2013

PRECISION STEEL TUBES LTD

A REPORT

ANUPAM GOGOI (27) ARUN TOM (34) ARUNANSU KUMAR (35) XAVIER INSTITUTE OF MANAGEMENT AND g e 1|Pa ENTREPRENEURSHIP

OVERVIEW OF STEEL INDUSTRY IN INDIA

INTRODUCTION India has acquired a central position on the global steel map, on back of ever increasing demand from sectors like infrastructure, real estate and automobiles, at home and abroad. India was ranked the world's fourth largest crude steel capacity in 2011-12 and is expected to become the second largest producer of crude steel in the world by 2015-16. India is also the world's largest producer of sponge iron with a host of coal based units located in its mineral-rich states. "With modernisation programmes of various public and private companies, the country will soon rise to second place," as per Dr Manmohan Singh, the Prime Minister of India. India's steel making capacity is estimated to exceed 100 million tonnes (MT) by 2013 and the production is expected to reach 275 MT by 2020. The per capita steel consumption increased from 34 kilograms (kg) in 2004-05 to 59 kg in 2011-12. MARKET SIZE The World Steel Association has estimated steel consumption in India to grow at five per cent in 2013. "Steel producers may see a spurt in demand in the medium term if the Indian Government implements its US$ 1 trillion infrastructure investment plan," as per India Ratings. India's steelmaking capacity is slated to cross 100 MT in 2013 that will require about 160-170 MT of iron ore. The steel industry is expected to add 12.8 MT of capacity in the second half of 2012-13, with the major contributors identified as SAIL (3.4 MT), RINL (2.3 MT), Bhushan Steel (2.1 MT) and Jindal Steel (2 MT). Indian crude steel production is estimated to grow at a compound annual growth rate (CAGR) of around 10 per cent during 2010-2013, whereas the finished steel consumption is estimated to grow at a CAGR of around 12 per cent during FY 2012-14, as per a RNCOS research report titled, 'Indian Steel Industry Outlook to 2012'. In addition, the Indian Bureau of Mines estimates the current pelletisation capacity in India to be around 20 million tonnes per annum (MTPA).

Steel Authority of India Ltd (SAIL) has recorded a growth of 8 per cent during November 2012 compared to the same month last year. The public sector company produced 972,000 tonnes of saleable steel during November 2012

Bhilai Steel Plant has registered growth of 4.1 per cent, 5.3 per cent and 5.3 per cent in hot metal, crude steel and saleable steel production respectively during April-December 2012, as compared to the same period last year

INVESTMENTS

SAIL plans to invest US$ 8 billion in Chhattisgarh. SAIL also plans to enhance the capacity of its Bhilai steel plant from 4 MTPA to 10 MTPA

JSW Steel and Japan-based JFE Steel Corporation have signed a joint agreement. JFE will provide technology for the production of non-oriented electrical steel sheets at the JSW Steel's Vijayanagar plant in Karnataka

The sinter plant at the upcoming IISCO Steel Plant (ISP) of SAIL commenced production. The Rs 704 crore (US$ 128.94 million) project is part of the 2.5 MTPA integrated steel plant under construction at Burnpur near Asansol in West Bengal

Mittal Corp is setting up a 1.5 MTPA pellet and beneficiation plant in Karnataka, while JSPL is in the process of setting up a 4 MTPA pellet plant in Orissa

Essar Projects has set up an 8 MTPA pellet plant in Vizag and 6 MTPA plant in Paradip for Essar Steel

GOVERNMENT INITIATIVES The Union Budget 2012-13 is a pragmatic and growth-oriented one. Infrastructure sector has been given due thrust in the budget. Doubling the infrastructure tax-free bond amount to Rs 60,000 crore (US$ 10.99 billion), reaffirming investment of Rs 50,000 billion (US$ 9.16 billion) in infrastructure sector in the 12th Five Year Plan (2012-17) are the steps that present a scenario conducive for growth of steel industry, according to Mr C S Verma, Chairman, SAIL. The main highlight of the Union Budget 2012-13 for the steel industry was the proposal to reduce basic customs duty on plant and machinery imported for setting up or substantial expansion of iron ore pellet plants or iron-ore beneficiation plants from 7.5 per cent to 2.5 per cent. The other proposals relating to the steel sector are as under:

To

reduce

basic

customs

duty

on

- Coating material for manufacturing of electrical steel from 7.5 per cent to 5 per cent - Nickel ore and concentrate and nickel oxide/ hydroxide from 2.5 per cent or 7.5 per cent to Nil

To enhance export duty on chromium ore from Rs 3,000 (US$ 54.95) per tonne to 30 per cent ad valorem

To enhance basic customs duty on non-alloy, flat-rolled steel from 5 per cent to 7.5 per cent

Some other initiatives taken by the Government include the following:

100 per cent foreign direct investment (FDI) through the automatic route is allowed in the sector

Large infrastructure projects in Public-Private Partnership (PPP) mode are being formed The Government is encouraging research and development (R&D) activities in the steel sector

Reduced custom duty and other favourable measures The Government of India has framed the National Steel Policy (NSP) to encourage the steel industry to reach global benchmarks in terms of quality, cost and efficiency

ROAD AHEAD Indian steel production has grown strongly in the recent decades and is likely to continue to expand as domestic producers increase their capacity to meet anticipated demand. The biggest opportunity before steel industry in India is that there is enormous scope for increasing consumption of steel in almost all sectors, including the rural sector which remains fairly unexposed to the multi-faceted use of steel. Steel makers such as SAIL and Jindal Steel are stepping up investments in beneficiation and pelletisation capacities. The Finnish firm Metso has signed up contracts with JSW Steel, JSPL, Essar and Bhushan Steel over the past one year to supply a host of equipments. A roadmap for research and development for steel industry has also been finalised and will be adopted with a special focus on beneficiation, coal ash reduction and promotion of production of high-grade value added steel in the country. Similarly, majority of Indian steel industry, in private sector, has also shown keenness to adopt latest technologies to make existing steel manufacturing processes more efficient and productive, as per Mr Beni Prasad Verma, Union Minister of Steel, the Government of India. Even though, steel companies from across the world have shown interest in the Indian steel industry due to its phenomenal performance. India is likely to remain self- sufficient in its supply of iron ore for the foreseeable future.

CASE OVERVIEW
PRECISION STEEL TUBES Ltd (PST) HISTORY Raw materials required: Cold rolled cold annealed steel coils (CRCA coils) Acquired from: Bokaro steel plant (SAIL) Issues: Inconsistent quality Uncertain deliveries MAJOR COMPETITORS Tube Investment Ltd Had own CR plants TATA Steel (Tubes division) Had own CR plants ADVANTAGES GAINED High Quality Efficient Delivery DECISIONS TAKEN 1) To offset the price differential between buying from SAIL and producing the coils in-house, 50% of produce would be for in-house consumption and 50% would be marketed at higher prices as CRCA coils. 2) Two-phase implementation: Phase 1 24000 Metric Tons/ year (50 : 50) Phase 2 36000 Metric Tons/ year (65/70 : 30/35) 3) IPO to separate the new product from the profit making company.

QUESTION 1:
Has the company followed properly all the steps of the New Product Development process?

In order to verify if the company has followed all the steps properly, we need to know what exactly are the steps involved in a new product development process. The following figure exhibits the same. There are usually 8 basic steps in this process which starts with Idea Generation and ends at Commercialization in clockwise direction as per the figure.

With respect to all the steps shown above, we can find out if the company has complied with the same at every stage of their product development. IDEA GENERATION AND SCREENING: This step calls for a systematic search for new product ideas obtained internally or externally. Some of the sources could be customers, competitors, suppliers, distributors etc. In the case given, the need or idea of manufacturing a new product called cold rolled cold annealed steel coils was generated from the competitors like Tube Investment Ltd and Tata Steel (Tube Division) as they had their own cold rolled plants which gave them a competitive edge in terms of quality and delivery of precision steel tubes. Another critical reason behind this idea of Backward Integration was the fact that the current supplier; SAIL was not consistent with the raw materials used and the deliveries were uncertain. Having said all these, the cost of manufacturing CRCA was more than purchasing from SAIL but was screened out due to inconsistencies that are mentioned above and the budget was within the companys financial capabilities.

 CONCEPT DEVELOPMENT AND TESTING: Developing the ideas into various product concepts and choosing the best one encapsulates this step of the process. o o From the given case, it is seen that the company intends to procure raw materials for CRCA coils from steel plants of SAIL as well as imports. Consideration of the possibility to use CRCA coils not only as a raw material for precision steel tube manufacturing, but also for marketing to present customers like bicycle manufacturers and automobile manufacturers besides other market segments. o It was also planned that the product did not need any foreign technical know-how and the same could be implemented by the in-house team with the help of an Indian technical consultant. MARKETING STRATEGY: This step involves the identification of target market, planned product positioning, product's planned price, distribution, marketing budget, marketing mix strategy, market share etc. In the given companys case most of the requirements were identified like target market segments were identified as bicycle manufacturers and two wheeler automobile manufacturers. Product catalogues were mad, pricing and other commercial terms were decided, sales engineers from branches were given training for the new product. BUSINESS ANALYSIS: This step should include review of product sales, costs and profit projections to see if they meet company objectives. In PSTs case, the marketing department carried out an in-house survey that included collecting and analysing information on market demand, technical and application needs of potential customers, competitors information on prices, commercial terms, market share and production, information on imports and exports of CRCA coils. The finance and technical departments worked on the techno-economic analysis. The requirement of investment in building, plant and machinery and working capital were estimated. Based on sales forecast; product mix; cost of manufacturing; likely price levels; profitability analysis, including return on investment and break-even volume were worked out for next five years. PRODUCT DEVELOPMENT: Once the business analysis is done and is in line with the objectives of the company, the product is developed. It was decided that the production would take place in two phases with the first phase seeing an output of 24000 metric tonnes of which 50% can be consumed in house and the rest could be marketed to the customers. The second phase had 36000 metric tonnes as a planned output with 30% marketed to customers at higher prices. TEST MARKETING AND COMMERCIALIZATION: Full marketing campaign in a small number of representative cities or few stores or sample customers. In the case given test samples were given against trial orders, suggestions were collected from customers on

technical factors, technical teams were sent to customer sites to take corrective actions and finally the product was launched. In a nutshell it can be said that the company did follow most of the steps involved in a New Product Development Process.

QUESTION 2:
Did the company take the right decision in going for the Backward Integration Process? A form of vertical integration that involves the purchase of

Backward Integration Process:

suppliers. Companies will pursue backward integration when it will result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins and make the firm more competitive. FACTORS FAVORING BACKWARD INTEGRATION Improvement in the quality of CRCA steel coils The quality of the raw materials was poor due to which the final product quality was depreciating. With control over the raw materials through the backward integration process the quality could be improved to the industry standards. Thus, improving the overall quality of CRCA coils, those were using this raw material. Opportunity to retain market leadership in precision steel tubes In order to retain majority of the market share it was necessary to have control over the supply chain process. Backward Integration would assure that the company had no trouble in sourcing for the raw materials supply as well as its quality. Provide competition to Tata Steel and Tube Investment Limited in terms of quality and delivery The major competitors for the company were well known names like Tata Steel and Tube Investment Limited. In order to be in the competition Precision Steel Tubes Ltd had to focus on its product quality as well as improved delivery time. Having control over the raw materials supply and quality ensured that they could plan well ahead of the delivery time and how to improve on it as well as the quality. This would be the usp of the company as well as their products. Project cost within companys financial capability (Rs 120 million)

The cost of backward integration and opening up of factories was well inside the financial position of the company which guaranteed that the process would not meet any financial road blocks. PROS OF THE BACKWARD INTEGRATION Company can get raw material of high quality and at the right time, i.e. the delivery of the raw materials would be under the control of the company. This will in turn improve the quality of the main product, i.e. precision steel tubes. More value from the main product for the clients. Will be able to diversify and market in terms of providing raw materials (CRCA coils) to other industries like bicycle and automobiles. In other words the additional raw materials that could be manufactured could now be used to sell to automobile and bicycle industries apart from in-house use. This would help in generating additional revenue. CONS OF BACKWARD INTEGRATION Higher manufacturing cost compared to buying cost. No prior experience in manufacturing CRCA coils, workforce lacking in knowledge of how to manage the operations efficiently. No guarantee that product quality would be better. Marketing of CRCA coils was against a well known and large competitor, i.e. SAIL. FINAL DECISION: RIGHT OR WRONG ?? From the pros and cons we feel that the decision to backward integrate was a CORRECT/RIGHT decision. Higher manufacturing cost can be nullified by the sale of CRCA coils as raw material and the consequent revenue generation. The product quality can be assured by continuous improvement in the operations and also updating the knowledge and skills of the work force. Standardization of the manufacturing process and gaining of experience by the workers with time. With improved quality and better marketing of the brand the orders in terms of volume as well as repeat orders would increase. Should be able to gain a fair market share besides SAIL. The technical knowhow can also be improved by hiring a foreign technical consultant who has a good amount of experience in such field.