Capital-Goods-Industry-Exim-Bank-Report

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EXPORT-IMPORT BANK OF INDIA

OCCASIONAL PAPER NO. 124

INDIAN CAPITAL GOODS INDUSTRY -A SECTOR STUDY

EXIM Banks Occasional Paper Series is an attempt to disseminate the findings ofresearch studies carried out in the Bank. The results of research studies can interestexporters, policy makers, industrialists, export promotion agencies as well asresearchers. However, views expressed do not necessarily reflect those of the Bank.While reasonable care has been taken to ensure authenticity of information and data,EXIM Bank accepts no responsibility for authenticity, accuracy or completeness of suchitems.

Export-Import Bank of IndiaPublished by Quest Publications

June 2008


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CONTENTS

Page No.

List of Tables 5

List of Exhibits 9

List of Boxes 9

Executive Summary 11

1. Introduction 282. Global Scenario 30

3. Capital Goods Industry in India 38

4. Exim Banks Support to Indian Machine tools Sector: 61Case Study

5. Indian Capital Goods Industry: Market Analysis and 65Export Potential

6. Challenges and Strategies 107

Annexure

1. List of Capital Goods Items Covered in Index of 116Industrial Production

2. Shipment of Textile Machinery: Various Segments 117

3. Indias Export, Import, and Export-Import Ratio of 118Select Machine Tools

4. Indias Export, Import, and Export-Import Ratio of 119Select Textile Machinery

5. Indias Export, Import, and Export-Import Ratio of 120Select Construction and Mining Machinery

6. Indias Export, Import, and Export-Import Ratio of 121

Select Process Plant Machinery

7. Indias Export, Import, and Export-Import Ratio of 121Select Electrical Machinery

3

Project Team:

Mr. S. Prahalathan, General Manager, Research and Planning Group

Ms. Renuka Vijay, Manager, Research and Planning Group


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List of Tables

Table Title Pg. No.No.

1. World Production of Machine Tools 2007 332. World Consumption of Machine Tools 33

3. World Export of Machine Tools 34

4. World Import of Machine Tools 35

5. FDI Inflows in Select Capital Goods Sector in India 40

6. Production of Machine Tools in India 42

7. Export of Machine Tools from India 42

8. Trends in Production of Textile Machinery in India 44

9. Indian Construction and Mining Machinery: Industry Size 47

10. Market Size and Leading Players: Select Segments of 48Construction and Mining Machinery (2006-07)

11. Export Performance of Select Construction and Mining 48Machinery (2006-07)

12. Market Size and Leading Players in Process Plants, 50Machinery and Equipments

13. Export of Select Process Plant Equipments / 51Machinery from India (2006-07)

14. Market Size and Leading Players in Transformer Industry 52

15. Indias Export of Electric Transformers, Static Converters 53and Inductors - HS Code 8504 (2006-07)

16. Indias Import of Electric Transformers, Static Converters and 54Inductors - HS Code 8504 (2006-07)

17. Market Size and Leading Players in Switchgear Industry 55

18. Indias Export of Switching and Protecting Electrical Circuits / 55Apparatus in (2006-07)

19. Indias Import of Switching and Protecting Electrical Circuits / 56Apparatus (2006-07)

20. Market Size and Leading Players in Electric Capacitor Industry 57

21. Indias Export of Electric Capacitors (2006-07) 57

22. Indias Import of Electric Capacitors (2006-07) 5823. Market Size and Leading Players in Motors and Generators 59

24. Indias Export of Electric Motors and Generators (2006-07) 59

25. Indias Import of Electric Motors and Generators (2006-07) 60

26. World Import of Select Machine Tools 66

27. Market Analysis for Machine Tools Under HS Code 8462 67




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32. Market Analysis for Machine Tools Under HS Code 8460 7233. Market Analysis for Machine Tools Under HS Code 8464 73



36. World Import of Select Textile Machinery 75

37. Market Analysis for Textile Machinery Under HS Code 8450 76






43. World Import of Select Construction and Mining Machinery 81

44. Market Analysis for Construction and Mining Machinery 82Under HS Code 8429



47. Market Analysis for Construction and Mining Machinery 84

Under HS Code 842648. Market Analysis for Construction and Mining Machinery 85

Under HS Code 8430


50. World Import of Select Process Plant Machinery 87

51. Market Analysis for Process Plant Machinery 88Under HS Code 8421







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57. Market Analysis for Process Plant Machinery 93

Under HS Code 841758. Market Analysis for Process Plant Machinery 93

Under HS Code 8402




62. Market Analysis for Process Plant Machinery 97

Under HS Code 8404



65. World Import of Select Electrical Machinery 99

66. Market Analysis for Transformers Under HS Code 8504 100

67. Market Analysis for Switchgears / Control gears 101(exceeding 1000v) Under HS Code 8535

68. Market Analysis for Switchgears / Control gears (below 1000v) 102Under HS Code 8536

69. Market Analysis for Electric Capacitors Under HS Code 8532 103

70. Market Analysis for Motors and Generators Under HS Code 8501 103

71. Market Analysis for Electric Generating Sets Under HS Code 8502 104

72. Trends in Licenses Issued under EPCG Scheme 108

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List of Exhibits

No. Title Pg. No.

1. Leading Producers of Electrical Machinery and Apparatus (ISIC 31) 30

2. Leading Producers of Other Machinery and Equipments (ISIC 29) 31

3. Revenue Generation and Growth in Global Capital Goods Industry 32

4. Global Construction and Mining Machinery Industry: 36Value & Growth

5. Global Market for Industrial Machinery 37

6. Movement of Index of Capital Goods Industry vis--vis IIP in India 39

7. Movement in Production Index of Sub-Segments of Capital 39Goods Industry

8. Classification of Indian Machine Tools Sector 40

9. Production and Export Performance of Indian Machine 41Tools Sector

10. Major Export Destinations of Machine Tools from India (2006-07) 43

11. Textile Machinery Trends in Capacity, Production and Capacity 44Utilization

12. Export and Import of Textile Machinery from India 45

13. Segment wise Import of Textile Machinery in India 45

14. Segment-wise Export of Textile Machinery from India 4615. Structure of the Electric Equipment Industry 52

16. Production and Export Performance of Indian Machine Tools Sector 63

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List of Boxes

No. Title Pg. No.

1. Lines of Credit : A Market Entry Mechanism for 112

Capital Goods Industry2. Assessment of Conformity Standards for Machineries 113

in USA and Europe


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INTRODUCTION

Capital goods industry is thebackbone of the manufacturingactivity. A vibrant capital goodsindustry is a pre-requisite to propelthe growth of the manufacturingactivity in any country.

A study commissioned by theGovernment of India1 has definedcapital goods as plant machineriesfor agricultural, industrial andcommercial segments of economicactivities that have economic assetlife of over 3 years.

Considering the list of itemscovered under the head capitalgoods in calculation of IIP, this studyhas analysed major segments suchas machine tools, textile machinery,electrical machinery, earthmovingand construction machinery, andprocess plant equipments.

GLOBAL SCENARIO

In value terms, the global capitalgoods industry is estimated to havegenerated total revenue of US $ 4.5trillion in 2006, according to a report

by Datamonitor. The capital goodsindustry has seen fluctuations in itsgrowth rate over the past few yearsand experienced a CAGR of 2.7%during the period 2002-2006. United

States is the major countryaccounting for 31% of the globalmarket value in 2006. Europe as aregion accounted for around 28%,followed by the Asia-Pacific region(27%). Globally, trade in capitalgoods2 was valued at over US $1.5 trillion in 2006. Thus, the capitalgoods trade accounts for 12% in

world merchandise trade and17.5% in world trade inmanufactures. The share of exportsin total world production isestimated to be one-third. Germanyis the largest exporter of capitalgoods in the world accounting for13% of global exports in 2006.China and the USA come next withshares of 12% and 11%,respectively.

According to a study by UnitedNations Industrial DevelopmentOrganisation (UNIDO), Japan is thelargest manufacturer of electrical

EXECUTIVE SUMMARY

1 Department of Industrial Policy and Promotion, Ministry of Commerce andIndustry, Government of India.

2 WTO statistics


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machinery and apparatus (ISICCode 31) in 2005, with a share of55.2%. Other major producers wereUSA (10.0%), China (8.9%),

Germany (6.9%) and France (2.6%).India holds a share of 1.7% in globalproduction of electrical machineryand apparatus in 2005. Amongstdeveloping countries, China is thelargest producer with a share of 55%in cumulative production ofdeveloping countries, followed byIndia with a share of 10.2%, and

Brazil (7.2%).In the case of other machinery

and equipments (ISIC 29), whichmainly consisted of general purposemachinery (engines, turbines,pumps, compressors, taps, valves,bearings, gears, ovens, furnaces,lifting and handling equipments) andspecial purpose machinery (such as

agricultural machinery, machinetools, metallurgical machinery,mining / quarrying / constructionmachinery, textile / leathermachinery, and food processingmachinery), USA is the worldsleading producer with a share of19.4% in world production in 2005,followed by Japan (15.6%),Germany (14.9%) and China (7.3%).

India is ranked at 15th position inworld production with a share of1.4%. Amongst developingcountries, China is the majorproducer of non-electrical machineryitem (ISIC 29) with a share of 33.8%in 2005. India is fourth largestmanufacturer with a share of 6.7%

in the total production of developingcountries.

Machine Tools

The total production of machinetools by the top 29 global producerswas more than US $ 70 billion in2007, experiencing a growth of18% over the previous year. Japanis the largest producer of machinetools accounting for 20% of theworld production. Other majorproducers are Germany (18%),

China (14%), Italy (10%), Korea(6.5%) and Taiwan (6%).

In terms of consumption ofmachine tools, China tops the listwith total consumption worth nearlyUS $ 13 billion, showing a growth of20% over the previous year. Japanand USA comes next with aconsumption level of more than US$

7 billion and US$ 6 billionrespectively. The consumption levelfor India is around US$ 1 billion, thusbeing the 11th largest consumer ofmachine tools.

World export of machine tools isestimated to be over US $ 40 billionin 2007, a growth of 18% over theprevious year. The export orientation

of global machine tool industry thusworks out to over 50% in 2007.Germany is the largest exporter ofmachine tools in the world; exportingmachine tools valued more than US$9 billion in 2007. Germany exportedover 70% of its production in 2007.Other major exporters include Japan


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(US $ 7.6 billion), Italy (US $ 4.2billion), Taiwan (US $ 3.4 billion) andSwitzerland (US $ 2.5 billion).

As far as the import isconcerned, China leads the world,with an estimated import value of US$ 6.9 billon in 2007. The UnitedStates (US $ 4.4 billion), Germany(US $ 3.7 billion) and Taiwan (US $2.8 billion) are other major importers.Amongst developing countries,Mexico and India are emerging asmajor importers of machine tools.

Construction and MiningMachinery

Global construction and miningmachinery industry3 is estimated tohave generated a total revenue ofUS $ 113 billion in 2006. Theindustry had experienced severalyears of decline in growth, sincethe beginning of the decade, butpicked up in recent years. Theindustry experienced a 7% growthin the year 2005, which, however,came down to 4% in 2006. TheCAGR for the industry during theperiod 2002-06 stood at 4.7%.

Construction sector witnessedgrowth both in developed anddeveloping countries during thisperiod. In the developed countries,such as USA and Europe, the growthin construction activity was fuelled byincreased demand for new officespace. In developing countries of

Asia-Pacific and Eastern Europeanregion investment in infrastructureincreased substantially. Increasinggrowth in extractive activities in Africa

region also led the growth in theglobal construction and miningindustry. USA dominates the globalconstruction machinery industry,accounting for almost 39% of theworld market. Asia-pacific (30%) isthe second largest region, followedby Europe (28%).

Industrial MachineryWorld market for industrialmachinery, equipment and suppliesis estimated to be US $ 345 billionin 2006. Asia is the leading marketfor industrial machinery accountingfor around 32% (US $ 109 billion)of world market in 2006. NorthAmerica and Europe are the other

major markets, accounting for 25%share each in the world industrialmachinery market and the industrialmachinery market is expected tocross US $ 500 billion in 2011, aCAGR of 8%.

CAPITAL GOODS INDUSTRYIN INDIA

The capital goods industry is thebackbone of Indias manufacturingsector. India produces wide rangecapital goods, including machineryand machine tools. Some of theprominent capital goods producedin India include heavy electrical

3 Includes construction machinery, farm machinery and heavy trucks.


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machinery, textile machinery,machine tools, earthmoving andconstruction equipment includingmining equipment, road

construction equipment, materialhandling equipment, oil & gasexploration equipment, sugarmachinery, food processing andpackaging machinery, railwayequipment, metallurgicalequipment, cement machinery,rubber machinery, process plantsmachinery & equipments, paper &

pulp machinery, printing machinery,dairy machinery, industrialrefrigeration, industrial furnaces etc.Capacity creation in the Indiancapital goods industry has beengrowing, since liberalization, and intune with the growth in industry.Cumulative foreign directinvestments (actual inflows) in thecapital goods industry amounted to

over US $ 1.6 billion since January2000.

Non Electrical Machinery

Machine Tools

The machine tools sector is one ofthe important segments of thecapital goods industry in India. The

sector is recognized as a providerof cost-effective high quality lean-manufacturing solutions. The sectormanufactures almost the completerange of metal-cutting and metal-forming machine tools. Customizedin nature, the products from theIndian basket comprise

conventional machine tools as wellas computer numerically controlled(CNC) machines.

Total production of machinetools in the country reached the levelof more than Rs. 2000 crores by theend of the year 2006-07, showing agrowth rate of almost 15%, over theprevious year. Export of machinetools has shown a steady increasein the last few years. In the year2006-07, export of machine toolswas worth more than US $ 234million. During the period April November 2007, machine toolsexport stood at US $ 199.28 million,an increase of over 27%, over thesame period in the previous year.USA is the largest market formachine tools exports from India. Inthe year 2006-07, USA accounted for19% (US $ 45.25 million) of Indias

total export of machine tools. Othermajor markets include Germany(8.1%), UAE (5%), Singapore(4.7%), and USA (4.6%).

Textile Machinery

Textile is one of Indias majorexport items contributing to over11% in Indias export earnings.

Indian textile machinery sectorstarted as an offshoot of the textileindustry to cater to the capitalexpenditure demand of the textileunits. the Indian textile machinerysector started producing automatedmachines, with innovation,envisaging growth in capacity


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expansion in the textile industry inthe post-quota regime.

Textile machinery production

has shown steady increase in therecent years. The total production oftextile machinery in the countryincreased from around Rs. 11,750million in 2002-03 to more thanRs.30,000 million by2007-08. Thesuccess of the textile machinerysector depends largely ontechnology and branding.

Considering that many Indian textilemachinery manufacturers havestarted in-house research anddevelopment activities, the sector ispoised for further growth. Recently,leading textile machinerymanufacturers have collectivelyestablished a research anddevelopment centre at the IndianInstitute of Technology, Mumbai.

Construction and Mining

Machinery

India produces a wide range ofconstruction and mining machinery

such as hydraulic excavators,wheel loaders, backhoe loaders,bull dozers, dump trucks, tippers,graders, pavers, asphalt drum / wet

mix plants, breakers, vibratorycompactors, cranes, fork lifts,dozers, off-highway dumpers (20Tto 170T), drills, scrapers, motorgraders, rope shovels etc. Theyperform a variety of functions likepreparation of ground, excavation,haulage of material, dumping/laying

in specified manner, materialhandling, road construction etc.

Indian construction and mining

machinery sector is also exporting tovarious countries, includingdeveloped countries such as USA,UK, and Singapore. Major items ofexport include moving, grading, pile-extracting machineries.

Process Plant Machinery

The process plant machinery and

components sector in India is aheterogeneous segment of capitalgoods industry. The sector catersto a wide range of processindustries like oil and gas,petroleum refining, petrochemicals,chemicals, fertilizers,pharmaceuticals. metal processing,cement, paper, sugar, and foodprocessing. The sector designs and

manufactures a wide range ofequipment and systems such as:pressure vessels, columns, towers,heat exchangers, multi-tubularreactors, evaporators, crystallizers,dryers, road/rail tankers, storageequipments, equipment for dairyand food processing, mineralbeneficiation equipments, rotary

kilns, equipments for solid-liquidseparation, equipment for waterand waste water treatment.

Few of the Indian companieshave made their mark in the exportarena due to their manufacturing skilland quality. These companies areequipped with modern machinery


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and are producing sophisticatedequipments such as high-pressureheat exchangers, spiral heatexchangers, multi-wall vessels, air-

fin coolers, multi-tubular reactors etc.Exports in the last couple of yearshave grown at a CAGR of 36%, whilethe import growth (CAGR) has beenaround 49%.

Electrical Equipments andMachinery

The electrical equipment and

machinery sector comprises arange of products, such astransformers, switchgears, motors,generators and control equipment.Electrical equipment and machineryis principally used in the powerindustry (generation, transmissionand distribution) as well as in othermanufacturing industries, such as

automobiles, cement, steel,petrochemicals and refining.

Transformer Sector

Transformer is a crucial componentin transmission and distribution ofelectricity. The transformer industryis usually divided into distributiontransformers, power transformersand other types of special

transformers for welding, traction,furnace etc.

Besides catering to the domesticdemand, India is exportingtransformers to over 100 countriescovering USA, Europe, Syria,Malaysia, Singapore, Bangladesh,Oman and China. In the year 2006-

07, Indias export of transformersamounted to US $ 645 million, agrowth of 74% over the previousyear.

India is also an importer ofelectric transformers; in the year2006-07, India importedtransformers valued US $ 557million, a growth of 37% over theprevious year. Indias major sourcecountries include China, Germany,USA, Singapore and Japan. Chinaalone accounts for about 40% of

Indias total transformer imports.

Switchgear and Control gear

Sector

Switchgears and control gears arerequired for transmission anddistribution of power and arenecessary at every switching pointin power transmission and

distribution system. This sector isfully developed and matured one inIndia, producing and supplying awide range of products catering tothe needs of households,commercial and power sector, forentire voltage ranging from 240 Vto 800 KV. India has been exportingswitchgears and control gears to

various countries. In the year 2006-07, India exported switchingapparatus (not exceeding 1000v)valued at US $ 234 million, agrowth of 28% over the previousyear. In addition, India alsoexported switching apparatus(exceeding 1000v) worth US $ 90million in 2006-07, a growth of 34%


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over the previous year. Majormarkets include UK, USA,Germany, UAE, Philippines,Australia and Hong Kong.

India is also an importer ofswitchgears and control gears. In theyear 2006-07, India importedswitchgears and control gears (notexceeding 1000v) valued US $ 462million in 2006-07. In the same year,the import of switchgears (exceeding1000v) amounted to US $ 51 million.

Capacitors

Capacitors are used for correctingpower factor at the consumer end,to improve the efficiency of thesystem and reducing unwantedloses. LT capacitors, HT capacitors,running capacitors, electrolyticmotor starter capacitors, andinduction furnace capacitors aresome of the capacitorsmanufactured in India. Indiasexport of electric capacitorsamounted to US $ 39 million in2006-07, witnessing a growth of56% over the previous year. USAis the major market for Indianelectric capacitors with a share of11.6%, followed by Spain and Qatar

(10% each), Turkey and UAE (6%each).

Motors and Generators

The generator industry has twosegments: portable sets, which runon kerosene, petrol and diesel; andstationary sets, which run primarily

on diesel. Large number of playersare engaged in production ofgenerators, particularly in the lowerKVA generator (3 to 15 KVA)

segment. This segment ischaracterized by simple technologyand hence dominated by the smalland medium enterprises (SMEs). Inthe year 2006-07, Indias export ofelectric motors and generators (HSCode 8501) was valued at US $133 million, whereas Indias exportof electric generating sets and

rotary converters (HS Code 8502)amounted to US $ 361 million. USAis the largest market for export ofboth the categories. On the otherhand, Indias import of electricgenerating sets (HS Code 8502)was valued at US $ 114 million, andthe import of electric motors andgenerators (HS Code 8501) wasvalued at US 244 million. China,

Germany, USA and South Koreaare major importers under both thecategories.

In sum, the capital goodsindustry in India has witnessedturnaround since last few years. Theindex of industrial production iswitnessing an increasing trend since2002-03. Exports by various sub-

segments of the capital goodsindustry is also on the increase,especially with regard to machinetools under the category of non-electrical machinery; andtransformers, switchgears, electricgenerating sets under the electricalmachinery category. India is net


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importer in most of the products, asthe leading players are expandingtheir capacities and the country is onthe manufacturing growth path.

EXIM BANKS SUPPORT TOINDIAN MACHINE TOOLSSECTOR: CASE STUDY

The economic reforms increasedthe competition to Indian industry,both in domestic and foreignmarkets. This resulted intransformation of Indian

manufacturing sector, which hasbeen increasingly seekingtechnological solutions that helpthem in sharpening theircompetitiveness, both in domesticand international markets. At this

juncture, Export-Import Bank ofIndia (Exim Bank) identified Indianmachine tools sector a sub-segment of Indian capital goodsindustry and brought out a studyidentifying appropriate strategies tostrengthen this sector and therebyhelp contribute to the growth ofIndian manufacturing sector. Onesuch recommendation made by thestudy was that the Indian MachineTools Manufacturers Association(IMTMA) to adopt a cluster

approach, seeking support fromUnited Nations IndustrialDevelopment Organisation (UNIDO)and the Government of India (thethen Department of Small ScaleIndustries) to help the member-firms in overcoming theweaknesses by adopting bestpractices in the industry across theglobe.

Following this recommendation,at the instance of the industry,National Programme forDevelopment of Indian Machine ToolIndustry (NPDMI) was launched inDecember 2002, as a cooperativeeffort of UNIDO, Government ofIndia, Exim Bank and IMTMA with theaim of strengthing the competitiveposition and technological andmarket development capacity ofplayers, and establishing Made inIndia label in machine tools.

A Steering Committee wasformed drawing expertise fromvarious fields to guide successfulimplementation of the project. EximBanks representation in theCommittee significantly contributedto the successful implementation ofthe programme. Range of activitieswas undertaken to update the

manufacturing and managementpractices of the players in Indianmachine tools sector. Evaluation ofmachine tool technology and markettrends in USA and Europe wasundertaken through surveys. Visit toEMO Milan (a biennial trade show formachine tools held in Italy) helpedthe industry to study the globaltechnological trends in the machinetools sector, and undertake gapanalysis of technology in Indianmachine tools sector. Learningthrough participation in internationaltrade shows were supplemented withshowcasing the capabilities of Indianmachine tool manufacturers in India.To bridge the technology gap,especially in the small and medium


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segment, a series of advancedmachine tool design courses wereorganized at International Centre forAdvancement of Manufacturing

Technology (ICAMT), Bangalore. Itmay thus be fair to surmise that as aresult of range of such activities, theproduction and export of Indianmachine tools sector have gone upover the years. Made in India labelof Indian machine tool sector hasgained international reputationmaking the sector more competitive

in domestic as well as internationalmarkets. UNIDO declared thisinitiative as a success story

Exim Bank has been closelyassociated with the export efforts ofIndian machine tools sector. TheBank has been supporting themachine tool sector to moderniseand upgrade their production

facilities, adaptation of technologyand internationally acceptablestandards through its variousfinancing products and services. TheBank under its export facilitationprogramme, has supported theinitiative of IMTMA in setting up ofthe Bangalore InternationalExhibition Centre (BIEC)

INDIAN CAPITAL GOODSINDUSTRY: MARKETANALYSIS AND EXPORTPOTENTIAL

Globally, the capital goods industryis worth around US $ 4.5 trillion.Germany and USA are traditionally

large suppliers of different sub-segments of capital goods. Of late,Asian countries such as China,Taiwan and South Korea have

become major players in productionand export of capital goods.Consumption of capital goods hasalso increased substantially indeveloping Asian countries due tothrust given to the value-addedmanufacturing.

Under the machine toolscategory, though there has been

growth in exports, in the last threeyears, the import of machine toolshave outgrown in several sub-segments, bringing down the export-import ratio (Annexure - ). Thisindicates that there is significantroom for market expansion in thedomestic market. Market analysesreveal that major developing country

importers of machine tools in theworld include Mexico, Thailand,Turkey, Poland and China. Indiasmajor developing country marketsfor machine tools have been UAE,Nigeria and Thailand. In addition,India exports machine tools to hostof developing countries of Africa andWest and South Asia, such asKenya, Sudan, Bangladesh, Iran and

Sri Lanka. Though some of the sub-segments of machine tools areexported to leading developingcountry markets, in many cases theshare of India in these markets areinsignificant. Thus, careful targetingof export markets need to beundertaken by the machine tool


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industry for penetration in newmarkets and expansion of marketshare in existing markets.

The technology upgradationfund scheme of Government of Indiahas contributed to the capacityexpansion in the domestic textilesector significantly. Most of suchcapacity expansion has occurredthrough imports. As a result, theexport-import ratio of textilemachinery sector has also comedown significantly in the last three

years (Annexure -), especially in sub-segment, non-woven machinery.Major developing country importersof textile machinery in the worldinclude China, Hong Kong, Turkeyand Pakistan. On the other hand,Indias major developing countrymarkets for textile machinery includeBangladesh, Indonesia and UAE.

There is ample scope for exportingto other developing countries ofSouth Asia, especially to Pakistanand Sri Lanka. In addition, countriessuch as Turkey and Egypt could alsobe targeted for expanding exportsand enhancing market share.

Construction and mining

equipmentis another area in which

the export-import share has comedown in the last three years, exceptunder the product group pulley tackleand hoists (HS Code 8425). Thisindicates that there is significantroom for capacity expansion inconstruction and mining equipmentsector also. Amongst developing

countries, China, Mexico andIndonesia are the leading importersin the world. While developedcountries cater to most of the importrequirements of these developingcountries, India could explore theopportunities in these countries.Indias export markets include UAE,Kuwait and Qatar in west Asia andAfrican countries such as Kenya,Tanzania, Togo, Tunisia andMauritius. The share of India in theimport of these countries is not

always significant. Thus, thesecountries could be targeted formarket expansion by theconstruction and mining equipmentcompanies in India.

Analysis of process plantmachinerysub-segment revealedthat in some product groups, exportis greater than imports, and export-

import ratio in most such productgroups has also improved in the lastthree years. However, in manyproduct groups, there has beenreduction in export-import ratio.Major developing country importersinclude China, Mexico, Taiwan,Indonesia and Turkey. ThoughIndias exports of process plant

equipments are oriented towardsthese developing countries, thevolume is not consistent with thepotential. Indias major exportmarkets for process plants includeUAE, Saudi Arabia, Nigeria, Kenyaand Vietnam. Except for fewproducts in few countries, Indias


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share is insignificant even in thesemarkets.

Mixed results are also observed

in electrical machinery andequipment sub-segment. While inmost of the product groups theexport-import ratio has increased,reduction has been witnessed inproduct groups such as electricmotors and generators. Majordeveloping country importers in theworld are China, Hong Kong, Taiwanand Mexico. Another interesting

trend in world trade is that there hasbeen significant trade amongst thesecountries, especially China, HongKong and Taiwan trading with eachother. Indias main developingcountry export destinations ofelectrical machinery include UAEand Saudi Arabia. Other developingcountries to which India has been

exporting the electrical equipmentsinclude Qatar, Mali, Nigeria, Syriaand Philippines. However, Indiasshare in total import of many of thesecountries is not significant, indicatingthe opportunities for marketexpansion in these countries.

In sum, the analyses show thatthere need to be capacity expansion

in the Indian capital goods industryto cater to the rising demand, bothfrom domestic and export markets.Technological solutions, throughresearch and development, are to beoffered to capture new markets;effective market enhancement andcustomer retention strategies arerequired to sustain and expand in theexisting developing country markets.

CHALLENGES ANDSTRATEGIES

Challenges

Technological Competency

The technologies used forproduction as also in assembly ofIndian capital goods are not alwaysupdated in tune with the globaltechnological trends. While thereare some players who havetechnological competencies,

especially in design capability,application innovation and processinnovation, the technologicalcapabilities of large number ofplayers, especially in the SMEsector, are limited. In addition, thetechnological competencies ofplayers in the SME sector, whoprovide components or

intermediates to original equipmentmanufacturers are also limited.Transfer of technology from otherdeveloped countries has also notbeen significant despiteliberalization of policies fortechnology transfer and foreigndirect investments.

Import of Second Hand

Capital Goods

Under the Export Promotion CapitalGoods (EPCG) Scheme, import ofsecond hand capital goods ispermitted in India for pre-production, production and post-production activities. The capitalgoods that may be imported underthis scheme include spares


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(including refurbished/reconditioned spares), tools, jigs,fixtures, dies and moulds. Import ofcapital goods under this scheme

would attract only 5% customs dutysubject to an export obligation,equivalent to 8 times of duty savedon the capital goods imported. Itmay be mentioned that machinetools, refinery equipments,construction and mining machinery,plastic processing machinery andprinting machinery are some of the

second hand capital goodsimported into India. During theperiod April December 2007, over14300 EPCG applications havebeen sanctioned with licenses /authorizations, with a CIF dutycredit of nearly Rs. 12,000 crores.While the main objective of thisscheme is to help modernization ofthe industry, by offering duty

concessions, the imported capitalgoods pose stiff competition to theindigenous capital goodsmanufacturers.

Cost Competitiveness

The Indian capital goods industrylargely uses crucial inputs such asiron and steel that are of domestic

origin. Over the years, there hasbeen significant increase in cost ofinputs, but the players in thisindustry are unable to pass on theprice increase to the endconsumers, due to competitionfrom imports.

The capital goods industry also

has high incidence of taxation; a

number of indirect duties (such as

excise duty, octroi, entry tax, sales

tax and service tax) are levied adding

up to the end user cost. This makes

the indigenous supplies costlier vis-

-vis imported capital goods. Some

estimates have put the cost

disadvantage, due to such levies to,

an extent of over 20%.

Delivery Schedules

It may be mentioned that most of

the capital goods are not supplied

off-the-shelves and are custom-

made to suit the requirements of

end users. Thus, the delivery

schedule to cater to the order is

longer than many other engineering

products. However, due to various

reasons, including infrastructure

constraints, the delivery schedules

of Indian capital goods suppliers

are longer than their foreign

counterparts. Industry sources

estimate that the delivery time of

Indian capital goods manufacturers

are two times longer than their

global counterparts affecting the

competitiveness in delivery

schedules. In such circumstances,

imported capital goods are

preferred over Indian capital goods,

though they are technologically and

functionally comparable with

international standards.


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Strategies

Transformation in Objective

and Approach

Sale of capital goods is not an one-time business but require technicalsupport in transportation, erection,staff training (for operation andminor repairs), continuous servicemaintenance and periodicalupgradation in technology. All overthe world, the capital goodsmanufacturers are turning

themselves as engineering servicescompanies offering turnkeysolutions to retain the customers.Players in Indian capital goodsindustry may also increasinglyreorient their approach to transforminto service based organizations.Such service orientation would helpthe industry in sharpening thecompetitive advantage.

Strengthening Research and

Development

Consistent with global trends,Indian capital goods industry alsoneeds to grant highest priority toinnovation and research anddevelopment. The R&D intensity offirms in Indian capital goods

industry is less than 1%, far belowthan the R&D intensity of othersectors such as pharmaceuticalsand automobiles. Precisionmeasuring, materials engineering,and process innovation are someof the areas for strengthening R&Din Indian capital goods industry. It

is also important to increase thelinkages between the publicresearch systems and industry tofacilitate technology transfer and

enhance the responsiveness of thecapital goods industry.

Common R&D facilities underthe cluster approach or under thepublic-private partnership approachwould enhance the technologicalstrengths of the Indian capital goodsindustry. In this context, it may bementioned that the textile machinery

industry, with the support ofacademia and Government, has setup a R&D center at Indian Instituteof Technology (IIT), Mumbai. It isreported that textile engineeringrelated projects undertaken by post-graduate students in IIT, Mumbai, inthis R&D center, would be useful inproduct development and innovation

in process engineering in the textileengineering industry. Such R&Dcenters may be encouraged tocontribute to the technologydevelopment in other capital goodssub-sectors also.

Strengthening Technological

Competencies

In order to enhance productivity,product quality and operatingefficiency, the players in the sectorneed to constantly upgrade theirtechnological competencies. TheDepartment of Heavy Industry,Government of India, has proposedto undertake a comprehensivescheme for technology upgradation


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and R&D facilities for modernizationof capital goods industry. Theproposed scheme may endeavourto help the players in the Indiancapital goods industry in trackingglobal trends in product andprocess technologies, with specificobjective of cost control, besidesenhancing productivity, energyefficiency, eco-friendliness, productquality, operating flexibility andefficiency. The scheme may alsohelp enhance the usage of

information technology thatprovides convenience to thecustomers, and help enhancecustomer base and new avenuesfor profitability. Such R&D Centresmay also be conceived as trainingplatforms for skill upgradation of theshop-floor technicians in the capitalgoods industry.

Fund for Technology

Upgradation in Capital GoodsIndustry

It may be fair to surmise that thereare capacity constraints at thefollowing two levels in the capitalgoods industry:

a) Capacity constraints to cater to

the demand in volume,considering the growthmomentum in the industrialsector as also the overalleconomic growth;

b) Capacity constraints to cater tothe technological demands that

may improve efficiency inoperations and cost control.

While fiscal incentives would

help attract investments in the capitalgoods industry in general, addingproduction capacity, a fund forsupporting technology upgradation inthe capital goods industry may beconsidered in order to achievequality, standardization andbenchmarking with internationalproducts.

Enhancing Market Position

Analysis of trends in imports bymajor countries reveals that thereis vast scope for market expansionin many developing countries towhich India is currently exporting.Various market entry strategiesmay be adopted including attainingmarket leadership, through

acquisition and consolidation, andachieving economies of scale inprice sensitive markets. Mergersand acquisitions routes may also beadopted by the players in the Indiancapital goods industry, to build andnurture brands in export markets.Value-based supply chain may becreated through building

customized products and offer ofengineering services to createexclusiveness in competitivemarkets. Sales approach should betransformed to provide solutionsthat add value to the clients throughenhancement of process efficiencyand product quality.


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Introducing New Product

Lines

Over the years, players in the

Indian capital goods industry hasbeen diversifying the product linesoffered with the objective ofmitigating risks associated withbusiness and cyclical trends.However, more focus should begiven in building new generationmachines that may be in demandin future. Such new generationmachines should have greater

flexibility to produce a variety ofproducts. Such new generationmachineries also createopportunities for offeringengineering services that are lesssensitive to business and cyclicalfluctuations.

Tapping Outsourcing

OpportunitiesGlobally, OEMs are increasinglyoutsourcing their design andengineering services to developingcountries like India to add value atlower cost and to focus on theircore competencies. According to aNASSCOM study, spending onengineering services across the

world is estimated to be US $ 750billion in 2004, which is expectedto cross US $ 1 trillion in 2020.While only 15-20 billion (2% of totaldemand) is being off-shored atpresent, the off-shoring market isexpected to grow to US $ 150billion to US $ 225 billion (around20% of total demand) by 2020.

Capital goods industry, one of thepotential players in India in theengineering services segment,holds significant potential to tap thegrowing business opportunities inthe outsourcing arena.

Increasing Interaction withEnd-Users

Capital goods manufacturers alsoneed to closely interact with end-users (especially sectors such asautomobile, defense, aeronatics,space, metals, construction,textiles, chemicals andpharmaceuticals), to understand thelatest trends in manufacturing; theexpectations of end users inperformance of machinery; areasfor improvement in processefficiency, energy efficiency, productquality, and cost control strategies.

The trends in shifting ofmanufacturing base fromdeveloped to developing countriescould also be unearthed throughinteractions with end-userindustries. Such interactions wouldhelp the players in capital goodsindustry to source appropriatetechnologies, in addition to makingplans towards capacityenhancement to cater to thegrowing demand.

Thrust on Safety Standards

and Product Liability

Exporting to USA and EU

requires the machinery

manufacturers to carefully consider


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the requirements for both regulatoryand liability protection. USA has acomplex, multi-tiered regulatoryenvironment for machinery and the

manufacturers need to define themethod of indicating compliance withregulatory issues in most acceptablemanner. The Occupational Safetyand Health Administration (OSHA),the agency in USA, which isresponsible for regulating machineryused in the workplace, has definedthe product requirements and safety

standards, as also the periodicity ofevaluating safety audits. In EuropeanUnion, there are host of Directives,such as Machinery Directive 98/37/EC, Lifts Directive (95/16/EC),Directive on Personal ProtectiveEquipments 89/686/EEC, Directiveon Noise Emissions 2000/14/EC,governing the safety standards ofcapital goods. In addition the EU

Directive concerning Liability forDefective Products make EUimporters liable for the products theyimport, including the machinery theyprovide to their employees for work.Exporters of capital goods,particularly to USA and EU shouldcarefully follow the trends in productstandards and conform their

products to such safetyrequirements.

Accelerating Investments inInfrastructure

Growth in investments ininfrastructure sectors, especially forconstruction of road / rail network,bridges and dams, ports (both air

and sea), and handling facilities insuch ports and power stationsboost the demand for capitalequipments. This would be

significant in the case of electricalmachinery (investments in powersector) and construction / earthmoving equipments (investments inroad / rail infrastructure), whichwould have direct impact. Inaddition, investments ininfrastructure would boost themanufacturing sector and there by

provide growth opportunities forcapital goods such as machinetools, textile machinery and processplant machinery.

The consultation paper onInvestment in Infrastructure Duringthe Eleventh Five Year Plan, hasestimated that about US $ 500 billioninvestments are required in the

Indian infrastructure sector to sustainthe GDP growth of 9%, during theEleventh Five Year Plan. This worksout to approximately 2.3 times higheras compared to the actualinvestments in the infrastructuresector that have taken place in theTenth Five Year Plan. If this volumeof investment demand in theinfrastructure sector is met

systematically, the capital goodsindustry would get furthermomentum in demand.

Accelerating Capital

Investments in IndianManufacturing Sector

Government may also consideroffering incentives to the


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manufacturing sector forupgradation of technology andequipments. The incentives thatmay be considered are tax

concessions, accelerateddepreciation allowances and exciseduty relief. Such strategy may beparticularly relevant for SME sectorthat would be encouraged toupgrade their technologicalcompetence, manufacturingprocess and product quality.

IN SUMIndia should leverage its inherentstrengths, such as availability ofpool of skilled workforce, low costoperations and existence of largedomestic demand, in strengtheningcapital goods industry. Leveragingthe abundant availability of softwareskills in engineering design and

drawing would strengthentechnological competitiveness.Continuous training and skillupgradation would help the humanresources in the industry to capturethe trends in new processes andtechnologies.

Scale economies would positionIndia further as a cost-effective

manufacturing base for capitalgoods. Strategies such astransformation of the shop-floors fullyflexible to produce different types of

machineries and redesigning themachining process to accommodateusage of common components /parts in various types of machineries,would contribute to the scaleeconomies significantly.

Technology sourcing fromcountries such as Germany,Switzerland, Italy and Spain may beencouraged, especially in the contextof shift in manufacturing base fromdeveloped to developing countries.

The strengths of machiningtechnologies in other developingcountries such as China and Taiwanshould be effectively adapted byIndian players.

Changing trends in productquality and safety standards shouldbe monitored and complied tosustain market presence in

developed countries. Developingcountries of Asia, Africa, LatinAmerica and central and east Europeshould be targeted for marketexpansion as these countries arehaving almost similar raw materialand manufacturing base, like India.Effective supply chain managementand thereby optimizing the productdelivery schedules should be giventop priority to retain the existingcustomers as also to fetch newcustomers.


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Capital goods industry is thebackbone of the manufacturingactivity. A vibrant capital goodsindustry is a pre-requisite to propelthe growth of the manufacturing

activity in any country. InternationalStandard Industrial Classification(ISIC) of all economic activities(Revision 3) classifies most of thecapital goods items under threedivisions (29, 30 and 31) with thefollowing codes:

291 - Manufacture of GeneralPurpose Machinery

292 - Manufacture of SpecialPurpose Machinery

293 - Manufacture of DomesticAppliances

300 - Manufacture of Office,Accounting and ComputingMachinery

311 - Manufacture of ElectricMotors, Generators, andTransformers

312 - Manufacture of ElectricityDistribution and ControlApparatus

313 - Manufacture of InsulatedWires and Cables

314 - Manufacture ofAccumulators, Primary

Batteries315 - Manufacture of Electric

Lamps and LightingEquipments

319 - Manufacture of OtherElectric equipments

In addition, divisions 32(Manufacture of radio, television and

communication equipment andapparatus) and 33 (Manufacture ofmedical, precision and opticalinstruments) are also considered ascapital goods, mainly used inelectronics or services industries.

A study commissioned by theGovernment of India4 has definedcapital goods as plant machineries

for agricultural, industrial andcommercial segments of economicactivities that have economic assetlife of over 3 years.

The Index of IndustrialProduction (IIP) compiled by the

1. INTRODUCTION

4 Department of Industrial Policy and Promotion, Ministry of Commerce andIndustry, Government of India.


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Central Statistical Organisation(CSO), Government of India, hasclassified capital goods under use-based classification having a weight

of 9.2% in IIP. Over 50 items arecovered under the capital goodsindustry. The list of products alongwith the corresponding weights in IIPis given at Annexure -1.

Considering the list of itemscovered under the head capitalgoods in calculation of IIP, this studyhas analysed the major segments

such as machine tools, machineryand equipments (such as textilemachinery, electrical machinery,earthmoving and constructionmachinery, and process plantequipments).


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According to a study by United

Nations Industrial DevelopmentOrganisation (UNIDO), Japan is the

largest manufacturer of electricalmachinery and apparatus (ISIC

Code 31) in 2005, with a share of55.2% in the year 2005. Other majorproducers were USA (10.0%), China

(8.9%), Germany (6.9%) and France(2.6%). India holds a share of 1.7%

in global production of electrical

machinery and apparatus in 2005.Amongst developing countries,

China is the largest producer with a

share of 55% in cumulativeproduction of developing countries,

followed by India with a share of10.2%, and Brazil (7.2%).

There has been a shift inproduction of electrical machinery

and apparatus in the last one decadewith many of the Asian countriesmoving up in both the ranking andmarket share. While Japan hasincreased its share from 44.3% in1995 to 55.2% in 2005, China andIndia have increased their shares,from 3.9% and 0.9% in 1995, to 8.9%and 1.7%, respectively. Both Chinaand India have also moved up their

ranking; while China has moved upfrom fifth position to third position,

SOURCE: International Yearbook of Industrial Statistics, 2007, UNIDO.

Exhibit 1:LEADING PRODUCERS OF ELECTRICAL MACHINERY AND

APPARATUS (ISIC 31)

2. CAPITAL GOODS INDUSTRY -

GLOBAL SCENARIO


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India has moved up from eleventhposition to sixth position.

In the case of other machinery

and equipments (ISIC 29), whichmainly consist of general purposemachinery (engines, turbines,pumps, compressors, taps, valves,bearings, gears, ovens, furnaces,lifting and handling equipments) andspecial purpose machinery (such asagricultural machinery, machinetools, metallurgical machinery,mining / quarrying / construction

machinery, textile / leathermachinery, and food processingmachinery), USA is the worldsleading producer with a share of19.4% in world production in 2005,followed by Japan (15.6%),Germany (14.9%) and China (7.3%).India is ranked at 11th position inworld production with a share of

1.4%. Amongst developingcountries, China is the major

producer of non-electrical machineryitems (ISIC 29) with a share of 33.8%in 2005. India is fourth largestmanufacturer with a share of 6.7%

in the total production of developingcountries.

In value terms, the global capitalgoods industry is estimated to havegenerated total revenue of US $ 4.5trillion in 2006, according to a reportby Datamonitor. The capital goodsindustry has seen fluctuations in itsgrowth rate over the past few years

and experienced a CAGR of 2.7%during the period 2002-2006.

United States is the majorcountry accounting for 31% of theglobal market value in 2006. Europeas a region accounted for around28%, followed by the Asia-Pacificregion (27%).

Globally, trade in capital goods5

was valued at over US $ 1.5 trillion

SOURCE: International Yearbook of Industrial Statistics, 2007, UNIDO.

Exhibit 2:LEADING PRODUCERS OF OTHER MACHINERY AND

EQUIPMENTS (ISIC 29)

5 WTO statistics


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in 2006. Thus, the capital goodstrade accounts for 12% in worldmerchandise trade and 17.5% inworld trade in manufactures. Theshare of exports in total worldproduction is estimated to be one-third. Germany is the largest exporterof capital goods in the worldaccounting for 13% of global exportsin 2006. China and the USA comenext with shares of 12% and 11%,respectively.

The trends in production and

trade in select capital goods sub-segments are discussed below:

MACHINE TOOLS

The total production of machinetools by the top 29 global producerswas more than US $ 70 billion in2007, experiencing a growth of

18% over the previous year. Japanis the largest producer of machinetools accounting for 20% of theworld production. Other majorproducers are Germany (18%),China (14%), Italy (10%), Korea(6.5%) and Taiwan (6%). In fact,following the unification ofGermany, the country has remainedas worlds second-largest producer,except in 1999 and 2002, when itedged out Japan for the numberone slot.

In terms of consumption ofmachine tools, China tops the listwith total consumption worth nearlyUS $ 15 billion, showing a growth of17% over the previous year. Japanand Germany comes next with aconsumption level of more than US$7 billion each. The consumption level

SOURCE: Datamonitor

Exhibit 3:REVENUE GENERATION AND GROWTH IN GLOBAL CAPITAL

GOODS INDUSTRY


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for India is around US$ 1.8 billion,thus being the 9th largest consumerof machine tools. The growth rate of

consumption is in fact highest amongthe top 20 countries (49%).

Table 1:WORLD PRODUCTION OF MACHINE TOOLS 2007

Share of

Rank Country Production Cutting Forming(in US$ Million) Tools Tools

1 Japan 14,443.50 88% 12%

2 Germany 12,725.40 76% 24%

3 China 10,090.00 71% 29%

4 Italy 7,272.70 49% 51%

5 South Korea 4,550.00 68% 32%

6 Taiwan 4,378.00 80% 20%

7 United States 3,578.00 79% 21%

8 Switzerland 3,323.80 85% 15%

9 Spain 1,436.80 67% 33%

10 Brazil 1,157.80 81% 19%

SOURCE: Gardner Publication Inc.

Table 2:WORLD CONSUMPTION OF MACHINE TOOLS

(US $ Million)

Rank Country 2007 2006 Growth (%)

1 China 15,390.0 13,113.0 17.0

2 Japan 7,619.4 7,858.6 -3.0

3 Germany 7,252.1 5,139.7 41.0

4 USA 6,171.8 6,361.2 -3.0

5 Italy 5,056.0 3,786.2 34.0

6 South Korea 4,150.0 4,020.0 3.0

7 Taiwan 3,785.0 2,887.0 31.0

8 Brazil 1,822.2 1,423.2 28.0

9 India 1,774.8 1,191.2 49.0

10 Mexico 1,669.6 1,245.9 34.0



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In terms of per-capitaconsumption6, however, Switzerlandtops the list with the per capitaconsumption being US $ 172 in2007. Other major countries in termsof per capita consumption includeTaiwan (US $ 166), Austria (US $ 97),Germany and Italy (US $ 87 each).

World export of machine tools isestimated to be over US $ 40 billionin 2007, a growth of 18% over theprevious year. The export orientationof global machine tool industry thus

works out to over 50% in 2007.Germany is the largest exporter ofmachine tools in the world, exportingmachine tools valued more than US$9 billion in 2007. Germany exportedover 70% of its production in 2007.Other major exporters include Japan

(US $ 7.6 billion), Italy (US $ 4.2billion), Taiwan (US $ 3.4 billion) andSwitzerland (US $ 2.5 billion).

As far as the import isconcerned, China leads the world,with an estimated import value of US$ 6.9 billon in 2007. The UnitedStates (US $ 4.4 billion), Germany(US $ 3.7 billion) and Taiwan (US $2.8 billion) are other major importers.Amongst developing countries,Mexico and India are emerging asmajor importers of machine tools.

CONSTRUCTION AND MININGMACHINERY

Global construction and miningmachinery industry is estimated tohave generated a total revenue ofUS $ 113 billion in 2006. The

Table 3:WORLD EXPORT OF MACHINE TOOLS

(US $ Million)

Rank Country 2007 2006 Annual Growth

1 Germany 9,167.80 7,516.00 22%

2 Japan 7,610.10 6,513.00 17%

3 Italy 4,207.60 3,318.70 27%

4 Taiwan 3,408.00 2,964.00 15%

5 Switzerland 2,457.50 2,236.70 10%

6 South Korea 1,800.00 1,450.00 24%

7 United States 1,659.80 1,802.30 -8%

8 China 1,600.00 1190.00 34%

9 United Kingdom 922.20 879.20 5%

10 Belgium 873.20 721.30 21%


6 Consumption weighted by population.


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industry had experienced severalyears of decline in growth, sincethe beginning of the decade, butpicked up in recent years. The

industry experienced a 7% growthin the year 2005, which, however,came down to 4% in 2006. TheCAGR for the industry during theperiod 2002-06 stood at 4.7%.

According to Datamonitoranalysis, the upturn is mainly due tothe improved performance of majorend-user industries like construction,

agriculture and manufacturing.Construction sector witnessedgrowth, both in developed anddeveloping countries, during thisperiod. In the developed countries,such as USA and Europe, the growthin construction activity was fuelled byincreased demand for new office

space. In developing countries ofAsia-Pacific and eastern Europeanregion, investment in infrastructureincreased substantially. Increasing

growth in extractive activities in Africaregion also led the growth in theglobal construction and miningindustry.

The largest segment of globalconstruction and mining machineryindustry is earthmoving equipment,which accounts for about 18% of theindustry size. Other major segments

include harvesting equipment (13%),industrial tractors (10%) and otherindustrial rolling machines (8%).Geographically, USA dominates theglobal construction machineryindustry, accounting for almost 39%of the world market. Asia-pacific(30%) is the second largest region,

Table 4:WORLD IMPORT OF MACHINE TOOLS

(US $ Million)

Rank Country 2007 2006 Annual Growth1 China 6,900.00 7,243.00 -5%

2 USA 4,253.60 4,474.60 -5%

3 Germany 3,694.50 2,535.40 46%

4 Taiwan 2,815.00 2,010.00 40%

5 Italy 1,990.90 1,397.40 42%

6 Mexico 1,544.80 1,397.40 34%

7 South Korea 1,400.00 1,358.00 3%

8 India 1,317.80 837.1 57%9 France 1,252.00 1,071.60 17%

10 United Kingdom 1,178.30 921.60 28%



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followed by Europe (28%), in theworld, in production of constructionand mining machinery.

Caterpillar, Inc, USA, is one ofthe major firms in the constructionmachinery sector. The company haspresence spanning across the world.

Few other major players include:Deere & Co., CNH Global, andKomatsu. Deere & Co. operates inUSA and Canada. It specializes inmanufacturing and distribution ofagricultural equipments, constructionand forestry equipment andcommercial and consumer turfequipment.

According to Association ofEquipment Manufacturers in USA,the growth outlook for theconstruction equipmentmanufacturers would be of the orderof 8% in the year 2008, as comparedto the estimated growth of 9.5% in

2007. Earthmoving equipment andlifting equipment are the two sub-segments that have tremendouspotential for growth.

INDUSTRIAL MACHINERY

World market for industrialmachinery, equipment and suppliesis estimated to be US $ 345 billion

Exhibit 4:GLOBAL CONSTRUCTION AND MINING MACHINERY INDUSTRY:

VALUE & GROWTH

SOURCE: Datamonitor


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in 2006. Asia is the leading marketfor industrial machinery accountingfor around 32% (US $ 109 billion)of world market in 2006. North

America and Europe are the othermajor markets accounting for 25%share each in the world industrialmachinery market. According toICON Group, the industrialmachinery market is expected tocross US $ 500 billion in 2011, aCAGR of 8%

IN SUM

The global capital goods industry

is on a growth path and there have

been many new countries emergingas new players, especially the

Asian countries. With the ample

opportunities available, this industry

would see a lot of changes in the

future along with greater scope for

further growth and development.

SOURCE: ICON Group Inc., USA.

Exhibit 5:GLOBAL MARKET FOR INDUSTRIAL MACHINERY


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INTRODUCTION

The capital goods industry is thebackbone of Indias manufacturingsector. India produces wide rangecapital goods, including machineryand machine tools. Some of theprominent capital goods producedin India include heavy electricalmachinery, textile machinery,machine tools, earthmoving andconstruction equipment includingmining equipment, roadconstruction equipment, materialhandling equipment, oil & gas

exploration equipment, sugarmachinery, food processing andpackaging machinery, railwayequipment, metallurgicalequipment, cement machinery,rubber machinery, process plantsmachinery & equipments, paper &pulp machinery, printing machinery,dairy machinery, industrialrefrigeration and industrial furnaces.

Indian capital good industry, inthe recent years has been witnessingbuoyancy after undergoing aprolonged period of cyclical andrecessionary phase. From 1994-95,the Indian capital goods industry haswitnessed a cyclical phase, andthereafter the sector witnessed a

recessionary phase till 2001-02. In2001-02, the Indian capital goodsindustry witnessed a negativegrowth, mainly due to decelerationin production of transport

equipments. However, since 2002-03, the sector has been witnessingbuoyancy in the production trends,as is evident from Exhibit -6. Thoughthe growth momentum hasmarginally slowed down in 2007-08,the capital goods sector stillcontinues to be the driver of growthfor IIP.

Under the two-digitclassification, in the index ofindustrial production, capital goodsare classified as:

35 & 36 - Machinery andequipments, other thantransport equipments;

37 - Transport equipments

The movement in the productionindex of these two categories showsa cyclical trend over the last onedecade. However, in many years,both the segments have witnesseda year-on-year growth of over 10%,contributing to the overall upwardmovement of IIP.

3. CAPITAL GOODS INDUSTRY IN INDIA


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Capacity creation in the Indian

capital goods industry has beengrowing, since liberalization, and intune with the overall growth inindustry. Cumulative foreign directinvestments (actual inflows) in thecapital goods industry amounted toover US $ 1.6 billion since January2000. Details of sector-wise FDIinflows are given in Table - 5.

ANALYSIS OF SUB-SEGMENTS

The study focuses on the status ofthe following segments of capitalgoods industry in India.

a) Non-electrical machinery(machinery not used inelectrical industry)

1. Machine tools

SOURCE: Central Statistical Organisation, Government of India.

Exhibit 6:MOVEMENT IN INDEX OF CAPITAL GOODS INDUSTRY VIS--VIS

IIP IN INDIA

SOURCE: Central Statistical Organisation, Government of India.

Exhibit 7:MOVEMENT IN PRODUCTION INDEX OF SUB-SEGMENTS OF CAPITAL

GOODS INDUSTRY


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Table 5:FDI INFLOWS IN SELECT CAPITAL GOODS SECTOR IN INDIA

Sub-segments 2000-03 2004 2005 2006 2007 Total(Jan-Dec) (JanDec) (Jan-Dec) (Jan-Dec) (Jan-Dec) Rs. US $

Million MillionElectrical equipments 11,089.16 4933.13 1075.55 3746.32 24872.69 45716.86 1055.25

Machine tools 1362.69 2652.70 1001.11 1579.25 1966.07 8561.81 193.68

Industrial machinery 2698.18 430.76 1474.73 1169.92 901.3 6674.89 149.53

Agricultural machinery 854.34 0 2777.52 2527.51 240.44 6399.82 142.18

Earthmoving machinery 755.96 5.22 2313.00 45.79 2611.36 5731.34 134.04

Boilers and steam 1.97 0 23.40 149.85 42.3 217.52 4.86generating plants

Prime movers 0 2.49 0 0 11.6 14.09 0.34

Total above 16,762.30 8024.30 8665.31 9218.64 30645.76 73316.33 1679.88

SOURCE: Department of Industrial Policy and Promotion, Government of India.

2. Textile machinery

3. Construction and miningmachinery

4. Process plant machinery

b) Electrical machinery (Machineryused in electrical industry)

1. Transformer industry

2. Switchgear and controlgear

3. Capacitors

4. Motors and generators

Non Electrical Machinery

Machine Tools

The machine tools sector can bebroadly classified into the followingsegments:

The machine tools sector is oneof the important segments of the

Exhibit 8:CLASSIFICATION OF INDIAN MACHINE TOOLS SECTOR


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capital goods industry in India. Thesector is recognised as a provider ofcost-effective high quality lean-manufacturing solutions. The sector

manufactures almost the completerange of metal-cutting and metal-forming machine tools. Customizedin nature, the products from theIndian basket comprise conventionalmachine tools as well as computernumerically controlled (CNC)machines.

The industry has been showing

an increasing trend in bothproduction and exports over the lastdecade. However, export orientationof the machine tools sector has beencoming down from a level of 67%in 2002-03 to 51% in 2006-07.

Total production of machinetools in the country reached the levelof more than Rs. 2000 crores by the

end of the year 2006-07, showing a

growth rate of almost 15% over theprevious year. The breakup ofproduction under various segmentsof machine tools sector is given inTable - 6. While the Groups A & Bhave witnessed impressive growthrates in 2006-07, over the previousyear, Group C has witnessednegative growth, due to which theoverall growth in the machine toolsector has come down.

The Numerical Code (NC)

machines and Non NC machinesbelonging to the Group A showed agrowth of 28% and 27%, respectivelyduring 2006-07, over the previousyear. Machine tools of Non NC typebelonging to the group B alsoexperienced a growth rate of 34%during the same period. However,Group C category of machine toolswitnessed a negative growth of 55%,

pulling down the overall growth for

SOURCE: Exim Research; Data Sources from Indian Machine ToolsManufacturers Association and Directorate General of Commercial IntelligenceStatistics, Government of India.

Exhibit 9:PRODUCTION AND EXPORT PERFORMANCE OF INDIAN MACHINE

TOOLS SECTOR


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this sector. HSS gear tools,Abrasives, HSS drilling tools, HSSmilling tools, tools for tapping andthreading, milling cutters are some

of the Group C category of machinetools that have witnessed negativegrowth rate in 2006-07.

Indian machine toolmanufacturers have been able toexplore the international markets too.Strategies such as productdevelopment with enhancedfeatures, competitive pricing, and

market focus have been helping theplayers to enhance their marketpresence in international markets,particularly in Europe, the UnitedStates, and east-Asian countries.Lathes and automats, presses,electro-discharge machines, andmachining centres formed the bulk

of export orders for Indianmanufacturers.

Export of machine tools has

shown a steady increase in the lastfew years. In the year 2006-07,export of machine tools was worth

Table 6:PRODUCTION OF MACHINE TOOLS IN INDIA

Machine Tools Value (in Rs. Million) Growth (%)

2005-06 2006-07Group A (large size machine tools)

NC Machines 9442.94 12052.53 27.64

Non NC Machines 4078.15 5164.33 26.63

Group B (medium size machine tools)

NC Machines - -

Non NC Machines 1866.03 2494.53 33.68

Group C (small size machine tools)

NC Machines - -Non NC Machines 2804.97 1246.67 -55.55

Total 18192.09 20958.05 15.20

SOURCE: Indian Machine Tools Manufacturers Association

Table 7:EXPORT OF MACHINE TOOLS

FROM INDIA

Year Exports(in US $ Million)

2001-02 102.48

2002-03 121.032003-04 140.75

2004-05 176.57

2005-06 230.39

2006-07 234.75

SOURCE: Directorate General ofCommercial Intelligence andStatistics


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more than US $ 234 Million. Duringthe period April December 2007,machine tools export stood at US $209.81 million, an increase of over28%, over the same period in theprevious year.

USA is the largest market forexport of machine tools from India.In the year 2006-07, USA accountedfor 19% (US $ 45.25 million) ofIndias total export of machine tools.Other major markets include

Germany (8.1%), UAE (5%),Singapore (4.7%), and US (4.6%).

Textile Machinery

Textile is one of the major exportitems of India contributing to over11% in Indias export earnings.Indian textile machinery sectorstarted as an offshoot of the textile

industry to cater to the capital

expenditure demand of the textile

units. In the initial years, the growth

in the Indian textile machinery

sector was hampered due to

increasing demand for automated

machines. However, the Indian

textile machinery sector started

producing automated machines,

with innovation, envisaging growth

in capacity expansion in the textile

industry in the post-quota regime.

The thrust given by the

Government of India for

upgradation of technology (through

the Technology Upgradation Fund

Scheme - TUFS) also contributed

to the growth in demand for textile

machinery.

Textile machinery productionhas shown steady increase in therecent years. The total production of

textile machinery in the country

SOURCE: Directorate General of Commercial Intelligence and Statistics

Exhibit 10:MAJOR EXPORT DESTINATIONS OF MACHINE TOOLS FROM INDIA

(2006-07)


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increased from around Rs. 1175crores in 2002-03 to more thanRs.3000 crores by 2007-08.Segments like spinning & allied

machinery, processing machinery,have experienced growth inproduction during this period.

The capacity of the sector (invalue terms) was estimated at Rs.3000 crores 2003-04, which hasincreased to around Rs. 3800 crores

in 2007-08. The capacity utilizationthus works out to around 80% in2007-08.

Table 8:TRENDS IN PRODUCTION OF TEXTILE MACHINERY IN INDIA

(Value in Rs. Million)

CATEGORIES 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08(P)

Spinning & 5816.68 6811.63 9957.79 13232.05 19910.45 22719.45allied machinery

Synthetic fibre machinery 962.98 982.84 510.35 366.89 223.8 404.58Weaving & 782.49 875.79 1166.64 1586.19 1572.86 1148.96

allied machineryProcessing machinery 731.92 1109.87 1358.07 2421.69 1644.39 921.43Miscellaneous 69.91 94.02 121.02 120.61 122.48 129.71

(Spinning, Weaving &Processing machines)

Textile testing/measuringinstruments machinery 387.84 497.98 578.01 647.69 630.81 437.01

Hosiery machinery & needles 260.72 442.71 391.91 425.26 338.74 354.72

Total 9012.54 10814.84 14083.79 18800.38 24594.02 26306.82

Spares & accessories 2737.9 2591.15 2764.35 3323.00 3396.80 3780.86

Grand Total 11750.44 13405.99 16848.14 22123.38 27990.82 30087.68

SOURCE: Office of the Textile Commissioner, Textile Machinery Manufacturers Association

SOURCE: Office of the Textile Commissioner, Textile Machinery Manufacturers Association

Exhibit 11:TEXTILE MACHINERY TRENDS IN CAPACITY, PRODUCTION AND

CAPACITY UTILIZATION


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Though not a significant volume,

India still exports textile machinery.

In the last few years, value of exports

of textile machinery was hovering

around less than Rs. 500 crores.

However, as a result of increasing

activities in the textile industry, import

of textile machinery is on the rise.

Total import of textile machinery

during the year 2006-07 was

estimated to be more than Rs. 9,000

crores, thus showing a growth rate

of around 33% over the previous

year. During the period April July2007, export of textile machinerystood at Rs. 189 crores, whereasimport value during this period stood

at Rs. 2465 crores.

Segment-wise exports show thatspinning machinery is the largestimport item accounting for more than40% of total textile machineryimports. Other major items areknitting machinery (19%), weavingmachinery (13%), and processingmachinery (12%).

Exhibit: 12:EXPORT AND IMPORT OF TEXTILE MACHINERY FROM INDIA

(In Rs. Million)


Exhibit: 13:SEGMENT WISE IMPORT OF TEXTILE MACHINERY IN INDIA (2006-07)


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With respect to exports, majorityof Indias textile machinery exportsare in the form of auxiliary machinery,having a share of 86% in 2006-07.

Other major export items arespinning machinery (17%),processing machinery (9%) andwashing machines (7%).

The success of the textilemachinery sector depends largely ontechnology and branding.Considering that many Indian textilemachinery manufacturers have

started in-house research anddevelopment activities, the sector ispoised for further growth. Recently,leading textile machinerymanufacturers have collectivelyestablished a research anddevelopment centre at the IndianInstitute of Technology, Mumbai.

Construction and Mining

Machinery

There is an all-pervasive boom in

the housing and infrastructureactivities in India, which is likely todrive the associated sectors suchas manufacture of construction andmining equipments. India producesa wide range of construction andmining machinery such ashydraulic excavators, wheelloaders, backhoe loaders, bulldozers, dump trucks, tippers,

graders, pavers, asphalt drum / wetmix plants, breakers, vibratorycompactors, cranes, fork lifts,dozers, off-highway dumpers (20Tto 170T), drills, scrapers, motorgraders, rope shovels etc. Theyperform a variety of functions likepreparation of ground, excavation,


Exhibit: 14:SEGMENT-WISE EXPORT OF TEXTILE MACHINERY FROM INDIA

(2006-07)

Source:


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haulage of material, dumping/layingin specified manner, materialhandling, road construction etc.

The construction and miningmachinery sector in India haswitnessed a phase of reorientationin the last few years throughacquisitions and joint ventures. Thisalso reflects the active interest ofinternational majors in the domesticmarket. However, given the heavysunk cost involved in the sector, thenumber of producers in eachsegment is few. Many internationalplayers have also appointed sellingagents for importing and sellingcomplete equipments in India.

Major players are Bharat EarthMovers Ltd (BEML) and TELCOconstruction equipment in the earthmoving machinery segment; Escorts

and Gujarat Apollo Instruments in theconstruction machinery segment;Mcnally Bharat Engg. Co., EleconEngg. Co., TRF, Godrej & Boyce,and Voltas in the material handling

equipment segment; ActionConstruction Equipment, TIL andMukand in the cranes segment; andOTIS and Johnson in the lifts and

escalators segments.

Export performance of Indianconstruction and mining equipmentindustry is given in Table 11. It maybe noted that in India, being a largeand growing economy, the domesticdemand is greater than theproduction capacity and thus themajor portion of demand is met

through imports. Major items ofimports include lifting, handling,loading and unloading machines;self-propelled bulldozers, scrapers,and graders; and derricks, cranes,mobile lifting frames. Import growth(CAGR) in the last three years hasbeen over 45%. Indian constructionand mining machinery sector is also

exporting to various countries,including developed countries suchas USA, UK, and Singapore. Majoritems of export include moving,grading, pile-extracting machineries.

Table 9:INDIAN CONSTRUCTION AND MINING MACHINERY: INDUSTRY SIZE

Sl. No Category Estimated size in Rs. crores(2006-07)

1 Earthmoving machinery 4500.00

2. Construction machinery 700.00

3. Material handling equipments 1600.00

4. Cranes 800.00

5. Lifts and escalators 700.00

Total above 8300.00

SOURCE: Industry Market Size and Shares, CMIE


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Table 10:MARKET SIZE AND LEADING PLAYERS: SELECT SEGMENTS OF

CONSTRUCTION AND MINING MACHINERY (2006-07)

Major Products Companies Market Share (%)

Earthmoving Machinery Bharat Earth Movers Limited 39.97Total Market Size: Telco Construction Equipment Co. 28.22Rs. 4500 crores L&T- Komatsu 13.20

Larsen & Toubro 4.60

Construction Machinery Escorts Construction Equipment 48.85Total Market Size: Gujarat Apollo Inds. 19.00Rs. 700 crores Ashoka Buildcon 6.57

Sayaji Iron & Engg. Co. 4.42Apollo Industrial Products 3.80

Material Handling Mcnally Bharat Engg. Co 24.87

Equipment Elecon Engg. 21.68Total Market Size: TRF 16.68Rs. 1600 crores Godrej & Boyce 10.18

Voltas 7.18

Cranes Action Construction Equipment 26.62Total Market Size: TIL 19.50Rs. 800 crores Mukand 14.00

Hercules Hoists 10.75Greaves Cotton 9.00

Lifts and Escalators OTIS Elevators 64.34Total Market Size: Johnson Lifts 33.22

Rs. 700 crores

SOURCE: Industry: Market Size and Share, 2007; CMIE

Table 11:EXPORT PERFORMANCE OF SELECT CONSTRUCTION AND MINING

MACHINERY (2006-07)

ITC HS Description Exports ImportsCode

8425 Pulley, tackle and hoists other than 6.99 24.22skip hoist; winches and capstans; jacks

8426 Derricks, cranes, mobile lifting frames etc 18.43 265.90

8427 Fork-lift trucks, other works trucks with lifts etc. 6.82 34.50

8428 Lifting, handling, loading & unload machines 27.44 342.97

8429 Self-propelled bulldozers, graders, scrapers etc. 26.59 283.05

8430 Other Machineries for moving, grading etc,pile-extractors, snow-ploughs etc 44.03 285.40

Total 130.30 1236.04


(US $ Million)


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Process Plant Machinery

The process plant machinery andcomponents sector in India is a

heterogeneous segment of capitalgoods industry. The sector catersto a wide range of processindustries like oil and gas,petroleum refining, petrochemicals,chemicals, fertilizers,pharmaceuticals. metal processing,cement, paper, sugar, and foodprocessing. The sector designs andmanufactures a wide range of

equipment and systems such as:pressure vessels, columns, towers,heat exchangers, multi-tubularreactors, evaporators, crystallizers,dryers, road/rail tankers, storageequipments, equipment for dairyand food processing, mineralbeneficiation equipments, rotarykilns, equipments for solid-liquid

separation, equipment for waterand waste water treatment.

The sector is highly capitalintensive with a strong engineeringorientation (thus knowledgeintensive also), where the productsare mostly custom built. Henceeconomies of scale have lessrelevance in this sector except for the

machine, or labour utilization factor,if workload is not uniform.

Due to the heterogeneousnature of the sector, the processplant industry is fragmented innature. Some large as well asmedium sized companies are welldiversified in terms of product range

and areas of applications.International companies (such asAtlas Capco, Alfa Laval, J.L. Smith,Sulzer) also have presence in India

through joint ventures or technologytie-ups. Besides, the internationallyrenowned consultants in the processindustries like Flour Daniel, Bechtel,Foster Wheel, LG, Daelim, Jacobs,Kvaerner, Mitsui Babcock, Linde,ABB Lummus, Technip, Stone &Webster, Udhe and ToyoEngineering have offices in India.

The market size and majorplayers in select segments ofprocess plants / machineries aregiven in Table - 12.

Few of the Indian companieshave made their mark in the exportarena due to their manufacturing skilland quality. These companies areequipped with modern machinery

and are producing sophisticatedequipments such as high-pressureheat exchangers, spiral heatexchangers, multi-wall vessels, air-fin coolers, multi-tubular reactors etc.Export and import of select processplant equipment / machineries aregiven in Table - 13.

Major categories of exports

include: machinery / plant, laboratoryequipment for heating or cookingexcl. household; centrifugemachines, including dryers, filteringor purifying machinery; metal rollingmills and rolls thereof. Indias importof process plant machinery weremainly centrifuge machines,


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including dryers, filtering or purifyingmachinery; machinery / plant,laboratory equipment for heating orcooking (excluding household use);

Metal rolling mills and rolls thereof;refrigeration and freezing equipment,electric or others; converters, ladles,ingot moulds and casting machinesused in metallurgy

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