"Heavy Engineering Industry to Witness Opportunities in Nuclear Power, Defence and Process Sector"

S N Roy,
Member of Board &
Whole-time Director, L&T (Power, Heavy Engineering & Defence)
Customers are becoming more demanding and also looking for long term partnerships, based on trust and transparency. The organizations need to be agile in responding in time, to customer queries. Customers nowadays expects complete transparency from suppliers and are interested in long term relationship which will help both parties in the long run says S N Roy, Member of Board & Whole-time Director, L&T (Power, Heavy Engineering & Defence) in an exclusive interview with Chemical Engineering World.

What are the factors responsible which has resulted in significant underutilization of capacity?

Heavy Engineering is the workshop to all industry. It’s where the machinery and equipment that serves a wide range of sectors get made. You name it –power, defence, oil and gas, refinery, nuclear, chemical and petro-chemicals, machine tools, consumer durables, fertilizers, automobiles, textiles, steel, cement, paper, construction, mining – heavy engineering keeps them all humming. The current share of national manufacturing is 16 per cent of GDP, which Government plans to increase to 25 per cent by 2022, through its ‘Make in India’ program.

Despite its almost ubiquitous application, Heavy Engineering around the world has faced many headwinds recently. It has been buffeted by slowdowns, postponement, and / or outright cancelation of major projects. This hit is broadly due to domino effect of depressed oil prices, the nuclear incident in Fukushima, Japan, slow moving defence procurement procedures in India, EU depression and the crash of steel prices etc. When economies are ailing, Heavy Engineering runs a temperature. It requires sustaining power, deep pockets and you need to build large capacities that may sometimes lie dormant. Clearly, it’s not a business for the faint of heart!

Having said that, I think the worst is behind us, and the industry is readying itself to move forward with positive sentiments.

India’s Machinery and Capital Goods Industry is composed of a mix of government owned and private companies as well as the giant capital goods manufacturing MNCs. How has this affected?

Overall India’s indigenous equipment manufacturing sector?

Equipment manufacturing organisations which are a part of large EPC conglomerates vis-à-vis standalone equipment manufacturers?

I am of the opinion that once the economy gets going, there will be room for all - manufacturers who are part of large EPC conglomerates as well as standalone equipment manufacturers. Each has its pros and cons.

Order Management:
Manufacturers and their parent EPCs can mutually benefit from each other where EPC can get orders which are given to the in-house manufacturing unit to supply the equipment.

Economies of scale:
EPC Companies can utilize the benefits of economies of scale to procure raw materials at a cheaper scale, hence decreasing costs and being more competitive.

EPCs can provide easy and economical access to warehouses / storage facilities, engineering capabilities and transportation / logistics capabilities, thereby providing a one stop solution, for the manufacturer

This model provides ease in project management, contract management and related complexities

Optimised Financial Management:
The manufacturer along with EPC, has an advantage of strong financial management by optimising working capital expenses, having common cost heads, thus creating a win-win situation for both EPC and manufacturer and increasing the bottom line.

There is a bit of downside too:
• Other EPC companies may treat the Manufacturer-EPC with trepidation. The manufacturer might not be considered for certain projects for fear that data confidentiality of data may be breached.

• Sometimes the manufacturer might have to play by the EPC’s rules even if it means loss of clientele, business, time or profits.

• As the scale of operations of the EPC is massive, usually by default it is ensured that the EPC is given the priority at times in the conflict of interests

The evolving market has paved ways for changing dynamics of customer’s behaviour, leading to change in market demand and significant increase in advanced technologies. In your view how f ast i s the Indian market evolving and responding to the much needed demand of advanced technologies in near foreseeable future- both as a consumer and as a manufacturer?

How competitive are Indian manufacturers of heavy machinery and equipment compared to their foreign counterparts?

What are the opportunities for domestic manufacturer in evolving Indian market as well in matured international markets?

What are the challenges for domestic manufacturer in evolving Indian market as well in matured international markets?

Customers are becoming more demanding and also looking for long term partnerships, based on trust and transparency. I feel organizations need to be agile in responding in time, to customer queries. Customers nowadays expects complete transparency from suppliers and are interested in long term relationship which will help both parties in the long run. These days a complete value proposition makes a greater impact in comparison to the price, which is no more, the sole differentiating factor. Customer demands are ever increasing and we need to be open and flexible in dealing with the changing requirements.
Most clients are willing to collaborate in drawing up a common, mutuallyacceptable solution that serves the interests of all parties. And to sustain long term relationship between both the parties, a structured and transparent claim management system is preferred to take care of interests of both the parties.

As I see it, the Heavy Engineering industry will witness a number of opportunities in the areas of Nuclear Power, Defence and Process Industry. Let me list out the opportunities:

Nuclear Power:
With a focus on generating clean energy, the Government has plans in place to construct 12 indigenous Nuclear Reactors and 16 Foreign technology Nuclear Reactors in India. This opens up great potential for Heavy Engineering.

Defence Sector:
India is seeing a spurt in investments and indigenisation initiatives in the Defence Industry. A large number of projects and capital acquisition by the Indian Armed

Forces are on anvil. This includes acquisition of six diesel fired submarines, an aircraft carrier, a programme to refit some aged submarines, a new class of warship, landing platform dock – a platform for helicopters and to carry battle tank and army, shallow water antisubmarine crafts, artillery programmes (Tracked SP Gun, Ultralight and Towed Gun), futuristic infantry combat vehicle (FICV) and a number of land-based platforms etc. I am sure that the Heavy Engineering industry is keenly waiting for all this to move from planning to procurement stage.

Process Plant Sectors (Power, Petrochemicals and Fertilisers):
A combination of a recovery in crude prices and implementation of stricter emission norms ( i.e . Euro 5/6 internationally and BS VI in India ) is resulting in newer , large scale plants coming up world wide . There are good opportunities in Asian & African markets ( as the economies develop ) , with new refinery , petrochemical and power plants coming up . Many plants in the fertilizer and refinery sector are ageing which translates into excellent potential for revamp and upgrade. All of these factors will result in great potential for heavy equipment manufacturers in the years ahead.

Challenges:
No opportunity is without its own set of challenges. Here are some of the challenges I envisage the Heavy Engineering industry in India will need to counter.
• Lack of indigenous major raw material sources

• Higher interest cost and inflation

• Poor transportation and power infrastructure in India



• Forex volatility

• Excess capacity in the global market coupled with poor investment appetite

• Dearth of young talent who prefers working in the service industry instead of manufacturing.

• Cartelizing by integrated players

Availability of skilled workforce is one of the key challenges that are looming over heavy engineering sector. Even on the global scale, India ranks 45 in terms of availability of scientists and engineers and 130 in terms of quality of scientific research institutions. How does it affect the heavy industries sector?

As an organization, how do you address the issue of training & retaining the human resources for the future and cultivate the culture of innovation?

In today’s knowledge economy, expertise and experience is a key differential. In the manufacturing industry, dealing with high-end technology, a person’s experience and knowledge could spell the difference between winners and also-rans. Retaining talent has become more challenging in today’s VUCA world for two reasons. One, increasing Gen Y workforce is more demanding in terms of work-life balance, culture, career growth & challenging work. Two, in today’s highly connected & competitive world, employment opportunities for the talented is a fingertip away.

At L&T, we are working towards building capability for the future and retaining talent, through various initiatives. A few of them include

• A structured 7 step leadership development framework for building employees’ capabilities and talent pipeline at all levels in collaboration with world’s finest management institutes

• A project management institute and a learning academy for various technical & behavioural training programs

• Talent Mobility Policy where employees are given opportunities to acquire new skills & work in challenging assignments (India & Abroad – Foreign Postings etc.) through job rotations • Platforms for fostering innovation and knowledge sharing through culture of cross-functional collaboration

The GST Bill has been passed by both the houses & is all set to be implemented across the spectrum of various industries in the country. How do you see the impact of its implementation on the heavy equipment manufacturing industry?

In your opinion, what are the lacunae that still need to be addressed to create a level playing for Indian manufacturers in the domestic market; and building globally competitive industry
Let me say that GST is a game changer. Its implementation will change the manner in which business is carried out in comparison with the ways of the current tax regime. With a single rate being applied to all goods and services, there will be a significant redistribution of taxes across all categories resulting in reduction in taxes on manufactured goods and hence impacting the pricing of the product, positively.

The most important benefit of implementing GST is that it would integrate the economy and provide for a common national market. This in turn will help in delocalization of ordering and hence will place all vendors on same platform instead of dividing them into geographic regions. Paper work and logistics will also be reduced which is another way where money can be saved.

Though there will be minimum impact of GST on export orders as they are mostly exempt from most taxes , it will certainly be a boost to the domestic market.

Under the “Make in India” initiative, domestic manufacturing supplemented with beneficial incentives has being promoted extensively. According to you, how beneficial would it prove for the Indian Capital Goods Manufacturing sector?

The initiative has paved for accelerated growth opportunities in sectors like Automotive, Engineering, Chemicals, Defence, etc. How L&T does plans to leverage the opportunity?

Let me say that L&T has championed ‘Make in India’ long before it was announced as a national programme. This is an excellent measure to promote domestic production coupled with increase in ease of doing business, foreign direct investments, skill and jobs for the youth and national manufacturing. In my opinion, the programme will have a huge positive impact and will help in developing domestic suppliers’ thereby reducing delivery time and costs, making India much more competitive in the long run.

However, for ‘Make in India’ to be truly successful, I feel multiple follow up steps from both government and companies are essential. Companies should take the effort to adhere to or upgrade to global quality standards, sensitise employees to IPR & other trade confidentialities and introduce a greater measure of transparency and flexibility in customer dealings.

Simultaneously, in its part, the government should support these initiatives by ensuring that there are adequate barriers to price dumping by foreign companies and safeguards for domestic produce. They also ought to assist companies for doing business in countries with high risk and encourage the Government / PSU bids to ensure indigenisation, reduce cost of capital etc. to ensure long term success of the programme .

What is the present size of order book at present for L&T Heavy Engineering Division and please share insights into the some of the key ongoing projects and future projects.

What are the future plans of L&T for Indian Capital Goods Manufacturing Sector?

As stated in our Annual Report, L&T Heavy Engineering has an Order Book of ` 7507 Cr., as on March 31, 2016, - a 10 per cent decline y-o-y basis. Recently, we have completed our exercise of fiveyear strategic plan with goals i.e. Lakshya 2021, wherein we have plans in place to increase the order book and bottom line.

Considering factors like the revival in oil prices, the thrust by government towards new nuclear power projects and increase in defence capital acquisition through indigenisation, we see good opportunities in the times ahead.

L&T Heavy Engineering regularly discloses its sustainability performance across the triple bottom line. I feel that sustainable organisations are the ones that will navigate the future best. Our plans across the triple bottom line are as follows:
People:
• Taking care of all stake holders and creating value for them
• Increasing morale of employees and preparing them for future endeavours and greater responsibilities
• Treating supplier as partners and developing a long term, mutually beneficial working relationship which will help both the partners flourish together
Profit:
• Concentrating moreon lucrative business opportunities and high profit jobs, while pruning nonprofitable products from the portfolio
• Creating unique selling proposition and generating key differentials in selected products to help increase the bottom line
Planet (Energy Conservation and Green Initiatives): • Our major plants - Hazira and Powai – the manufacturing base for Heavy Engineering - use 50 per cent & 22 per cent renewable energy respectively
• All our campuses are ‘Zero Discharge’, i.e. we don’t release any waste into the environment
• Most of our plants (Hazira, Powai, Vadodara, Talegaon) are water positive: • Consume less than what we conserve through various measures
• Use of energy efficient manufacturing methods in welding, fabrication, heat treatment & various other stages of manufacturing
• Use of variable Frequency Drives in overhead cranes & machine tools, so as to conserve energy
• Transition to energy efficient LED lights for plant as well as offices is in progress. We also have several green buildings in our campuses 40 per cent reduction in potable water consumption and 30 per cent reduction in overall energy consumption