STEEL INDUSTRY

OVERVIEW OF STEEL INDUSTRY

Introduction Steel is crucial to the development of any modern economy and is considered to be the backbone of human civilization. The level of per capita Consumption of steel is treated as an important index of the level of socioeconomic development and living standards of the people in any country. It is a product of a large and technologically complex industry having strong forward and backward linkages in terms of material flows and income generation. All major industrial economies are characterized by the existence of a strong steel industry and the growth of many of these economies has been largely shaped by the strength of their steel industries in their initial stages of development. Steel industry was in the vanguard in the liberalization of the industrial sector and has made rapid strides since then. The new Greenfield plants represent the latest in technology. Output has increased, the industry has moved up in the value chain and exports have raised consequent to a greater integration with the global economy. The new plants have also brought about a greater regional dispersion easing the domestic supply position notably in the western region. At the same time, the domestic steel industry faces new challenges. The Indian Steel Industry is in a midst of the worldwide downturn. Prices have been under pressure both internationally and domestically as a result of oversupply, coupled with stagnant demand growth. Though Indian steel exports are exempted from the trade restrictions announced in March 2002 in the US and EU, it continues to face the earlier trade restrictions in the form of antidumping and countervailing trade actions. Thus, the prospects of declining exports and rising imports may further deteriorate the demand supply position in the Indian steel market. Also the restrictive trade policies may further delay the recovery of global steel prices. During 2001, it is estimated that global steel production capacity is 1068mt, with global production estimated at 835mt and consumption at 721mt. Of this, Indian steel production accounts for 3.2%. The major steel producing countries are China, US, Japan, Russia, Germany and South Korea. In order to come out of 20-year low steel prices, a move has been initiated globally to cut-down steel production. Also some recent events of internal demand picking up and price hike points out to a possible recovery.

The Indian iron and steel industry is nearly a century old, with Tata Iron & Steel Co (Tata Steel) as the first integrated steel plant to be set up in 1907. It was the first core sector to be completely freed from the licensing regime (in 1990-91) and the pricing and distribution controls. The last ten years have seen inefficient steel mills with outdated technology perishing, while new capacities have come up which possess latest technology. At present India is the tenth largest producer of steel in the world producing nearly 30 mt of steel. Two of its companies (SAIL ranks 13th and Tata Steel 57th) figure among the worlds 80 largest steel producers. With a market capital of Rs. 102bn it, gives direct employment to about 0.5m and indirect employment to 1.5m people. The Indian steel sector enjoys advantages of domestic availability of raw materials (iron ore) and cheap labor. This provides major cost advantage to the domestic steel industry inducing developed countries to construct or shift their steel plants to India. During the year 2001, India has been a world leader in ship breaking and re-cycling industry. Some of these relate to the trade barriers in developed markets and certain Structural problems of the domestic industry notably due to the high cost of Commissioning of new projects. The domestic demand too has not improved to significant levels. The litmus test of the steel industry will be to surmount these difficulties and remain globally competitive. Background The demand for steel is derived from other sectors like automobiles, white goods and construction/ infrastructure. Being a core sector, it tracks the overall economic growth. The Indian Steel sector enjoys advantages of domestic availability of raw materials and cheap labor. Iron ore is available in abundant quantities. However, Indian steel companies have to bear additional costs pertaining to power, fuel and freight costs. The domestic industry continues to witness an oversupply situation. End users import due to the price advantage and non-availability of certain high quality steel grades. The basic import duty on steel has been consistently brought down. This has made the industry vulnerable to international competition. Rapid integration of the global steel markets has begun to affect the domestic steel market. The current year has been relatively good for the Indian steel industry. Finished steel production has been on an up trend due to buoyant domestic demand and exports. Primary steel majors have increased the prices of their products on several occasions reflecting the firming up of the prices in the international markets. Historical Perspective The finished steel production in India has grown from a mere 1.1 million tones in 1951 to 31.63 million tones in 2001-2002. During the first two decades of planned economic development, i.e. 1950-60 and 1960-70, the average annual growth rate of steel production exceeded 8%. However, this growth rate could not be maintained in the following decades. During 197080, the growth rate in steel production came down to 5.7% per annum and

picked up marginally to 6.4% per annum during 1980-90, which further increased to 6.65% per annum during 1990-2000. Though India started steel production in 1911, steel exports from India began only in 1964. Exports in the first five years were mainly due to recession in the domestic iron and steel market. Once domestic demand revived, exports declined. India once again started exporting steel only in 1975 touching a figure of 1 million tones of pig iron and 1.4 million tones of steel in 1976-77. Thereafter, exports again declined to pick up only in 1991-92, when the main producers exported 3.87 lack tones, which rose to 2.79 million tones in 1995-96 and 3.3 million tones in 2001-02. The growth in the steel sector in the early decades after Independence was mainly in the public sector units set up during this period. The situation has changed dramatically in the decade 1990-2000 with most of the growth originating in the private sector. The share of public sector and private sector in the production of steel during 1990-91 was 46% and 54% respectively, while during 2001-02 the same was 32% and 68% respectively. This change was brought about by deregulation and decontrol of the Indian iron & steel sector in 1991. A number of policy measures have been taken since 1991 for the growth and development of the Indian iron & steel sector. Some of the important steps are (a) removal of iron & steel industry from the list of industries reserved for the public sector and also exempting it from the provisions of compulsory licensing under the Industries (Development & Regulation) Act, 1951, (b) deregulation of price and distribution of iron & steel, (c) inclusion of iron and steel industry in the list of high priority industries for automatic approval for foreign equity investments up to 51%. This limit has been since increased up to 100%, (d) lowering of import duty on capital goods and raw materials etc. As per the International Iron and Steel Institute, India has emerged as the largest producer of sponge iron in the world in 2001. Production of sponge iron in the country as an alternative feed material to steel melting scrap, which was being imported hitherto in large quantities by the Electric Arc Furnace Units and the Induction Furnace Units, has resulted in considerable savings in foreign exchange. CURRENT GLOBAL SCENARIO The global production of crude steel increased from 777 million tones in 1998 to 785 in 1999. The world steel consumption has also increased by 1%. The international steel trade constituted around 279.6 million tones or 39.8% of the production. World steel industry witnessed major ups and downs in the last two decades and especially over the past five years. The pattern of trade has been upset by two important developments. These are the collapse of the Soviet Union and the severe financial crisis in most South East Asian countries as well as in Korea and Japan. The Asian crisis and the collapse of USSR have transformed importers of steel into exporters. Till the recent financial crisis, the Asian countries were large importers of steel. In 1996, eight of the ten largest steel producing nations were in Asia and import by the region in the mid 1990s was around 80-90 million tones of finished and semi finished steel per year, which is equivalent of a third of total steel trade. After the Asian crisis, the region got transformed into a net exporter of steel.

DOMESTIC STEEL SECTOR SCENARIO The iron and steel sector has been experiencing a slow down in the last few years. The growth of the steel sector is dependent upon the growth of the economy in general and the growth of industrial production and infrastructure sectors in particular. The major reasons for the slow growth in the steel sector during the last few years include: (a) Sluggish demand in the steel consuming sectors Steel being the basic raw material for the construction industry, the capital goods and engineering goods industry, as also the auto sector and white goods sector, its growth is dependent upon the demand for steel by these segments of the industry. Since no major infrastructure or construction projects have been implemented in the last few years, demand for steel has remained low. No major projects in the oil sector, power sector, fertilizer sector, where intensity of steel consumption is high, have come up in the recent past. (b) Overall economic slow down in the country All major core sectors of the economy have been facing an economic slow down. These include, power, coal, cement, industry, mining and steel. The slow down phenomenon is not restricted to the steel sector alone. Only when the overall economy of the country picks up, the steel sector would also show signs of revival. (c) Lack of investment by Government/private sector in major infrastructure projects Due to budgetary constraints, no major construction activity in mega projects including fertilizer, power, coal, railways etc, have been planned by the Government. Despite liberalization of the economy and relaxation in the investment norms, private sector investment is yet to materialize in the core sectors of the economy. This has also contributed to slowing down demand for steel. (d) Cost escalation in the input materials for iron and steel Power tariff, freight rates, coal prices etc. have been under the administered price regime. These rates have been frequently enhanced, thereby contributing to the rise in input costs for steel making. (e) Continuous reduction in import duty on iron and steel After liberalization, import duty rates on iron and steel items have been gradually reduced over the years. This has opened up the domestic iron and steel sector to international competition. Due to rationalization in the import duty structure in 1999-2000, the rates of basic custom duty have generally gone up. ACTION BEING TAKEN BY MINISTRY OF STEEL

The Ministry of Steel has been making all out efforts to help the domestic steel sector to overcome the problems faced by the steel industry at present. These include: (a) Boosting demand in the steel consuming sectors To help the steel industry by way of research and developmental support for boosting steel consumption and providing technical support and trained manpower to steel producing and consuming sectors, the following institutes have been set up: The Institute for Steel Development and Growth (INSDAG), Kolkata (WestBengal); National Institute of Secondary Steel Technology (NISST), Mandi Govind Garh (Punjab); and Biju Patnaik National Steel Institute, Puri (Orissa). The Development Commissioner for Iron & Steel (DCI&S) has launched a National Campaign for increasing the demand for steel, in non-traditional sectors, particularly in the construction, rural and agro-based industrial sectors. (b) Reduction in Power & Rail Tariffs In order to make dispatches of iron and steel material more attractive through railways, the Railway Board has been requested to consider lowering the classification of steel, give freight discount to bulk users and to bring down freight rates of iron and steel commodities. (c) Reduction in input costs The Ministry of Steel has been able to rationalize the classification of coking coal in consultation with the Coal Ministry so as to reduce the impact of royalty payable on this basic raw material. Import duties on several raw materials, such as, scraps, ships for breaking, coke, etc. used by the steel industry have been reduced steadily over the past 4 to 5 years. (d) Strengthening of Anti Dumping mechanism To check the increasing trend of cheap imports in certain categories of flat products especially from CIS and South East Asian countries, the Ministry of Steel has suggested a few necessary steps to Department of Commerce to strengthen the antidumping mechanism so that quick decisions to check dumping can be taken. Future Prospects With the onset of liberalization, the steel industry has now to gear-up, not only to domestic competition, but also to global competition in terms of product range, quality and price. The growth of the steel sector is intricately linked with the growth of the Indian economy and especially the growth of the steel consuming sectors. India has become self-sufficient in iron and steel materials in the last 3-4 years. Exports are rising and imports are taking place mostly in a few specialized categories. Production and production capacities

are increasing. The position needs to be further consolidated and issues affecting production and consumption need to be resolved on a continuous basis. At the same time, productivity of our steel plants must be maintained at levels close to international standards. The Ministry of Steel continues to play an active and major role in helping the steel industry to overcome bottlenecks in the growth of this sector. HIGHLIGHTS India is the 10th largest producer of steel in the world, but per capita consumption is one of the lowest. It accounts for 3.2% of the world steel production of 835mt. In FY01, India produced 26.5mt (million tones) of crude steel and 29.5mt of finished steel. The demand for steel in India is derived from other sectors of the economy like automobiles, consumer durables and infrastructure. Over the last few years the performance of the Indian steel industry has been adversely affected due to over-capacity, cheap imports, economic slowdown, declining global steel prices and anti dumping duty imposed by USA on Indian exports. However, few recent events like the capacity curtailment by the OECD countries, price and demand hike portend good prospects. According to the routes of production, the industry can be classified as, Integrated Producers and Secondary Producers with the products being Iron ore, Pig iron, Sponge iron, Flat steel products, Long products and Alloy steel products. SAIL ranks 13th and TATA Steel 57th among worlds 80 largest steel producers. TATA Steel is the lowest cost producer in the world as well. During April-October 2001, exports of iron & steel bars/rods and primary and semi-finished steel reduced sharply by 28% while imports of iron and steel went up by 6.5%. The New Industrial Policy, 1991 opened up the sector to the private players. National Steel Policy 2000-01 was framed to inject further competition into the industry and provided a clause of Buy Indian Act. The Vision 2020 brought out by the Ministry of Steel last year aims at increasing steel demand by 200% in the country by the year 2020. This implies a CAGR of more than 5.5%. A trust, Indian Steel Alliance, has been formed, who prepared a fiveyear program for creating demand of steel.

AUTOMOBILE INDUSTRY

INTRODUCTION Peter Drucker called the automobile industry as "the industry of industries". During the last few years, the production and management systems have been revolutionized in the automobile industry (Karmokolias, 1990). One of the major changes in the industry has been the opening up and growth of several emerging markets. India is one of the most important emerging car economies in the world today. In 1991, the Government of India embarked on an ambitious structural adjustment program aimed at economic liberalization, based on the pillars of Delicensing, Decontrol, Deregulation and Devaluation. Post-liberalization, the Government of India's new automobile policy announced in June 1993 contained measures, such as delicensing, automatic approval for foreign holding of 51% in Indian companies, abolition of phased manufacturing programme, reduction of excise duty to 40% and import duties of CKD to 50% and of CBU to 110%, and commitment to indigenization schedules. The Government of India's new automobile policy attracted a large number of automobile companies to India. These include General Motors and Ford, and two Japanese, seven European and two Korean companies. Toyota and Chrysler are also seeking to enter the country with suitable Indian partners. In addition, there are three existing Indian companies, Hindustan Motors, Premier Automobiles and Telco, and one Indo-Japanese venture, Maruti already in the passenger car market. Maruti is by far the biggest player with about 70% of the market share. As of April 1997, a total of 7 Automobile companies (Daewoo, Peugeot, Fiat, Ford, General Motors, Merc, Audi) have already started selling cars, while another 8 companies (Honda, Mitsubishi, Renault, VW, BMW, Toyota, Hyundai, Chrysler) have either begun operations in India or plan to start soon. Some Indian companies like Telco and Kinetic are also working on introducing small car models. The number of new entrants and the level of investment within a very narrow time window of two to three years are unprecedented and seems unique to India. Compared to three major models available in the Indian market until recently, customers can now choose from a wide variety of products. Some of the entry barriers faced by automobile companies in India are relatively high levels of import duties, a promising ancillary industry, and product modifications required for relatively poor road conditions and high levels of heat and dust. On the other hand, a rapidly growing middle class, rising per capita income, and high levels of latent unsatisfied demand with customers starved of world class options promise enormous opportunities As the data shows, the automobile industry does not dominate the transportation industry. Out of $17 billion fresh investments in the transportation industry up to the year 2000, only $5.7 billion will be in the

automotive industry. Turnover figures include sales for trucks, cars, utility vehicles like jeeps, and two wheelers. The share of passenger cars is much lower and is expected to rise from 11% currently to the 15% to 20% range by the year 2000. Some of the strengths of the industry are low labor costs; the supplier industry also faces enormous challenges to keep pace with rapid growth. Manufacturing practices will have to change considerably to come closer to lean production. It is also possible that some companies will increasingly use India as a base for exporting vehicles to other countries. These issues will become clear as the future unfolds The Indian automotive industry has been growing for the third year in succession at over 25%. The number of persons per car is 200, which is very large compared to other emerging markets like Korea and Brazil, which have about 12 persons per car. There is therefore a very huge untapped market. Compared to three major models available in the Indian market until recently, customers can now choose from a wide variety of products. Mukherjee and Shastry (1996) provide an analysis of the entry strategies of the new entrants. The future looks promising since the economy has been growing at nearly 6% in real terms, inflation is relatively low at less than 6%, consumption is growing at 11%, and deregulation and market liberalization are now difficult to reverse. Major weaknesses are a small and fragmented ancillary industry, poor infrastructure, and low level of diffusion of lean manufacturing, improvements needed in quality and productivity, and lack of product development capabilities. The opportunities that the industry offers are a large untapped market, and a possible production base for exports. Some MNCs like Maruti-Suzuki have already started using their Indian plant for exports. THE INDUSTRIAL STRUCTURE Suzuki was the first MNC to enter India in 1981 through a joint venture with the Government of India and set up Maruti Udyog Limited. Currently, Maruti has around 70% of market share, and the Maruti 800 in the small car segment is the best selling model. Since 1995, the industry is witnessing a change with the introduction of several new models by MNCs coming into India through joint ventures with Indian partners. In the super-premium segment there is the Mercedes Benz's E-class sedan. BMW and Audi are also considering plans to sell cars. New introductions in the premium segment are General Motor's Opel Astra, PAL Peugeot's 309, Maruti's Esteem, Telco's Sumo, Estate and Sierra, DCM Daewoo's Cielo and Sipani's Montego. In the economy car segment, Fiat Uno and Telco are expected to produce 60,000 cars each per annum. The power relationship between automobile companies, dealers and customers is going to change substantially as the industry moves from a supply constrained sellers' market to a demand driven buyers' market. Thus dealers and customers are going to acquire greater power.

THE MARKETING QUESTIONS Distribution Channels The distribution environment for automobiles in India is quite different from that of most advanced countries. Such differences exist in type and size of dealers, number of dealers, car supermarkets, vertical integration, functions of dealer, bookings, financing, manufacturer-dealer relationship, number of cars sold per dealer, margins, and market environment. Market Segmentation The Indian automobile market is still in its evolutionary or early growth stage. Therefore, no fixed or widely accepted method of segmenting the market has evolved as yet. Segmentation has mostly been done on product types or price ranges. There has hardly been any kind of segmentation on psychographic or behavioral parameters as seen in developed car markets. The segmentation provided in this paper is based on an understanding of the current state of the industry. These segments are quite different from the segments known in the US, European or Japanese markets. The following four segments based on price and type of car have been identified: Off-road or utility vehicles e.g., Maruti Gypsy, Mahindra Armada, Tata Sumo. Economy segment, comprising cars priced at less than $ 13,333, e.g., Ambassador, Premier Padmini, Maruti 800. Luxury segment, comprising cars in the $ 13,333 to $ 33,333 price bracket, e.g., Maruti Zen, Premier 118NE, Contessa, Maruti Esteem, Tata Sierra, Peugeot 309, Opel Astra, Cielo, Ford Escort, VW Golf, Mitsubishi Lancer, Rover Montego. Super-luxury segment, comprising cars priced at higher than $ 33,333, e.g., Mercedes-Benz, BMW, Audi. There is a significant variation in demand in the four geographical regions of India. North India is the largest market for cars in India currently with 43% market share. Next come west with 27% and south with 22%. East has the lowest market share at 8%. Positioning The positioning of the brands in the Indian passenger car market can be understood from the price-power map given in the next page. This map gives an idea of competition in different segments. Since the Indian car market is in a state of flux, the positioning of most companies in the consumer's mind appears to be confused. However, the companies have developed imagebased positioning strategies for their brands. Some of them are : Hindustan Motors (HM) - enduring, sturdy General Motors Opel (GM) German engineering Daewoo - Family car

Honda - superior aftersale service Peugeot - sound-free diesel engine Ford Esteem - smooth drive

Ambassador car of HM is being mostly targeted for the taxi segment and for institutional purchases like the Government. 40-45% of the taxi segment in the country and as much as 55% of this segment in the South is accounted for by Ambassador cars. The Contessa Classic is a luxury car and is primarily targeted at corporate sector clients. Only 10-15% of the total purchases of Contessa is by individuals. Opel Astra, the 1995 Opel model, is a leader in the European car market and the largest selling car in Europe. This model is being produced in the GM India facility at Halol. Astra is positioned as a reliable family sedan in the European market, which has been modified to suit the Indian market where it is an upmarket vehicle given the underdeveloped market. Around 60 to 70% of Astra's European market is in the taxicab segment and is regarded as the reliable second car for a family. In contrast, the Opel Astra positioning in India is - " German engineered luxury car with safety features unmatched by others". Advertising & Communication Advertising in the Indian passenger car industry hardly existed till the onset of competition. Today however, the industry is one of the highest spenders on advertising among consumer durables. A sizeable bulk of this has been spent by the new entrants to create brand awareness. An interesting aspect to not is that the advertising strategies for most of the new entrants have changed several times within a short period of one year. The advertising strategies of some of the companies are given below as illustrative examples: Hindustan Motors (HM) has traditionally put in advertising efforts for the lowselling Contessa Classic, and not so much for the good old Ambassador. But with a plethora of new brands in the Indian market, HM has stepped up its advertising budget significantly. The company feels that the importance of advertising is set to further increase in this market with greater competition. The company is also introducing several promotion strategies like Contessa Campaign Scheme, free servicing, shields for no problem performance and customer gifts. Advertising has been concentrated to the print media. The company also recognizes that effective PR exercises would be a critical component of its marketing efforts in future. The advertising communication for General Motor's Opel Astra handled by McCann-Erichson India has seen some discernible shifts. Initially, it talked of a rare combination of German engineering, American management and Indian values. Then, there was a delay in its product launch, and it showed ads showing a pregnant woman and saying: "All good things are worth the wait". Finally, when the car was launched, GM advertised its launch and announced the opening of an Astra club (of customers). Quality, Technology and R&D

With increased competition, established automobile manufacturers in India are becoming more conscious about technology and quality. These companies are incorporating ISO 9000 certification and Total Quality Management as explicit corporate goals. R&D expenditure in Maruti, Hindustan Motors, Premier Automobiles and Mahindra & Mahindra, the four companies with over 95% of the market currently, is very low and in 1994-95, the combined budget of these four companies was $1 million or 0.38% of sales. However, Telco has been building product development capabilities in trucks, light commercial vehicles, and jeeps over the past fifteen years and has launched the Tata Sumo and Sierra in the market. It has plans to increase exports of these models. Most of the MNCs entering the Indian automobile market are bringing in modern technology. Emission control techniques like catalytic converters and injection technology are present in most models. The fuel efficiency of these cars is higher than that of domestic models. Foreign models are equipped with vehicle safety gadgets which have never been seen in Indian cars. In fact, some brands in the luxury and super-luxury. CHALLENGES FACING NEW ENTRANTS AND MARKET INCUMBENTS The type of products in each company's portfolio is interesting to examine. The market leader, Maruti Udyog Limited (MUL), has a small800 cc car in the economy segment (Maruti 800), a family van (Maruti Omni), an off-road vehicle (Maruti Gypsy), a 1000 cc notchback car (Maruti Zen), and a luxury car (Maruti Esteem). Thus, Maruti has now got a product in each segment except the super-luxury segment. GM currently has only one brand in the Indian market - the Opel Astra. Astra is the third largest selling car in the world. Ford is currently in the market with the Ford Esteem, and will soon introduce a second brand - the Ford Fiesta. Daewoo has currently only one brand on the Indian roads - the Cielo in the luxury segment. Honda is entering the Indian car market with its Honda City, which the company claims has been `developed' and not adapted for India. While in India, the main market seems to be in the sub-compact economy segment for quite some time to come, hardly any company is entering this segment. Therefore, while MUL's Maruti 800 and Maruti Omni continue to dominate the largest segment unchallenged, the smaller luxury segment is witnessing heavy competition with several foreign players and well-known brands. There could be several reasons for this. First, while the economy segment is the largest, MUL's sales volumes in this segment and its highly competitive cost structure act as effective entry barriers for new entrants. Economies of scale in the sub-compact range occur at volumes greater than 150,000 cars per year. Maruti already has a capacity of 250,000 cars which could be a deterrent for new entrants in this segment. However, for a firm with an established portfolio of automobiles, the addition of a sub-compact line could be attractive. Telco has plans to move into this range. This option is not open to a foreign player planning to introduce a single model. Since none of the foreign companies can match the price of Maruti 800 for a similar car, they are preferring to operate in a segment which values attributes other than just price. With the higher end of the market

likely to generate high margins, these companies plan to slowly move down the scale to a smaller car in course of time to take MUL head-on on price. This explains to some extent the fact that all new entrants are avoiding the subcompact car segment. Secondly, the used or second-hand car market in India is likely to become more organized in future. The car dealers will themselves deal with used cars. It is expected that a used Cielo or Astra will be priced close to a new Maruti 800. This could put a question mark on the prevalent assumption that a large number of current two-wheeler users in India will graduate to a Maruti 800 in future with higher incomes. Consumer behavior studies of Indian buyers seem to suggest that the car is the ultimate status symbol, and particularly a sedan signifies higher status than a small car. Therefore, if the price of a new Maruti 800 is the same as that of a used Cielo or Astra, the demand for the luxury cars could grow higher than expected. However, the third reason seems to be the most plausible. An analysis of the world car market shows that no car company in the world, with the expectation of the Japanese, has a car in its range, which is directly comparable to the Maruti 800. Contrary to popular belief, the Ford Fiesta, Opel Corsa and the VW Golf would compete with Maruti Esteem or Maruti Zen, and not with Maruti 800. All these cars, though small by Western standards, are high-power cars which would be priced in India in the luxury range. Given that only 30% of the market is estimated for cars above 1000cc and with so many companies already in the Indian market, the industry seems to be heading for a shake out. The firms that would be able to design and properly implement sound marketing strategies are likely to be the winners. With every company trying to encourage the Indian car buyer as never before, the industry is undergoing a shift from a supply-constrained market to a buyers' market, with different car brands competing on different strategies. Alternately, India could emerge as a manufacturing base for exports. Maruti's experience with the Indian customer gives it a better understanding of product and service needs. Moreover Indian firms have established suppliers, and are better at liaising with the government. Joint ventures will help but there will be pressure in the initial stages. The availability of a vendor base is a critical factor in the success of an automobile firm. Given high import duties on components, it could mean the difference between breaking even in the first or second year of operation or in the fifth year of operation, depending on the level of indigenization achieved. Companies with a developed vendor base might try to create entry barriers by putting pressure on their suppliers not to work with new entrants. In developed markets, customers look for and appreciate various advanced features in a car. Often there is a loyal set of customers. The markets are structured on sharply differentiated and clearly positioned models. This is not the case with India. Here, cars enhance social status and there may be a strong association of price with quality and status. The market may take time to mature and understand the value of advanced features. Given the poor condition of roads, the management of distribution is a critical function. The

recent industry trend has been to set up exclusive dealerships. However this could be an expensive proposition. For instance, a showroom in a large city could cost as much as $ 85,000. Since car prices are high compared to incomes, the life of automobiles tends to be longer than in developed countries. This means a high cost of switching for the consumer, and this represents a significant entry barrier. However as the used car market develops, this factor might not be so significant. An interesting feature of car sales in India is the use of 'bookings', i.e., getting customers to deposit $500 to $1000 for a car that will be supplied a few months from the date of booking. This method of trying to tie in customers is possible because of the large amount of unsatisfied pent up demand, severe capacity shortages, and the initial glamour for foreign cars. These bookings are so successful currently that a company's entire capacity is booked within a month. In anticipation of new product launches by competitors, companies with established products could create artificial shortages of their product for some time, and make it available off the shelf when the competitor goes for bookings. IMPLICATIONS The market is growing at about 25% for the last three years. In the highly price sensitive market, reduction of prices because of lower duties and taxes and progressive indigenization, and rising middle class incomes are likely to further increase industry growth rate. Penetration in rural and semi urban areas is extremely low and could provide fresh markets. New entrants will have to deal with uncertainty of demand, different and evolving customer needs, a relatively poor supplier base; a market crowded with competition and industry wide capacity shortages. However, if there is a shake out as many analysts expect, further opportunities for survivors will open up. Another implication is that India could emerge as a significant manufacturing base for exports. The supplier industry is also going through massive growth, although from a small initial base. Except for Telco, product development capabilities are very low among established indigenous assemblers and suppliers, and the industry has some way to go before it becomes world class.

FERTILIZER INDUSTRY

Overview The continuing growth in population calls for an increase in food grain production from its current level of 202 million tones to about 240 million tones per annum in the next five years. In face of serious limitations on increasing land area under cultivation which is saturated at 143 million hectares the only other option appears to be raising farm productivity. Fertilizers are an essential input for increasing productivity of food grains and other agricultural crops. With installed capacity of about 14 million tones per annum (mtpa), India is the third largest producer and consumer of fertilizers in the world. The fertilizer industry in India has played a pivotal role in facilitating the required increase in the use of plant nutrients for achieving the goal of self-sufficiency in food grains production on one hand and rapid and sustained agricultural growth on the other. At present, there are 64 large size fertilizer units in the country, manufacturing a wide range of nitrogenous and phosphatic / complex fertilizers. Of these, 39 units produce urea, 18 units produce Diammonium Phosphate Di-Ammonium Phosphate (Dap) and complex fertilizers, 7 units produce low analysis straight nitrogenous fertilizers and 9 of the above units produce ammonium sulphate as a by-product. Besides, there are about 79 small and medium scale units producing single super phosphate (SSP). The phenomenal growth of the industry during the last two and half decades was made possible by an overall conducive policy environment (specially during 70s and 80s) and assured availability of various feedstock viz., naphtha, natural gas, fuel oil/LSHS. The domestic fertilizer industry has attained high levels of capacity utilization. The capacity utilization during FY99 was 99.6 percent for nitrogen and 99.1 percent for phosphate and is estimated at 103.0 percent for nitrogen and 94.2 percent for phosphate during FY00. The total fertilizer production in terms of nitrogen and phosphate nutrients increased from 1.06 million tones in FY71 to 14.28 million tones in FY00. The growth rate of production in FY00 for nitrogenous and phosphatic fertilizers was 3.8 percent and 7 percent respectively and the consumption

was up by 4.7 percent, 15.6 percent and 30.1 per cent for N, P, K type of fertilizers respectively. The most widely used fertilizers include nitrogenous (N) 70 percent of consumption, phosphatic (P) 22 percent and potassic (K) 7 percent. Potassic fertilizer is not manufactured in India and consumption is out of imports. urea, the nitrogenous type of fertilizer accounts for 60 percent of total fertilizer consumption in India. An appropriate balance in the consumption of different fertilizer nutrients is critical to productivity enhancements. The appropriate NPK ratio under Indian soil conditions is stated to be 4:2:1 and at present it stands at 10:4:1 which points towards an imbalance in consumption. Although the average per hectare consumption of fertilizer nutrients has increased from less than 1 Kg. in FY52 to about 95 Kg. at present, this level of fertilizer use is low with reference to the objective of doubling food grains production in the by 2010, as well as the consumption levels prevailing in other countries, including some of the developing countries in Asia like Pakistan and Bangladesh. In the wake of rising fertilizer prices due to sudden increases in crude oil and feedstock prices the Government of India introduced the Retention Price Scheme (RPS) in 1977 with the twin objective of providing fertilizers to farmers at affordable rates without harming the interests of the manufacturers. Under the scheme the government pays the difference between the administered price (sale price) and the retention price (cost of production as assessed by the government plus a reasonable return on net worth) to the manufacturers, which guarantees a post tax 12 percent return on net worth. The Government also sets the farm gate price, which is the price at which fertilizer is sold to the farmer and the fixing of the retention price is done by the Fertilizer Industry Coordination Committee (FICC) and pricing policy is determined for three-year period. The retention price varies from one producer to another and for the same producer from plant to plant. The retention price broadly reimburses two broad categories of costs the variable costs and the fixed costs. In addition to the retention price subsidy, equated freight subsidy is paid to the manufacturers of controlled fertilizers to cover the cost of transportation from the production points to the consumption centres. Since the consumer prices of both indigenous and imported fertilizers are fixed uniformly, subsidy is paid on imported fertilizers in order to bridge the difference between the cost of imports and the statutorily fixed consumer price. The National Industrial Policy, unveiled in July 1991 announced the delicensing of the fertilizer industry. Promoters are now free to set up fertilizer plants in the country without obtaining license from the government provided they obtain environmental clearance. In an another major policy initiative taken in August 1992, with a view to reducing the subsidy, all distribution of phosphatic, potassic and complex fertilizers was decontrolled and imports were decimalized and retention pricing scheme thus confined to urea. Consequently, the prices of these fertilizers increased sharply leading to fall in their consumption. In order to cushion the impact of increase in prices of these fertilizers and to arrest decline in their consumption, the Ministry of Agriculture introduced a concession scheme on sale of decontrolled fertilizers from FY93 itself at the

rate of INR 1000 per tone. In another major policy initiative taken by the Government on 5th July 1996, the scale and coverage of this special concession was substantially increased to give impetus to the stagnating demand for these fertilizers and to ameliorate the nutrient imbalance in the soil which is essential for sustaining the desired growth in agricultural productivity. The scope and coverage of concession scheme have been significantly enhanced in subsequent years. To encourage investment in the fertilizer sector by the domestic industry Government offers confessional customs duty benefit on import of capital goods for setting up of new plants/substantial expansion / renovation / modernization of existing units and deemed export benefits to indigenous supplies of capital goods to new / revamped /retrofit / modernization of fertilizer projects subject to the condition of bidding for them at international market prices.

The fertilizer industry is passing through a critical phase which promises to significantly alter the future of the industry. The recent policy pronouncements point to a direction, in which even the fittest of the industry are required to stretch themselves to survive. Over and above the current domestic scenario, thanks to WTO, the industry has to gear up to a new environment where adoption and adaptability to latest technology will prove to be a decisive factor. Not withstanding the turmoil, one factor will remain certain. The country needs to ensure smooth and timely availability of fertilizer to all parts of the country. The marketing divisions of the fertilizer industry will continue to handle millions of tones of fertilizer material. Greater responsibilities will be thrust upon the marketing personnel as they are among the limited gateways to rural India. New opportunities are likely to unfold in the rural sector which will encourage fertilizer industry to add new activities for their marketing divisions. The emphasis will be on efficiency and effectiveness and this will bring into focus the speed and quality of information flow for decision making. This will call for a radical overhaul of the existing information systems in the industry. The contribution of information technology in bringing down costs, increasing efficiency & improving productivity and thereby contributing to the bottom line needs no special emphasis. In the fertilizer marketing context, I.T. can play a major role in logistics, efficient sales operations, checking the marketing costs, safeguarding market share and providing efficient customer services. A well conceived I.T. set up can endow decision makers at all levels with better reflexes to effectively respond to market conditions. Unfortunately, it may be argued, that information technology has not received adequate attention from the major segment of the fertilizer industry. This is more glaring when it comes to marketing function. It is time for all the companies in the fertilizer industry to appreciate the complete potential of computers and communications and to fully tap its benefits to strengthen

marketing operations. But before proceeding further, it may be useful to review the present situation with respect to information technology in fertilizer marketing. Present Status of I.T. in Fertilizer Marketing In a recent Survey (1), interesting factors have emerged on the current status of information technology in the fertilizer industry with respect to fertilizer marketing. About 16 major fertilizer companies were studied to analyze the extent of I.T. penetration in fertilizer marketing activities, verify their perception on the existing computerization and to obtain feedback on future possibilities with special emphasis on e-commerce. The companies were selected from public, private & cooperative sectors. Almost 75 % of the sample has recorded turnovers of above Rs 1000 crore, involved marketing volumes of over 8 lakh tones of various types of fertilizer, with at least 1000 people on rolls. All the companies surveyed have marketing operations in more than three states with about 60% of the sample having operations in more than 10 states. About 45% of the companies have more than 200 field personnel while about 50% have from 50 to 100.The sample studied contributes to a major chunk of fertilizer industrys marketing activities and the survey provides an insight into the status of usage of I.T in these companies. Of the 16 fertilizer companies, 13 companies have less than 50 systems personnel at various levels. About 60% reported more than 200 computers in the organization. However, when it comes to deployment of I.T. usage on the field, the situation is not very encouraging except for a few companies. About 60% of the companies have less than 50 computers in the field. Most importantly, these are used for simple tasks such as word processing and spreadsheet based jobs. The preferred means of communication still happens to be conventional channel i.e. courier, fax, telephone and postal system. Ten of the companies are using e-mail to a varied extent. Six of the companies have set up wide area networks to facilitate message and data transfer. While the extent of use of e-mail and electronic data transfer may be constrained by the availability of access, even where available, most of the industry is using it in a limited way. Background Fertilisers are basic nutrients supplied to soil which replenish the depletion or original deficiency of nutrients in the soil. India is the third largest producer and consumer of chemical fertilisers and accounts for 12% of world fertiliser consumption. Owing to importance of fertilisers for agriculture in India and the focus on affordability to farmers, the fertiliser industry has been under tight Government control. Chemical Fertilisers are commonly grouped according to the principal nutrient constituents, viz. nitrogen, phosphate and potassium. The ideal consumption ratio of N (Nitrogen), P (Phosphorous) and K (Potassium) for the country as a whole is estimated at 4:2:1. However the present consumption ratio is 6.8:2.8:1. Urea is the principal nitrogenous fertiliser with 46% nitrogen content. While, fertilisers other than urea have been made freely importable since 1992,

import of urea continues to be canalised through MMTC Ltd., State Trading Corporation and Indian Potash Ltd. There are about 30 players in the domestic nitrogenous fertiliser industry. The prices and distribution of urea are regulated by the Government to ensure that it is affordable and available to the entire farmer community. However a few months ago, the Government relaxed a part of the distribution controls. Nitrogenous fertiliser manufacturers enjoy the benefit of higher and assured subsidy through Retention Price Scheme (RPS). Natural Gas is the preferred feedstock for manufacture of urea due to economic benefits arising out of lower capital and production costs, high energy efficiency, environmental safety, etc. in comparison to other feedstock. In phosphatic and potassium fertilisers, all aspects relating to pricing, distribution, feedstock, imports and capacities were de-regulated in August, 1992. Di-Ammonium Phosphate (DAP)) and Single Super Phosphate (SSP) are the most commonly used complex phosphatic fertilisers. In the absence of adequate indigenous availability of Rock Phosphate, the main raw material used to manufacture Di-Ammonium Phosphate and SSP, it is imported in large quantities. Muriate of Potash (MOP) is the common potassic fertiliser used in the country which is entirely imported due to insufficient potash deposits in the country. Demands for hike in farm gate prices of fertilisers continue to be met with stiff resistance from the powerful farmers lobby. With the expected removal of quantitative and price restrictions under WTO, Indian fertiliser industry has to face stiff competition from imports, primarily urea. Decontrol of phosphatic and potassic fertilisers bolstered the nitrogen consumption and reduced levels of phosphate and potassium. Excess application of nitrogen led to an adverse NPK ratio and is seen to invite pest to the plant and leech into the soil. Long term fertiliser policy should aim at providing solution to the balanced NPK ratio and the domestic industry prospects. 4. FUTURE PROSPECTS While the imports of P and K fertilizers have been decimalized, urea imports are still controlled by the government. The removal of all QRs on urea import by April 1, 2001 will put the viability of Indian manufacturers into question, as their costs of production are higher than the currently prevailing international price of urea. The availability of LNG will play a critical role in determining the competitive strength of Indian manufacturers. The existing naphtha and fuel oil based plants will have to switch to natural gas to be able to sell at competitive rates. The domestic availability of LNG will fall short of the demand and gas will have to be imported in the form of LNG. But this requires the setting up of LNG terminals, which is a very capital-intensive exercise. The issue of urea selling price is expected to remain sticky because of political factors. On the cost side, urea manufacturers are facing sharp increases in feedstock costs. Thus, the subsidy burden on the exchequer in the current financial year i.e. FY01 is likely to be higher than in the previous fiscal. The profitability of urea manufacturers would also be affected by the reassessment of

capacity announced by the Government. Further, the draft of the proposed long-term fertilizer policy also mentions the decontrol of urea distribution in 2000. It is stated that this would save equated freight subsidy by INR 7 billion. Removal of freight subsidy will put pressure on the margins of manufacturers. The profitability of nitrogenous fertilizers other than urea will continue to come under pressure on account of sharp increases in input costs. For complex fertilizers, the decision by the Government to subsidies the nitrogen content in addition to the phosphatic content will improve realizations and profitability. The issue facing the sector in the short term is the abolition of differential subsidy support for the sale of domestically produced Di-Ammonium Phosphate by April 1, 2001 and low global prices of Di-Ammonium Phosphate and the cost of raw materials in medium term. Excess capacity in (DAP) existing globally is expected to keep the international prices down in the medium term and this along with the commissioning of the Oswal Chemicals and Fertilizers Ltd. (OCFL) plant in Orissa is likely to lead to a significant increase in (DAP) supplies in the domestic market. This may result in an excess supply situation in the medium term till the time the domestic (DAP) demand is able to catch up. The problem is compounded by the fact that the bound rate of duty on imported (DAP) committed to the WTO is as low as 5 percent. The re-negotiation of this rate upward is crucial in sustaining the viability of the domestic industry with abolition of subsidy (in form of ad-hoc concessions) support to (DAP) under WTO commitments. MAJOR SEGMENTS The Indian fertilizer industry is broadly divided into Nitrogenous, Phosphatic and Potassic segments. In addition to these, nutrients are combined to produce several complex fertilizers. To express the nutrient constitution of fertilizers, the grade of a fertilizer is expressed as a set of three numbers in the order of percent of Nitrogen (N), Phosphate (P) and Potash (K). The straight nitrogenous fertilizers produced in the country are urea, ammonium sulphate, calcium ammonium nitrate (CAN) and ammonium chloride. The only straight phosphatic fertilizer being produced in the country is SSP. The complexes fertilizers include Di-Ammonium Phosphate(Dap), several grades of nitro phosphates and NPK complexes. Urea and DiAmmonium Phosphate(Dap) are the main fertilizers produced indigenously. HIGHLIGHTS India is the third largest producer and consumer of fertilizers in the world with an installed capacity of Nitrogen (N) and Phosphate (P) nutrients at 14 million tones p.a. The Indian Fertilizer Industry is broadly divided into Nitrogenous, Phosphatic and Potassic segments. In addition to these, nutrients are combined to produce several complex fertilizers.

Urea, a nitrogenous type of fertilizer, is most widely consumed in India. Currently the urea capacity is 20.2 million tones while consumption is 21.7 million tones. The demand of urea is expected to grow at a CAGR of 4 percent. Urea segment currently subsidized under the Retention Price Scheme, with controls on distribution, to be decontrolled by 2006. First phase of reform in this segment initiated through a move towards Group Retention Scheme, as announced in FY02 Budget. The total production of phosphate in the country was 3.36 million tones per annum in FY00a 6 percent increase over FY99. Main phosphatic fertilizers produced in India are Diammonium Phosphate (DI-AMMONIUM PHOSPHATE(DAP)) and Single Super Phosphate (SSP). Entire requirement of potassic fertilizers is imported. The major potassic fertilizer Consumed in the country is Muriate of Potash (MOP).

CEMENT

INDUSTRY

Background The Indian cement industry (120 million tons per annum) is the fourth largest in the world after China, Japan and USA. However, per capita consumption in the country is only around 80-90 kg compared to the world average of approximately 250 kg. Historically, the Indian cement sector has been highly fragmented comprising 54 players that operate 124 plants. The majority of the plants are small-sized and well spread through out the country. The cement industry is cyclical and capital intensive. A new plant typically has a gestation period of 3-4 years. The industry is rapidly consolidating with Mergers & Acquisitions (M&A) activity. In the recent past, Gujarat Ambuja acquired control of ACC and Grasim has acquired control of L&T. These two players now dominate the industry. Amongst MNC players, Lafarge has acquired a capacity of 4.5 mtpa and Itali Cementi a capacity of 2.7 mtpa. Besides the above-mentioned large players, other noteworthy companies include India Cement, Madras Cement, Chettinad Cement, Shree Cement, Birla Corp and JK group. Demand Supply Scenario Presently cement demand and supply is balanced at around 120mtpa. The capacity can be stretched to 130 mtpa, whereas demand is expected to grow at 10% p.a. over the next 3 years. The emphasis laid by the government on the development of physical infrastructure mainly roads, airports, seaports and railroads and the boom in housing driven by easy availability of cheap housing credit have been the key growth drivers for the sector. Government

is the single largest buyer of cement. Historically, in the last year before elections, drive to complete pending infrastructure project has driven demand growth. One of the major cement consuming projects is the Golden Quadrilateral Project- 5,846 km(Completed so far 2,500 km), North-South & East West corridors 7,300 km. (Completed so far 1,400 km). At roughly 3,000 tons per km, assuming 50% of roads to be concrete (rest coal tar), it will require about 10 million tons over the next two years. Besides construction and modernization of four airports and two seaports will boost demand for cement. Besides, the industry has been witnessing rising cement demand on account of a boom in the housing sector. Interest rate for housing finance has plummeted from around 15-16% p.a. to 7.75-8% p.a. Also real estate prices in major and mini metros have been stable for last two years. This has led to a huge demand for housing units. Last year, housing finance disbursed was around Rs650bn to finance some 5 million units In addition, the government has initiated a number of housing projects. Traditionally housing, infrastructure and industrial construction have accounted for 55%, 25% and 20%, respectively of total cement demand in the country. In the recent past, housing sector is estimated to have accounted for 70% of cement consumption.

Cement Demand (Consumption) Monthly Trend Apr 1989- Jun 2003:

Investment Rationale With demand set to exceed supply and no new capacity in pipeline, the industry should witness its best period over the next 5 years. We believe cement sector has come out of a dull and financially bleeding phase. We believe further consolidation of the sector will help players perform well operationally. Rising demand supply mismatch will ensure higher realizations.

Players with well disciplined cost structure; high capacity share and wider geographical spread will outperform their industry peers. Also M&A activity will provide opportunities of mega returns to investors in smaller companies as well. Demand-supply imbalance imminent We are at a crucial juncture in the evolution of industry. A duopoly has been created at a time when demand and supply are evenly matched. Demand growth is likely to accelerate on the back of an unprecedented housing boom and government led infrastructure spending as a prelude to elections. The Golden Quadrilateral Project (5,846km plus 7,300 km of feeder roads) and a number of other infrastructure projects related to ports and power plants have commenced. Also export prospects have brightened as India is nearest source to supply cement for Iraq reconstruction. With supply side constraints (as enumerated above), the mismatch is likely to happen in near future. The housing boom It is not without reason, that all leading business magazines are carrying cover stories on the housing boom. Interest rates and cost of servicing housing loans have halved, and still continuing their southward journey. This, coupled with tax breaks and stable real estate prices, has triggered an unprecedented housing boom. The housing finance industry has estimated a latent demand of 33 million houses and forecasts a growth of 50% pa for next 4 years.

When MNCs Are Buying Already Lafarge and Itali Cementi have acquired 4 mtpa and 2.7 mtpa of capacities respectively, which cannot satisfy their scale requirements. Cement companies are trading at close to historic lows of market capitalization per ton of capacity. The current market capitalization is just a fraction of replacement value. Promoters have been quietly increasing their stakes as weary retail investors have been exiting. The dominant Indian companies will also find it attractive to acquire cement companies with accumulated losses as the Indian Income tax act allows them to set off losses of acquired companies against future profits. Regional Cement Price Trends Cement Prices The charts show that after an up-trend in cement prices in end of 2002, prices have stabilized during the last few months. Output and average realization are the crucial determinant of the profit for the sector. We believe there will be price spike in October 2003 as demand picks up post monsoon and a more consolidated industry works towards disciplined production and pricing. Over next 2-3 years, demand supply balance will tilt towards the former and a more sustained rise in prices.

The above graphs belong to the different regions. If we study the graphs at a time then a similarity evolves though the variation can not be equal. But the trend of the line goes almost similar that means the prices in certain time frame are either decreasing or increasing. For example in the beginning the graph tends to decline and then it increases for a time period and then it declines. The pattern shows that the industry is highly price sensitive and it is seasonal.

THE ANALYSIS OF CORRELATION AND REGRESSION ARE GIVEN AND THEIR LINKS ARE GIVEN BELOW:

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FOR REGRETION CLICK HERE:

IN THE LINKS GIVEN THE REGRESSION CALCULATIONS ARE GIVEN WITH GRAPHS. AND CORRELATION