Cover Story - Industry Focus

The Power of fluid power

Dr. Ranjit Singh

Infrastructure sector is the key demand booster for hydraulics and pneumatics industry catering to a diverse range of customer-base, with applications that find use in almost every conceivable industry. With WTO implications looming large, players big and small are increasingly opting out for consolidation and amalgamation exercises to stay aboard

Wafted by the strong winds of recession — recent announcements by the Prime Minister Atal Behari Vajpayee to boost spending in the infrastructure projects — were music to India’s hydraulics and pneumatics industry. Among various technologies that are playing a prominent role in the rapid growth of Indian industry, fluid power is indeed unique.

Whether it is the control of rudders of an aircraft, or it is the question of laying telecom cables, contraptions based on hydraulics and pneumatics play a vital role.

A number of innovative applications have emerged based on pneumatics and hydraulics in manufacturing sector. Applications in the downstream segments are in the diverse fields like automobiles, machine tools, mining, textile, water treatment, oil and petrochemicals, food and process industry, control systems, automation, power transmission and so on.

Large players dominate the domestic hydraulics market (Fig. 1). Vickers International and Mannesmann Rexroth are the market leaders with market shares of around 20 percent each. Yuken India and Parker are the other major players with a market share of 15 percent each. Dennison accounts for around 10 percent of the total market.

The demand for total fluid power components is currently estimated at around Rs 1,000 crore. Of this, the hydraulic market is around Rs 770 crore and pneumatics around Rs 230 crore.

The GDP is growing around 5 percent, and the industry can only hope the same 5 percent growth for the coming years.

The global hydraulics industry is characterised by region-centric dominance. For instance, the US majors specialise in the pumps category; Australian companies focus on the valves segment and German players in the area of fluid systems used in defense.

These companies find India to be a suitable manufacturing base to source their products and export the same to other regions. For instance, Bailey Sales Corporation, US is setting up a subsidiary, Bailey Hydropower Private Limited at Irungatukotai, Sriperumbudur. The company’s plant is a 100 percent EOU with an annual installed capacity of 0.2 million cylinders. The entire output will be consumed by the parent company in accordance with the buy-back arrangement.

This highlights the high growth possible in the exports arena, and are increasingly occurring on account of the cheap but skilled labor available in the country. Typically, foreign majors, forge alliances with domestic majors by offering steep price discounts on low-technology products, and in turn use the latter’s distribution network to market their high-value products.

As example, L&T Komatsu, the joint venture between L&T and Komatsu, Japan, was formed to market Komatsu’s hydraulic excavators in the domestic and neighbouring countries. In case of the domestic market, these products are to be marketed through L&T’s strong distribution network. At the same time, L&T will have access to Komatsu’s other products as well.

Exports in the Indian context are largely restricted to areas such as Japan, Korea and the SAARC nations. Also, exports to the Japanese and Korean markets are mainly by domestic players who have strategic alliances with majors from either Japan or Korea. Despite such arrangements, Indian majors are increasingly witnessing competition from China and Taiwan.

Import orders are primarily routed through parent companies such as Vickers (UK), Yuken Technologies (Japan), Dennison (US), Rexroth (Germany) and Dowty (UK).

Domestic players supply hydraulic equipment that function at pressures less than 400 bar, while global majors or domestic arms of such global majors supply equipment that generate pressure over 400 bar.

The Indian pneumatics industry, with majors like Chicago Pneumatics and Ingersoll-Rand, is fully dependent on general overall health of the economy and more so on the key end-user segments such as automotive, electrical, electronics, machine tools, mining, textile, water treatment, oil & petrochemical and food processing.

The Indian pneumatic industry is largely an MNC playground, dominated by MNCs either directly through dealer / trader networks or by Indian arms with backstage support. With WTO implications looming large, players big and small are increasingly opting out for consolidation and amalgamation exercises to stay aboard. Increase in the level of competition has made the domestic players to become cost-conscious.

While companies like Ingersoll-Rand initiated stringent cost cutting exercises, others are opting out for synergistic alliances that will help achieve economies of scale.

The Indian pneumatic industry has by and large come to accept import-duty dilutions as an inevitable trauma that it will have to withstand, and considering the possible import-competition that they might be subject to, they have rather been forced to embark upon aforementioned preparatory measures. According to Mr. Suresh General Manager, Marketing of Atlas Copco, the Indian industry might witness a considerable shakeout. Players like Kaiser from Germany are beginning to make an impact.

The pneumatic tools industry is estimated to be around Rs 200-250 crore with the OEM segment constituting 75 percent of the total market share for pneumatic tools.

According to Mr. Chaubal, Manager business development, Ingersoll Rand, the size of pneumatic tools market has been growing at the rate of 10 to 12 percent per annum. This industry is characterised by the presence of 3 to 4 large players, all of who are multinationals.

The abc of pneumatic tools ......

AIR power provides better percussion force to actuate the work in reciprocating mode compared to hydraulics. Pneumatic tools function by converting the energy from the expansion of compressed air using either air cylinders or air motors, or a combination of both. Air power provides better percussion force to actuate the work in reciprocating mode compared to hydraulics.

Based on the tool action, pneumatic tools are classified into two basic categories: Rotary tools and the air cylinder.

Rotary Tools are used in Grinders, Sanders, Buffers, Drills, Reamers, Tappers, Stud setters, Wrenches, Screw drivers, Nut setters, etc.

The air driven motor is the heart of the rotary pneumatic tool. The air motor is generally vane-type, turbine-type or piston-type, which imparts a rotary motion to the tool. Based on the application, the motors are equipped with control systems such as governors, throttle valves, a variety of clutches etc.

The air cylinder is the actuator for the percussion tools. The reciprocating pistons impart linear motion to the tool. In addition, there are a number of tools that employ a combination of these two principles, for example a rock drill.

The adoption of automation involves the use of microprocessors for control. A pneumatic automation system comprises of: Pneumatic man-machine interface components, Pneumatic logic gates and devices and Pneumatic programmable sequencers.

Based on the application, pneumatic tools can be classified as: Industrial tools and Automotive tools. The industrial tools find application in any industry for automation purpose. However, automotive tools are used at service stations with similar application of industry.

The existence of very few manufacturers in the organised sector has contributed to the limited market and restriction of many products to automation related areas. Also, there is no requirement of any consumables.

The larger companies manufacture a wide range of tools, however each has its own niche. The unorganised sector manufactures 10 to 15 varieties of smaller and technically less complex tools, mainly small grinders and hammers. The small-scale sector accounts for just about 20 percent of the market since the organised sector is dominant. There is not much competition from this small or unorganised sector as it has a different set of clientele. The small players are not seen as a threat to the organised sector either in terms of technology, product range or the service.

The market for pneumatics is primarily in the OEM segment with the replacement market accounting only for 25 percent of the total market. Most of the pneumatic tools last at least for a minimum period of 6 - 7 years and hence replacement market is limited.

The air compressors industry is an independent and unique industry by it self. However, pneumatics and air compressors
go hand in hand. Compressors are used in most of the pneumatic applications. Hence,
the market growth of pneumatic industry directly depends on the growth of air compressors as well as pneumatic components / tools.

The main players in the organised sector include multinationals like Ingersoll Rand, Atlas Copco, and Chicago Pneumatic and Indian companies such as BHEL, Elgi Equipments and Kirloskar Copeland. Ingersoll Rand is the leader in the industry with a market share of around 30 percent. There are many companies in the unorganised segment.

The Indian companies such as Elgi and the unorganised manufacturers concentrate on smaller capacity compressors of less than 30 HP.

Though pneumatic components are not known for their small size, pneumatic transmitters, controllers, indicators, recorders and panel-mount instruments are not as pricey as their electronic counterparts. Owing to their established technology and their relatively simple mechanical construction, pneumatic instruments have remained solidly entrenched in many industries.

Pneumatic tools are exposed to greater extremes of operating and maintenance conditions than any other type of industrial equipment. Even then, their performance in general is satisfactory with the import of technology and the emergence of multinational companies in the Indian scenario. The state-of-the-art and some remarkable products are entering the Indian industries.

Microprocessor based pneumatic tools are growing very fast and the demand is very high even though they are costlier by 8 to 10 times than the normal tools. Currently, microprocessor based pneumatic tools are in great demand.

Small players have the advantage on the price front, their lack of quality forces them to concentrate more on the price conscious replacement market. Companies in the unorganised sector, or the small companies do not have technology back-up and hence they operate on a range of only about 10-15 low tech products. Moreover, these companies are not very keen either in developing technology on their own or in investing in R & D. Hence they suffer on the quality front.

In user segments such as food and pharmaceuticals, electronic controls embedded equipment/device are preferred, as the fluid (either air or liquids) used in pneumatic (or) hydraulic system may contaminate the final product.

Leakage and noise problems in the pneumatic tools are irritating. The technology is moving towards less noise and leakage tools.

Chicago Pneumatics has alliances with Desoutter (UK), Georges Renault (France), Crepple & CIE (France) and Hokent Su (Japan) for various pneumatic tools and applications. Though a few industry players believe that technology access is instantaneous, there are numerous instances of Indian alliance partner getting a raw deal, like having to put-up with outdated know-how.

Foreign partners have often been accused of transferring obsolete technology. In some cases, even if the technology being transferred were the latest, the foreign players have been quoted to be restrictive in their approach, thus not allowing free-flow of technology. This has been the norm even in the international marketplaces where alliances between companies have faced inevitable culminations owing to transfer blockades.

Though the domestic industry has instant access to global technology by way of strategic alliances, the quantum of innovations is naturally high in the international scene. For instance, Rexroth Mecman has turned out a complete range of specialised pneumatic products and air tools that will provide complete solution, which are corrosion-proof in nature. User segments such as food industry and pharmaceuticals demand corrosion proof pneumatics.

In some cases MNCs are turning out domestic production facilities into sourcing bases for export destinations. Under Ingersoll-Rand’s policy of "global sourcing mechanism", it identifies key production centers across countries for manufacturing some selected products.

The company has chosen India as the center of excellence for manufacturing pneumatic tools, components and complete equipment (like compressors, in the smaller capacity segment).

ELGI has announced that in the long run it will turn its production-bases here into global sourcing bases for component manufacturing through the help of alliance partner Hitachi.

Chicago Pneumatic India exports 40 different types of pneumatic tools. Also companies such as IEC and Janatics, who are manufacturing indigenous pneumatic tools, are exporting their products to European countries. Nevertheless, exports are not very high at present. Rs 5 crore worth of exports for pneumatic tools can be enhanced manifold, say industry sources. The export scenario is likely to face an uptrend in the future with bigger companies planning to increase their export component. For instance, Ingersoll Rand and Chicago Pneumatic have plans to make their Indian plants as global sourcing points. They have the advantage of global sourcing arrangement with their parents that would help them in exports.

Imports constitute just 5-10 percent of the domestic market as the domestic organised players cater to the majority of the product range.
The pneumatic equipment are imported from countries such as USA, UK and Japan.

Some of the pneumatic tools are now getting imported from the Far East due to their competitive prices. Imports are more in the case of control systems, speciality materials and components for critical applications.

Pneumatic industry is dominated by foreign players such as Chicago Pneumatics (including Atlas Copco) and Ingersoll Rand. Quite a few of them are well established with their manufacturing bases in India while others market their products through their distributors in India. The world leader in pneumatic systems, Crouzet Automatismes, France, have their presence in India through a distributor M/S JD-Novatech, Baroda. Many more foreign companies are entering the Indian market.

R & D trailblazers in hydraulics

A few players in the hydraulics industry successfully harnessed technology to provide superior design and engineering innovations. This has resulted in customisation of products in certain niche segments.

L&T Komatsu produced hydraulic drives specifically for the sugar industry and has also developed an excavator equipped with flexible control systems based on hydromechanical intelligence.

Yuken India Limited has developed a noise-free pump (Pal Pump). Considerable noise reduction in case of this pump is achieved, as the motor’s rotor and stator is immersed in hydraulic oil, and the presence of a common shaft to drive the same. To reduce the oil temperature, the company has designed the "Yuken’s Cool Donut Power Unit" to rectify this problem.

Fike India Pvt Ltd, Pune, an Indian subsidiary of Fike Corp of the US launched an enhanced version of a hydraulic tubing drain that enhances the performance capabilities in the case of well drilling, completion and production processes. This product is expected to negate the problems caused on account of mechanical failure and shear pin-pressure related problems.

These developments indicate technology trends towards the areas on noise, leakage reduction and improving efficiencies. Such improvisations / innovations provide the companies with a competitive edge.

There is vast scope for the growth of pneumatic industry in this country, especially in the area of automation. However, in most cases, factories do not invest sufficiently in modernisation and automation as the labour force is seen as a fixed expenditure. Hence, semi-automatic processes continue. However, all this will change in time as competitive pressures force manufactures to adopt modern processes.

The pneumatic industry in India has shown positive growth trend during 2000- 2001, recovering from the aftemath of recessionary years. Also, the coming years show promise of a reasonable growth rate for the industry with the Government’s increased attention to the petrochemical / oil / gas industry and power generation. Coupled with rapid growth in the automobile sector, investment in construction, mining and infrastructure sectors, the future appears to be bright for this industry.

Indian pumps industry

Technology Information, Forecasting & Assessment Council (TIFAC) too, in its recommendations for the domestic pump industry in India, has stressed the need for more thrust in developing special purpose material for pump manufacturing. For instance, common materials that have been traditionally used for handling abrasive, acidic / corrosive fluids have numerous operational pit-falls.

The domestic industry has been advised to develop advanced ceramics and plastic technology that overcome such problems. The domestic industry has made satisfactory attempts in this regard.

With the advent of foreign players into the scene, the market will have abundant access to such superior pumps, forcing the domestic industry to turn proactive in this regard. For example, Grundfos has successfully differentiated its products by way of quality of material used, such as superior-grade imported stainless steel that will avoid corrosion unlike the cast-iron parts that rust.

The Indian industrial pumps industry is weathering an inevitable phase of shakeouts. Intense foreign competition is adding its share of woes to the demand-depleted market. With newer investments getting dearer in crucial end-user segments of power, oil & refineries and fertilizers, revenue starved industry constituents are gambling on all available options.

While some have announced plans of turning themselves into sourcing base for their MNC parents, a few others have strained themselves to don a role of end-to-end solutions provider. With market getting competitive by the day, customer-centric focus will be a prerogative to stay aboard.

Growth measures announced for end-user segments such as power sector and fertilizer industry might translate into wider market pie for the industrial pumps & valves industry, when one considers the long-term perspective.

According to Roopak Chowdry, Sr Manager, Kirloskar the sore point to note is that the uniform slab of 16 percent given for the SSIs will further aggravate unorganised competition, especially for industrial valves, as units which were paying much higher duty will now be more severe on the price front. Already the price variation ranges from as low as 6 percent to 100 percent in some cases. The recent trend that is getting prominent across various engineering / manufacturing sectors, is the systems approach to buying and selling. Industrial buyers have started emphasizing on the latest fad of ‘vendor consolidation’, thus increasingly opting out for those vendors who will be able to provide solutions and not just products. The pump industry is no exception. But in this industry, however it is the buyer market that is forcing the trend.

Today, the customers want a single bidding party that will be fully responsible for design, install, commission and complete turnkey projects in water supply, power generation, civil construction and sewage treatment. This has forced players such as KBL in the industrial pump business to don the role of turnkey project managers. T J Madhusudhan, Senior Manager, KBL said that their company opted for turnkey projects, as market wants solution providers and not mere suppliers of pumps.

Sulzer India Ltd initiated an acquisition spree, when it acquired Khimline Pumps and turned it into its production centre. Now it is the turn of Grundfos Pumps India Pvt Ltd, the Indian subsidiary of Danish major Grundfos, to follow suit.

The company is looking out for strategic acquisitions of at least 4 to 5 companies in the coming year. The acquisitions will be based on the degree of leverage that can be realised by the brand equity and distribution strengths of the acquired companies. Increasing occurrence of such expansion measures from MNC giants will surely be a wake-up call for the domestic industry. Export volumes gaining...

Pune-based Mather & Platt has made formidable foray into Gulf countries, especially Iraq with centrifugal pumps for applications in water & sewage handling segment. Foreign help comes very handy as far as harnessing export potential is concerned. For instance, KSB AG of Germany has turned its Indian subsidiary, KSB Pumps Ltd into a global sourcing base to target selected European markets. The company has also announced that it would set-up three strategic centres, in Chinchwad, Pimpri and Coimbatore, aptly named ‘competent centres’ that would churn out products of international standards.

By the end of 2001, we see better future for the industrial pumps industry, as a lot of infrastuctural projects will take-off.

Industrial valves

The Indian industrial valves industry is a traditional unorganised playground. Industrial valves find widespread application in oil & gas industry, power sector, fluid handling industry, petrochemicals, and fertilizer industries. Oil refineries and power sector together account for nearly 45 percent of the total demand for valves. Steel industry, which was another major user, has sequentially dropped its demand-share in the last couple of years.

The industrial valves industry has quite a few causes for worries. The Governmental sops such as tax exemptions invite more and more unorganised players into the manufacturing sector, many of whom resort to price undercutting with poor quality products.

This has resulted in a situation wherein foreign players setting up manufacturing bases in India source all their valve requirements through their overseas counterparts. This is a genuine cause of concern when one considers the fact that OEM market is higher than the replacement market share.

Industry sources are of the opinion that at least 10 percent of the business is lost this way, as valves get routed from the UK, the US, Italy and Spain.

The Indian industrial valves industry is a traditional unorganised playground. Industrial valves find widespread application in oil & gas industry, power sector, fluid handling industry, petrochemicals, and fertilizer industries. Oil refineries and power sector together account for nearly 45 percent of the total demand for valves. Steel industry, which was another major user, has sequentially dropped its demand-share in the last couple of years

Danfoss is emerging as a leading player with formidable grip in OEM and end-user markets. The company, specialising in solenoid valves has displayed its strength with customisations in pneumatic & thermostatically controlled valves. Apart from product customisations, the company is a good example of how diversified product portfolios can be of help, to stem deficits in demand.

Danfoss provides everything from compact valves to huge valves for large flows. This trend, which has been witnessed prominently in the international market scenario, will take a while to follow suit in case of domestic industry too.

Margins have been affected due to the increasing cost of raw materials. In the overall cost equation, raw material alone constitutes 50-60 percent. Off-late numerous foundries have closed down, being unable to tide over the raising costs. There are numerous valve manufacturers who outsource the basic casting activity to small third party units.

The rising input cost may force such small third party casting units to forego quality, which will indirectly affect the industry in the long run.

Kirloskar Brothers Ltd has repositioned itself as a complete fluid-handling product company. As a part of its re-positioning exercise, the company has categorically announced that it will be shedding away all its non-core activities. Its core businesses will be industrial, domestic, agricultural pumps and industrial valves apart from special products such as anti-corrosion products. This, according to company sources is a sensible move since as
over 90 percent of the company’s sales by value are accounted by the aforementioned product categories. As mentioned earlier the company is getting to be recognised as turnkey project management expert too.

The industrial valves industry too is poised for an imminent shakeout, as raising input costs are proving detrimental, more so in the wake of poor off-take from crucial end-user segments. In a nutshell, revival for the Indian industrial pumps and valves industry will have to wait.

Compressor Industry

The compressor market is highly volatile. It is difficult to pinpoint an exact growth rate for the industry. To combat such end-user fluctuations, one needs to seek alternative options. Unless there is sufficient initiative from the Government and there is more capital flow into infrastructural projects, players keep their fingers crossed.

The Rs 1,300 crore compressor market has seen feverish activity in the last couple of months with players both big and small indulging in massive restructuring and brand building exercises. The lack of Governmental initiatives in infrastructural projects has left the high-end manufacturers to look up on emerging opportunities such as component exports, facilities management and rental business. Industry sources declare that the characteristic volatility of the compressor market has necessitated players to embark on such potential ventures.

The low-end market is not far away from the chaos either. The entry of high-end players such as Ingersoll-Rand into lower range of compressors will only mean that a player such as Elgi will be compelled to work out strategic techno- commercial alliances to face the competition.

As industry players gear up for the challenge, even a 5 percent growth in the coming fiscal will be considered a good achievement.

Building formidable product portfolio is the only thing players constituting the Indian compressors industry are totally obsessed with, in the current scenario.

This has been the underlying objective of all the feverish activity recently. For instance, the merger of Chicago Pneumatics with Atlas Copco (India) Ltd means that the latter now has indirectly added reciprocating compressors to its existing product range.

Elgi’s alliance with Samsung and the existing alliances with Hitachi must also be seen in this perspective. By virtue of these techno-commercial alliances Elgi will be making silent inroads into the high-end compressor markets, thus adding multiple products to its portfolio in a simple way.

Ingersoll-Rand, by silently filling the product gap that existed in the centrifugal / screw compressor category in the 200-2000CFM range, has rendered itself a giant that provides solutions that range from 5CFM to 10,000 CFM.

While a player in the low-range compressor segment such as ELGI is moving up the value chain to shift to high end products, a giant such as Ingersoll-Rand is closing the portfolio gaps in the lower-end of the spectrum.

The perils of such ventures need to be carefully handled. For instance, the advantages of entering a low-margin business may be eroded by the substantial resource investments Ingersoll will have to account for in managing a wider portfolio. And on the other hand, a small-end player such as Elgi might find itself losing focus and end-up forfeiting existing market share. Effective portfolio and brand management will ensure that such pot holes are successfully dealt with or fully avoided.

The Swedish parent of Atlas Copco (India) Ltd, Atlas Copco AB plans all its acquisition and mergers with the prime objective of leveraging on existing brand equities of the acquired or merging company.

High-end compressors market that was reeling under the impact of economic slowdown in the last two years, is staring at yet another bout of the same grim environment. Economic indicators point towards a 5 percent growth.

The industrial slowdown and lack of Governmental projects in crucial infrastructural exercises such as construction and oil exploration will adversely affect the compressor market, especially the high-end segments. There seems to be virtually no exploration activities taking place.

According to Government press releases, there are nearly 50 infrastructural projects that are in abeyance, out of which ten projects concern oil-exploration and refining projects. Apart from these, the list includes 15 crucial projects in the area of highway construction, fertiliser and petrochemical projects. These are the very end-user segments that the high-end market is dependent upon for its growth.

This hallmark uncertainty in the high-end market might explain the export and rental market focus of some of the big players.

This industry now has a new formidable addition, with LG entering the scene to manufacture compressors in India. The fully owned subsidiary of Chaebol LG (Korea), LG Electronics India Ltd, has announced plans to create a $10 million worth manufacturing capacity in India, with a proposed installed capacity of 5,00,000 compressors per annum. The long-term objective of the exercise is to convert this facility into an indigenous sourcing base for components used in LG products manufactured in the country.

Initially the plant will produce compressors for LG’s refrigerators nd air-conditioners. By 2003, the company will be creating similar capacities in the western and eastern regions in India. Though entering the compressor market only for captive consumption, this new entrant will still affect market dynamics substantially.

Given the MNC back up that this Indian subsidiary possesses, it may not be long before the company starts targeting the ‘industrial’ compressor segment too. If that happens, players such as Ingersoll-Rand will have some reason to worry.

The compressor industry in India has only a handful of majors in the high-end namely Atlas Copco and Ingersoll-Rand and any new addition, big or small will definitely have an overall impact.

The defensive or offensive moves that these existing players will chart out in the forthcoming months will be fascinating to watch.