It’s a surprising fact: The world’s largest factory for forgings — parts for engines, axels and the like — sits not in Detroit, Tokyo or Stuttgart, but in the industrial city of Pune in western India.
The factory, equipped with gleaming robots and networked with plants overseas for technical support, belongs to Bharat Forge, foremost among a group of auto parts companies that are rapidly putting India on the world map for manufacturing. Bharat Forge has embraced a strategy that includes heavy investment in technology, a scientifically skilled workforce, and aggressive overseas acquisitions. Along the way, it has been helped by a growing domestic auto industry and by fragmentation and ferocious cost-cutting by large auto manufacturers worldwide. In recent years, the Pune-based firm has emerged as a bellwether for India’s auto parts industry, akin to the position Bangalore-based Infosys Technologies holds in the far more high-profile information technology industry. Some see the comparison as particularly apt.
“Information technology leveraged India’s intellectual power in services,” says Amit Kalyani, executive director of Bharat Forge and son of the firm’s chairman, B.N. Kalyani. “We’re doing the same in manufacturing. It’s very similar.”
With turnover exceeding $650 million and a roster of blue chip clients that include DaimlerChrysler, Toyota and Ford, Bharat Forge’s success offers a roadmap to other ambitious Indian manufacturing firms. Sachin Nandgaonkar, a director based in the Boston Consulting Group’s New Delhi office, calls it a classic example of a company with an entrepreneurial management team that understands the global industry well.
Yet, say experts at BCG and Wharton, Bharat Forge’s story also illustrates the hurdles Indian industry must overcome, ranging from weak infrastructure to low labor productivity. “I see pockets of competitiveness and efficiency in Indian manufacturing, but in a vast sea that is technologically outdated, labor intensive and not sufficiently quality driven,” says Saikat Chaudhuri, a Wharton management professor. “Bharat Forge is a primary example of that island of competitiveness.”
Brains, Not Muscle
Bharat Forge was founded in 1961, during the heyday of Nehruvian socialism in India. At the time, central planning and import substitution were pillars of Indian economic policy. Although state-owned industries were encouraged to control the so-called commanding heights of the economy, the private sector was never entirely shut out. The firm, recalls Kalyani, was formed to serve two somewhat disparate markets — diesel engines used by farmers for irrigation and a nascent domestic auto industry.
“It was mainly buses and trucks,” says Kalyani. “In those days, the passenger car market was very small.”
At any rate, both irrigation and automobiles required engines, and engines required parts. Bharat Forge arranged for technical assistance from a firm in Cleveland, Ohio. It helped that the Kalyanis had close family ties with some of the region’s leading industrial houses. Two of them, the Kirloskars and Tatas, ended up being among Bharat Forge’s first customers.
Over the next three decades, India persevered with its brand of socialism even as Asian tigers such as Korea and Taiwan leapfrogged to prosperity powered by industrialization and exports. For Bharat Forge this was a time of consolidation within India’s protected domestic market. It focused on technology and quality and carved out a reputation for reliability. Then in 1988, not long before India embarked upon economic reforms, Bharat Forge decided to take a big gamble: Realizing that it was not possible to achieve economies of scale with a relatively low-technology and low-skilled workforce, it invested one billion rupees (at the time, turnover was only 1.5 billion rupees) in a sophisticated German-engineered plant.
“We decided to bet the house on technology,” says Kalyani.
Along with the investment in technology came an upgrade of manpower. Traditionally, Bharat Forge, like other Indian firms, had employed a poorly educated workforce often virtually indistinguishable from farm labor. Now it began the process of replacing them with the kind of educated workers who would be able to make the most of the new technology. Through a combination of attractive severance packages and attrition a third of the firm’s 1,800-strong workforce was replaced. By the time the transition was completed, a largely blue-collar factory floor had become largely white collar. Today, Bharat Forge employs about 4,000 people, but 80% of them are college graduates and a third are engineers.
“These are extremely bright, fast and hardworking people. They have good values,” says Kalyani. “We needed computing and analytical skills which the blue collar guys just didn’t have. For the company this was a cultural change. We replaced muscle power with brain power.”
In retrospect the decision seems obvious, but at the time it was seen as risky. Arindam Bhattacharya, a New Delhi-based BCG director, credits Bharat Forge chairman B.N. Kalyani with foresight. “What sets them apart is that in Baba Kalyani they have an outstanding leader,” says Bhattacharya. “He’s ambitious, but also an outstanding technical person with a very deep knowledge of tool design. He’s been the key factor in increasing productivity. They have gone against the grain, which was to use labor costs for competitive advantage. They are able to get the most out of their machines.”
Exports, Exports, Exports
In 1991, India began opening its economy to competition and foreign capital. The country’s auto parts manufacturers moved to upgrade their technology and skills, accelerating a process that had begun with the government-owned Maruti Udyog’s co-production of a small car with Japanese auto manufacturer Suzuki in 1983. Keeping with Japanese practice, Suzuki’s suppliers in Japan had followed it to India and played a large role in technology transfer and training. After liberalization, India’s potentially vast domestic market attracted a raft of auto companies. Toyota, Hyundai and Ford manufacture cars in India and source parts from Indian suppliers.
Bharat Forge’s new high-tech plant was already up and running when, in 1996, a sharp downturn in the domestic market forced it to look outwards more aggressively. Kalyani reels off the factors that allowed Bharat Forge to grab a toehold in the fiercely competitive global market. The industry was fragmented worldwide; had it been dominated by a few big players it would have effectively shut out smaller ones. It was engineering intensive: skilled manpower mattered more than in labor-intensive industries such as shoes and textiles. Global auto companies were spread out across the world, which made them open to sourcing parts from a wide array of suppliers. Finally, in a capital-intensive and highly competitive industry, outsourcing to reliable high quality suppliers rather than investing the company’s own resources began to make more and more sense. Between 1997 and 2005 Bharat Forge’s exports grew more than seven-fold from $16 million to $117 million.
More recently, Bharat Forge’s export strategy has been coupled with a series of overseas acquisitions. In the last two years alone it has snapped up five small foreign companies. Last year it bought Sweden’s Imatra Forging, Europe’s largest manufacturer of front axels, for an estimated $57.5 million. In 2004 it bought German firm CDP Aluminiumtechnik for €6.3 million. The 2003 acquisition of Carl Dan Peddinghaus for £29 million gave Bharat Forge an infusion of new technology and access to customers such as BMW and Volkswagen. At present, Bharat Forge owns eight plants — two in India, three in Germany and one each in Sweden, Scotland and the U.S. In addition, says Kalyani, a new joint venture with FAW (formerly First Automotive Works) in China commenced production in March 2006. It will give Bharat Forge access to the Chinese market, which is four times larger than India’s.
The acquisitions strategy is meant to bolster what the company calls its “dual-shore supply model.” In a nutshell it means that it can supply all components to a client from two plants — one in India as well as one closer to the client. The plants in the U.S. and Europe reduce supply chain risks while the flagship plant in India — with economies of scale and relatively low-cost skilled labor — helps keep costs down. Bharat Forge’s overseas operations currently account for about 40% of turnover, and the company expects this to rise to 50% over the next few years.
Watching for Roadblocks
Bharat Forge dominates India’s $615 million market for forgings with about 45% market share. Over the past four years, the firm has grown at a compounded annual rate of 66%. Before-tax profit over the same period has shot up by 107%. Should this continue, Kalyani says the firm hopes to reach a turnover of $1 billion in 2008, more than double the $460 million of 2005.
The opportunities are vast. At present, India only exports about $1.8 billion in auto parts each year. Countries such as Mexico, Canada and Japan export between $25-35 billion. Analysts expect the global outsourcing in auto parts pie to keep growing — from $110 billion in 2005 to $700 billion in 2015. India’s auto component exports have been growing at 25% annually, and have the potential to grow 15- or 20-fold over this period. To get there, firms like Bharat Forge will need to keep on performing.
“The India story till recently was driven by the success of the Indian software industry showcased by firms like Infosys, Wipro and TCS (Tata Consultancy Services),” says BCG’s Nandgaonkar, referring to India’s three largest software firms. “They gave confidence to Indian firms that they can compete on the global platform. Bharat Forge pretty much exemplifies the same in manufacturing.”
But obstacles remain. Kalyani says the two largest are infrastructure and education. Compared to China, India’s infrastructure — power, roads, ports and airports — is very poor. Firms like Bharat Forge have found ways around it. Nearly half of its power, for example, is generated in-house, but it can’t do everything itself. The roads network is still under-developed, and the turnaround time at ports is sluggish compared to the hyper-efficiency of Hong Kong and Singapore.
The deficiencies in education, says Kalyani, will begin to become apparent in about five years. He believes that demand for technically skilled manpower will outstrip supply. “In some of these institutes they’re still using technology that’s 30 or 40 years old,” he says.
Bhattacharya also argues that more needs to be done to make globally competitive Indian manufacturing firms the norm rather than the exception. “Several external factors make India uncompetitive,” he says. “There’s power, transaction costs and tariffs.” As an example he points out that in India, firms pay higher duties on steel than on forgings. And though the heavy hand of government in business has lightened since liberalization, it shows no sign of disappearing. “License Raj has gone away, but we still have Inspector Raj,” says Bhattacharya, referring to the plethora of arcane regulations still faced by Indian businesses.
For India, the lessons of Bharat Forge’s success are several. On the one hand, it shows that a focused and well-managed company can overcome commonly cited constraints such as poor infrastructure and inflexible labor laws to thrive in a globally competitive environment. On the other hand, it highlights the challenges to sustain this competitiveness given its reliance on skilled manpower in a country where most manpower is not skilled. A recent IMF report points out that overall, the Indian economy is tilted toward services rather than manufacturing, and that within manufacturing, it is tilted toward the skill-intensive rather than the labor-intensive kind. Unlike China and the rest of East Asia, India has traditionally emphasized tertiary rather than primary education. Unless India can broaden its industrial base to include competitive labor-intensive industries such as electronics, textiles and shoes, progress toward building large-scale, globally competitive manufacturing will be slow.
For now, though, analysts remain optimistic that a revolution in Indian industry has begun. “A lot of small component manufacturers look at [Bharat Forge] and say, ‘Today we may be small, but if those guys could do it, why can’t we?'” Nandgaonkar says.