Electrosteel Castings Limited

ELECTROSTEEL CASTINGS LIMITED

SUBMITTED BY,

SUNIL PANDEYSECTION – B

2012116

Sunil PandeySection B2012116 Page 1

Electrosteel Castings Limited

Case Synopsis:

Electrosteel had been India's largest manufacturer of ductile iron pipes(DIP) and cast iron pipes(CIP) for over 40 years. Its growth had been solid in recent years, largely driven by infrastructural projects in the domestic market. However, this market was expected to come under increasing pressure as foreign competitors were pushing aggressively to enter the Indian market. Management wanted to at least double international volumes over the next three years. International expansion would offer a strong opportunity for continued growth, with the added benefit of providing additional hard currency for further investment in new production technologies.

Anil Das, CEO(Electrosteel Castings) narrowed the options to either a new marketing office or new manufacturing facility in either Europe or Southeast Asia. Building an overseas plant was particularly attractive, as it would effectively translate into Electrosteel being considered a local competitor in that market, yielding lower costs and reduced import duties. In Southeast Asia, Vietnam was being considered as a location for the new plant, as it would offer a strong base to serve the domestic Vietnamese market, as well as the surrounding region of rapidly developing economies-each with great need for basic infrastructure. In Europe, France was being looked as an attractive option. Das believed that Electrosteel could be transformed from a domestic supplier into a strong international competitor.

Historically, CIP had been favoured for its relatively low cost and durability. Since 1965, DIP had been increasingly used, particularly in developed countries, because the metal pipe was less brittle, which translated directly into easier handling and installation. The enhanced ductility reduced breakage and leakage. As a result, DIP was expected to last 70 years versus 40 years for CIP and was therefore priced about 20 per cent higher. Dip also faced competition from other materials, such as plastic (PVC), mild steel, asbestos and pre-stressed concrete.

Although Electrosteel had been producing CIP for decades, its first plant to manufacture DIP was built in 1994 in Kedah, near Calcutta, India. Setting up a plant in Calcutta offered the advantage of using the infrastructure of the existing CIP plant and the services of trained staff. Being close to the corporate headquarters in Calcutta also simplified management control and engineering support. The plant had recently been accredited with ISO 9002 certification and the product was licensed to carry the British Standards Institution (BSI) Kitemark, an important, international product certification widely recognised by customers.

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Electrosteel Castings Limited

Process Information:

The basic process was structured into two stages-castings and finishing. Capital investment for a casting operation including annealing was very high and was only feasible in large increments. In contrast, investment for a finishing line required a smaller investment. Separating the two stages also reduced transportation costs by about 10per cent, which was the weight of the coating and lining.

Combined, product and process improvements in DIP had been credited with significantly improving customer acceptance and increasing sales in countries as diverse as Singapore, Malaysia, Brunei, Korea, Kuwait, Saudi Arabia and England. The domestic market was spread across 28states in India, with the state-level governments being the primary buyers to improve infrastructure.

Electrosteel was a well-established brand in India and maintained an extensive local network of agents and a team of sales professionals. Several manufacturing operations, such as casting, zinc coating and cement lining, had proven difficult to duplicate. Moreover, skilled employees were difficult to recruit, as Electrosteel’s employees were very loyal and reluctant to join this new start-up. As a result this new competitor found it very difficult to initiate and ramp up production. Once the competitor was fully functional, Das expected much stronger price competition in the domestic market.

The size of the Indian market, both now as well as in the longer term, presented an attractive opportunity to international manufacturers.The markets in Asia were rapidly expanding as many developing countries were moving aggressively to develop their infrastructure. In contrast, the emphasis in developed countries such as Europe was to maintain their existing system with the steady replacement of older pipelines.

Large scale manufacturers tended to increase their export volumes when the local market was unable to absorb the installed production capacity. As a result, several competitors at any given time were equally willing to sell their products at a discounted rate in order to maintain minimum production levels at their plants.

Electrosteel expanded internationally in Vietnam where private ownership was encouraged and English was also becoming accepted as the language of business. Economic growth since liberisation had been strong, but recent decreases in FDI had slowed growth. Yet, the country lacked proper infrastructure, such as transportation, port facilities, poor roads, and poor water supply and sewage systems.

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Electrosteel Castings Limited

Options:

Electrosteel had several options such as, opening a branch sales office or building a new manufacturing facility. In addition to being considered a local supplier, cost savings would be possible by avoiding the transportation of DIP from India to Vietnam. Second, foreign investment could be reduced by simply installing a finishing line, with any necessary casting capacity added to the Kardah plant in India.

European markets unlike Asia were stable. France and Germany represented the largest markets because of the preference by tier local utilities for DIP. The fastest growing market was Spain. Europe was very attractive because of the large, stable business environment with fewer political and bureaucratic problems. In contrast to developing countries, Dip was a well-established and accepted material for public infrastructure in Europe. Das and his team had focussed on France as the principle location. France had the largest market which allowed for greater local contact with potential local customers and also minimise transportation costs.

The expansion options in Europe were similar to those being considered for Vietnam. A branch sales office could be opened. Alternatively, Electrosteel could build a new manufacturing plant, with both casting and finishing operations, or just a finishing line. If the finishing line was located close to the French seaport, transportation and handling costs from India would be reduced, as well as potentially facilitating shipment of goods to other markets in Europe. As with Vietnam, it was difficult to accurately forecast the sales volumes that Electrosteel might achieve. However, potential agents in several countries indicated that, by focusing on niche segments where clients were hesitant to deal with larger incumbent firms, Electrosteel could expect to build significant volume.

Issues in expansion:

Expanding operations in France presented several issues. First, there was the issue of operating costs. French labour was 10times more expensive than that in India or Vietnam. Second, the French language presented a challenge for Electrosteel's managers. Third, the strong presence of competitors complicated any decision, and a joint venture was highly unlikely.

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