IvEy - imm
IvEy
Richard lvey School of Business The Universitv of Western Ontario
902D16
ELECTROSTEEL CASTINGS LIMITED
Nitish Bahl prepared this case under the superuision of Professor Robeft Klassen solely to provide mafeial lol c/ass d/scusslon. The authors da not intend to illustrate either effectNe or ineffective handling of a manageial
situation. The authors may have disguised cerlain names and other identifying information to protec( confidehtiality.
Ivey ManagEment Services Nohibits any fom of reyoduction. storage or tansmittal without its wtitten permission. This material is not covered under authorization fiom Cancopy ot ahy reyoduction ghts organization. To order copies ot rcquesl pemission to rcprcduce materials, contact lvey publishjng, lvey Management Services. c/o Richard lvey Schoo/ of Brsiness. The LLniversity of Western Aftaio Landon, Ontario, Canada.
NOA 3K7:
phone (519) 661-3208: fax (519) 661-3882 e-mail [email protected].
Copyight @ 2002, Ivey Management
Sevrces
Vercjon: (A) 2A03-0126
On June 30. 2001. Anil Das. chief erecutile offrcer at Eleclrosteel Caslings. headquartered in Calcutta. lndia. received a call frorn the companl''s Singapore sales office. A Vietnamese firm. Construction Machinery Corporation (CMC). *'anted an update on Electrosleel's possible decision
1o
inrest in Vietnam.
Eleclrosleel had been lndia's largest marufacturer of duclile iron pipes (DtP) and cast iron pipes (ClP) for oler four decades. Its gro*1h had been solid in recenl
)'ears. largel] driren br, neri inlrastructural projects
in the domestic
markel.
Horvever- this market rvas expected to come under increasing pressure as loreign compelilors tere pushing aggressii,eh' 10 enter the Indian market. Inlemational espansion rvould ofl-er a slrong opportunifi for conlinued grollh. l-ith the added benefit of proi iding additional hard curenc_r' for lurther in\eslnent in ne\\, production technologies. A1 a mrnimum- management \\'anted 10 at least double inlemational Iolumes or,er ne\l three vears. After extensir e stud1. Das had narroled the options to eilher
the
a ne* marketing office or nel' manulacturing l'acilill in one of tlo particular markets: Europe ar.rd Soulheast Asia. Building an oyerseas planl uas panicularh aflractrve. as it nould effectir,ell translate inlo Electrosteel being considered a local competitor in thal market. r'ielding lower costs and reduced import duties.
To
assess Southeasl Asia- Eleclrosteel had approached CMC fir,e months ago to explore the costs of constructing a neN plant in Vietnam (see Exhibit l). This
Open Rubric
localion offered a slrong base to ser\,e the domestic Vietnamese market- as \\.ell as the surrounding region of raprdll deleloping econonries each l.ith great need lor basic inl'rastructure. Hotr.er er. Das \\,as not conr,inced that this location las ideal. Erpansion inlo Europe also rvas leq' allractile- shere a neu. plant could be
built in France. In recent neeks. the urgencv lbr a decision had dramalicalll as Das became increasinglr a\\'are lhal foreign cornpetitors inlestigating similar erpansion options including lndia.
increased ere also
l
-
ELECTROSTEEL IN INDIA
During the 1990s. India had achieved strong annual economic gro$.th rales erceeding fire per cenl. As one of the largesl democracies in the norld r,ith a populatron of one bilhon. the courtq had an intricate polilrcal rveb. l,hich affected manl aspecls ofbusiness. lndia had adopted policres that protected local induslr.r'. and that combined riith both a complicated go|emment bureaucrao - complex duties. and conloluted 1a\ structures made it difficult I'or multinationals to conduct business there. Hon,ever" in 1991. the govemment started a liberalizalion program aimed at reducing these barriers. pafih, dllen bv lndia's membership in the World Trade Organizalion (WTO). Since thal time. slos progress had been made. partlr. held back b1,polilicalll lnked labor unions. Electrosteel \\'as the largest manulaclurer of DIP and Clp in India and had been producing ptpes since 1965. Git,en i1s long histon.in the domestic market, local protectionism for the steel industl had foslered Electrosteel"s gro$th. Ot,erall produchon reached 231.000 1orutes for CIP and DIP last I ear. generating re\ enues ofUS$124 million and contributing to cash rcserves ofabout US$50 million (see Exhibit 2). The companl' rias listed on the stock exchanges in Mumbai and Calcutla.
E\port sales of DIP in 2001 represenled a small proportion of total production. at 25.000 lonnes. u'hrch uas doivn slightlr. from the 30.000 lonnes erported in the previous vear. These sales *ere primarilr. directed al Asia. including Bangladesh. Nepal and Sri Lanka. Unfortunatelr'. nel.er markets in this region. such as Singapore. Hong Kong. Brunei. Malal sia and Vietnam. had pror.en diflicult and slo$ lo develop. In addition. Electrosleel erported smdl quaniities to cuslomers in the Middle Eas1. including S1'ria. Lebanon. Kuq'ait. Oman. Ethiopia and earar. The erport deparlment in Calcutla. as iiell as branch sales offices rn Singapore ar.rd Lebanon. sen,ed these markels. Das be eled that Electrosteel could be translomed from a domestic supplier into a strong intemational competitor: We aim to be uorld
class
committed to customer satisfaction
and demonstraling strong leadership in desrgn and manufacluring.
Page 3
CHARACTERISTICS OF IRON PIPE
National and local govemmenls. as lell as prirate seclor ulilities- routinel) used large iron pipe to supplv basic infrastructural needs such as sater and senage s]stsms. Histoncallr'. CIP had been falored for its relalir ell lol cost and. durabilil. Since 1965. DIP had been increasingll used. particularlr,in developed countnes. because the metal pipe n,as less brittle_ rvhich translated directll into easrer handling and installation. Moreor,er- during subsequenl use- the enhanced ductilitr. reduced breakage and leakage. As a resuh. DIP las e\pecled 10 last 70 vears versus 40 r'ears for CIP and u,as therefore priced about 20 per cent higher. DIP also faced competition from other materials. such as plastic (PVC). mild s1eel. asbestos- and pre-stressed concrele. Pipes of these malerials uere generalll cheaper than DIP. but had seleral disadvantages. First. a shorter life span xas tl pical. ranging from 15 to 20 \'ears for PVC and mild steel pipe. respectiveh. Second. the qualill of l aler flos ing through pipes of these other malenals tended 10 deteriorate more quicklr'. Water qualitr rvas compromised as leakages der eloped and contaminanls from the surrounding soil enlered the pipe
ELECTROSTEEL'S OPERATIONS
Ductile lron Pipe Manufacturing Process
The manul-acturing process used mohen iron as a rarr rnaterial- drall uhere possible lrom a blast l'umace (E\hibit 3). Magnesium n'as added 10 impro\ e metallurgical properties. Pipe rvas then cast using sophisticated centrifugal casting machines. A rotating melal- n,ater-cooled mold used centrifugal lbrce to create a holloii pipe. therebl' eliminating the need lor a central core. Thrs operation emplol ed highll specialized. automated equipment $ith computerized conlrols.
After centrifugal casting. the iron pipe las heated to betl\'een 1.000 C and 1.400 C (depending on the metallurgical properties of the pipe) and then graduallv cooled in an annealing fumace to reliere intemal metal stresses. The specific tempelature and cooling rate had 10 be precisell' monilored in order to ensure a high quahlr'. duable finished product. This annealed pipe was termed rurw DlP. Rarr DIP las then coaled and lined on a finishing line 10 meel specific slandards. rihich laned based on intended use and other customer requirements. An e\temal coaling of zinc impror,ed resislance to rust. \\ilh its thickness conlorming to the preriouslv mentioned. uidell recognized intemational slandards. An rntemal cement lining impro|ed the flo$ of $,ater through the pipes. prer ented the ductile iron from coming in conlact riith the nater and pror,ided an acceptable pH value for drinking laler. Again. a centrifugal process \\as used to creale a smooth cement finish, u'ith the thickness being determined bl intemational standards.
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Finalll'- a second ertemal coating- norv of bitumen. las added 10 further protect both the zinc coating and the underlving ductile iron. After a dn'ing time of about l0 hours. the pipe could be packaged and shipped. Finished DIP had to Nithstand specific hr"drostalic lest pressures diclated bl.the u idel1, accepted. intemational standards. such as British or lntemational Standards. These standards ensured compliance for joinling. operaltng pressure alrd f pes ol fluid flos'ing through the pipe. Sandeep Sengupta. senior manager of
qualitr and det elopmenl. commenled.
ln
contrast to CIP. manufacturing DIP is like producing art. as it requrres erpertise at each stage. The proper cherntcal conrposllton must be der,eloped in the molten metal. process temperatures must
be closell monilored and controlled. and the casting machine requires training and judgmenl. Both erpertise and elfectit e svstems are essenlial 10 producing consistent melallurgical properties and surface hnishes thal meel custorner expeclations.
Plant Operations
Although Electrosteel had been producing CIP for decades. its first plant 1o manulacture DIP las buih in 1994. The DIP production lacilitr, ivas localecl in Kardah. near Calcutta. Indta. Setling r-lp the plant in Calculla offered the ad\,antage of using the infraslructue of the eristing CIp plant and the sen,ices of trarned stafll Being close to corporate headquarters in Calculta also stmplified management conlrol and engineering support.
of the ne\\' equipmenl for the casting and finishing operations uas manufactured in India. Hori eler- German lechnrcal knol,ledge nas critical to sta(ing up this plant. German consultants rvorked ri.ith skilled in-house personnel. including design engineers and cilil conlractors. The planl lavout ir.as deleloped Much
to minimize handling and throughput times. l'ith straightline flol,s *hereler possible While manl of the ra\\' materials u ere sourced locallr. some u ere imported. including metallurgical coke. zinc and bitumen. as \\'ell as some of the allol ing melals (see Exhibit .l). The plart had recentlv been accredited rl'ith ISO 9002 certification and the product uas licensed to carry the British Standards Institution (BSl) Kitemark. an rmportant- intemalional product certilication $idelv recognized bv cuslomers.
Br' 2001. the Kardah plant had DIP production capacilr,
of
130.000 tonnes
annuallr'. and supplied l5 standard pipe sizes ranging from 80 to l.()00 rnillimelres (mm) in diameter. Three different pipe joints (i.e.- shape of the end of the pipe)
r\ere also offered. CIP also u'as manufactured here. as ueil as rn another plant in Elar ur. $.ith a total capacit\' of l(r5.000 tonnes per y,ear (see E\hibil 2). In 2002managemenl planned 1o increase Eleclrosteel's installed riorlduide capaciq' f6r ran DlP. Houeler. the best location eilher in India or abroad for ne* casting ard hnishing capacih renuined a difficult dectsion. Capital Investment for DIP Because the basic process \\'as structured into t$ o stages
casting and finishing rnvestnlent las generalh assessed separatelv for- each stage. Capital -lnlestment for a casting operation including annealing \\'as \e[ htgh- and uas onll feasible in large increments. Based on recenl experience- each incremental addition of 50.000 lonnes per ).ear to casting capacilr' rvas e\pected 10 cost about US$40 million.
ln contrast. investment lor a finishing line. uhich included both e\ternal coating and inlemal lining. required a much smaller inlestment. This line a.lso could be separated geographicallr' from casting. Bv installing finishing capacitr or erseas. the llnished DIP \\'as considered local produclion for purposes of tendenng. Separating the t\\.o stages also reduced transportalion costs bv about l0 per centrihich u,as the lerght ofthe coaling and Ining. E\pected costs of constructing a linishing line are provided in E:ihibit 5.
er the last fel vears- Electrosteel had made amual in\,eslments of approxrmatell US$2 million 1o erpand finishing capacit] and upgrade process technologl for DIP. While mrnimum funclionalih \ras still determined bv confonnance \\ ith intemational standards. technologicil upgrades in the linrng and coating operations impror,ed product qualil (i.e.. appearance. melallurgical properties. and uniform thickness of coatings and linings). and reduced costs b\' about l0 per cent. Reject rates also dropped to less than fire per cent o\er thts period comparable to larger global competitors. Or
-
Initiallr.
a blasl fumace ri as no1 buih. and pig iron (a form of processed ral iron used as an input to casting) ri'as purchased on the open market. A blast fumace soon follon'ed in 1996 nrlh further inr estmenr of US$Zo million. This backlard
lnlegration pror,ided better control over the quali!. of molten iron. u'hich in tum improved the qualilr,ofthe finished product. Combined. product and process impror,emenls in DIP had been credited *ith significantll impror,ing cuslomer acceplance and increasing sales in countries as diverse as Singapore. Malal'sia. Brurei- Korea. Kulail. Saudi Arabia and England. Bn an Tong- a senior manager at Singardo Trading- a Singaporear customer. commenled. -'The manufacluring facilitf is tmlr rl orld-class. The final product is at par \uth those of anv global manufacturer."
DOMESTIC MARKET FOR DIP
Demand
The domestic market $ as spread across 28 different slates in India. \\,tlh the stateler,el gor emments being the priman buvers to improle infraslructure. This market for DIP had been grouing a1 betri'een fire per cent 10 l0 per cent annualll o\er the lasl lour )'ears as intemational agencies increased funding for later
suppll projects in India. Untbrtunatell. the gronlh experienced in the late 1990s las not e\pected to conlinue. Current estimates slrongh indicated that these sgencles \\ ere significantlr reducing support oler the nest fen, 1ears. With less inlemational fr.urding. state go\,emments sere forced 1o relv on a cash-slrapped central go\ emment- rrhich lranslated into much lo*.er funding for infrastructural projects. As a resuh- overall demand for DIP Ias expecled to remain a1 roughl_r, the current ler el
tith
greater vear-to-\'ear varialion.
The manulacturing and deli\ en, of rron pipe (both DIP and CIP) l.as undertaken onll afler the go\,ernmenl had placed a firm order. The peak bul ing period tended 10 occur in the first quarter of the calendar (Januarl to March). coinciding $,ith the slate and central govemments fiscal vearend. Demand then usuallr'fell bv a third in the much slol er second quarter. The steel market. including DIP. l'as plolected b) an import tariffof25 per cent of landed price. As a resuh. domestic pnces lor DIP lere about l5 per cent higher than intemalional prices (betbre dutl'). India's panicipation in the WTO suggested thal these reslriclions rrere likell to be phased out. although the timeframe las some\\,hat flesible and r.rncertain because ofstrong lobbr,ing for delal's bl the local steel industn .
Competition
Electrosleel rias a tvell-eslablished brand in Indra and maintarned an e\tensive local nell ork of agents and a lean of sales professionals. Il 2001. Electrosteel supphed or,er 90 per cenl and 60 per cent of the domeslic demand lor DIp and ClP. respeclrlelr'. A nen domestic compelitor had recentll started manufacturing DIP in 2001. and currenth held about half the remarning DIP market share. nhile lmports accounted for the remzunder.
Manulaclurers around the rvorld had been len. secreti\ e about specific technologres related to DIP producrion. Ser eral manufacturing operations. such as casting- zinc coating and cement lining- had proven difficult to duplicate. Moreorer. skilled emplol ees nere difficull to recmil. as Eleclrosteel's emplol ees \\'ere len loval and reluctant to join this new slartup. As a result. lhis nen.
Page 7
competilor found it r,er] challengrng to initiate and ramp up produclion. Das estimated that Electrosleel had approrimatelv trvo r,ears before this competitor rould presenl a serious threat. Once the competitor was full! functional. Das e\pecled much stronger price compelilion in the domeslic market. The size olthe lndian market- bolh no\\'as n'ell as in the longer tern presented an allractl\,e opportunih: 1o intemational manulaclurers such as France's St. Gobain Group (see E*libit 5). Rumors u,ere circulating that this firm. along n.ith others. rras contemplatlng entn into the Indian markel in the near 1'uture. Anr. reduclion in import duties *ould onlv offer a further rncentrr e for their aggressii e entn..
GLOBAL OPPORTUNITIES
The markets in Asia l'ere rapidll. erpanding. as manv deleloping countries \\,ere moring aggressir eh lo de\,elop their infrastmclure. Here. much of the funding came f-rom inlemational organizalions such as the World Bank. the Asian Delelopment Bank. and the Organization for Economic Cooperation and Der elopment (OECD). In contrast. the emphasis in developed countries such as Europe u as 1o maintain their exisling s) stem \\ ilh the sleadv replacemenl of older pipelines.
A number of developing cor.ultries such as Singapore. Vietnam-
Cambodia and BrLnei did not hai e local mar.rufacturers of DIP and uere lorced to imDort. For those countries rrith loca.l production. either duties might be imposed 1o protect local manulacturers (e.g.. India) or unique local standards might be eiracted. Specific national standards could include improved coalings. such as epoxr.or poll urelhane coated pipes. dilferent pipe sizes or a different thickness of coatings. linings or pipe rralls. DIP manufacturers could respond to these unique standards bi deleloping a specific producl an expensile six- to l2-month process h picalh costing aboul $50r).{n)rl Manulacturers e\porting pipe also had deal r.ith the logistics of hzurdling a l.en. large and hearl product. Thus. it n,as no1 surprising that sma.ller diameler pipes. up 10 200 mm- rvere lalored for erport business- uhere lhe ri'eigh1-to-\.olume ratio nas higher. Smaller pipe \\as e\ported in 20-foo1 containers: larger diamelers $ere slacked direclh on the ship (i.e.. break-bulk). This meant thal adequale porl lacilities and handling equipment uere required in close proximilr'to the customer to recerr,e imported pipe.
Prices for DIP in the intemational market lere about US$600 per tonne. lilh smaller pipes (i.e.. 80 and 150 mm) commanding a fir,e 1o l0 per cent premium because 1o their greater marulactr-rring compleritr'. (ln general. manufacluring cosls for the rndustry ti ere roughlr' 80 to 85 per cent of the intematior.ral price.) Transportation. port handling charges and insurance h.picalh added another l0 per cenl to the deli\iered price. plus anY applicable import duties.
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Page
I
9B02D016
Global ComDetition
In general" large-scale manuibclurers tended to increase their e\port \,olumes \\.hen the local market Nas unable 10 absorb the installed production capacitr'. As a result. several compelilors at anl giren time Nere usualll' tvilling 1o sell their products al a discounled price in order to maintain minimurn produclion le|els at their plants. A sunel bv senior management of the priman competrtors highlighted sir of particular importance. based in France. Korea. Japan. Auslralia and China (see E\hibit 6).
ofthe compelitor or market- rarl DIP nas not at ailable: manufaclurers offered onh finished DIP. This alloled the producers to retain direcl contact \\ilh the end-cristomer (e.g.- government agenq and captrire addittonal margin. Cuslomers also l'ai ored this arrangement. If a qualit\ problem de\eloped. liabilitl and responsibilit for correcting the issue could be clearll assigned. Regardless
)
Electrosteel's International Exoansion
After a series of planning sessions- the manufactunng and erport departments had concluded that Electrosleel should target a total e\port I olurne oi approrimalelv 60.000 tonnes per vear- based on current domeslic demand and an erpansion of produclion capacitr'. As a resuh. Das had formalized a corporale obiectir e of ramping up inlemational lolurnes bl' 10.000 tonnes per vear. While manl locations tere possible. a detarled and thorough analiiis bv management hod narrol'ed the candidate list to tlo specific countries: Vietnam and France. EXPANSION INTO VIETNAIVI
Vietnam l'as the second largest counll in Southeast Asia nilh a population of 7g million. As the socialist stale had become increasinglr, liberalized oler the last decade. loreign investment had begun 1o reshape the major cities of Hanoi. Ho Chi Mrnh Cilv- Da Nang arid Hai Phong. Mosl Vielnamese companies lere orlned and controlled br' the goi,emment- although prir ate onnership l.as increasinglv encouraged. English l'as also becoming accepted as the ltutguage ofbusrness. Economtc grolth since liberalization had been strong- but recent decreases in forergn direct inlestment (FDI) had slo$ed grori th to about four per cent annualh,. Yet. the countn, continued to lack proper infrastructure in most areas. For erample. transpoflalion iras challenging. nilh inadequate port facilitres and poor roads that slorved the movemenl of hea\,\, equipment. Water suppll and se\\ age slsiems faced simtlar shoficomrngs and needed urgenl in\ estment. Moreor er- these projects targeted onl| lhe Nater supplr. in major cenlres. lea\in! an estimated 80 per cent of lhe countn tr ith it aler that did not
meet basic drinking standards. There also \\ere no fr.urctioning \\aste$,ater trealment plants in the countn. Adding furrher 10 the challenge. a number of national agencies and proYincial $'aler companies had o|erlapping responsibilitr. combined *ith a rveat admrnistration struct,'e. As a result. the politiial sr.stem \\as ven bureaucratic and difficult to penetrate. These ualer supplv projecls had been fLrrded
bl inlematronal agencies such as the Bank and Asia Der,elopment Bank. These agencies ol.lered open tenders. {orld whrch allos'ed a local supp|er a premium of l5 per cent o\ er intemalional pnces. Othel projecls had been funded bv countryspecific det,elopment agenciei lrom countnes including France. Denmark. Finland and Japan. This dependeno. on tbreign agencies for funding n as e\pected to continue into the foreseeable future. Since 1995- rvater-relaled inlrastructure proiects lotaling LlS$1.210 million had been undertaken. utilizing approrimatelr. 130.000 lonnes of DIp. Four DIp
sith a local mzurufacluring plant. had strong sa.les in Vietnam: St. Gobain. Kubota. Xin\in. and KCIP (estimated. cumulalir e sales lolumes o|er the prer,ious four-r'ear period are noted in Erhibit 7). Maragemenl estinlated thal a similar amor"nl of CIP had been used. all of rr.hich uas produced bv a local firm. ln addition. lorr-cost pipe oforher marerials ,ras rnrponecl. manufacturers- none
Electrosteel's Ootions
LIp to this point. Electrosleel had erported onl1. small quanllties oi DIp to the Vietnamese markel. tolalling aboul 900 lonnes of pipe for t* o projects. Ser eral options \\'ere ar,ailable to establish a stronger presence here- including opening a branch sales office or building a nerr manufacturing lacilif . (ln iontrist. establishing a manufacturing planl in nearbr, Singapore or Hong Kong $as prohibitilelv erpensile. gii en the combined high cost of land and labor.) ,{ sales office ii'ould cost about US$120.000 annualll._ nith minimal start_up costs. lf Electrosteel decided to build a plant. at least t\\o configuratlons rvere possrble. Frrst. both a casting operation and a finishrng line could be installed to provide lnlegrared. local production. pig iron. the prirnan rnpur. *ould be purchased on the open markel. In addition to being considered a local supplier. cost sar ings lould be possible bl aloiding the lransportalion of DIp from lndia to Vretnam equal to approrimatelr l0 per cent ofthe market price. Second. foreign inlestmenl could be reduced bl.srmpli rnstalling a finishing line. with anl necessan casting capacit\, added to the Kardah plant in lidia. Rau DIp s,ould then be shipped from the Kardah plant to Vietnam. *.here it il.ould be e\lemalh' coated and inlemalll' lined in the ne* plan1. Ho*er er- transporarior.l sa'ings nould be much less thar the first configurarions as ra* DIp accounted for 90 per cent of the iveight offinished DIp. Initia.l market research indicated that if
Page
'10
9802D016
an esumated
l0
per cent cosl
ad\ antage
$ere achie\.ed. relali\'e to foreign
competilors. sales of about 10.000 tonnes per r ear should be possible.
l.hollv os.ned subsidiary or as arrangement lith a local Vielnamese partner. Unfortr.uratell.. the earher record of foreign manulaclurers in Vietnam had been poor. $i1h httle success. The Vietnamese go\emmenl offered a further incenti\e 10 Electrosteel: a credit loan ofUS$3. I milhon. This loan las to be allocaled 10 an lndian manufacturer to encourage ne\\'inlestment and trould be used b1 CMC. a contractor based in Hanoi. fbr construclion. CMC also offered to purchase DIP lrom Electrosteel as needed for other uroiects on a contractual basrs. Plant conliguration could be structured eilher as a
part
of a ioinl \'enture
Das reflecled:
Vietnam is a fast groning market. The gro\\lh potenlial is huge. but the lack of infrastructure and resources creates manv ne\\ challenges lor Eleclrosleel. The opportunitv to be the first local manufacturer of DIP in Vietnam is |en attraclive.
EXPANSION INTO EUROPE
Unlike much of Asia. *'hich promised slrong gro\\1h. the European market as a nhole rras stable. lrth annual demand of betrveen 700.000 and 800.000 lonnes of DlP. France and Germanl represented the largest markets because of lhe preference bv their local utilities for DIP (see Erhibil 8). The fastest groting market \\,as Spain. Horverer- demand in some other countries u,as lalling: for erample. demand in the Lhlted Kingdom had lallen br' 50 per cent o\ er the last decade.
While each market *as conlrolled bl,specific golernmenl regulations and sub.iect 10 particular pncing structures. a manufacturer located in anr European Union countn \\'as considered a local supplier for all other EU countries DIp for this markel also las produced 10 common European standards. Collectireh. go\,emment regulatlons- approval processes and buver preferences t'alored local suppliers. alloling an ar erage l2 per cent price prernium oler intemational pnces. Electrosteel's Options
len attracti\ e because of the large. stable business enrironment uith political fet,er and bureaucratic problerns. In conlrast to developing countriesDIP qas a l ell-established and accepted matenal for public infrastruclure in Europe. Deleloping countries tended 1o favor lou,er cosl pipe ahematir es because their tightl) conslrained funds could be stretched to sen ice more people. Finallr.. Europe rvas
Page 1'l
9B02D016
unlike Vietnam. project funding rras not limited to foreign der,elopment agencies but instead came from a r,arie8 of domestic sources.
In the past. Electrosteel had been able to build a small presence in Europe b1' sending executives as needed from head office to address particular sales requiremelits. Unfortunalel). the large geographic area of the European market made it diffrcult to effectivell' expand and sen ice this customer base from lndia. The erpansion options in Europe u'ere similar to those being considered for Vielnam. A branch sales olfice could be opened. for US$400.000. Altematir elv. Electrosteel could build a nen manufacturing plant. u.ith both casting and finishing operalions. orjusl a finishing line. If located close to a seaport. trrnsponation costs from Lrdia tr,ould be reduced. as nell as potentialll. facilitate shipmenl of finished goods to olher markets in Ewope.
As uith Vietnam. it rvas difficult lo accuratel) forecast the sales r olumes that Electrosleel might achiele. Ho\\ eler- polenlial agents in seleral counlries indicated that. br' focr-rsing on niche segments *here clients uere hesitant to deal
l'ith
larger incumbent firms. Electrosteel could expect to build significant rolume. Based on these lengthl, discussions. Das projected thal Electrosteel could reasonablr' achier e an zrnnual volume of 30-000 lonnes.
Expanding operations in France presenled other significant challenges. First. there uas the issue of operating cos1. French labor ri as about l0limes more espensire than that in India or Vietnam. Second. the French language presented a challenge for Eleclrosteel's managers. Third. the strong presence of St. Gobain Group complicated anl decision. and ajoint lenture \\ as r,ery unlikell. Das rvas unsure hol this global leader wor:Id react. Another senior manager expressed the oplnlon:
Europe rs a dir,erse market and the home of the largest global manufacturer ol DIP. Enlenng Europe n.ith our orrn manufacturing operations uould mor e us onto St. Gobain's home turf. ln doing so. \'e mrght be able to eslablish Eleclrosteel as a serious global competitor. MOVING FORWARD
Das realized that Electrosteel lras at a significanl crossroad. He u'as continced thal the current approach of corporate sales executir es sen icing foreign markets ol'lered very limited potential. lnstead. intemational sales lould be appreciabl)' increased onll u,ith a significant inlestment in a parlicular foreign market. The remaining question- git en the firm's limited resources- $,as \\here to concenlrale that inleslment and hon to implemenl anl decision. Both Europe and Vietnam appeared attracti\,e for differenl reasons. Das belier ed that no$ \\es time to act before he rras forced to reocl lo rggressir e competitors
Exhibit
1
MAP OF SOUTHEAST ASIA
Exhibit 2 HISTORICAL OPERATING STATISTICS
year ending March 31
(in US$ millions) 1SS8
ReGnues expenses Gross profit less: interest, depreciation & Net
profit
$ 81
62
tax
19
9
$10
2001
$99 $ 120 74 87 25 33 11 13 $14 $ 20
$124 97
27 13
$
14'
Production (000's tonnes) ductile iron pipe (DlP)
capacly production cast iron pipe (ClP)
capac[y production
90 100 80 90
100 95
130 110
1 150 120 120
165 120
165
121
Exhibit 3 OVERVIEW OF MANUFACTURING PROCESS
Induction furnace (reheat iron)
Page 15
9802D016
Exhibit 3 (continued)
Pipe emerging from casting operation
Pipe in annealing furnace
Application of internal cement lining
Source. www.el ectrclste el.com
Page |6
9802D016
Exhibit 4 COST STRUCTURE FOR DIP MANUFACTURING
(in percentages)
Process Stage
Casting Finishing
Total
Raw Materials
. iimported
15
8
domestic
60
7
23 67
LADOT
J
7
10
Total
78
22
100
.
Exhibit 5 ESTIMATED CAPITAL COST OF FINISHING LINE: THREE POSSIBLE CAPACITIES (in US9000s)
Description
/ Construction Utilities Civil structure Overhead cranes Gantries & trolleys
Annual capacity (tonnes)
10,000 30,000
50,000
$70
$
Civil
Finishing Ljne Equipment Chamfering equipment Cement lining equipment Zinc coating equipment Bitumen coating Packaging Stenciling & bundling Packaging Tools for inspection
TOTAL
$
30 35 40
110 43
130
55
50 35 65
40 390 80 150
40 600 100 800
40 700 150 900
30
45
10
10
25
JJ
55 20 35
s 900
35
$
1,873
$2,180
Page 17
9B02D016
Exhibit 6 SUMMARY OF MAJOR COMPETITORS St. Gobain Group (France)
. . . .
Global leaders in DIP and fittings Insta.lled annual capacity of tw-o million tonnes annually, Europe- where they rvere market leaders
with much of that capacity in
Manufacturing in Brazil, Chin4 South Afric4 and Saudi Arabia, each with casting and finishing Ertensive range of products, with including a wide range ofpipejoints
Kubota Corporation (Japan) Estimated capacitv of about 800,000 tonnes per yea"r Producer ofhigh quality pipe allowed a slight premium in price
. .
Kurimoto Pipes (Japan) Smaller manufacturer with a strong presence in Asia Capacity ofabout 80,000 tonnes per year High quality of finish for lining and coating
. . .
Tyco Pipes (Australial Installed capacity of about 70,000 tonnes per yea.r Due to cyclical demand in Australia, they were able to offer attractive discounts, when the Australian demand was low Targeted $o\,th in Asia because of its close proximrty
. . .
Xinxin Pipes (China) Growing competitive threat rith a current installed capacity ofabout 250.000 tonnes per year Currently export to many markets served by Electrosteel Estimated cost of production was lorver than Electrosteel
. . .
Korean Cast lron Pipes (Korea)
. .
With capacit_v of about 150-000 tonnes per year, was the largest manufacturer in Korea Very competitive in Asian markets, as attractive discormts were offered in the absence of a strong domestic market
Page 18
9B02D016
Exhibit 7 COMPETITOR ANALYSIS FOR SELECTED SOUTHEAST ASIAN MARKETS FOUR-YEAR CUMULATIVE MARKET VOLUME FOR DIP (1997 to 2000)
(in tonnes)
Vietnam Singapore St. Gobain Group Kubota Corp.
Kurimoto Pipes Tyco Pipes Xinxin KCIP E lectrosteel Others
TOTAL
'A
20,000 15,000
130,900
Malaysia
25,000 35,000
15,000 60,000 16,000
2,000 15,000
10,000 35,000 25,000 15,000
'15,000
30,000 25,000 900 40,000
Kong
Hong
4,000 -
30,000
149,000
136,000
8,000
130,000
.
155,000
localfirm accounts forthe majoity ol this ma*et.
Exhibit
E
COMPETITOR ANALYSIS FOR SELECTED EUROPEAN MARKETS MARKET VOLUME FOR DIP IN 2OOO
(in tonnes)
France cermany
Spain
^l[:T, St. Gobain Group Stanton Pipes* Halburghutte* Tiroler Rohren- und Metallwerke AG (Austria) Buderus Guss GmbH (Germany) Others
,ro,oo2_-
TOTAL
250,000 '14,000
Elecirosteel's potential**
'
*,*:
Italy
..
65,000
20,000 5,000
5,000
ao,ooo
2/t0,000
65,000
65,000
145,000
765,000
3,000
3,000
2,000
3,000
30,000
40,000
150,000 40,000
50,000 30,000
T.otal345,000 40,000 150,000 40,000 70,000 129,000
-
Note: NI these fims also actiwly expofted elsewhere in the wond
*'
.
Paftofthe St. Gobain Group. Based on managemerf's exfetsrve discussions with local disttibutors and customers
Richard lvey School of Business The Universitv of Western Ontario
902D16
ELECTROSTEEL CASTINGS LIMITED
Nitish Bahl prepared this case under the superuision of Professor Robeft Klassen solely to provide mafeial lol c/ass d/scusslon. The authors da not intend to illustrate either effectNe or ineffective handling of a manageial
situation. The authors may have disguised cerlain names and other identifying information to protec( confidehtiality.
Ivey ManagEment Services Nohibits any fom of reyoduction. storage or tansmittal without its wtitten permission. This material is not covered under authorization fiom Cancopy ot ahy reyoduction ghts organization. To order copies ot rcquesl pemission to rcprcduce materials, contact lvey publishjng, lvey Management Services. c/o Richard lvey Schoo/ of Brsiness. The LLniversity of Western Aftaio Landon, Ontario, Canada.
NOA 3K7:
phone (519) 661-3208: fax (519) 661-3882 e-mail [email protected].
Copyight @ 2002, Ivey Management
Sevrces
Vercjon: (A) 2A03-0126
On June 30. 2001. Anil Das. chief erecutile offrcer at Eleclrosteel Caslings. headquartered in Calcutta. lndia. received a call frorn the companl''s Singapore sales office. A Vietnamese firm. Construction Machinery Corporation (CMC). *'anted an update on Electrosleel's possible decision
1o
inrest in Vietnam.
Eleclrosleel had been lndia's largest marufacturer of duclile iron pipes (DtP) and cast iron pipes (ClP) for oler four decades. Its gro*1h had been solid in recenl
)'ears. largel] driren br, neri inlrastructural projects
in the domestic
markel.
Horvever- this market rvas expected to come under increasing pressure as loreign compelilors tere pushing aggressii,eh' 10 enter the Indian market. Inlemational espansion rvould ofl-er a slrong opportunifi for conlinued grollh. l-ith the added benefit of proi iding additional hard curenc_r' for lurther in\eslnent in ne\\, production technologies. A1 a mrnimum- management \\'anted 10 at least double inlemational Iolumes or,er ne\l three vears. After extensir e stud1. Das had narroled the options to eilher
the
a ne* marketing office or nel' manulacturing l'acilill in one of tlo particular markets: Europe ar.rd Soulheast Asia. Building an oyerseas planl uas panicularh aflractrve. as it nould effectir,ell translate inlo Electrosteel being considered a local competitor in thal market. r'ielding lower costs and reduced import duties.
To
assess Southeasl Asia- Eleclrosteel had approached CMC fir,e months ago to explore the costs of constructing a neN plant in Vietnam (see Exhibit l). This
Open Rubric
localion offered a slrong base to ser\,e the domestic Vietnamese market- as \\.ell as the surrounding region of raprdll deleloping econonries each l.ith great need lor basic inl'rastructure. Hotr.er er. Das \\,as not conr,inced that this location las ideal. Erpansion inlo Europe also rvas leq' allractile- shere a neu. plant could be
built in France. In recent neeks. the urgencv lbr a decision had dramalicalll as Das became increasinglr a\\'are lhal foreign cornpetitors inlestigating similar erpansion options including lndia.
increased ere also
l
-
ELECTROSTEEL IN INDIA
During the 1990s. India had achieved strong annual economic gro$.th rales erceeding fire per cenl. As one of the largesl democracies in the norld r,ith a populatron of one bilhon. the courtq had an intricate polilrcal rveb. l,hich affected manl aspecls ofbusiness. lndia had adopted policres that protected local induslr.r'. and that combined riith both a complicated go|emment bureaucrao - complex duties. and conloluted 1a\ structures made it difficult I'or multinationals to conduct business there. Hon,ever" in 1991. the govemment started a liberalizalion program aimed at reducing these barriers. pafih, dllen bv lndia's membership in the World Trade Organizalion (WTO). Since thal time. slos progress had been made. partlr. held back b1,polilicalll lnked labor unions. Electrosteel \\'as the largest manulaclurer of DIP and Clp in India and had been producing ptpes since 1965. Git,en i1s long histon.in the domestic market, local protectionism for the steel industl had foslered Electrosteel"s gro$th. Ot,erall produchon reached 231.000 1orutes for CIP and DIP last I ear. generating re\ enues ofUS$124 million and contributing to cash rcserves ofabout US$50 million (see Exhibit 2). The companl' rias listed on the stock exchanges in Mumbai and Calcutla.
E\port sales of DIP in 2001 represenled a small proportion of total production. at 25.000 lonnes. u'hrch uas doivn slightlr. from the 30.000 lonnes erported in the previous vear. These sales *ere primarilr. directed al Asia. including Bangladesh. Nepal and Sri Lanka. Unfortunatelr'. nel.er markets in this region. such as Singapore. Hong Kong. Brunei. Malal sia and Vietnam. had pror.en diflicult and slo$ lo develop. In addition. Electrosleel erported smdl quaniities to cuslomers in the Middle Eas1. including S1'ria. Lebanon. Kuq'ait. Oman. Ethiopia and earar. The erport deparlment in Calcutla. as iiell as branch sales offices rn Singapore ar.rd Lebanon. sen,ed these markels. Das be eled that Electrosteel could be translomed from a domestic supplier into a strong intemational competitor: We aim to be uorld
class
committed to customer satisfaction
and demonstraling strong leadership in desrgn and manufacluring.
Page 3
CHARACTERISTICS OF IRON PIPE
National and local govemmenls. as lell as prirate seclor ulilities- routinel) used large iron pipe to supplv basic infrastructural needs such as sater and senage s]stsms. Histoncallr'. CIP had been falored for its relalir ell lol cost and. durabilil. Since 1965. DIP had been increasingll used. particularlr,in developed countnes. because the metal pipe n,as less brittle_ rvhich translated directll into easrer handling and installation. Moreor,er- during subsequenl use- the enhanced ductilitr. reduced breakage and leakage. As a resuh. DIP las e\pecled 10 last 70 vears versus 40 r'ears for CIP and u,as therefore priced about 20 per cent higher. DIP also faced competition from other materials. such as plastic (PVC). mild s1eel. asbestos- and pre-stressed concrele. Pipes of these malerials uere generalll cheaper than DIP. but had seleral disadvantages. First. a shorter life span xas tl pical. ranging from 15 to 20 \'ears for PVC and mild steel pipe. respectiveh. Second. the qualill of l aler flos ing through pipes of these other malenals tended 10 deteriorate more quicklr'. Water qualitr rvas compromised as leakages der eloped and contaminanls from the surrounding soil enlered the pipe
ELECTROSTEEL'S OPERATIONS
Ductile lron Pipe Manufacturing Process
The manul-acturing process used mohen iron as a rarr rnaterial- drall uhere possible lrom a blast l'umace (E\hibit 3). Magnesium n'as added 10 impro\ e metallurgical properties. Pipe rvas then cast using sophisticated centrifugal casting machines. A rotating melal- n,ater-cooled mold used centrifugal lbrce to create a holloii pipe. therebl' eliminating the need lor a central core. Thrs operation emplol ed highll specialized. automated equipment $ith computerized conlrols.
After centrifugal casting. the iron pipe las heated to betl\'een 1.000 C and 1.400 C (depending on the metallurgical properties of the pipe) and then graduallv cooled in an annealing fumace to reliere intemal metal stresses. The specific tempelature and cooling rate had 10 be precisell' monilored in order to ensure a high quahlr'. duable finished product. This annealed pipe was termed rurw DlP. Rarr DIP las then coaled and lined on a finishing line 10 meel specific slandards. rihich laned based on intended use and other customer requirements. An e\temal coaling of zinc impror,ed resislance to rust. \\ilh its thickness conlorming to the preriouslv mentioned. uidell recognized intemational slandards. An rntemal cement lining impro|ed the flo$ of $,ater through the pipes. prer ented the ductile iron from coming in conlact riith the nater and pror,ided an acceptable pH value for drinking laler. Again. a centrifugal process \\as used to creale a smooth cement finish, u'ith the thickness being determined bl intemational standards.
9802D016
Finalll'- a second ertemal coating- norv of bitumen. las added 10 further protect both the zinc coating and the underlving ductile iron. After a dn'ing time of about l0 hours. the pipe could be packaged and shipped. Finished DIP had to Nithstand specific hr"drostalic lest pressures diclated bl.the u idel1, accepted. intemational standards. such as British or lntemational Standards. These standards ensured compliance for joinling. operaltng pressure alrd f pes ol fluid flos'ing through the pipe. Sandeep Sengupta. senior manager of
qualitr and det elopmenl. commenled.
ln
contrast to CIP. manufacturing DIP is like producing art. as it requrres erpertise at each stage. The proper cherntcal conrposllton must be der,eloped in the molten metal. process temperatures must
be closell monilored and controlled. and the casting machine requires training and judgmenl. Both erpertise and elfectit e svstems are essenlial 10 producing consistent melallurgical properties and surface hnishes thal meel custorner expeclations.
Plant Operations
Although Electrosteel had been producing CIP for decades. its first plant 1o manulacture DIP las buih in 1994. The DIP production lacilitr, ivas localecl in Kardah. near Calcutta. Indta. Setling r-lp the plant in Calculla offered the ad\,antage of using the infraslructue of the eristing CIp plant and the sen,ices of trarned stafll Being close to corporate headquarters in Calculta also stmplified management conlrol and engineering support.
of the ne\\' equipmenl for the casting and finishing operations uas manufactured in India. Hori eler- German lechnrcal knol,ledge nas critical to sta(ing up this plant. German consultants rvorked ri.ith skilled in-house personnel. including design engineers and cilil conlractors. The planl lavout ir.as deleloped Much
to minimize handling and throughput times. l'ith straightline flol,s *hereler possible While manl of the ra\\' materials u ere sourced locallr. some u ere imported. including metallurgical coke. zinc and bitumen. as \\'ell as some of the allol ing melals (see Exhibit .l). The plart had recentlv been accredited rl'ith ISO 9002 certification and the product uas licensed to carry the British Standards Institution (BSl) Kitemark. an rmportant- intemalional product certilication $idelv recognized bv cuslomers.
Br' 2001. the Kardah plant had DIP production capacilr,
of
130.000 tonnes
annuallr'. and supplied l5 standard pipe sizes ranging from 80 to l.()00 rnillimelres (mm) in diameter. Three different pipe joints (i.e.- shape of the end of the pipe)
r\ere also offered. CIP also u'as manufactured here. as ueil as rn another plant in Elar ur. $.ith a total capacit\' of l(r5.000 tonnes per y,ear (see E\hibil 2). In 2002managemenl planned 1o increase Eleclrosteel's installed riorlduide capaciq' f6r ran DlP. Houeler. the best location eilher in India or abroad for ne* casting ard hnishing capacih renuined a difficult dectsion. Capital Investment for DIP Because the basic process \\'as structured into t$ o stages
casting and finishing rnvestnlent las generalh assessed separatelv for- each stage. Capital -lnlestment for a casting operation including annealing \\'as \e[ htgh- and uas onll feasible in large increments. Based on recenl experience- each incremental addition of 50.000 lonnes per ).ear to casting capacilr' rvas e\pected 10 cost about US$40 million.
ln contrast. investment lor a finishing line. uhich included both e\ternal coating and inlemal lining. required a much smaller inlestment. This line a.lso could be separated geographicallr' from casting. Bv installing finishing capacitr or erseas. the llnished DIP \\'as considered local produclion for purposes of tendenng. Separating the t\\.o stages also reduced transportalion costs bv about l0 per centrihich u,as the lerght ofthe coaling and Ining. E\pected costs of constructing a linishing line are provided in E:ihibit 5.
er the last fel vears- Electrosteel had made amual in\,eslments of approxrmatell US$2 million 1o erpand finishing capacit] and upgrade process technologl for DIP. While mrnimum funclionalih \ras still determined bv confonnance \\ ith intemational standards. technologicil upgrades in the linrng and coating operations impror,ed product qualil (i.e.. appearance. melallurgical properties. and uniform thickness of coatings and linings). and reduced costs b\' about l0 per cent. Reject rates also dropped to less than fire per cent o\er thts period comparable to larger global competitors. Or
-
Initiallr.
a blasl fumace ri as no1 buih. and pig iron (a form of processed ral iron used as an input to casting) ri'as purchased on the open market. A blast fumace soon follon'ed in 1996 nrlh further inr estmenr of US$Zo million. This backlard
lnlegration pror,ided better control over the quali!. of molten iron. u'hich in tum improved the qualilr,ofthe finished product. Combined. product and process impror,emenls in DIP had been credited *ith significantll impror,ing cuslomer acceplance and increasing sales in countries as diverse as Singapore. Malal'sia. Brurei- Korea. Kulail. Saudi Arabia and England. Bn an Tong- a senior manager at Singardo Trading- a Singaporear customer. commenled. -'The manufacluring facilitf is tmlr rl orld-class. The final product is at par \uth those of anv global manufacturer."
DOMESTIC MARKET FOR DIP
Demand
The domestic market $ as spread across 28 different slates in India. \\,tlh the stateler,el gor emments being the priman buvers to improle infraslructure. This market for DIP had been grouing a1 betri'een fire per cent 10 l0 per cent annualll o\er the lasl lour )'ears as intemational agencies increased funding for later
suppll projects in India. Untbrtunatell. the gronlh experienced in the late 1990s las not e\pected to conlinue. Current estimates slrongh indicated that these sgencles \\ ere significantlr reducing support oler the nest fen, 1ears. With less inlemational fr.urding. state go\,emments sere forced 1o relv on a cash-slrapped central go\ emment- rrhich lranslated into much lo*.er funding for infrastructural projects. As a resuh- overall demand for DIP Ias expecled to remain a1 roughl_r, the current ler el
tith
greater vear-to-\'ear varialion.
The manulacturing and deli\ en, of rron pipe (both DIP and CIP) l.as undertaken onll afler the go\,ernmenl had placed a firm order. The peak bul ing period tended 10 occur in the first quarter of the calendar (Januarl to March). coinciding $,ith the slate and central govemments fiscal vearend. Demand then usuallr'fell bv a third in the much slol er second quarter. The steel market. including DIP. l'as plolected b) an import tariffof25 per cent of landed price. As a resuh. domestic pnces lor DIP lere about l5 per cent higher than intemalional prices (betbre dutl'). India's panicipation in the WTO suggested thal these reslriclions rrere likell to be phased out. although the timeframe las some\\,hat flesible and r.rncertain because ofstrong lobbr,ing for delal's bl the local steel industn .
Competition
Electrosleel rias a tvell-eslablished brand in Indra and maintarned an e\tensive local nell ork of agents and a lean of sales professionals. Il 2001. Electrosteel supphed or,er 90 per cenl and 60 per cent of the domeslic demand lor DIp and ClP. respeclrlelr'. A nen domestic compelitor had recentll started manufacturing DIP in 2001. and currenth held about half the remarning DIP market share. nhile lmports accounted for the remzunder.
Manulaclurers around the rvorld had been len. secreti\ e about specific technologres related to DIP producrion. Ser eral manufacturing operations. such as casting- zinc coating and cement lining- had proven difficult to duplicate. Moreorer. skilled emplol ees nere difficull to recmil. as Eleclrosteel's emplol ees \\'ere len loval and reluctant to join this new slartup. As a result. lhis nen.
Page 7
competilor found it r,er] challengrng to initiate and ramp up produclion. Das estimated that Electrosleel had approrimatelv trvo r,ears before this competitor rould presenl a serious threat. Once the competitor was full! functional. Das e\pecled much stronger price compelilion in the domeslic market. The size olthe lndian market- bolh no\\'as n'ell as in the longer tern presented an allractl\,e opportunih: 1o intemational manulaclurers such as France's St. Gobain Group (see E*libit 5). Rumors u,ere circulating that this firm. along n.ith others. rras contemplatlng entn into the Indian markel in the near 1'uture. Anr. reduclion in import duties *ould onlv offer a further rncentrr e for their aggressii e entn..
GLOBAL OPPORTUNITIES
The markets in Asia l'ere rapidll. erpanding. as manv deleloping countries \\,ere moring aggressir eh lo de\,elop their infrastmclure. Here. much of the funding came f-rom inlemational organizalions such as the World Bank. the Asian Delelopment Bank. and the Organization for Economic Cooperation and Der elopment (OECD). In contrast. the emphasis in developed countries such as Europe u as 1o maintain their exisling s) stem \\ ilh the sleadv replacemenl of older pipelines.
A number of developing cor.ultries such as Singapore. Vietnam-
Cambodia and BrLnei did not hai e local mar.rufacturers of DIP and uere lorced to imDort. For those countries rrith loca.l production. either duties might be imposed 1o protect local manulacturers (e.g.. India) or unique local standards might be eiracted. Specific national standards could include improved coalings. such as epoxr.or poll urelhane coated pipes. dilferent pipe sizes or a different thickness of coatings. linings or pipe rralls. DIP manufacturers could respond to these unique standards bi deleloping a specific producl an expensile six- to l2-month process h picalh costing aboul $50r).{n)rl Manulacturers e\porting pipe also had deal r.ith the logistics of hzurdling a l.en. large and hearl product. Thus. it n,as no1 surprising that sma.ller diameler pipes. up 10 200 mm- rvere lalored for erport business- uhere lhe ri'eigh1-to-\.olume ratio nas higher. Smaller pipe \\as e\ported in 20-foo1 containers: larger diamelers $ere slacked direclh on the ship (i.e.. break-bulk). This meant thal adequale porl lacilities and handling equipment uere required in close proximilr'to the customer to recerr,e imported pipe.
Prices for DIP in the intemational market lere about US$600 per tonne. lilh smaller pipes (i.e.. 80 and 150 mm) commanding a fir,e 1o l0 per cent premium because 1o their greater marulactr-rring compleritr'. (ln general. manufacluring cosls for the rndustry ti ere roughlr' 80 to 85 per cent of the intematior.ral price.) Transportation. port handling charges and insurance h.picalh added another l0 per cenl to the deli\iered price. plus anY applicable import duties.
9B02D016
Page
I
9B02D016
Global ComDetition
In general" large-scale manuibclurers tended to increase their e\port \,olumes \\.hen the local market Nas unable 10 absorb the installed production capacitr'. As a result. several compelilors at anl giren time Nere usualll' tvilling 1o sell their products al a discounled price in order to maintain minimurn produclion le|els at their plants. A sunel bv senior management of the priman competrtors highlighted sir of particular importance. based in France. Korea. Japan. Auslralia and China (see E\hibit 6).
ofthe compelitor or market- rarl DIP nas not at ailable: manufaclurers offered onh finished DIP. This alloled the producers to retain direcl contact \\ilh the end-cristomer (e.g.- government agenq and captrire addittonal margin. Cuslomers also l'ai ored this arrangement. If a qualit\ problem de\eloped. liabilitl and responsibilit for correcting the issue could be clearll assigned. Regardless
)
Electrosteel's International Exoansion
After a series of planning sessions- the manufactunng and erport departments had concluded that Electrosleel should target a total e\port I olurne oi approrimalelv 60.000 tonnes per vear- based on current domeslic demand and an erpansion of produclion capacitr'. As a resuh. Das had formalized a corporale obiectir e of ramping up inlemational lolurnes bl' 10.000 tonnes per vear. While manl locations tere possible. a detarled and thorough analiiis bv management hod narrol'ed the candidate list to tlo specific countries: Vietnam and France. EXPANSION INTO VIETNAIVI
Vietnam l'as the second largest counll in Southeast Asia nilh a population of 7g million. As the socialist stale had become increasinglr, liberalized oler the last decade. loreign investment had begun 1o reshape the major cities of Hanoi. Ho Chi Mrnh Cilv- Da Nang arid Hai Phong. Mosl Vielnamese companies lere orlned and controlled br' the goi,emment- although prir ate onnership l.as increasinglv encouraged. English l'as also becoming accepted as the ltutguage ofbusrness. Economtc grolth since liberalization had been strong- but recent decreases in forergn direct inlestment (FDI) had slo$ed grori th to about four per cent annualh,. Yet. the countn, continued to lack proper infrastructure in most areas. For erample. transpoflalion iras challenging. nilh inadequate port facilitres and poor roads that slorved the movemenl of hea\,\, equipment. Water suppll and se\\ age slsiems faced simtlar shoficomrngs and needed urgenl in\ estment. Moreor er- these projects targeted onl| lhe Nater supplr. in major cenlres. lea\in! an estimated 80 per cent of lhe countn tr ith it aler that did not
meet basic drinking standards. There also \\ere no fr.urctioning \\aste$,ater trealment plants in the countn. Adding furrher 10 the challenge. a number of national agencies and proYincial $'aler companies had o|erlapping responsibilitr. combined *ith a rveat admrnistration struct,'e. As a result. the politiial sr.stem \\as ven bureaucratic and difficult to penetrate. These ualer supplv projecls had been fLrrded
bl inlematronal agencies such as the Bank and Asia Der,elopment Bank. These agencies ol.lered open tenders. {orld whrch allos'ed a local supp|er a premium of l5 per cent o\ er intemalional pnces. Othel projecls had been funded bv countryspecific det,elopment agenciei lrom countnes including France. Denmark. Finland and Japan. This dependeno. on tbreign agencies for funding n as e\pected to continue into the foreseeable future. Since 1995- rvater-relaled inlrastructure proiects lotaling LlS$1.210 million had been undertaken. utilizing approrimatelr. 130.000 lonnes of DIp. Four DIp
sith a local mzurufacluring plant. had strong sa.les in Vietnam: St. Gobain. Kubota. Xin\in. and KCIP (estimated. cumulalir e sales lolumes o|er the prer,ious four-r'ear period are noted in Erhibit 7). Maragemenl estinlated thal a similar amor"nl of CIP had been used. all of rr.hich uas produced bv a local firm. ln addition. lorr-cost pipe oforher marerials ,ras rnrponecl. manufacturers- none
Electrosteel's Ootions
LIp to this point. Electrosleel had erported onl1. small quanllties oi DIp to the Vietnamese markel. tolalling aboul 900 lonnes of pipe for t* o projects. Ser eral options \\'ere ar,ailable to establish a stronger presence here- including opening a branch sales office or building a nerr manufacturing lacilif . (ln iontrist. establishing a manufacturing planl in nearbr, Singapore or Hong Kong $as prohibitilelv erpensile. gii en the combined high cost of land and labor.) ,{ sales office ii'ould cost about US$120.000 annualll._ nith minimal start_up costs. lf Electrosteel decided to build a plant. at least t\\o configuratlons rvere possrble. Frrst. both a casting operation and a finishrng line could be installed to provide lnlegrared. local production. pig iron. the prirnan rnpur. *ould be purchased on the open markel. In addition to being considered a local supplier. cost sar ings lould be possible bl aloiding the lransportalion of DIp from lndia to Vretnam equal to approrimatelr l0 per cent ofthe market price. Second. foreign inlestmenl could be reduced bl.srmpli rnstalling a finishing line. with anl necessan casting capacit\, added to the Kardah plant in lidia. Rau DIp s,ould then be shipped from the Kardah plant to Vietnam. *.here it il.ould be e\lemalh' coated and inlemalll' lined in the ne* plan1. Ho*er er- transporarior.l sa'ings nould be much less thar the first configurarions as ra* DIp accounted for 90 per cent of the iveight offinished DIp. Initia.l market research indicated that if
Page
'10
9802D016
an esumated
l0
per cent cosl
ad\ antage
$ere achie\.ed. relali\'e to foreign
competilors. sales of about 10.000 tonnes per r ear should be possible.
l.hollv os.ned subsidiary or as arrangement lith a local Vielnamese partner. Unfortr.uratell.. the earher record of foreign manulaclurers in Vietnam had been poor. $i1h httle success. The Vietnamese go\emmenl offered a further incenti\e 10 Electrosteel: a credit loan ofUS$3. I milhon. This loan las to be allocaled 10 an lndian manufacturer to encourage ne\\'inlestment and trould be used b1 CMC. a contractor based in Hanoi. fbr construclion. CMC also offered to purchase DIP lrom Electrosteel as needed for other uroiects on a contractual basrs. Plant conliguration could be structured eilher as a
part
of a ioinl \'enture
Das reflecled:
Vietnam is a fast groning market. The gro\\lh potenlial is huge. but the lack of infrastructure and resources creates manv ne\\ challenges lor Eleclrosleel. The opportunitv to be the first local manufacturer of DIP in Vietnam is |en attraclive.
EXPANSION INTO EUROPE
Unlike much of Asia. *'hich promised slrong gro\\1h. the European market as a nhole rras stable. lrth annual demand of betrveen 700.000 and 800.000 lonnes of DlP. France and Germanl represented the largest markets because of lhe preference bv their local utilities for DIP (see Erhibil 8). The fastest groting market \\,as Spain. Horverer- demand in some other countries u,as lalling: for erample. demand in the Lhlted Kingdom had lallen br' 50 per cent o\ er the last decade.
While each market *as conlrolled bl,specific golernmenl regulations and sub.iect 10 particular pncing structures. a manufacturer located in anr European Union countn \\'as considered a local supplier for all other EU countries DIp for this markel also las produced 10 common European standards. Collectireh. go\,emment regulatlons- approval processes and buver preferences t'alored local suppliers. alloling an ar erage l2 per cent price prernium oler intemational pnces. Electrosteel's Options
len attracti\ e because of the large. stable business enrironment uith political fet,er and bureaucratic problerns. In conlrast to developing countriesDIP qas a l ell-established and accepted matenal for public infrastruclure in Europe. Deleloping countries tended 1o favor lou,er cosl pipe ahematir es because their tightl) conslrained funds could be stretched to sen ice more people. Finallr.. Europe rvas
Page 1'l
9B02D016
unlike Vietnam. project funding rras not limited to foreign der,elopment agencies but instead came from a r,arie8 of domestic sources.
In the past. Electrosteel had been able to build a small presence in Europe b1' sending executives as needed from head office to address particular sales requiremelits. Unfortunalel). the large geographic area of the European market made it diffrcult to effectivell' expand and sen ice this customer base from lndia. The erpansion options in Europe u'ere similar to those being considered for Vielnam. A branch sales olfice could be opened. for US$400.000. Altematir elv. Electrosteel could build a nen manufacturing plant. u.ith both casting and finishing operalions. orjusl a finishing line. If located close to a seaport. trrnsponation costs from Lrdia tr,ould be reduced. as nell as potentialll. facilitate shipmenl of finished goods to olher markets in Ewope.
As uith Vietnam. it rvas difficult lo accuratel) forecast the sales r olumes that Electrosleel might achiele. Ho\\ eler- polenlial agents in seleral counlries indicated that. br' focr-rsing on niche segments *here clients uere hesitant to deal
l'ith
larger incumbent firms. Electrosteel could expect to build significant rolume. Based on these lengthl, discussions. Das projected thal Electrosteel could reasonablr' achier e an zrnnual volume of 30-000 lonnes.
Expanding operations in France presenled other significant challenges. First. there uas the issue of operating cos1. French labor ri as about l0limes more espensire than that in India or Vietnam. Second. the French language presented a challenge for Eleclrosteel's managers. Third. the strong presence of St. Gobain Group complicated anl decision. and ajoint lenture \\ as r,ery unlikell. Das rvas unsure hol this global leader wor:Id react. Another senior manager expressed the oplnlon:
Europe rs a dir,erse market and the home of the largest global manufacturer ol DIP. Enlenng Europe n.ith our orrn manufacturing operations uould mor e us onto St. Gobain's home turf. ln doing so. \'e mrght be able to eslablish Eleclrosteel as a serious global competitor. MOVING FORWARD
Das realized that Electrosteel lras at a significanl crossroad. He u'as continced thal the current approach of corporate sales executir es sen icing foreign markets ol'lered very limited potential. lnstead. intemational sales lould be appreciabl)' increased onll u,ith a significant inlestment in a parlicular foreign market. The remaining question- git en the firm's limited resources- $,as \\here to concenlrale that inleslment and hon to implemenl anl decision. Both Europe and Vietnam appeared attracti\,e for differenl reasons. Das belier ed that no$ \\es time to act before he rras forced to reocl lo rggressir e competitors
Exhibit
1
MAP OF SOUTHEAST ASIA
Exhibit 2 HISTORICAL OPERATING STATISTICS
year ending March 31
(in US$ millions) 1SS8
ReGnues expenses Gross profit less: interest, depreciation & Net
profit
$ 81
62
tax
19
9
$10
2001
$99 $ 120 74 87 25 33 11 13 $14 $ 20
$124 97
27 13
$
14'
Production (000's tonnes) ductile iron pipe (DlP)
capacly production cast iron pipe (ClP)
capac[y production
90 100 80 90
100 95
130 110
1 150 120 120
165 120
165
121
Exhibit 3 OVERVIEW OF MANUFACTURING PROCESS
Induction furnace (reheat iron)
Page 15
9802D016
Exhibit 3 (continued)
Pipe emerging from casting operation
Pipe in annealing furnace
Application of internal cement lining
Source. www.el ectrclste el.com
Page |6
9802D016
Exhibit 4 COST STRUCTURE FOR DIP MANUFACTURING
(in percentages)
Process Stage
Casting Finishing
Total
Raw Materials
. iimported
15
8
domestic
60
7
23 67
LADOT
J
7
10
Total
78
22
100
.
Exhibit 5 ESTIMATED CAPITAL COST OF FINISHING LINE: THREE POSSIBLE CAPACITIES (in US9000s)
Description
/ Construction Utilities Civil structure Overhead cranes Gantries & trolleys
Annual capacity (tonnes)
10,000 30,000
50,000
$70
$
Civil
Finishing Ljne Equipment Chamfering equipment Cement lining equipment Zinc coating equipment Bitumen coating Packaging Stenciling & bundling Packaging Tools for inspection
TOTAL
$
30 35 40
110 43
130
55
50 35 65
40 390 80 150
40 600 100 800
40 700 150 900
30
45
10
10
25
JJ
55 20 35
s 900
35
$
1,873
$2,180
Page 17
9B02D016
Exhibit 6 SUMMARY OF MAJOR COMPETITORS St. Gobain Group (France)
. . . .
Global leaders in DIP and fittings Insta.lled annual capacity of tw-o million tonnes annually, Europe- where they rvere market leaders
with much of that capacity in
Manufacturing in Brazil, Chin4 South Afric4 and Saudi Arabia, each with casting and finishing Ertensive range of products, with including a wide range ofpipejoints
Kubota Corporation (Japan) Estimated capacitv of about 800,000 tonnes per yea"r Producer ofhigh quality pipe allowed a slight premium in price
. .
Kurimoto Pipes (Japan) Smaller manufacturer with a strong presence in Asia Capacity ofabout 80,000 tonnes per year High quality of finish for lining and coating
. . .
Tyco Pipes (Australial Installed capacity of about 70,000 tonnes per yea.r Due to cyclical demand in Australia, they were able to offer attractive discounts, when the Australian demand was low Targeted $o\,th in Asia because of its close proximrty
. . .
Xinxin Pipes (China) Growing competitive threat rith a current installed capacity ofabout 250.000 tonnes per year Currently export to many markets served by Electrosteel Estimated cost of production was lorver than Electrosteel
. . .
Korean Cast lron Pipes (Korea)
. .
With capacit_v of about 150-000 tonnes per year, was the largest manufacturer in Korea Very competitive in Asian markets, as attractive discormts were offered in the absence of a strong domestic market
Page 18
9B02D016
Exhibit 7 COMPETITOR ANALYSIS FOR SELECTED SOUTHEAST ASIAN MARKETS FOUR-YEAR CUMULATIVE MARKET VOLUME FOR DIP (1997 to 2000)
(in tonnes)
Vietnam Singapore St. Gobain Group Kubota Corp.
Kurimoto Pipes Tyco Pipes Xinxin KCIP E lectrosteel Others
TOTAL
'A
20,000 15,000
130,900
Malaysia
25,000 35,000
15,000 60,000 16,000
2,000 15,000
10,000 35,000 25,000 15,000
'15,000
30,000 25,000 900 40,000
Kong
Hong
4,000 -
30,000
149,000
136,000
8,000
130,000
.
155,000
localfirm accounts forthe majoity ol this ma*et.
Exhibit
E
COMPETITOR ANALYSIS FOR SELECTED EUROPEAN MARKETS MARKET VOLUME FOR DIP IN 2OOO
(in tonnes)
France cermany
Spain
^l[:T, St. Gobain Group Stanton Pipes* Halburghutte* Tiroler Rohren- und Metallwerke AG (Austria) Buderus Guss GmbH (Germany) Others
,ro,oo2_-
TOTAL
250,000 '14,000
Elecirosteel's potential**
'
*,*:
Italy
..
65,000
20,000 5,000
5,000
ao,ooo
2/t0,000
65,000
65,000
145,000
765,000
3,000
3,000
2,000
3,000
30,000
40,000
150,000 40,000
50,000 30,000
T.otal345,000 40,000 150,000 40,000 70,000 129,000
-
Note: NI these fims also actiwly expofted elsewhere in the wond
*'
.
Paftofthe St. Gobain Group. Based on managemerf's exfetsrve discussions with local disttibutors and customers
