1foundry cluster report

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Cluster Study

Rajkot Foundry & Forging Cluster

(October 2009)

Submitted By

Mandar Hukeri & Rajeev Thakur

(Management Trainees)

SME Business Unit

Corporate Centre, Mumbai


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Cluster Study: Rajkot Foundry & Forging Cluster

Index

Sr. No Topic Page No.

1. Introduction

2. Foundry industry

3. Production process used in Rajkotfoundry cluster

4. Raw Material Sourcing

5. Institutional Set-up in Rajkot

6. Cluster Situation:

7. SWOT Analysis of Rajkot foundryCluster:

8. Research Objective & ResearchMethodology

9. Market Size, Market Share & MarketPotential

10. Observation from Primary Research

11. Strategy & Action Plan:12. References

Annexure 1: Respondents

Annexure 2: In depth Interview Guidelines

Annexure 6: Leads

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Introduction

The Indian metal casting industry is as old as the Indian civilization and its

primordial manifestations were found in the religious figures like 'Natraja', thedancing deity. The root of modern metal casting industry was laid out in the year

1850 A.D and grew with the development of the engineering sector.

A peculiarity of the foundry industry in India is its geographical clustering. Typically,

each foundry cluster is known for catering to some specific end-use markets. For

example, the Coimbatore cluster is famous for pump-sets castings, the Kolhapur

and the Belagum clusters for automotive castings and the Rajkot cluster for diesel

engine casting.

Rajkot foundry cluster consist of micro small and medium scale units of foundry and

forging. The study has been conducted during 26

th

October to 30th October 2009and focuses on the research of Foundry cluster in Rajkot. Rajkot is an important

foundry cluster in Western India. There are about 1100 units at Rajkot. The intention

of this study is to find out market share and market potential of SBI in this cluster

and forming strategies to improve it.

The study consists of primary and secondary research. Under primary research we

have conducted in-depth interviews of industry stalwarts and leaders of associations

and a survey of around 20 units in the Rajkot foundry cluster.

The study reveals the existing picture of Market size being Rs. 500 Cr out of which

SBIs market share being around 27 % in terms of advances. The study also includesstrategies and indicative action plan along with timelines to achieve the target

market share of 40- 50%.

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F oundry Industry

There are about 35000 foundries in the world with annual production of 90 millionmetric tones, providing employment to about 20 lac people. USA tops the list inalloy production followed by China, Japan, Germany, and the CIS. In terms ofnumber of foundries China has the highest score (9374), followed by India (5000)and then CIS (4000). The share of Iron foundries is the maximum i.e. almost56.21%, followed by steel with 14.31% and then the non-ferrous ones with 29.48%.

The growing environmental concerns and globalization of economies have led to aclosure of some 8000 foundries in Europe. These countries have beencontemplating to shift their business to the low labour cost centres i.e. thedeveloping countries.

There are more than 5,000 foundry units in India, having an installed capacity ofapproximately 7.5 million tonnes per annum. The majority (nearly 95%) of thefoundry units in India falls under the category of small-scale industry. The foundryindustry is an important employment provider and provides direct employment toabout half a million people.

Rajkot, located in the state of Gujarat, is an important foundry cluster in WesternIndia. There are about 500 foundry units at Rajkot. The cluster came-up mainly tocater to the casting requirements of the local diesel engine industry. Thegeographical spread of the cluster includes Aji Vasahat, Gondal Road, BhaktinagarInd Area, Mavdi Plot and Bhavanagar Road areas. Majority of the foundry units atRajkot produces grey iron castings for the domestic market. A relatively smallpercentage (about 10%) of the foundry units export castings such as electric motorcastings, etc. Apart from oil engines, the foundry units at Rajkot cluster caters to anumber of other end-use applications, as can be seen from the table below.

Cupola is by far, the predominant melting furnace used by nearly 90% of the

foundry units. Most of the cupolas are of conventional type. A local cupola design,

called 'Rajkot cupola', is quite popular in the cluster. Use of low ash coke is common

among the foundry units. A smaller number of foundry units (about 10%) producing

castings for the automotive industry use electric induction furnace for melting.

The foundry men have to take care of numerous parameters, right from selection of rawmaterials to dispatch of the final product. This demands technical knowledge for ensuringgood quality castings.

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Production process used in Rajkot foundry cluster

A Foundry deals with the process of casting of moulds formed with sand or some othermaterial. The whole process can be classified into six stages, which are:

- Designing by Methoding and Gating: The design supplied by the customer is furtherdesigned to provide necessary allowances and selection of parting line. Methoding andGating are the tools to achieve this. While Methoding consists of feeders, whichcompensate the shrinkages in the castings, the Gating system consists of spruce andrunner and in-gates that allow the molten metal into the mold. This is the crucial step andentails developmental time of 2 to 3 months, and in certain cases it can even take upto 8months. The process is usually carried out on trial and error basis.

- Pattern making: This refers to the Replica of castings that are prepared on the basis ofdrawings given by the Customer. These patterns are usually made with wood.

- Molding and Core making: Moulds are prepared in the sand with the help of patterns toget the same shape as that of the pattern. Core making is useful for getting hollowness in

the castings.- Melting and Casting: Metals are melted in suitable furnaces to get the requiredcomposition and then the molten metal is poured into the moulds by means of 'ladles'.

- Fettling: After solidification, the castings are removed from the mould boxes andunwanted metal attachments like runners and raisers are removed and the sand adheredto the casting is cleaned. Later these castings are sent for further operations like heattreatment and machining.

- Testing and Inspection: Before dispatching of the components, visual and dimensionalinspection is carried out. In some cases, as per the customer requirement, non-destructivetests like ultrasonic radiography etc. are carried out to know the internal soundness of thecasting.

Raw Material Sourcing

The raw materials constitute 40 to 70% of manufacturing costs, depending upon thesegment of the industry. A majority of the foundry units are procuring raw materialthrough dealers from Rajkot and traders on a 30-day credit basis. As a result,sometimes, the purchasers are constrained to purchase inferior raw materials fromthe traders at a higher price. Only few entrepreneurs are resorting to bulkpurchases directly from manufacturers and enjoying cash & quantity discounts.Lack of working capital and lack of awareness on discounts are the reasonsattributed to purchasing from local sources. Aluminium is sourced against LC/Cash.

The "Pressure Die segment" is mostly engaged in conversion and therefore, thecustomers themselves supply raw material.

- Process material: Sand, Sodium Silicate, Coal dust, Bentonite, Co2 gas, mouldcoats, foundry fluxes and chemicals are some of the process material used in thecasting industry. River and Silica Sand are sourced from local quartz processingindustries. The rest, like Chirala & Bentonite are available locally.

- Consumables: Furnace oil, an essential ingredient for running furnaces of Non-ferrous segment is procured from IOC dealers by large and medium units,whereas the small units owing to a lack of storage capacity and explosive

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license, procure only from the local traders. They often complain of adulterationin oil affecting their production and productivity.

Most of the raw material is procured by either relying on visual inspection or by a

test certificate provided by the suppliers, or sometimes on oral assurances by the

traders. In-house testing facilities are not available with the units and if the materialis sent for testing in labs, their cost will go up significantly.

Institutional Set-up in RajkotThere is a well-established network of support institutions catering into the needs of theindustry, which are listed below:

SUPPORT SERVICE PROVIDERS

- Heat Treatment Service Providers: There are some treatment service providers existing inthe cluster. They provide heat treatment to non-ferrous casting segment either through

oil fired or electric heat treatment furnaces. They blame the foundry units if castings arenot responding to heat treatment pointing out the composition of castings, even though,at times, the problem many times is due to poor calibration.

- Machining service providers: Reportedly, their charges are high and they dont keep up tothe delivery schedules, which ultimately leads the castings manufactures to default theirdelivery commitments. Due to their exorbitant charges, the cluster is not able to competewith manufactures of other places like Bangalore.

- Consultants: A large pool of scientific talent is available at Hyderabad but theFoundrymen do not fully utilize their services due to a lack of appreciation of the same.

OTHER INSTITUTIONS

- GIDC: Gujarat Industrial Development Corporation has established industrial estates of noof varities from functional to general type from large to mini including worksheds innearby villages. Rajkot has had privilege of being selected for the very first industrialestate in India.

- RCCI-- Chambers of Commerce, Gujarat: The Rajkot Chamber holds seminars, workshopsand discussions on different subjects related to the trade and commerce and also organizecoaching classes engaging eminent charted accountants, Tax consultants etc. who impartprimary knowledge to the businessmen, industrialist and their administrative staffregarding Income Tax, Sales Tax, Vat and other taxes of state and central Governments

- C-MAT LAB: Center for material testing: This institution was set up by the Government.Apart from the development activities it provides testing facilities to the industry ingeneral.

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- Private Testing Laboratories: There are five private labs for testing the chemicalcomposition of raw materials and product composition. They are not accredited byreputed agencies like NABL and lack qualified personnel.

- DIC District Industries Center, Rajkot: The DIC helps the industry in getting provisionaland permanent registrations through a newly set up single window clearance system. Italso guides the new entrepreneurs to setup industries.

- Teri:

- Gujarat Pollution Control Board: Apart from its role as a regulatory agency, it is assistingthe industry in creating awareness on pollution norms related to foundry. They have beenencouraging the industry to adopt pollution control devises such as cyclones, dustcollectors, wet scrubbers etc.

- Government Polytechnic Ahmedabad: It is a State Government technical institution. Itimparts training and education in the field of foundry. The institution regularly sends itsstudents of Diploma in Metallurgy to various foundries for a one year training period.

ASSOCIATIONS

- Institute of Indian Foundrymen (IIF) - Ahmedabad Chapter: Institute of Indian Foundrymen(IIF) which is a National body registered at Kolkata was set up in 1950, with the primemotive of development of Indian foundries. The IIF works through its head office atKolkata, four regional branches at 4 metros and 27 Chapters spread all over India. It hasstrength of 300 members and disseminates information to them through the IndianFoundry Journal. Its other activities areo To organize the annual Indian Foundry Congresso To organize exhibitions of equipmentso

To arrange buyer-seller meetso To promote the export of foundry products and related serviceso To provide technical services to the member companieso To maintaining the data bank of foundries and suppliersThe institute is a member of World Foundrymen organization (WFO), Zurich andConfederation of Indian Industry (CII), New Delhi. The Ahmedabad Chapter of IIF hastaken a lead role in developing the foundry industry in Gujarat.

- REA- Rajkot Engineering Association: An association having around 1200 members ,cters tothe need of representation of the cluster. Facilitates training through seminars andevents.

ENERGY AUDITING INSTITUTES

All the above organizations are extending their help for energy auditing and wasteminimization. The industry has availed their services quite well in the past.

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Cluster Situation:Un-Healthy Competition: Most of the products being manufactured are to serve the needs oflocal industry, which has a limited area. This leads to unhealthy competition between clusterunits and results in severe undercutting of prices. The firms do not express any collaborativebehavior amongst each other.

Poor Foundry practices in majority of the units: A high level of rejection rate owing to poorfoundry practices has pushed the cluster to operate at a high volume and low marginsegment, which does not demand quality. Thus, this cluster is not seen as a significant qualityproducer in general.

Inadequate efforts to tap the niche markets: The cluster offers a vast potential for reverseengineering to enter into niche markets like Defense and Space technology. There is also anavailability of institutions for facilitating this process.

Government Institutions are under -valued: The support institutions set up by theGovernment have been perceived to be too general and ineffective to help the industry.

Mistrust on private laboratories: Though private laboratories are known for timely delivery oftest reports yet many times there are variations in reports of one laboratory vis--vis another.This is adversely affecting the quality of the product.

CLUSTER ISSUES:Technological issues:- Raw material Characterization - testing of raw material- Awareness about the standards of BIS, ASTM & BS with regard to raw material and final

products- Vast Improvement scope in foundry practices- Methodizing systems- Conservation of energy & Introduction of Divided Blast Cupola- Waste minimization & Pollution normsManagerial issues- Formal Management Skills required- Introduction of Management Information systems- Training of Executives, supervisors and workmen- Benchmarking with other foundry industriesFinancial Issues- Managing the working capital- Promotion of Bill culture- Introduction of new working capital instruments e.g. JIT inventory- Cost reduction across the board through bulk purchases of raw material and joint-

marketingMarketing Issues

- Pricing of products- Scouting of domestic and export markets- Participation in Buyers-Sellers meets in domestic and export markets- After sales service to the customers

Support Institutions- Interactions with associated institutions (SISI, CITD, NSIC, PCRA, Engineering colleges etc.)

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- Involving final year Engineering students in Foundries as a part of their summerprogrammes

- Exposure visit of IIF Ahmedabad Chapter to other Places and its strengtheningR&D Issues- Characterization of raw materials- Preparation of manual on Foundry practices- Prototype Development

SWOT Analysis of Rajkot foundry Cluster:

STRENGTHSMarkets- Wide range of segments like fan, C.I. mould, automobile, refrigeration, Sanitary and Non-

ferrous sand & gravity die-castings.- Wide range of customers- Caters to all type of moulding industries- Catering to niche markets like Space and Defense.Technology- Availability of AUTO CAST software which can increase the yield and reduce lead time- AUTO CAST will make the first pour-right concept, thus reducing the rejection rate and

decreasing the raw material cost by 15%.Inputs Availability- Dealer network for supply of pig iron, steel scrap, Al and Coke.- Easy access to silica sand, quartz sand and other materials.Skills- Skilled and unskilled labour is available.- Presence of Government polytechnic which conducts Diploma courses in Metallurgy.- The entrepreneurs are mostly experienced in the foundry line and in some cases there are

technocrats managing the units.Innovation capabilities- Specialization in product development.- Presence of a vast pool of consultants

WEAKNESSESMarkets- Most of the foundries are supplying only to the domestic market- Diesel parts manufacturers have the highest share in terms of volume within the cast iron

segment, where margins are thin and commands lesser price.- Lack of marketing personnel in the manufacturing units.- Lack of knowledge about markets available for similar products in other parts of the

country.- Concentration only on rough castings instead of finished/sub assemblies.- Lack of network with major industries that require castings in large quantities.- Auto parts Industry predominated by unorganised sector.Technology- Lack of technical know-how in raw material characterisation.- Non-adoption of scientific foundry practices.- Existing cupola's are inefficient in terms of coke consumption-awareness of Dividend blast

cupola, which is an alternative is low.Inputs availability

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- Use of poor quality scrap and untested raw materials and alloying- Use of adulterated furnace oil in non-ferrous sector.- Innovation capabilities- Except non-ferrous segment, other segments do little innovation- Mainly concentrating on low value productsSkills- Non-appreciation for good and proven gating and melting practices.- Lack of M I S systems.- Pre-occupied with pouring aspect only and little understanding of other organizational

aspect.- Lack of awareness particularly to bill discounting and management of working capital.- Lack of collective action for bulk purchase of raw material like pig iron, Aluminium, coke

and Furnace oil for reduction of cost.- Lack of standardization and testing procedures by testing laboratories.

OPPORTUNITIESMarket- Spending on niche sectors can increase the opportunities for developing products and

castings of high value for critical applications.- Growing environmental concerns in foundries of western countries provides opportunities

for sourcing of castings from developing countries like China and India.Technology- Lot of scope for advancement

THREATS- China could be a strong competitor and make rapid technological advancements in terms

of quality, delivery schedule and effective price.- The new environment policy emboldened by the Supreme Court of India for necessary

energy savings, clean technology or eco-friendly process will impact the cost of castings.

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Research Objective

- To find the Market size, Market share & Market Potential of SBI (SME BU) in

Foundry cluster of Rajkot.- And to devise strategies and action plan to increase the Market share.

Research Methodology

Primary Research

Part 1: In-depth interviews Part 2: Direct interviews

In-depth interview were conducted onindustry association members, industryleaders, Government bodies. The questions

were put up to understand the Foundrycluster in Rajkot.

Direct interviews were administered to 20different sized SME units.The Questions were focused on Turnover of

the unit, Banking requirements of unitCurrent banker.

Please refer Annexure 1 for the respondentdetails.

Please refer Annexure 1 for the respondentdetails.

Secondary Research

Secondary Research was done to get an outlook on global & Indian Foundry industry.

Turnover wise breakup of cluster unitsFund Limits Turnover No of Units (Approx) Category

1Cr > 5 Cr 120 BTiny 500 C

Total 1100

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Market Size, Market Share & Market Potential

Category

based onLimits

Numberof units

Average

Turnover(Rs. Cr)

Total

Turnover(Rs. Cr)

WorkingCapital

required(Rs. Cr)

% of No.of

companiesrequiredfunding

Market

Potential(Rs. Cr)

SBI

Share(Rs. Cr)

SBIShare %

A (1 Cr) 120 20 2400 456 90 410 124 30

Total(SME)

600 3360 581 498 134 27

Total number of units= 600 units

WC /Sales turnover = 13 % For Category A units (Assumption based on survey)= 19 % For Category B units (Assumption based on survey)Cash Credit Potential of each slab = (Number of units) x (Avg. Turnover) x (% of WC/ SalesTurnover) x (% of No. of companies required funding) x (% of WC not self financed)

Total Turnover of the Cluster = Rs.3360 Cr (Approx)Market Potential for Cash Credit for SME = Rs.500 Cr (Approx)

SBI Market Share & Targets:

In terms of value,

-in Category A units, presently SBI has around 11% (Rs.10 Cr) share in the marketand target can be set to reach 25% (Rs.22 Cr) i.e. additional 12 Crs can be booked.

- in Category B units, presently SBI has around 30% (Rs.124 Cr) share in the market

and target can be set to reach 40-50% (Rs.185 Cr) i.e. additional 60 Crs can be booked.

In all together a business target of around Rs. 75 Crs and can be set for a 1 year period withexisting SME asset products and adopting and implementing the strategies suggested.

In terms of no of units, presently only 74 units are availing facilities with SBI, target can be

set to reach to 300 units (40 % of the Market).

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Observation from Primary Research:

The primary research was carried on a sample of 20 SMEs to understand the

structure of the industry and their financial needs. The sample is selected based onturnover and banking with which bank

1 Cr Limit banking with SBI 51 Cr Limit not banking with SBI 5

20

- It is observed that the market share of SBI in this cluster is below the reasonable level andstands at just 27%. The circle has financed 74 units with an overall exposure of Rs.134crores. Another Rs.75 Cr of business is possible to achieve.

- 15-20% of total turnover gets exported.- Beside SBI other prominent banks in the cluster include Bank of Corporation Bank, OBC,

Bank of India and HDFC.- The cluster lacks in the awareness about various SBI SMEs Asset as well as Liability

products.- Post slowdown the units are carrying excess capacities than the orders in hand, so there

seems not much scope for term loans at this moment. However, the cluster units are faraway from the technological advancement of the manufacturing processes and plantsetup. An initiative in technological advancement will generate huge scope of term loanfacilities after some one year period. TERI is conducting a technological diagnostic study

in the cluster for the same.- The cluster unit needs awareness on marketing, export promotion, skill up-gradation etc.

- There is scope for technology upgradation through out the cluster for energyefficiency, manufacturing process and lab facilities.

- The risk associated with the cluster is rejections due to not meeting the qualitystandard

- Fluctuating prices of right quality of raw materials is another risk factor.- SBSs branches were having well presence and customer relationship in Rajkot

city.

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Strategy & Action Plan:

In a short term, i.e. in a period of one year to achieve the set targets of Rs.75 Cr weshould take following actions immediately:

- Currently there is huge scope for working capital finance and there is lack of awarenessabout SBIs existing offering in the cluster. We shall promotion of existing SBI SME schemeslike SME Credit card and SME Smart score through email & SMS campaign.

- We shall sponsor and participate in the cluster events, seminars arranged by DistrictIndustries Centre. We shall also advertise SBI SME products in cluster publications andlocal publications and arrange SME meets in association with Rajkot EngineeringAssociation.

- Association with TERI / SIDBI for generating awareness in the cluster of technologyupgradation. This will give us a platform to develop relationship with the non SBI units

- We suggest the consultancy services cell to conduct a feasibility study of the cluster tounderstand the technical needs of the cluster which will help us to decide ontaking up the cluster for Project Up tech.

In a long term, if the cluster is found feasible for project uptech we shall designing

specific scheme for the cluster. The study reveals that this cluster lacks in

technology compared to other foundry cluster in India.

SBI should follow a top-down approach i.e. improving the relationship with the industry

stalwarts and association by having meeting with them, to give them assurance about the

SBIs better offerings and service quality. This will help to convert these prospective into

customers. As these industry stalwarts are the influencers/power center of the industry, thesmaller units tend to follow the industry leaders and thus it will be easy for SBI to

penetrate/capture the smaller accounts. The president of associations expressed willingness

to have a joint meeting with SBIs senior officials.

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References

- Primary Study: Interview of Units & Industry Stalwarts

- Secondary Study: Various reports, Association Bulletins, Web sites, Directories

- Latest news in Business Standard

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Annexure 1

Respondents of In-depth Interviews

Organization Contact Person Designation

Rajkot Engineering

AssociationDistrict Industries CentreTeriGujarat Industrial

development Corporation

SME Respondents

SBI NON SBIV K INDUSTRIAL CORPN

GALAXY

KERASON ENGINEERING CO.

PERFECT CASTING

KRISHNA FORGE

PARAG CASTING

KAMANI FOUNDRY

MAHADEV

ASIAN FOUNDRY

ROLLWELLM/S MKK ENGINEERS

VISHAL FOUNDRY

GUJRAT ALLOY CASTING

NEW RAMESH

SAURASHTRA IRON FORG

SENSITIVE CASTING

MARS FORGE PVT LTD.

LN TECHNO CAST

INNOVATIVE TECHNOCAST

MEGHDOOT FOUNDRY

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A nnexure 2

In depth Interview Guidelines

Industry Trend: YoY Growth & future prospects

No of units in Rajkot

No of units in operation an reason for closures

Value chain and various stakeholders

Funds required by the cluster every year

Working Capital / Sales Turnover (percentage)

Exports %

Banking Needs of the cluster

Clusters expectation form Banks

Pain points with Banks

Opinion on existing financial products features

Expansion plans of units in cluster

Most preferred bank other than SBI

Pricing trend & Margins available for the players in the clusters

Turnover slabs and breakup of total no of units

Pollution related risks to the cluster and steps taken to mitigate it.

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Annexure 3

Prospective Leads

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