low-cost bases in countriessuch as India and China. The company is taking thesame approach with engineering, where it isprogressively building up capability through productdevelopment activities in India. Synergies across theTata Group are also realised through engineering anddevelopment activities undertaken in Pune.

As Jaguar Land Rover grows its global scale,managing component supply and development, aswell as engineering services, will become increasinglyimportant. This will help JLR to not only control thecost of new product development and manufacture,but also to access skills in key areas, such as vehicleelectronics and software development. In Indiaspecialised clusters such as those in Bangalore andTrivandrum have developed quickly.

Developing skills in both manufacturing anddevelopment sectors is critical to the success of OEMsand suppliers alike. Investment in education at avocational and professional skills level will be vital forboth pre-employment and in-career development.Here, there are special challenges for SMEs – vitalparts of the chain – as they may not have the scale tobe able to establish and manage in-houseprogrammes. Working in partnership across industrysector with OEMs, other SMEs and educationalinstitutions to continually up-skill is critical, and thiswill involve establishing collaborative networks withaligned aims that must transcend simple short-termrecruitment needs.

Developing the right sourcing footprint will benefitcost, technology development, and also overall carbonemissions through reduced shipping miles. UK andIndian suppliers will likely benefit from this strategy,and as a consequence of JLR's growth we are likely tosee investment into India by our UK and global supplybase, enabled by developments in the infrastructureand skills environment.

Manufacturing is, in many senses, the ‘pull’ functionat the top of the supply chain that drives innovationand research and development and will be the growthengine in India for SMEs and regional facilities ofglobal companies in India. If the national target formanufacturing as a proportion of GDP (25%) is to bemet from today’s base, skills development acrosscompany scale, industrial sector and all educationallevels will be required.

Jaguar Land Rover see India as a market with verysignificant opportunities, both in sales expansion andin other areas, working with the support of our parentcompany, Tata Motors Limited.


PwC 34

Case study: GKN Driveline inIndiaGKN Driveline began manufacturing in India in 1986,investing in a CVJ joint venture with InvelTransmissions, with a 40% stake. Invel was the firstcompany in India to manufacturer CVJ systems forfront-wheel drive vehicles.

As a result of changes in legislation, GKN was able totake majority ownership of Invel in 1995.

In the following years the Indian motor industry grewrapidly. To meet the increased demand GKNDriveline opened new factories in the south inGummidipundi, Tamil Nadu, in 1996 and in the northat Dharuhera, Haryana, in 1997, complementing theexisting facility at Faridabad, also in Haryana. All thefacilities manufactured CVJ systems.

With demand rising rapidly in the south GKNDriveline outgrew the existing facility. In 2006, an all-new manufacturing location opened in Oragadam,near Chennai, and Gummidipundi was closed.

More recently, in 2011, GKN Driveline broke groundon a new facility in Pune in the west and expandedOragadam with the opening of a precision forge.

The new 8,000-square-metre facility at Pune willmanufacture products from GKN Driveline’s CVJSystems and Trans Axles Solutions product portfolio.The £18 million factory will employ 200 people and isstrategically located within 30 kilometres of a numberof major GKN Driveline customers. When fullyoperational, the plant will have an annual productioncapacity of 600,000 CVJ Systems and will alsomanufacture differentials from GKN Driveline’s TransAxle Solutions product range.

In November 2011, GKN Driveline opened the new£6.6 million precision forge at Oragadam. The 5,000square metre facility supplies precision forgings toGKN Driveline’s Oragadam CVJ Systemsmanufacturing plant.

A state-of-the-art research and developmentengineering centre at Faridabad, and a new oneopening at the plant in Pune, supported by globalengineering development centres enables GKNDriveline to remain a technology leader in the Indianautomotive market.

The continued expansion enables GKN Driveline toremain close and accessible to its customers in India.With the completion of the new facilities, GKNDriveline employment in India will total 1,300 peoplein four plants strategically located across India.

Today GKN Driveline is the leading supplier of CVJsideshafts in India, supplying every major vehiclemanufacturer in India including Bajaj, Fiat, Ford,General Motors, Honda, Hyundai, Volkswagen,Mahindra, Maruti, Piaggio, Renault, Skoda, Tata andToyota. It has built successful relationships with keyvehicle manufacturers based upon supply reliability,product integrity and consistent quality. It shares itsunique application capability with customers todevelop dedicated driveline solutions that meet thechallenge of improved environmental performance,greater efficiency, lighter weight and enhancedreliability. GKN Driveline’s business in India hasgrown at an annual rate of more than 15% over thepast five years and India is expected to remain a high-growth market


PwC 35

The Indian clean energyindustryIndia’s electricity transmission and distributionnetwork is the third largest in the world, and itsgeneration capacity (209 GW) is the fifth largest.However, India’s rate of economic growth hasrecently slowed down substantially from its previouslevels, due to reasons including – among others –persistent infrastructure challenges, includingelectricity shortages. Despite a sizeable addition ofgeneration capacity in recent years, shortages remain,presently at 12.1% in peak demand and 11.1% inenergy supply. Indeed, the shortfall is much bigger ifsuppressed demand, rather than un-met demandalone, is taken into account.

Economy and energy

Current socio-economic trends suggest that demandfor electricity will in fact accelerate further in India,necessitating the addition of new power generationcapacity on an immediate basis. The significantunderlying trends include:

1. Population migration from rural to urban centresin search of better livelihoods and opportunities.Urbanisation is forecast to increase from thecurrent level of 28% of the population to 41%by 2030.

2. The provision of universal electricity access underongoing electrification programmes. Currentlythe access levels are relatively low, covering 91%of villages but only 54% of households. Howeverthe actual supply is far lower than these accessfigures suggest, as rural supply isseverely rationed.

3. Growth in incomes and living standards willgradually increase per-capita electricityconsumption, which at one-quarter of the globalaverage is currently well below similarly-placeddeveloping countries.

Power demand and supply

The supply-side is also hampered by severalchallenges that present opportunities forimprovement. For example, an earlier generation ofpower plants, totalling over 21 GW, has beenidentified for replacement or renovation. Thetechnology used in Indian coalmines also needs to beupgraded, as productivity is well below globalstandards. The necessary improvement include a needfor more coal beneficiation capacity – currently lessthan 10% of thermal coal used is washed – and betterlogistics solutions to reduce transportation losses.

0%

4%

8%

12%

16%

20%

FY07 FY08 FY09 FY10 FY11 FY12

GDP growth

Power generation growth

Peak power deficit

0%

4%

8%

12%

16%

20%

50

250

450

650

850

FY08 FY09 FY10 FY11 FY12

En

erg

yin

TW

h

Demand (TWh) Supply (TWh) Deficit (%)

Defi

cit

in%

Section 4: Clean energy


PwC 36

Some steps have been taken to address thesechallenges. For instance, new power generation isincreasingly based on super-critical technology forbetter energy efficiency, and inter-state transmissionlines are now being designed at higher voltages, suchas the 800 kV power evacuation line from East to theNorthern grid. The Bureau of Energy Efficiency hasalso kicked off several initiatives, such as the ‘PAT’scheme in Standards and Labelling, to improveefficiency of use and reduce the energy intensity ofthe economy.

Encouraging renewable energy is an important policyintervention in India, and several schemes at nationaland state government level are aimed at providing itwith a robust investment climate. There is a robustcase for having a higher proportion of renewableenergy in the country’s overall energy mix, as it helpsto limit the carbon footprint; enhances nationalenergy security, as the resource factors are local; andprovides an additional source of energy to help meetgrowing power demand.

Given these benefits, renewable energy capacity hasgrown at a rapid pace over the past two decades, fromabout 0.5% of overall generation capacity in 1992 toabout 12.25% in 2012. The past five years have seenthe most intense activity, with average annual growthof 33.3%.

India’s National Action Plan on Climate Change hasset the renewable energy target for the year 2017 at12% in energy terms.,Based on the PlanningCommission’s growth estimates and an average loadfactor of 30% for renewable energy projects, thistranslates to total renewable generation capacity of 64GW. This represents significant growth over thecurrent renewable generation capacity of about24 GW.

Key policy and regulatorychangesIn recent years, a number of policy, legislative, andregulatory changes have combined withadministrative actions to drive a significantimprovement in the outlook for renewable and cleanenergy. The industry structure of renewable energy islargely deregulated and competitive, dominated byprivate sector sponsors. A number of autonomousagencies provide the institutional support to betterunderstand resource factors and suitable technology.Examples include the Centre for Wind EnergyTechnology (C-WET) Chennai for wind power; theAlternate Hydro Energy Centre at the IIT Roorkee forsmall hydro; and IIT Jodhpur for solar.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

50

100

150

200

250

300

350

FY1992

1997 2002 2007 2008 2009 2010 2011 2012 2017

Total installed generation capacity Total installed RE capacity % of total capacity


PwC 37

The Government of India’s commitment is reflected inthe National Action Plan on Climate Change (NAPCC)and the eight national Missions that have beenlaunched: (1) The National Solar Mission; (2) TheNational Mission for Enhanced Energy Efficiency; (3)The National Mission on Sustainable Habitats; (4)The National Water Mission; (5) The NationalMission for Sustaining the Himalayan Ecosystem; (6)The National Mission for a Green India; (7) TheNational Mission for Sustainable Agriculture; and (8)The National Mission on Strategic Knowledge onClimate Change.

The Electricity Act 2003 ushered in significantreforms in the power sector, including in cleantechnology. Of particular interest to the latter are themandatory Renewable Procurement Obligation, andthe opening-up of a portfolio of sale options includingfeed-in tariffs, competitive retail supply to end-usersvia open access, and trading (either physically such asbilateral and power exchanges, or as certificates suchas on the REC market). The feed-in tariff is set by thepower regulators for a defined term largely on a cost-plus basis with about 16% return on equity. Also, thisprocurement is exempt from merit-order dispatch,meaning they are treated as ‘must run’ plants.

Renewable procurement obligation: By state

The Renewable Purchase Obligation (RPO) – set bythe state electricity regulator for a defined term –varies across states, but averages around 4.9% of totalpower procurement by designated entities, against anNAPCC target of 6% for the period. To develop thesolar power market, a separate RPO is now definedfor it, currently targeted at 0.3%.

The designated entities include all distributioncompanies, but now the definitions are being widenedin many states to cover all open access suppliers andlarge energy users as well. These designated entitiessign power purchase agreements with renewablepower generators at defined feed-in tariffs or simplybuy Renewable Energy Certificates (RECs) fromthe exchange.

0% 2% 4% 6% 8% 10% 12%

HP

Karnataka 1

TN

Maharashtra

Nagaland

Rajasthan

karnataka 2

Mizoram

Gujarat

UP

Chhattisgarh

Orissa

AP

Uttaranchal

J&K

Maniput

Assam

Bihar

Jharkhand

MP

WB

Kerala

Delhi

Goa and Other UTS

Punjab

Haryana

Tripura

Meghalaya

Non-solar RPO Solar RPO


PwC 38

A renewable power generator can sell power at feed-intariff to these designated entities. Alternatively, it cansell power at a defined average pool price to adistribution company or any third party, and earncurrently traded prices on the REC market. The RECsare freely traded within a floor-and-cap price rangeset by the Central Electricity Regulatory Commissionfor a five-year term. The REC-RPO is a powerfulmarket-driven mechanism that brings all power usersthe ability to buy renewable energy without theirhaving to be located within the same geographicvicinity, thus enabling better use of local factors.

The National Action Plan on Climate Change aims toincrease proportion of renewable energy to about 15%of total power generation by FY 2020. The share ofthe solar energy component in this obligation isplanned to increase from the current 0.25% to 3% byFY 2022.

A number of additional incentives are available forrenewable power generators, though the trend is tomove away from subsidies and tax-credits andtowards output-based incentives, such as concessional

wheeling charges, generation-based incentives, andattractive feed-in tariffs. Financing for eligiblerenewable energy projects is available from manysources, including commercial banks, sector lendinginstitutions such as the Indian Renewable EnergyDevelopment Agency (IREDA), private equityinvestors, the capital markets, and externalcommercial borrowing. To date, renewable energy hasattracted one-quarter of all private equity investmentsinto the electricity sector, although as an asset-class itrepresents only one-tenth the sector’s generationcapacity, reflecting the greater confidence and growthexpectations in the renewable energy segment.

Solar energyThe National Solar Mission (NSM) aims to install 22GW (20,000 MW grid connected, and 2,000 MW off-grid) of solar power capacity by 2022. To help achievethis, a separate solar power purchase obligation ismandated for all designated entities, starting at 0.25%(up to 2013) and rising to 3% by 2022. The RECmarket also trades in separate solar REC, withseparately-defined floor-and-cap prices in recognitionof its higher costs.

21 MW

201 MW

709.5 MW

10 MW

2.5 MW

5.1 MW

2.1 MW

16 MW

7.8 MW

14.3 MW

24.7 MW

7.9 MW

4 MW

13 MW

State with broader renewable policy (or)solar tariff announced

States with dedicated solar policy andfavourable market conditions


PwC 39

India’s total solar power generation capacity hasgrown rapidly in the past two years to reach acommission capacity of 1,047 MW as at November2012, with a further 610 MW expected to becommissioned by March 2013. Most investments havebeen made in the resource-rich regions for solarpower generation, with western and southern Indiaaccounting for about 92% of total installed capacity.The off-grid market is modest, at 100 MW installedcapacity, and is more dispersed across the states.

The solar sector has attracted considerable interest atthe state level as well, and many states such asRajasthan, Gujarat, Madhya Pradesh, Karnataka andmore recently Andhra Pradesh and Tamil Nadu haveannounced aggressive state policies to attract solarpower investments. The table below shows theexpected capacity resulting from some ofthese policies.

Programme category Capacity

allocated/

registered

(MW)

Capacity

commissioned

(MW)

Under

progress

(MW)

Key features and issues

Migration scheme 54 48 3.5 -

National Solar

Mission, Batch 1

150 130 20 3 projects (15MW) not achieved COD –

Land related hurdles

IREDA Roof-top

programme

100 87.8 12.2 Financial closure issues

Gujarat Solar Policy 964 709.5 254 Financial closure, Infrastructure delays

National solar mission,

Batch 2

350 - 350 340 MW achieved Financial closure

and under installation

REC based - 18.1 947 In various stage – DPR, EOC

Andhra Pradesh Solar

Policy

1000

(target)

Permits competitive and captive trade

of solar power on open access basis

Competitive bidding for 1000 MW

announced

Tamil Nadu

Solar Policy

3000

(target)

Expands Solar RPO to all large users

with an option to procure from Solar

Park to be set up on PPP basis

Competitive bidding for 1000 MW

announced

Other States’ Policies* 285 - 285 Under Financial closure

* States include Karnataka, Orissa and Madhya Pradesh


PwC 40

Solar Power ProjectsA number of grid-connected MW-scale solar powerprojects are supported under the NSM and variousstate solar power policies. In the NSM alone, theexpected pipeline includes 6,300 MW of solar PV and2,700 MW of solar thermal (by 2017), plus a further12,000 MW (by 2022) of solar PV and solar thermalprojects. The tender for Phase 1 (batch 1 and 2) hasbeen very successful, attracting widespread local andoverseas interest in the projects.

Equipment manufacturingGiven the emerging market opportunity at both thenational and state level, and to meet the local contentrequirement in some technologies, a number of solarcell and module manufacturing projects have beeninitiated. It is expected that the equivalent of about 5GW of solar manufacturing capacity could come up by2022, including 2 GW of capacity for poly-siliconmaterial. The Ministry of New and Renewable Energy(MNRE) estimates that manufacturing capacity for2,500 MW of solar cells and modules and 2,500 MWequivalent capacity of components and subsystems ofsolar thermal power plants will be required by the endof FY2017 alone.

In contrast, the current cumulative manufacturingcapacity of 90 operating companies is barely 800 MWin cells and 1,500 MW in modules. To help meet thisneed, it is expected that a new incentive scheme –Special Incentive Package Scheme 2 – will be offered,providing a 25% capital expenditure grant to supportthe setting-up of local solar semiconductor plants.

Solar parks and projectsGujarat and Rajasthan have established solar parks tofacilitate solar power project investments and reducethe common costs, such as land acquisition,establishing road connectivity or setting uptransmission facilities. Given the success of theseparks, a few other states are taking steps to followsuit. The tenants also benefit from the availability ofbetter solar resource data and the fact that the EPCcompanies are already present on the site.

Off-grid solar energyMany of India’s rural areas are still not gridconnected, or suffer less than reliable supply. Off-gridsolar energy applications, ranging from home lanternsto village-level mini-grids, have emerged as a viablealternative. The central and state governments areoffering incentives to encourage such applications,and multilateral agencies are involved in supportingbetter dissemination of these technologies andsupporting the ecosystem needed for these ventures.

There are opportunities in commercial off-grid solarenergy supply as well. This targets specific types ofprocess industrial units that can adopt solar poweredsolutions for low to medium heat and non-motiveload for applications in industries such as breweries,food processing, dairies and electroplating. This helpsthem reduce their carbon footprint and the long-runcosts of the power consumed.

Key barriers to solar energyWhile the investments in solar PV and solar thermalare encouraging so far, they have been largelyfinanced by sponsors on the strength of their balancesheets. These technologies have secured commercialfinancing as well, but the lenders have tended to bewary and have adopted a conservative wait-and-watchattitude – i.e., go slow on further lending untilongoing projects are commissioned.

Their main concern is over performance, andspecifically whether the project sponsors have doneadequate due diligence into the resource factors;whether the technology imported suits localconditions and is able to operate at rated levels inthem; and whether the project implementation is upto the mark. Given the lack of a track record for large-scale solar plants, these concerns are understandable.It is likely that multilateral financing institutions willstep in to offer long-term project financing to developthis sector.

Transmission links are often a further challenge,given the low load-factors and thus higher unit coststhat users have to pay. In some states, such as Gujaratand Rajasthan, new lines have been financed, and ona national scale there are plans to establish greentransmission corridors. The regulatory frameworkcould emerge as a key challenge as it varies from stateto state, and there are concerns that incumbentutilities may act to restrict competitive open-accesssales.

Bio-energyGiven its tropical climate and large rural economy,India has long experience with bio-energy sources. Inlate 2011 the Government of India announced aproposal for a ‘Biomass Mission’ to support thebiomass supply chain and set up bio-energyinstallations of 16,000 MW by 2020. The details ofthis proposal are yet to be worked out, but a numberof models already exist, and the challenges to beaddressed are well known.


PwC 41

One of the foremost of these challenges is theavailability of affordable biomass feed-stock, which isaffected by changes in crop cultivated, rainfall, andlocal sustenance use. In response, biomass plantshave the option of setting up plantations to meet partof their feedstock requirement.

Storage and transportation are further key challenges,and bio-energy plants are constrained by theseconsiderations in their site decisions. Anotherchallenge is the seasonal availability of feedstock, andthe multiple uses it has in the rural economy,including for fodder and fuel. To an extent biomassplants overcome this hurdle by transporting feedstockfrom a wider area with a different cropping pattern.Overall, it is the transport and storage facilities thatare the weakest link today, and there is scope to set upstand-alone or integrated storage andlogistics facilities.

Key barriers to bio-energyThe biomass sector has remained largely unorganiseddue to limited understanding of the resource profile.The Biomass Atlas is meant to bridge this informationgap, but it needs further detail and to be keptrefreshed to support investments. Given theseshortcomings, its current assessment of the biomassavailable for feedstock at 18,000 MW maynot reliable.

The need for fossil fuel support is a further deterrent,as it represents a sizeable additional cost for theproject developer. The feedstock prices themselveshave been very volatile depending on farm conditionssuch as the area sowed, rainfall, crop productivity andso on, and current regulations do not permit pass-through of actual prices.

Wind powerAnnual wind capacity added (MW)

Wind power generation dominates India’s renewableenergy sector, accounting for about 70% of installedcapacity. India’s wind power capacity passed 18 GWin October 2012 and is the fifth largest in the world.This is still well below the onshore resource potential,which has been estimated at 48 GW, and whichstudies are now revising upward to 100 GW andalmost 800 GW based on the extractable capacity ofhigher-rated turbines, greater hub-heights and betteruse of land area.

The wind power capacity added annually in India hasgrown robustly in the recent years, with annualgrowth of about 25% over the past decade, althoughthe current year has been slack on account of theremoval of tax credits that have so far attractedfinancial investors. However, the tide has now turnedin favour of IPP investors, who now are responsiblefor the major part of capacity addition. Investmenthas also been boosted in recent years by falling capitalcosts and improved feed-in tariffs in many states.

One outcome of these trends is that more effort is nowbeing spent on technical studies and collation of windmonitoring data, and thereafter in better projectmanagement, which has in turn improved the capitalefficiency of wind power projects. The business modelis changing too, as the previous emphasis on turnkeydevelopment gives way to a more unbundledapproach, with specialists in different areas such aswind site development, turbine sales, balance of plant,logistics, and maintenance coming to the fore in theirrespective areas, bringing in further efficiency andinnovation. Currently, the most attractive area is earlystage projects, with sponsors seeking to extract valuefrom all stages of development.

1,742 1,6631,485 1,565

2,349

3,197

0

500

1,000

1,500

2,000

2,500

3,000

3,500

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012


PwC 42

We expect to see continued growth in the Indian windpower market. To meet the NAPCC and state-levelRPO targets, extra capacity of about 5.8 GW will haveto be added each year. Capacity of this magnitude canonly be added by large IPPs, and wind-rich states,such as Tamil Nadu, Gujarat, Maharashtra,Karnataka, Rajasthan and Andhra Pradesh haverefined their policies to reflect these changes inthe industry.

Wind tariffs across states (inINR/KWh)

Rajasthan 1 = Districts of Jaisalmer, Jodhpur, Barmer

Rajasthan 2 = rest of the state

Maharashtra wind zones are classified on the basis of

Wind power density

A significant recent development in the Indian windpower market has been the achievement of grid-parityin the traditional wind power states. This has comeabout with wind capital costs declining, while fossilfuel generation has become more expensive due torising global commodity prices and a higherproportion of imported coal. Grid-parity has alsohelped the policy and regulatory regime to becomemore mature and commercially orientated. To attractinvestment into marginal areas, the traditional windpower states such as Rajasthan and Maharashtra arenow offering higher tariffs commensurate with lowerwind power density regions in the state, thus helpingwind power development to expand into previouslyuntapped areas.

To permit wind power plants to participate in thecompetitive power market, the Indian Electricity GridCode permits a certain level of intermittency (+/- 30%of schedule) for inter-state sales. This should createdemand for wind forecasting services and for real-time trading desks.

The equipment supplier market has seen a significantchurn in recent years. While there are 16 active WTGmanufacturing companies in India, just four of them– Suzlon, Enercon, Regen Powertech, and Gamesa –were responsible for about 90% of the total capacityadded last year. New equipment is permitted subjectto its passing specified testing and certificationconducted by C-WET. Other suppliers include GE,Vestas, Kenersys, WindFin BV (through a JV withShriram EPC), AMSC-WINDTECH, Wind TechnikNord (JV with Siva Windturbines), Winwind Oyamong others. The total manufacturing capacity, atthree-shift operation, is about 10 GW.

Offshore windThe offshore wind segment is at a fairly embryonicstage of development in India, and some earlyexplorations are being conducted to assess itssuitability and potential. It is understood that MNREis working on a scheme to add 4.5 GW offshorecapacity along the country’s 7,500-km coastline.Tamil Nadu is installing a 100-metre wind mast inDhanushkodi to explore the resource potential. C-WET believes that Tamil Nadu alone may haveoffshore potential of about 1 GW north ofRameswaram and another 1 GW south ofKanyakumari, based on some assessmentsundertaken by a Scottish agency. It is expected thatoffshore wind power experience from Denmark andthe UK could further help shape this opportunity inyears ahead.

Key barriers to wind powerWind energy is among the most mature renewableenergy technologies in India, which means it has thebenefit of a more tested resource data and betterregulatory capture. A few barriers that exist today arereactions to its rapid growth: for example, in somestates high delivery of wind power in certain parts ofthe year has resulted in their being backed tomaintain grid stability. To address this issue, the STUis planning for high capacity transmission links totransfer surplus wind power to other parts ofthe country.

4.4

6

4.6

9

4.6

1

5.6

7

4.9

3

4.2

3.7

8

3.7

3.3

9

4.7

4.3

5

4

3.1

4

0

1

2

3

4

5

6

Ra

jasth

an

1

Ra

jasth

an

2

Gu

jara

t

Ma

ha

rash

tra

-Zo

ne

1

Ma

ha

rash

tra

-Zo

ne

2

Ma

ha

rash

tra

-Zo

ne

3

Ma

ha

rash

tra

-Zo

ne

4

Ka

rna

taka

Ta

mil

Na

du

An

dh

raP

rad

esh

Ma

dh

yaP

rad

esh

WestB

en

ga

l

Ke

rala


PwC 43

In certain other states that are less resource-rich, theregulators have not pressed hard for RPO complianceby the procuring utilities, effectively taking away themarket. It is expected that the regulators will soon getstricter, and this trend has already been noted insome states that have levied penalties for a failure toprocure the mandatory RPO. The REC market willalso revive as the compliance becomes more rigorousand as the prevailing rules for the REC market arerationalised. In general, however, policymakers andregulators have been directionally consistent andprogressive in addressing regulatory and investment

barriers, as they work towards reaching the goal of15% renewable energy generation by 2020.

Small hydro powerSmall hydro power generation, defined as hydroprojects of less than 25 MW rated capacity, isconsidered as renewable energy, and is popularamong renewable energy investors. Small hydroprojects offer a source of energy that is stillreasonably affordable, use mature and wellunderstood technology, and generally do not raise anysignificant resettlement and rehabilitation issues.

SHP – Yearly capacity addition

The Small Hydro Power (SHP) segment represents arelatively small proportion of the total hydro powercapacity in the country. The installed capacity underlarge and medium hydro power projects is about 39.3GW, while that under SHP is about 3.4 GW. Likewise,of the overall hydroelectric power potential of about150 GW (equivalent to 84 GW at 60% load factor), theSHP potential is estimated to be about 15 GW.

However, this still represents a sizeable potentialopportunity, and barely a fifth of it has been tapped.The states of Himachal Pradesh, Uttarakhand,Jammu and Kashmir, Karnakata, and ArunachalPradesh have the bulk of small hydro capacity,although SHP sites are prevalent in almost all thestates of the country. Himachal Pradesh, for example,has a small hydro potential of 2,268 MW, of whichonly 508 MW is developed so far.

SHP projects are relatively easier to develop, as theyare largely run-of-the river with few of thedeforestation or resettlement challenges that affectthe larger projects. A techno-economic clearance isnot required for projects up to Rs. 2.50 billion(US$40 million) in project cost, which is within therange of most SHP projects. The MNRE extendslimited seed capital to qualifying mini projects, alongwith support for resource assessment for small hydrosites and preparation of project reports. It also offersother facilities such as support forperformance testing.

An SHP project can contract to sell power through anyof the three options: firstly, to power utilities at thenotified feed-in tariff; secondly, to power utilities ataverage pool cost while monetising the earned RECsin the market; or thirdly, direct to end consumers ortraders through open access. The feed-in tariffs invarious states (see chart) are set for the term of agiven project, but revised rates are notified from timeto time to allow new SHP projects to recover theircosts (set on a normative basis) and earn a reasonablerate of return on capital

0

50

100

150

200

250

300

350

400

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

20

15

-16

20

16

-17

MW

Target Actual


PwC 44

Small hydro tariffs (INR/kWh)

Hydro projects along the Himalayan region, includingsmall hydro projects, suffer from the challenges ofgeology and hydrology risks that are specific to thisarea. The development of cascade projects and highsedimentation rates poses challenges that are nowbeing addressed in upcoming projects. Still, smallhydro projects have attracted wide private sectorinterest given their inherent advantages in providing amore reliable, cost effective, long-term source ofsupply. The prominent hydro mechanical equipmentsuppliers include BHEL, Boving Fouress, Jyoti Ltd,Alstom, Kirloskar, HPP Energy, Voith-Siemens. MajorEPC players include BHEL, Boving Fouress, Alstom &Voith Hydro.

Key barriers to small hydro powerDespite the wide private sector interest and activeparticipation in the auction of new hydro sites invarious states, SHP project implementation has beenslower than desired. Some of this delay was to beexpected, as many developers are now engaged inundertaking site assessment and geo-technical studiesin order to prepare the detailed project reports. Thesesites are naturally on remote hilly terrain, andtherefore lack access roads and require constructionof roads and transmission lines to the closest poolingpoint. As a result they involve more time and effort toassess and develop.

Land acquisition can also be a challenge. The typicalSHP project can be built on a small area, and theacquisition cost is reasonable, about 1% to 2% of theproject cost, but difficulties may be faced in theprocedural aspects of land acquisition. On the positive

side, the state has strong incentives to support projectprogress as it stands to earn a sizeable royalty, often12% to 18% of the output or as offered by thesuccessful bidder.

Indeed, the real challenges to SHP projects may lieelsewhere, more likely in gaining access to capital andexpertise. For their size, small hydro projects arecapital intensive and local project sponsors often lackthe bandwidth to develop them. The experiencerequired to develop a small hydro power portfolio isalso in limited supply, especially in the private sector,as historically the policy focus has been to pursuelarger hydro projects. These limitations can beaddressed more readily in the future, and we seegrowing interest among overseas funds and strategicinvestors in India’s hydro sector.

Energy efficiencyOne of the key components of the NAPCC’s Mission isthe NMEEE (National Mission for Enhanced EnergyEfficiency), which – as conceived by the Bureau ofEnergy Efficiency – seeks to promote the policy andregulatory framework, financing, and business modelsto create and sustain the market for EnergyEfficiency. To achieve this, the Mission hasfour programmes:

Perform, Achieve and Trade (PAT) scheme: Amarket-based mechanism for cost-effective gainsin energy efficiency in large industries throughtradable certificates.

Market Transformation for Energy Efficiency(MTEE): To encourage the move to energy-efficient appliances in defined sectors.

Energy Efficiency Financing Platform (EEFP): Toevolve models to finance demand-sidemanagement programmes in all sectors bymonetising future energy savings.

Framework for Energy Efficient EconomicDevelopment (FEEED): To develop financialinstruments to promote energy efficiency.

The NMEEE has given a strong boost to efforts toimprove energy efficiency in the country, as haveother activities of the Bureau of Energy Efficiency(BEE), the nodal agency established to implementenergy efficiency goals under the Energy ConservationAct 2001. As per its mandate, the BEE works topromote energy efficiency across public and privatesectors in a wide range of areas, including powergeneration, buildings, equipment and appliances,and mobility.

3.5 3

.75

3.6

5

3.5

3.4

3.2

4

3.6

2.6

2.4

4

3.4

4.2

6

0

1

2

3

4

5

Him

ach

alP

rad

esh

Utt

ran

ch

alU

pto

5…

Utt

ran

ch

alU

pto

5-…

Utt

ran

ch

alU

pto

10

-…

Utt

ran

ch

alU

pto

15

-…

Utt

ran

ch

alU

pto

20

-…

WestB

en

ga

l

An

dh

raP

rad

esh

Ke

rala

Ka

rna

taka

Ma

ha

rash

tra


PwC 45

PAT schemeThe BEE announced the Energy Conservation Rules2012 (Perform, Achieve and Trade rules) in March2012 covering 478 ‘Designated Consumers’ acrossvarious sectors, including power generation, cement,iron and steel, fertiliser, aluminium, paper and pulp,textile and chlor-alkali production. The energyintensity in these sectors is higher than globalstandards, and the objective is to use a cap-and-tradeprogramme to recover this inefficiency. The baselineand targets are assigned in terms of Specific EnergyConsumption (SEC) in Tons of Oil Equivalent per Tonof Product, and those improving on set targets earncredits that can be traded.

The PAT scheme encourages companies to take stepsincluding investing in efficient processingtechnologies, improving waste heat recovery,introducing efficient motors and drives, and installingsmart lighting. The Ministry of Power estimates thepotential electricity savings at 183.5 GWh per annum,corresponding to 148.6 million tons of avoidedCO2 emissions.

ESCO-based marketsEnergy Service Companies (ESCOs) play a useful rolein facilitating the adoption of energy efficienttechnologies and services, typically on performancecontracting basis, with returns linked to the energysavings achieved. The model is gaining acceptanceand is being adopted in government and commercialbuildings, agriculture, and municipality sectors. Thecurrent market size for ESCO in India is relativelysmall, but growing rapidly. Earlier, the ADBestimated the market under ESCO system ofperformance contracts at INR 140 billion (US$3.1billion, 2004).

The scope for ESCOs has increased in recent years,with new projects tendered on PPP basis for purposessuch as managing street-lighting provisioning forurban local bodies. Also, with consumer retail tariffsgoing up by 15% to 35% across various states in thepast two years, the value of potential energy savingshas also appreciated. There is scope for global ESCOcompanies to bring in new technical skills, capital,and ideas and best practices from theirwork elsewhere.

Buildings and appliancesThe energy conservation building code is a guidingtool for developers. The opportunities today lie inimproving standards through the ESCO route, and inproviding energy-efficient building materials forwalls, doors, floor and roofs, natural lighting,ventilation, and design of structures.

In the appliances segment, India has initiated arobust Standards and Labelling programme for mostcategories of household appliances includingrefrigerators, fans and air conditioners, and inverters.In order to sustain the gains to date and graduallyimprove standards, these initiatives will need to becontinued in the future, through initiatives such asraising awareness and setting up more testingfacilities, and continued improvements in standardsand monitoring.

Key barriers to energy efficiencyThe main barriers to energy efficiency include a lackof familiarity with energy efficiency opportunities andthe historically lower value of savings – although thisis now changing rapidly, with significantly higherretail tariffs reflecting the higher costs of primaryenergy and removal of some cross-subsidies. Evenknowledgeable buyers may be stymied by theirorganisational processes, as the typical procedures forcapital budgeting or investment appraisal are notsuited to reflect these savings. Furthermore, the focushas often been on seeking energy efficiencyinterventions with shorter pay-back periods. Giventhe nature of their business, ESCOs have found it hardto arrange financing for their capital andoperational requirements.


PwC 46

Summary – Clean energyin IndiaThe clean energy sector in India has come a long way,from its origins as a mainly policy and incentive-driven industry to a broader market-orientatedapproach with robust private sector participation. Theinvestment climate and business outlook in cleantechnology sectors remain attractive and healthy – instark contrast to the challenges faced today by thefossil fuel-based generators – resulting in the industryattracting considerable attention from investors andfunds. Significantly, the share of renewable energycapacity has increased from about 0.5% in 1992 to12.3% in 2012.

The scope for future growth is robust, and is driven bymultiple factors including government policy (withrespect both to climate change and concerns overenergy security), energy shortages, and theachievement of grid parity on marginal cost basis formost of the renewable technologies. There is also anatural cost advantage, as resource factors in Indiaare closer to the load centres, the resource potential isreasonably reliable, and the development costs arelower. The market is also growing with wider RPOcoverage, and smart investors are capturing early-stage sites to enhance value recovery.

The market needs to grow at least three-fold to meetthe 15% RPO target set by 2020. In the medium-term(2012-17), the current renewable capacity of 25 GW(excluding large hydro) is expected to grow by afurther 23.5 GW.

The prospects appear evenly good across all the assetclasses. The wind power segment is being encouragedby the recognition of a much larger resource potential.Hydro power has seen strong private sector entry,ranging from EPC firms to large energy users seekingto hedge against fuel inflation. Solar projects haveattracted wide interest from multilateral and bilateralinstitutions, export credit agencies and individualcorporate investors.

A significant challenge is to ensure the supply ofequipment, technology, and capital to meet thisdemand. The private sector players that dominate thisspace are now looking to enhance their bandwidth byattracting new overseas suppliers, partners,and investors.

Kameswara RaoPwC India, Energy, Utilities, andMining Leader | GRID


This publication has been prepared for general guidance on matters of interest only, and does not constituteprofessional advice. You should not act upon the information contained in this publication without obtainingspecific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, the authorsand distributors do not accept or assumor anyone else acting, or refraining to act, in reliance on the information contained in this publication or for anydecision based on it.

Copyright 2013. All rights reserved.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legalentity. Please see www.pwc.com/structure for further details

UK India Business Council is the premier businessbetween the two countries. Our mission is to facilitate an increase in trade between the UK and India throughbusiness to business dialogue.

UKIBC plays an influential role in creating and sustaining an environment in which freeflourishes. Through the facilitation of partnerships, and with an extensive network of influential corporate andindividual members, UKIBC provides the resource, knowledge and icompanies to make the most of emerging opportunities in India.

130207-134507-PP-OS

This publication has been prepared for general guidance on matters of interest only, and does not constituteprofessional advice. You should not act upon the information contained in this publication without obtaining

c professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, the authorsand distributors do not accept or assume any liability, responsibility or duty of care for any consequences of youor anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any

C refers to the PwC network and/or one or more of its member firms, each of which is a separate legalwww.pwc.com/structure for further details.

il is the premier business-led organisation promoting bilateral trade and investmentbetween the two countries. Our mission is to facilitate an increase in trade between the UK and India through

e in creating and sustaining an environment in which freeflourishes. Through the facilitation of partnerships, and with an extensive network of influential corporate andindividual members, UKIBC provides the resource, knowledge and infrastructure support vital for UKcompanies to make the most of emerging opportunities in India. www.ukibc.com

This publication has been prepared for general guidance on matters of interest only, and does not constituteprofessional advice. You should not act upon the information contained in this publication without obtaining

c professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, the authors

e any liability, responsibility or duty of care for any consequences of youor anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any

C refers to the PwC network and/or one or more of its member firms, each of which is a separate legal

led organisation promoting bilateral trade and investmentbetween the two countries. Our mission is to facilitate an increase in trade between the UK and India through

e in creating and sustaining an environment in which free-trade and investmentflourishes. Through the facilitation of partnerships, and with an extensive network of influential corporate and

nfrastructure support vital for UK

route to the indian market: opportunities for uk ... · route to the indian market: opportunities...

Documents