electric equipment industry overview

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Section A: Electrical Equipment Industry Introduction The infrastructure sector (especially power) remains a key focus for the Government of India (GoI) because of its importance in overall economic development of the country. The electrical equipment industry plays a vital role in infrastructure development, especially in the power sector. India has capitalised on the advantages of low cost of labour and its vast manpower base to establish itself as a strong manufacturer and exporter of electrical equipment. To keep pace with the reforms in the power sector, over the years, GoI has encouraged foreign participation in the manufacture of electrical equipment through joint ventures, an example being the joint venture between Larsen & Toubro and Mitsubishi Heavy Industries (MHI) and with Mitsubishi Electric Corporation (MELCO) in Jul 2008. As long as the problem of acute shortage of power continues to plague the country, ample opportunities exist for foreign electrical equipment manufacturers to enter the Indian market. GoI has also encouraged Foreign Direct Investment (FDI) into the sector. During Apr 2000 to Jun 2010, the electrical equipment industry attracted FDI inflow of US$ 2.2 bn, which represents 2% share in India’s overall FDI inflow. However, despite a strong domestic manufacturing base, imports play a crucial role in the sector. Significant expansion in domestic manufacturing capacity and research and development (R&D) activities would be required for reduction of reliance on imports of electrical equipment. A number of well established players operate in the Indian electrical equipment industry, from large public sector companies such as Bharat Heavy Electricals Ltd (BHEL), private players such as Crompton Greaves and multinational companies such as ABB Ltd to numerous small and medium enterprises (SMEs). Besides China, India is among the few developing economies with capabilities of manufacturing an entire range of equipment for power generation and transmission. India has developed strong capabilities in manufacturing products such as transformers and generators as reforms in the power sector have induced players to improve quality levels. However, despite such achievements, the Indian electrical equipment manufacturers have not reached the competitive levels of players in the developed nations such as the US and Germany. India is weak compared with these countries in terms of automation in production, R&D expenditure and training and development. Industry structure Indian electrical equipment is one of the fastest-growing industries in the country, catering to a gamut of industrial sectors. The power sector remains the largest consumer for electrical equipment. Increased activity in India’s power sector (generation, transmission and distribution), improving industrial climate and GoI’s initiatives over the past few years have been key drivers for growth in this industry. Moreover, it is highly fragmented, with SMEs having significant presence.

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Page 1: Electric Equipment Industry Overview

 

Section A: Electrical Equipment Industry

Introduction

The infrastructure sector (especially power) remains a key focus for the Government of India (GoI) because of its importance in overall economic development of the country. The electrical equipment industry plays a vital role in infrastructure development, especially in the power sector. India has capitalised on the advantages of low cost of labour and its vast manpower base to establish itself as a strong manufacturer and exporter of electrical equipment.

To keep pace with the reforms in the power sector, over the years, GoI has encouraged foreign participation in the manufacture of electrical equipment through joint ventures, an example being the joint venture between Larsen & Toubro and Mitsubishi Heavy Industries (MHI) and with Mitsubishi Electric Corporation (MELCO) in Jul 2008. As long as the problem of acute shortage of power continues to plague the country, ample opportunities exist for foreign electrical equipment manufacturers to enter the Indian market. GoI has also encouraged Foreign Direct Investment (FDI) into the sector. During Apr 2000 to Jun 2010, the electrical equipment industry attracted FDI inflow of US$ 2.2 bn, which represents 2% share in India’s overall FDI inflow. However, despite a strong domestic manufacturing base, imports play a crucial role in the sector. Significant expansion in domestic manufacturing capacity and research and development (R&D) activities would be required for reduction of reliance on imports of electrical equipment.

A number of well established players operate in the Indian electrical equipment industry, from large public sector companies such as Bharat Heavy Electricals Ltd (BHEL), private players such as Crompton Greaves and multinational companies such as ABB Ltd to numerous small and medium enterprises (SMEs). Besides China, India is among the few developing economies with capabilities of manufacturing an entire range of equipment for power generation and transmission. India has developed strong capabilities in manufacturing products such as transformers and generators as reforms in the power sector have induced players to improve quality levels.

However, despite such achievements, the Indian electrical equipment manufacturers have not reached the competitive levels of players in the developed nations such as the US and Germany. India is weak compared with these countries in terms of automation in production, R&D expenditure and training and development.

Industry structure

Indian electrical equipment is one of the fastest-growing industries in the country, catering to a gamut of industrial sectors. The power sector remains the largest consumer for electrical equipment. Increased activity in India’s power sector (generation, transmission and distribution), improving industrial climate and GoI’s initiatives over the past few years have been key drivers for growth in this industry. Moreover, it is highly fragmented, with SMEs having significant presence.

The electrical equipment industry has a strong manufacturing base in India and produces a wide range of products. Electrical equipment and machinery are principally used in the power sector (generation, transmission and distribution) and manufacturing industries such as automobiles, cement, steel, petrochemicals and refining, etc.

Electrical equipment broadly includes rotating machines (Electrical generators and electric motors), switchgears and control gears, transformers, cables, capacitors, transmission lines and energy meters. Table 3.1 outlines electrical equipment manufactured in India.

Page 2: Electric Equipment Industry Overview

In the past two decades, consolidation of the Indian electrical equipment industry, especially in heavy electrical equipment, has created stronger companies with greater size and economies of scale, extensive product ranges, better financial strength and wider access to foreign markets. Consequently, the industry’s growth has accelerated over the past few years. While there are a few large players with dominant presence, several SMEs specialise in specific product lines.

SMEs play an important role in the growth of the Indian economy, contributing to about 45% of the industrial output and 40% of exports and employing around 42 mn people. SMEs generally require less capital investment and therefore have low technological capabilities. As a result, most SMEs operate in the lower-end of the value chain where the requirement of high technological capabilities is limited. In the electrical equipment industry, SMEs have dominant presence in production of lower KVA generators (3 to 15 KVA) since this segment is characterised by use of simple technology. The SME units are mainly concentrated in Agra, Rajkot, Kolhapur, Mumbai and Kolkata.

The fortunes of the Indian electrical equipment industry are tied to the power sector. GoI’s strong thrust on improving the power scenario in the country has resulted in introduction of several power sector reforms that have boosted the electrical equipment industry. The power sector increased its investments in new equipment and systems to bring down power losses (technical as well as theft) and be more commercially

Page 3: Electric Equipment Industry Overview

viable. This need arose after the unbundling of state-owned power utilities and corporatisation of transmission and distribution sectors in early 1990s.

Over the years, through increased focus on research and development, the industry has seen significant technology upgrade which has brought it at par with most other Asian nations, although India still lags most developed nations by quality.

Further, various infrastructure development schemes such as the ongoing Accelerated Power Development and Reforms Programme (APDRP) for modernising transmission and distribution network and lowering cash losses incurred by distribution entities, have provided impetus to demand for electrical equipment such as distribution transformers, switchgears and power capacitors. Moreover, delicensing and approval for foreign collaborations with 100% FDI also drove growth in the industry since FY04.

The electrical equipment industry recorded strong growth of 11.25% in FY10, on the back of economic recovery. The industry had recorded a subdued 2.73% growth in FY09 owing to the global financial meltdown. However, growth picked up in the second half of FY10, when the industry grew by 20%. Recovery, mainly in real estate and infrastructure, provided the necessary boost to the industry.

Growth in certain product segments such as rotating machines, switchgears and cables was more than 30% in the last quarter of FY10. Revival in economic activity, GoI’s stimulus packages, export incentives and the ongoing thrust on programmes such as the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and the Accelerated Power Development and Reform Programme (APDRP) also supported growth in the electrical equipment industry.

Exports weakened in FY10

The Indian electrical equipment industry exports a wide range of products, including FHP motors, power transformers, HV and LV cables, capacitors and switchgears and components. During FY10, India’s foreign trade in electrical equipment was a mixed bag, with imports rising significantly and exports recording a decline; this can be attributed to slow recovery in the global economy resulting in sluggish demand. India’s

Page 4: Electric Equipment Industry Overview

exports of major electrical equipment declined by 32% during FY10, with categories such as rotating machines, cables and transmission towers seeing a decline. This was especially significant during the second half of the fiscal when exports declined by more than 40%.

Imports, on the other hand, increased by 14%, indicating improving demand conditions in the domestic market. FHP motors, AC generators, power transformers and HT control gears were among the segments that experienced a rise in imports during FY10.

Page 5: Electric Equipment Industry Overview

Challenges faced by the electrical equipment industry in India

While the domestic electrical equipment industry has made rapid strides in production and exports over the past several years, it faces several challenges. Raising domestic production capacities substantially to counter stiff competition from countries such as China and to keep up with domestic power sector developments remains a key challenge. Further, greater focus on R&D activities to improve quality of equipment to match the standards of most developed economies also remains vital. Major challenges faced by the industry are highlighted below:

Page 6: Electric Equipment Industry Overview

Shortage of skilled manpower: The Indian electrical equipment industry continues to face severe shortage of skilled manpower. Although the country has a large number of engineering colleges, a significant misalignment exists between education and employment in the sector. The main reason is that the engineers that graduate do not possess the necessary skill-set, which in turn is attributed to outdated syllabi used by colleges, lack of practical training, non-exposure to products and limited awareness about the industry. Moreover, many engineering graduates perceive the electrical equipment industry as ordinary and slow moving, entailing limited career options and inadequate salaries and thus they opt for other sectors such as Information Technology (IT). This demand-supply mismatch can be addressed partially by updating the current curriculum followed by engineering colleges.

Inadequate research and development facilities: The Central Power Research Institute (CPRI) is an R&D testing laboratory set up by GoI, where majority of electrical equipment are tested and certified. Current facilities of the institute are inadequate in terms of capacity and voltage class. While the facilities at the CPRI testing labs in Bhopal and Bengaluru can cater to short circuit tests on transformers up to 90 MVA, 220 kV, for higher capacity testing, the industry has to depend on imports from developed nations. Therefore, the CPRI testing facilities need to be upgraded for the industry to keep up with the country’s massive power programme.

Inadequate transportation facilities: Given the massive expansion taking place in the power sector, transportation of electrical equipment is a critical factor. Any electrical equipment weighing more than 32 MT needs to be transported via vehicles with hydraulic axles only (hydraulic trailers). However, availability of hydraulic axles is low, as India does not have many domestic manufacturers. While axles can be imported, it has proven to be expensive and cumbersome. Further, the central and state Governments have adopted a highly complex procedure for providing registration clearance for movement of consignments on hydraulic axles; this has led to delays and increase in project costs.

Inadequate supply of raw materials: Cold rolled grain oriented (CRGO) electrical steel is a specialised variety that is required in manufacture of electrical equipment such as generators and transformers. India is highly dependent on imports for this variety of steel. Given the large power programme outlined by GoI during the 11th and 12th Five Year Plans, there will be huge demand for transformers and generators. This in turn is expected to result in significant increase in demand for CRGO electrical steel. Since this product is of strategic importance to the industry, GoI should look to establish an indigenous CRGO manufacturing facility in India.

Raw material price fluctuations: During FY10, prices of two major raw materials, copper and aluminium, experienced upward movement. A large off-take from China and frequent disturbances in domestic copper mines were major factors for price increases. Although there aren’t any easy solutions for controlling price fluctuations, ensuring that domestic supply of raw materials is not hampered would insulate the industry from high international raw material prices to some extent.

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Demand drivers for the electrical equipment industry

Demand for electrical equipment in India is primarily linked to development in infrastructure, specifically the power sector. To sustain the economic boom that the country is experiencing, development of infrastructure remains a key imperative. Increased focus of GoI to improve infrastructure in the country over the past few years has boosted demand for electrical equipment; as long as developments are taking place in India’s power sector, demand for various electrical equipment is likely to increase. Some of the key demand drivers for this industry are as follows:

Power: Demand for electrical equipment such as transformers and switchgears will be driven by GoI’s ongoing efforts to improve India’s power scenario. Huge investments of GoI in the power sector as well as its objective of ensuring that power is distributed to the remotest village in the country bode well for the industry

Infrastructure: Infrastructure development remains a key focus for GoI. To ensure better infrastructure, it has undertaken a large reform initiative, which will bring about business opportunities for the Indian electrical equipment industry.

Telecommunications: Increasing penetration of the Internet in the country, rising popularity of broadband connection and introduction of 2G and 3G technologies is expected to drive demand for cables in the electrical equipment industry.

Real estate: The real estate sector has seen a significant boom in the country. Spurt in construction of factories as well as commercial and residential buildings has brought along higher demand for generators (for office as well as residential buildings) and cables. This is expected to drive demand for electrical equipment.

Outlook

After being affected by the global economic slowdown in FY09, the Indian electrical equipment industry recovered strongly in FY10, especially in the second half. Increasing activity in the infrastructure sector will bode well for the industry in the coming years. The Government of India has embarked upon an ambitious plan of ‘Power for all by 2012’. This plan aims to achieve an installed generation capacity of 200,000 MW by 2012. Towards achieving this ambitious target, the Government has been encouraging formation of joint ventures between Indian electrical equipment companies and their foreign counterparts that in turn will provide the requisite impetus to the industry. Further, India’s nuclear deal, which is in initial stages, could generate huge demand for electrical equipment as nuclear power projects require equipment similar to thermal power projects, although with some modifications.

On the supply side, efforts to develop better technology through strong focus on R&D are needed to drive the industry in line with most developed countries. Going forward, quality of electrical equipment would improve through greater focus on R&D, enabling Indian manufacturers to compete globally and improve performance in exports.