1. THE INDIAN FORGING INDUSTRY- A PROFILE 1.

1 The Indian Forging industry has now emerged as a major contributor to the manufacturing sector of the Indian economy. 1.2 Forging industry is a basic industry and such industries tend to grow in a country in relation to the rate of growth of its GDP. As far as India is concerned, we expect our GDP to continue to grow and therefore, the basic industries will grow and so will the industry. Since the forging industry is largely dependent on the automotive sector, the forging industry will also continue to grow and do well. Thanks to outsourcing, opportunities for exports are huge. An increasing number of companies from all over the world are coming to India to procure components and products. Many companies are working hard to capitalise on this. Hence the optimism that the forging industry will continue to grow and do well in the immediate future. 1.3 Briefly, the composition of the Indian forging industry can be categorized into four sectors- large, medium, small and tiny. By and large, the Indian forging industry ( an important segment of the Indian auto component industry) still remains highly fragmented, with around 400 units (out of which only 9 10 are large units scattered all over India). These SMEs form the backbone of the industry. 1.4 The organized sector accounts for about 65-70% of the total forging production in the country, while unorganized players (who are mainly small and tiny units) cater mainly to job work and the replacement market or tier 3 or tier 4 component manufacturers. Notwithstanding this, a wide range of products are being manufactured, each being a diverse market structure and technology requirement, which has negated any possible concentration of the market in a few hands. It is perhaps because of this, cases of domestic consolidation have been few in the industry, unlike other industries. Rather the trend has been to cater to or set up base in global markets. The industry is one of the leading industries in M&As overseas, These acquisitions have largely been in Europe and USA because the auto ancillary industry in these countries have been collapsing. Indian forging companies like Amtek Auto, Bharat Forge, Sundram Fasteners and some others (a few our members) have also setup bases through M&A s in other emerging economies to establish themselves as low cost suppliers. 1.5 The industry was previously more labour intensive. It is closely estimated that the industry provides employment (direct and indirect) to about 200,000 people. More than around 65% of the companies in the forging employ less than 200 people. Now with increasing globalization, the industry is becoming more capital intensive. However, the high cost of capital (technology) still remains a major constraint facing the forging industry (especially the SMEs). The total investment in the large and medium sectors is estimated to be around US $ 700 million. 1.6 The small scale units too are increasing their capital investment to keep pace with increasing demand in the global markets as also to broaden the areas of demand for forgings. Many of them are now suppliers to Original Equipment Manufacturers (OEMs) in the Automobile sector, which speaks volumes about their efforts at technology and quality upgradation. 2. PERFORMANCE OF THE INDIAN FORGING INDUSTRY 2.1 The year 2007-08 (April-March) was relatively not so good a year for the Indian Forging industry as compared to the previous year due to a continuous and steep rise in the prices of its basic input forging quality steel. 2.2 The Indian Forging industry has been growing at a CAGR of 29% from 2003 onwards, and on an average exports contribute around 10-15% of the industrys production. 2.3 The capacity of the industry is estimated to be around 1.5 million tones and the industry currently operates around 70% capacity utilization producing around 1.0 -1.2 million tonnes of forgings. 2.4 Although the overall production of forgings increased to about 1.2 million tonnes mark during the year, the capacity utilization did not improve as much as in the previous year. In the previous year the industry could utilize about 65 per cent of the additional capacity created. In the year 2007-08, the average capacity utilization in the industry stood at about 70%. (a growth of only 5% as against 1015% in the previous year). Again, in the last quarter of the year 2007-08, the capacity utilization declined up to 50% of its capacity or even less due to the very high raw material costs as well as higher costs on other fronts like fuel and energy, finance, labour etc. This overall increase in costs however still remained, largely due to the spiraling prices of steel (as mentioned above) across the globe. 2.5 Worldwide, while the automotive industry is the main customer for forgings, the industrys continuous efforts in upgrading technologies and diversifying product range have enabled it to expand its base of customers. The Indian forging industry is increasingly addressing opportunities arising out of

the growing trend among global automotive OEMs to outsource components from manufacturers in lowcost countries. As a result, Indian forging industry has been making significant contributions to countrys growing exports. 2.6 India exported forgings whose value is estimated at around US$ 472 million in 2007-08. Technological developments have also contributed to export growth. The industrys major markets are USA, Europe and China. However, only about 30-35 manufacturing units are currently contributing to exports directly. 2.7 On the domestic front many Indian forging companies (most of whom are AIFI members) have posted moderately good results in 2007-08. 2.8 Despite the slowdown in production in the last quarter, the industry expects to post good results in the coming year due to the initiatives taken by all quarters including the Govt. to rationalize rate of inflation in the country. In view of this, many large and medium forging companies have taken important initiatives to improve capacity utilization /modernization by diversifying into non-auto alternatives also and further reduce cost etc. 2.9 Notwithstanding this, the industry had also to contend with its share of other problems. It had to bear the brunt of steep and frequent increases in the cost of major inputs like fuel, energy, labour and finance costs .For a major part of the year, the industry has grappled these issues and managed to keep afloat under the adverse circumstances. 3. To highlight some of the major challenges/key Issues faced by the forging industry in India. 3.1 Domestic Volatile international and domestic prices of inputs Compliance with stringent environment norms. Practical difficulties associated with consolidation of capacities. High attrition rate, at all levels High interest rates. 3.2 Exports Impact of a rising rupee on export realisation. Reluctance of suppliers and end users to compensate for increasing costs. Inadequate investment in technology upgradation, due to high costs of capital. Cost competitiveness adversely affected due to constant cost escalation without adequate compensation coupled with the impact of a rising rupee. 4. Future Outlook 4.1 There are now clear-cut indications that India is beginning to get noticed and recognized as a global strategic necessity. This is evident in the Auto world and there is a distinct shift now to focus towards India. The global OEMs and Tier I companies are increasingly appreciating the advantages of Indias open market economy, transparent and liberal policies, its engineering and manufacturing skills as well as its ability to handle global business. 4.2 In view of the above, the market potential continues to grow for the auto component sector. The future is undoubtedly contingent on the growth of the automobile industry. The liberalization of automobile industry has resulted in greater opportunities and greater demand potential for the future. Within the auto industry, commercial vehicles remain the mainstay of the forging industry, with passenger cars still an important segment. The newer generation cars will require better quality forgings. Looking at the overall long term picture, the vehicle industry seems well poised to achieve a figure of 3 million passenger cars by the year 2015. The estimates for the Indian Auto component industry are US$ 30 -40 billion by 2015. The growth Is expected to be led by exports which could be worth US$ 20-25 billion by 2015. Going by these estimates a conservative estimate (15-20%) of the production of forgings by 2015 would be to the tune of US$ 6 billion. A Statistical Profile Number of Units :

400

Investment Employment Capacity

: : :

US $700 Million Approx 200,000 (Direct and Indirect) 1.5 Million M Tonnes/Year*

Year 20002001 20012002 20022003 20032004 20042005 20052006 20062007 20072008

Production (in 000 tonnes) 435 382 440 600 732 878 983 1200**

Export (million US$) 90 110 145 178 250 310 360 432**

* Excluding captive and tiny units ** Closely Estimated Production Range Close Die Forgings (Up to 600 Kg.) Open Die Forgings (Up to 13,000 Kg) Upset Forgings (Up to 260 Mm Dia.) Ring Rolling (Up to 3 Mtr) Disc & Tube Sheets (Up to 3 T Sp) Equipments installed: Close Die Hammers (Up to 16 T), Presses (Up to 16,000 T), Upsetters (Up to 20 Cm) Open Die Presses (Up to 3000 T) Materials Handled Alloy Steel Carbon Steel Stainless Steel Special Steel Aluminium Non-ferrous Titanium

 Super Alloy Capability Closed Forging Open Forging Upset Forging Cold Forging Roll Forging Warm Forging Ring Rolling Machining Shell Forging Axial Close Die Forging Heat Treatment

Industries Catered Automobiles Railways Construction Petro Chemi Power Diesel Engines Aviation Defence Agriculture Mining Oil & Gas Industrial Machinery Shipping Process Industry Space Number of Employees