Small and medium enterprises revive engineering exports
Small and medium enterprises lead the remarkable revival in engineering exports.
LM Panchal of V-Excel Spares and Equipment
Almost all sectors were hit by the global economic downturn of 2008/09, but some were hit harder than others. One of the worst affected was engineering exports, which make for a quarter of India's export basket.
Having grown at 30 per cent annually between 2003 and 2008, it saw a sharp 18 per cent fall in 2009/10, from $40 billion in the preceding year to $34 billion. But equally stunning was the recovery in 2010/11 when engineering exports soared 84 per cent to touch $60 billion. And the prime movers were not the engineering giants but the small and medium enterprises, or SMEs, in the sector.
Engineering SMEs, mainly located in clusters across Punjab, Haryana, Tamil Nadu, Maharashtra and Gujarat, dominate the light engineering sector. "Except during the slump following the recession, exports by SMEs have grown consistently at 35 per cent year on year, higher than the overall growth in engineering exports," says R. Maitra, Executive Director at industry body Engineering Exports Promotion Council, or EEPC. SMEs contribute over 38 per cent to the overall engineering exports, show EEPC figures.
Traditionally, the biggest export advantage of the Indian engineering industry has been the low cost of its labour. "The labour we employ is 25 to 30 per cent cheaper than in the United States," says L.M. Panchal of the Mumbai-based V-Excel Spares and Equipment, which manufactures goods for engineering heavyweights such as Tata Steel, Larsen & Toubro and JSW Steel. "Our workers' productivity is also higher. Labour in the US will not work for more than eight hours, five days a week. But our people work double shifts, six days a week, sometimes even seven."
Not surprisingly, many international clients increasingly rely on Indian SMEs for cheap, yet high quality products. "Many countries have completely outsourced their requirements for castings, forgings and fasteners to Indian SMEs," says Piyush Khemka, Director at EDCONS (MKS) Castings, a Howrah maker of metal castings.
Engineering SMEs also deserve credit for responding quickly as Western markets began to revive, by making fresh investments in capacity building, expanding into new markets and seeking the help of professional consultants.
Gautam Maini, Managing Director of Maini Precision Products, which calls itself a one-stop shop for manufacturing solutions, has been investing heavily in additional machinery in the past six months.
"During the slump of 2008/09, all our customers in the US and Europe piled up huge inventories," he says. Explaining his investments, he adds: "When the recovery started around June 2010, these were quickly exhausted, and there was a sudden order spike." V-Excel's Panchal invested Rs 80 lakh on machinery upgrade in 2010 and has doubled his production too, since.
Many SMEs are also replacing obsolete machines with the latest technology to adapt to a changing world. EDCONS made metal castings using induction-based furnaces. But two years ago, it installed coke-based furnaces as the use of inductionbased furnaces made the end product costlier, and demand consequently suffered, especially during the slowdown. "Castings produced from cokebased furnaces are 20 to 25 per cent cheaper and are in much in demand now," says Khemka.
Hit hard by the downturn, engineering SMEs have also been quick to adopt lean manufacturing practices to maximise the use of resources and reduce wastage. "SMEs have increasingly invested in professional consultancy to adopt lean manufacturing practices in the past three to four years," says Amol Matte, consultant at UMAS India, an engineering consulting firm. Maini Precision Products, for instance, has formulated a new, extremely flexible business model which enables it to switch between a varied manufacturing line, from aerospace to hydraulics products, without much difficulty.
SMEs have enthusiastically responded to the government's Lean Manufacturing Competitiveness Programme, launched in August 2009 across 100 SME clusters, bringing in consultants to teach them efficient practices.
But Western markets are still to regain their earlier robustness. Exports to the US and Europe are lower than they used to be five years ago. But Indian exporters, including the engineering SMEs, have made up for it by seeking out new markets.
Five years ago, the US and Europe accounted for 50 per cent of India's exports; in 2010/11, that slipped to just 30 per cent, but exports to countries in Africa, Latin America and Asia have doubled. "It has been damn good luck," says Rahul Khullar, Commerce Secretary. "Our engineering exporters, who used to predominantly deal with the US are now breaking into fast-growing markets like Brazil, Columbia, Argentina, Mexico and Chile." Adds Ajay Sahai, Director General at business lobby Federation of Indian Export Organisations: "Exports to these other regions show very high growth as these economies are also growing fast."
How long the current engineering exports boom continues, however, remains to be seen. The Commerce Ministry hopes to double engineering goods exports from $60 billion in the last financial year to $125 billion by 2012/13. Is this achievable? "Last year's recovery was largely because the G-20 countries, which control 80 per cent of global trade, were on a spending spree. But there could be a rollback," cautions Sahai.
Equally, a number of schemes initiated by the Indian government to encourage exports may not continue indefinitely. One of them, the Interest Rate Subvention Scheme was withdrawn in March this year. The Duty Entitled Pass Book Scheme, which provides certain tax breaks to exporters, expires on July 1. A third much-utilised tax break, the zero duty Export Promotion Capital Goods Scheme, may also be headed for the chopping block.
Rising inflation over the past year, as well as the increase in interest rates by the Reserve Bank of India in a bid to control inflation, are both hurting engineering goods exporters. Ishwar P. Bajaj at Sainest Tubes, for instance, finds that the price of his key input, steel tubes, has increased 30 per cent from last year, from around $850 per tonne to around $1,100. Simultaneously, rising interest rates are making credit costlier; he is currently paying 14 per cent on his bank loans against 11.5 per cent last year. "It is difficult to deal with the pressures on margins," he says.
"The contribution of SMEs in the engineering sector is very significant. The export push will have to come from SMEs," says Uday Kumar Varma, Secretary in the Ministry of Micro, Small and Medium Enterprises. But he maintains the sector does not need subsidies, instead it should become more aware of recent technologies and have better access to them.
Having grown at 30 per cent annually between 2003 and 2008, it saw a sharp 18 per cent fall in 2009/10, from $40 billion in the preceding year to $34 billion. But equally stunning was the recovery in 2010/11 when engineering exports soared 84 per cent to touch $60 billion. And the prime movers were not the engineering giants but the small and medium enterprises, or SMEs, in the sector.
Engineering SMEs, mainly located in clusters across Punjab, Haryana, Tamil Nadu, Maharashtra and Gujarat, dominate the light engineering sector. "Except during the slump following the recession, exports by SMEs have grown consistently at 35 per cent year on year, higher than the overall growth in engineering exports," says R. Maitra, Executive Director at industry body Engineering Exports Promotion Council, or EEPC. SMEs contribute over 38 per cent to the overall engineering exports, show EEPC figures.
Traditionally, the biggest export advantage of the Indian engineering industry has been the low cost of its labour. "The labour we employ is 25 to 30 per cent cheaper than in the United States," says L.M. Panchal of the Mumbai-based V-Excel Spares and Equipment, which manufactures goods for engineering heavyweights such as Tata Steel, Larsen & Toubro and JSW Steel. "Our workers' productivity is also higher. Labour in the US will not work for more than eight hours, five days a week. But our people work double shifts, six days a week, sometimes even seven."
Not surprisingly, many international clients increasingly rely on Indian SMEs for cheap, yet high quality products. "Many countries have completely outsourced their requirements for castings, forgings and fasteners to Indian SMEs," says Piyush Khemka, Director at EDCONS (MKS) Castings, a Howrah maker of metal castings.
Engineering SMEs also deserve credit for responding quickly as Western markets began to revive, by making fresh investments in capacity building, expanding into new markets and seeking the help of professional consultants.
Gautam Maini, Managing Director of Maini Precision Products, which calls itself a one-stop shop for manufacturing solutions, has been investing heavily in additional machinery in the past six months.
"During the slump of 2008/09, all our customers in the US and Europe piled up huge inventories," he says. Explaining his investments, he adds: "When the recovery started around June 2010, these were quickly exhausted, and there was a sudden order spike." V-Excel's Panchal invested Rs 80 lakh on machinery upgrade in 2010 and has doubled his production too, since.
Many SMEs are also replacing obsolete machines with the latest technology to adapt to a changing world. EDCONS made metal castings using induction-based furnaces. But two years ago, it installed coke-based furnaces as the use of inductionbased furnaces made the end product costlier, and demand consequently suffered, especially during the slowdown. "Castings produced from cokebased furnaces are 20 to 25 per cent cheaper and are in much in demand now," says Khemka.
Hit hard by the downturn, engineering SMEs have also been quick to adopt lean manufacturing practices to maximise the use of resources and reduce wastage. "SMEs have increasingly invested in professional consultancy to adopt lean manufacturing practices in the past three to four years," says Amol Matte, consultant at UMAS India, an engineering consulting firm. Maini Precision Products, for instance, has formulated a new, extremely flexible business model which enables it to switch between a varied manufacturing line, from aerospace to hydraulics products, without much difficulty.
SMEs have enthusiastically responded to the government's Lean Manufacturing Competitiveness Programme, launched in August 2009 across 100 SME clusters, bringing in consultants to teach them efficient practices.
But Western markets are still to regain their earlier robustness. Exports to the US and Europe are lower than they used to be five years ago. But Indian exporters, including the engineering SMEs, have made up for it by seeking out new markets.
Five years ago, the US and Europe accounted for 50 per cent of India's exports; in 2010/11, that slipped to just 30 per cent, but exports to countries in Africa, Latin America and Asia have doubled. "It has been damn good luck," says Rahul Khullar, Commerce Secretary. "Our engineering exporters, who used to predominantly deal with the US are now breaking into fast-growing markets like Brazil, Columbia, Argentina, Mexico and Chile." Adds Ajay Sahai, Director General at business lobby Federation of Indian Export Organisations: "Exports to these other regions show very high growth as these economies are also growing fast."
Uday Kumar Varma, Secretary, Ministry of Micro, Small and Medium Enterprises
Equally, a number of schemes initiated by the Indian government to encourage exports may not continue indefinitely. One of them, the Interest Rate Subvention Scheme was withdrawn in March this year. The Duty Entitled Pass Book Scheme, which provides certain tax breaks to exporters, expires on July 1. A third much-utilised tax break, the zero duty Export Promotion Capital Goods Scheme, may also be headed for the chopping block.
Rising inflation over the past year, as well as the increase in interest rates by the Reserve Bank of India in a bid to control inflation, are both hurting engineering goods exporters. Ishwar P. Bajaj at Sainest Tubes, for instance, finds that the price of his key input, steel tubes, has increased 30 per cent from last year, from around $850 per tonne to around $1,100. Simultaneously, rising interest rates are making credit costlier; he is currently paying 14 per cent on his bank loans against 11.5 per cent last year. "It is difficult to deal with the pressures on margins," he says.
"The contribution of SMEs in the engineering sector is very significant. The export push will have to come from SMEs," says Uday Kumar Varma, Secretary in the Ministry of Micro, Small and Medium Enterprises. But he maintains the sector does not need subsidies, instead it should become more aware of recent technologies and have better access to them.
