You are on page 1of 33

BHARAT FORGE LIMITED

Forging Leadership

Winner of 2005 AIMS Best Case Award

This case has been written by J. Ramachandran, BOC Professor of Business Policy and
Sourav Mukherji, Assistant Professor of Organisational Behaviour, both at the Indian
Institute of Management Bangalore. The authors are grateful to the management team at
Bharat Forge Limited for their help and support in writing the case. This case was
developed solely as a basis for class discussion. It is not intended to serve as an
endorsement, source of primary data or an illustration of either effective or ineffective
management.

© 2005, Indian Institute of Management Bangalore.


Mr. Baba Kalyani, Chairman and Managing Director of Bharat Forge Limited received
an email from two of his people who had gone to visit the company’s recently acquired
subsidiary, CDP Bharat Forge GmbH, in Germany. The email read:

Dear Sir

We had been to CDP two weeks back as part of Technical Exchange Programme.
When we entered the facility in Daun we found something missing at the entrance.
It was the signboard that did not have Bharat Forge name included. We made a
request to our colleagues in Daun to change the name to CDP Bharat Forge. Our
colleagues in CDP responded immediately and we could see the signboard at the
entrance in four days.

Well the incident does not end here!

Few days later, we met one Indian gentleman, Mr. Hans Raj Bally in front of
factory gate. Mr. Hans Raj Bally has been living in Daun for 23 years and works
in Daun. He told us how proud he felt seeing an Indian flag in Germany and that
too in a small town like Daun. He got down from his car to salute the Indian flag
and the person who made the Indian flag flying high in Germany. He added that in
his entire career of 23 years in Daun he never saw this happening and never could
imagine that something like this would ever happen.

Thankfully and proudly we would like to convey the salute of Mr. Bally to our
Chairman and Managing Director, whose entrepreneurship and great vision has
made it happen.

Regards,
Niyaj/Raskar (CDFD-ENGG).

Baba Kalyani smiled as he read the email. He and his management team (Exhibit 1) had
done what many believed to be rather difficult for manufacturing companies from an
emerging economy like India to do: achieve global scale. In mid 2004, BFL was the
second largest forging company in the world, behind ThyssenKrupp Automotive Group
of Germany and ahead of Sumitomo Metal Industries of Japan. More importantly, the
planned expansion of its capacity and its willingness to pursue other acquisition
opportunities could very well see the company emerge as the global leader in the near
future. In his annual report to the shareholders, Baba Kalyani wrote:

In an atmosphere where Chairmen and CEOs are advised not to say anything about
the future, I have no hesitation in saying that my management team and I are
optimistic about our future performance. Looking at the order books, and the de-
risking of the business model that we have carried out, I see Bharat Forge
continuing on its growth path.

1
Baba Kalyani’s optimism stemmed from the stellar performance of the company over the
last decade. During this period, even as it coped with severe downturns in its major
markets, the company had more than doubled its turnover and nearly quintupled its
profits (Exhibit 2); expanded capacity (Exhibit 3), improved productivity (Exhibit 4),
moved up the value chain (Exhibit 5), diversified its product-market portfolio (Exhibit 6),
improved its speed to market, upgraded its technology, became India’s largest exporter of
auto components and emerged as the world’s largest axle component manufacturer with a
market share of over 25%.

To sustain its growth momentum, BFL is investing Rs 3.5 billion to double its forging
capacity, expand its machining capacity and set up a new product testing and validation
facility. The new capacity was expected to be fully operational by the last quarter of the
financial year 2004-05. BFL’s decision to invest in fresh capacity was influenced in part
by the buoyant market conditions in both domestic and overseas markets, and in larger
part by the changing dynamics in the global automotive industry.

Faced with renewed competitive pressures, the global auto majors are triggering a fresh
wave of rationalization in the industry supply chain (see Annexure). The traditional
suppliers to the auto majors out of Europe and America were finding it difficult to meet
the further reduction in prices that was being demanded of them. The earlier waves of
restructuring had resulted in erosion in the profits and capital efficiency of the auto parts
suppliers, as the OEMs had typically been unwilling to compensate them for the
additional capital they had invested. The search for lower cost was leading the OEMs
(and their suppliers) to low cost destinations like India, China and Thailand. Among the
low cost destinations, India was fast emerging as a destination of choice because of the
superior design and engineering capability of the Indian auto component industry
(Exhibit 7). Several global auto majors including Daimler Chrysler, Toyota, Cummins,
Ford, Volvo etc set up offices in India to source auto components from here. The global
OEMs were, in addition to low costs, placing significant emphasis on the suppliers’
ability to undertake value added services such as design, engineering, product testing and
validation. BFL, with its state of the art technology, global scale & presence, membership
of the Kalyani Group (Exhibit 8) was best positioned to exploit this growing trend of
sourcing from India. BFL estimated its addressable market opportunity to be of the order
of US$5 billion. Baba Kalyani said:

Fundamentally our competition today is vulnerable on cost. My cost even 25 years


ago was lower than theirs, but I was not able to match their quality. Today our
manufacturing side is on par with best anywhere in the world and at a cost that is
lower by almost 20-25%! The challenge for us now is to move from just being a
manufacturing enterprise into a full service enterprise. We need to be able get into
in an automotive platform right at the beginning - right from the concept design
stage. And that is the front end that we are now putting together. It will take us
about 4-5 years to build up the capability. And once you build that capability, then
the world is at your feet – you can do anything

2
The Foundation
Dr. Neelkanth Kalyani, Baba Kalyani’s father, established BFL in 1961 at Pune1 in India.
The Kalyani family was based in Karad, a small town near Pune, where they were
involved in farming and agriculture. Over several generations they had become close
friends of the Kirloskars – an industrial house with a strong presence in engineering
industries. The Kirloskars, who resided in neighboring Kirloskar Wadi, would pay a visit
to the Kalyani household every time they went to Mumbai as Karad was en route to
Mumbai. In the early sixties, the Kirloskars needed a supplier of forged components for
their engine manufacturing unit and they encouraged Dr.Kalyani to enter the forging
industry. While the idea was mooted in 1961, it took Dr.Kalyani four years to get the
license from the Government of India, and finally the plant was setup in 1966.

Since there was no technological base available in India at that time for setting up a
forging plant, technology was obtained through a technical collaboration with a
Cleveland, US, based company. The collaborators provided ten engineers who stayed in
India for the next 5 years and helped Dr. Kalyani establish the forging plant. Baba
Kalyani joined the organization in April 1972, after completing his masters in
engineering from MIT in Boston. Baba Kalyani recollected:

I did a three-month stint at our collaborator’s plant before coming back. I became
the plant manager in December 1972 and remained one for the next 21 years! I
could run every machine on the shop floor and knew the business like the back of
my hand.

By the middle of eighties, BFL had established itself as the market leader. The company
had also made a foray into export markets with mixed results. While its exports to Russia
were steady, its participation in the more developed markets of the world was highly
sporadic. Baba Kalyani said:

Right from the beginning my dream was to export. Having studied in the US, I felt
a strong desire to export our products to the developed markets of the world. But it
took us almost ten years to get our first export order. I worked very, very hard, my
people worked very, very hard – I had a willing workforce; a willing management
team, and of course I was willing to do whatever it took. But it took a long time and
those were very frustrating ten years. This was because we were just not capable of
producing consistent quality across several lots of production. We could not
produce 5000 pieces of crankshaft of consistent parameters. Nobody in India could
do it at that time. In fact, very few in India can do it even today!

It then became clear to us that we got to change the way we produce. It is simply
not possible to consistently produce high quality products with a manual process,
however good and well trained our people are. And our people were very good. I
realized that to compete in advanced markets I would need to modernize our
facilities and deskill the process. We needed to replace muscle power with

1
Pune is ~ 200Kms South-East of Bombay

3
brainpower and design our processes in such a way that we use brainpower as
inputs rather than muscle power as an input.

Until the late 1980s, BFL, like all other forging companies in India, had a conventional
hammer shop for making forgings. The capacity of the plant was enough to meet the
monthly demand of 3000MT. Since most of the hammer shop operations are manual, it
took anywhere between three and five minutes to make one forging. Also there is little
consistency in the jobs that are done. In sharp contrast, the alternate method of producing
forgings in a press shop was substantially superior both in terms of consistency in quality
(due to high degree of automation) and productivity (it took about 40 seconds to make the
same forging in a press shop).

Mr. Gopal Agarwal, Executive Director, said:

One of the key factors for succeeding in the developed market is to make the
customer comfortable with your facility. They expect to see facilities that are
comparable to facilities abroad. But when they saw our old forge shop it was
difficult to get business from them because of the impression our plant and
technology gave them. They would not buy even though our price was much lower
because they did want to risk disruption in their supply. So the first step was to
upgrade everything. Mr. Kalyani took that decision in 1987, which created a
foundation for us to be able to talk in the language that our customers wanted to
hear from us.

Modernizing Operations

BFL upgraded its technology by installing fully automated press lines for manufacturing
forgings. Baba Kalyani recalled:

There were two directions to follow at this stage. We could have gone with smaller
capacity presses and be one of the few hundred forging plants that exist across the
world. Or we could go with the biggest and break into the top five of the world. We
chose the second option. I was confident that we could do it. The experience of
being here, running the plant successfully all these years – all contributed to the
confidence. I knew that if we leveraged our intellectual capabilities, we would be a
winner in the global market.

Between 1987 and 89, BFL invested about Rs. 1500 million and installed two state-of-
the-art forging Press lines from Muller Weingarten, Germany with a combined capacity
of 22000 MTs. Such an investment was way ahead of its time and was written off as a
‘white elephant’ by popular press; especially since even the old hammer shops were not
operating at full capacity at that time. Internally too, there was plenty of skepticism, not
all of which was without a reason. The technology was new and except for a select few,
nobody knew how to operate a fully automated press line. Baba Kalyani said:

Forging as a technology is not very complex. But there are lots of ‘touch-points’
that are technology intensive. This adds to the complexity. There is a little bit of

4
‘black-box’ that needs to be dealt with. But this is also what makes India
competitive; we are extremely good at dealing with technology intensive touch
points. Indians do not have superior manual skills or the strength and energy of a
European or an American. Our capability is more intellectual. But, to leverage that,
we need to do things differently. We needed to run the operations with knowledge
workers. That is what we did.

Reengineering Work

BFL decided against upgrading the existing workforce, as it would have called for
changing the then prevailing work culture. It opted instead to staff the new press shop
with freshly recruited white-collar employees, each of them, at the very minimum, a
science graduate. The company made conscious efforts to ensure that the work practices
and attitude existing in the old shop did not influence the freshly recruited workforce. For
example, while the hammer shop work force was characterized by narrow specializations
like a ‘fitter’, a ‘grinder’ and a ‘machinist’, the employees in the press shop were trained
to be multi skilled. The new recruits were paid higher salaries and provided with
facilities and infrastructure that would help them to deliver high productivity. A new
canteen was built very close to the facility so that the employees could adjust their
schedules and there was no stoppage of work during the lunch hour. This was in contrast
to the working of the hammer shop where the lines were stopped for an hour for the
employees to have their half hour lunch break.

The employees recruited for the Press Shop were a younger lot – mostly in their late
twenties and early thirties - comprising engineers, technical experts and computer
literates. The young work force took to the new facilities and demanding work norms
very enthusiastically. Teams on the shop floor were also given considerable autonomy to
decide the best way to run the operation and continuously improve it. As a consequence,
shop floor issues got resolved in half-as-much time as before, since engineers on the shop
floors used their discretion rather than refer them to higher levels of managers. This
directly led to faster response times. Baba Kalyani noted:

Our aim was to become a global organization. In a global organization, you don’t
break a problem into tasks. Rather, you take a problem, put cross functional teams
in place, put a time frame and business processes and fundamentally bring together
people from different fields of expertise like engineering, manufacturing, quality
and so on and allow them to solve the problem. The challenge was to institute a
system driven management rather than one that is driven by the hierarchy. This
transformation was imperative. But bringing about this change is difficult because
this is where we, as Indians, are very weak. We are great individually, but we do
not know how to conform to systems and work as a team.

Predictably, the new recruits in the press shop were seen as a ‘privileged’ lot and that
caused dissatisfaction among the older employees. However, it did not snowball into a
crisis, largely because of the trust that employees had in Baba Kalyani. Dr. Chandak,
Vice President (Human Resources), remarked:

5
All our employees have seen him slogging on the shop floor every day and have
developed tremendous respect for him. He used to come to office at 7:30 in the
morning and work till 7:30 in the evening, and of those 12 hours, he would spend
more than 6 hours on the shop floor. He would know at least 60 to 70% of the shop
floor employees by their names. And he would share lots of information with them
- both good and bad. This was not the prevalent norm in manufacturing companies
in those days, especially in the shop floor. Mr. Kalyani would tell them what he
was doing and more importantly why. He was able to convince the employees that
what he was doing and (what he) was asking them to do were in the best interests
of the organization and its people.

BFL also gave the older employees an option to retire early and many chose to do so. For
the remaining employees, BFL initiated several training programmes to upgrade their
skills in technology, operations, inspection and handling of instruments. On the financial
side, they were provided with perquisites like loans to buy two-wheeler etc.

Implementation of the new press lines took two and a half years, which was more than
what was initially planned for. This was largely because, apart from four people at the
top who had significant experience, the entire team was made up of fresh recruits straight
out of college. However, once the line was stabilized, it resulted in dramatic cost
reduction on the shop floor. It enabled the company to save about Rs. 6000 / MT in
variable costs alone. Other savings included extension of the life of the die – impression
of a piece that is used to make a forging – by nearly two and a half times. If BFL could
make 1000 pieces with a singe die in a hammer shop, it could make 2500 pieces with the
same die preparation on a press line.

Acquiring Customers

The first big break came when Rockwell International2, a joint venture partner in one of
the companies in the Kalyani Group invited BFL to send in its proposal for supply of
forgings. Rockwell planned to shut down its forging plant in Newcastle, Pennsylvania
and source its requirements from the market. BFL’s proposal was cost competitive and it
was short listed along with suppliers from Brazil, Hungary and Japan. Rockwell
employees visited the facilities of all the short listed candidates and gave a very positive
report about the technological capabilities of BFL. And, BFL was awarded the contract to
supply 30% of Rockwell’s requirements.

BFL performed extremely well on all parameters of cost, quality and delivery. Extensive
efforts were made to remove any apprehensions that the customer had about dealing with
a supplier who was located several thousand miles away. A resident engineer was posted
in the US; stocks were kept in a local warehouse and potential bottlenecks in the supply
chain resolved. Agarwal remembered:

Initially there was a lot of resistance, at least psychologically. How can one deal
with a supplier who is 10000 miles away? Can they match the levels of services
that are being currently provided? For example, in our business, the customer needs

2
currently known as ArvinMeritor

6
supply of parts two to three times a day. And they do not want to stock. The service
is not only in terms of delivery, but also in dealing with complaints and doing some
joint development. So they want a person to be available there, one whom they can
meet and monitor etc. We therefore stocked 30 days inventory in warehouses
located close to the customer such that we can deliver them as many times as was
needed. We posted a resident engineer there. Our key people who interact with
them were ready with multiple entry visas so that they could be with the customer
at short notices. Over and above that we had weekly telephone conferences with
teams comprising experts from quality, production, technology along with sales
personnel.

Within two years, following the failure of the principal supplier to cope with the volatility
in customer’s demands as efficiently as BFL did, BFL was supplying 70% of Rockwell’s
requirement. Agarwal explained:

Suppliers from the developed nations work on a business model of predefined


capacity allocated to a steady set of customers. But we have flexible capacity to
accommodate any incremental demand. Our old shop acts as a reservoir of
capacity, and we can also start a third shift, if required. Thus, if somebody’s
requirement goes up, we can absorb it. More importantly we never charge them a
premium for it. Obviously this is risky, but one can live with it provided one has a
good sense of the market and the potential customers.

I remember the Vice-President of Purchasing of one of the customers asked me


‘Gopal, what is your capacity?’ And I told him, ‘my capacity is what you want it to
be.’ He asked, ‘what do you mean?’ He thought that I did not understand his
question. So he said, ‘no, no, I want you to tell me about your production – how
much you are selling to somebody else, and how much more you can do for us?’
So I said, ‘Craig, I will do what you want me to do’. Then he said, ‘can you do
9000 front axle beams?’ I said yes. So it became 9000 beams!

There are two ways of making an investment decision in our industry. One is to
look at total demand, analyze how much the existing suppliers will be able to meet
and then plan for meeting the residual demand. However, we do it the other way
round, based on one-to-one relationships. If we come to know that Meritor is
investing and we sense that they are willing to increase their involvement with us,
we go ahead and invest. Sooner or later, they will increase their purchase from us.
Mr. Kalyani is always very aggressive in making such decisions. That has gone a
long way in making Bharat Forge an agile and dynamic organization in the eyes of
our customer.

Widening the Footprint


Notwithstanding the successes it met with in the export market, BFL continued to depend
heavily on the domestic market. The growth in domestic demand fuelled by the economic
reform program undertaken by the Government of India in the early 1990s to accelerate
growth of the Indian economy, resulted in BFL further consolidating its leadership of the

7
domestic forging industry. BFL had a well-diversified customer base that included
virtually every OEM in the country. Even though many of these OEMs had historically
built up captive forging capacity, they increasingly preferred to source forgings from
BFL to meet their growing demand, as the company was cost and quality competitive. By
mid 1990s, BFL had 55% share of the market for heavy forgings and 85% market share
in machined crankshafts. The company offered the widest product range in the domestic
market. In addition to supplying forgings to the automotive industry, the company
supplied non-automotive forgings to customers in sectors such as diesel engine,
earthmoving, cement, sugar, steel, and oil and gas industries.

The burgeoning growth in the domestic market prompted BFL to further expand capacity.
In 1996, it entered into a technical agreement with MetalArt Corporation, Japan for small
forgings and set up two mechanical lines with a total capacity of 6500 MTs for
manufacturing small forgings. The company also decided to set up new machining
facilities for crankshafts, front axle beams and heavy steering knuckles that would make
it one of the largest independent crankshaft manufacturers in the world. But even as the
company was implementing the capacity expansion projects the domestic market went
into a steep downturn and the company found itself in a crisis. Baba Kalyani said:

Until the previous year 1995, every one of our customers was projecting huge
growth. They were constantly urging us to expand our capacity. And when we did,
the demand collapsed! It took us all by surprise. Nobody anticipated it, including
our major customers like Tata Motors etc. We had spent so much capital in creating
capacities that we were in a bad shape. We started by doing the standard things like
delaying the commissioning of the new facilities, working three days a week, and
when that was not enough, started laying off people etc. But then we sat back and
started analyzing what happened. I have to give credit to our senior management
team who thought about this in great depth. We came to the conclusion that this is
not a recession. This is not a down cycle that is going to get over in a year or 18
months, but this is a structural change. And the only way to survive was by getting
a larger portion of the global market. So we started to shift gears.

Restructuring Finance and Operations

The downturn in 1996 led BFL to actively focus on its cost structure. One of the
cornerstones of its cost reduction strategy was to focus on its financing costs. As a first
step, in 1997-98, the company repaid two major high cost loans amounting to Rs 1000
million. Next it moved towards what it called “dollarizing” its balance sheet. It started
mobilizing debt from the international capital markets as the interest rates where much
lower and by 2004, 88% of its debt was in the form of foreign currency loans. While
overseas capital subjected the company to currency risks, its exports acted as a natural
hedge against this risk. To improve its ROCE, the company decided to reduce its
exposure to financial assets. In 1996 over half the company’s total assets was invested in
financial assets, which yielded substantially lower returns than its manufacturing assets3.
It first divested its portfolio investments, then divested the holdings in group companies,
and finally spun off the remaining assets that were not core to its manufacturing
3
One internal analysis found the difference to be an order of magnitude (20% on manufactured assets vs
2% on financial assets)

8
operations – that included the investment in windmills it had undertaken to take
advantage of tax and power tariffs credits that reduced its cost of power – into a separate
entity called BF Utilities Limited through a process of de-merger. By the financial year
2000-01, BFL emerged as a fully focused manufacturing company with only those assets
that were relevant to the core business in its balance sheet.

Efforts were made in parallel to reduce operating costs. BFL reduced its energy costs by
optimizing its operations, which included optimization of motor loads, modification of
furnaces and transferring jobs to energy efficient units. It cut its manpower costs by
eliminating non-value added jobs through a voluntary retirement scheme and by
redeploying workers to direct production related areas. Simultaneously it rolled out a
programme called “Vikasachi Navee Dalane” (New Horizons for Progress) in vernacular
Marathi. Almost all employees were taken through workshops that ran them through the
evolution of Bharat Forge over the past three decades, and where the organization was
poised to go in future. The company also launched several initiatives like ‘Kaizen’,
‘TPM’ and ‘5 S’ to constantly upgrade the competencies of the workforce and keep them
up to date with the latest tools and techniques in operations and management. Later, BFL
entered into an agreement with Birla Institute of Technology and Science, Pilani, a
leading engineering school of India, under which employees of the company could
pursue a part time engineering course for a B.S (Manufacturing Engineering) degree.

To reduce the material cost the company streamlined its vendor management processes. It
reduced its vendor base and only engaged with what it called the “chosen and trusted”
few – those that had the scale and quality standards to meet with its increasingly
demanding standards. To reduce transaction costs it developed a low cost system where
even the smallest vendor could log into its supply chain system. It deployed an integrated
supply chain system, which provided the operating managers with real time visibility of
material requirement and inventory throughout the chain and provided decision support at
all stages of the operations.

BFL replaced its multi-level organization, where shop floor feedback of manufacturing
changes took ages to implement, with a three-layered structure. The first was the
operating layer comprising employees who run the manufacturing process. The second
layer comprised the middle management who had been converted from their supervisory
task-oriented roles to becoming problem solvers. The third layer consisted of the senior
management that provided leadership and strategic direction over and above managing
organizational performance. To bring about greater transparency and objectivity in its
performance management practices, particularly to identify and reward performers, the
company rolled out a new performance management system. Dr. Chandak remarked:

While we had HR practices in place from early nineties, we felt the need for change
and revitalization. Today we actively involve the departmental managers in
understanding the pulse of the organization – aspirations, level of confidence, gaps,
if any, in the alignment of both people and processes, with the organizational vision
– and in formulating performance evaluation parameters.

The above measures, which were rather demanding on the management team, enabled the
company to improve its cost structure. In a letter to the shareholders, Baba Kalyani wrote:

9
Any management team can deliver results during booms. The test of a disciplined,
proactive management is not only how it can weather slumps, but also use the
period of adversity to reengineer the company to widen its footprint, cut costs and
implement strategies that overcome adversity.

Growing Exports

Simultaneously the company embarked on the exercise of reducing its dependence on the
domestic markets. It actively searched for opportunities to grow its exports. Its existing
relationships with overseas customers enabled it to achieve fresh breakthroughs. Its
relations with Meritor proved to be particularly helpful. One of the plant managers of
Meritor had joined Metaldyne, a company that was a supplier to Caterpillar. Metaldyne
was facing quality issues with its existing US based supplier and the plant manager
recommended BFL as a potential supplier to his new firm, since he had, while at Meritor,
good experience in dealing with it. BFL was asked to send a response to their query.
Agarwal recollected:

Our response went within five days and it ran into sixteen pages. Over and above
the price, we explained our manufacturing process in detail with diagrams and flow
charts. They were quite impressed, both with the response time as well as by the
comprehensiveness of it and asked for a teleconference. This ran into couple of
hours, where they clarified a lot of their doubts. At the end of it, they told us that
they would like to visit our facilities for evaluation. Three weeks later they flew
down. We took them around to show our facilities. When they came to the press
shop, they asked, “Whose part is being forged? It looks very similar to ours.” We
told them it was their part that was being forged. This took them completely by
surprise and they asked “How can you be making our part, when we never gave
you the order”. We said, ‘if four of you are coming all the way from the US, it
means that you are seriously interested. Now what you want to find out is whether
we can make the part or not. Two of you would say, ‘yes, you can’, and two of you
might say, ‘I am not sure’, so how do we prove it? The best way we thought was to
show the actual product to you! We thought if you are spending 5000 dollars to
come here, we should be willing to spend 20,000 dollars and develop this part’.
When they were going back, we gave them the sample so that they could test it in
their lab. After the testing, they called back and told us, ‘the program is on!’

It was during this time it became apparent to BFL that to break into the fiercely
competitive global market it would need to stretch itself and respond faster than the
existing suppliers of their potential customers. While its willingness to create capacity
ahead of demand provided it with opportunities to gain a toehold with customers, it
realized that to gain a pole position in the customer’s account it would need to redefine its
value proposition in a fundamental way. It sought to do this by radically improving its
designing skills and adding value to its product offerings.

10
Building Design Competence

Designing is an important part of the process of manufacturing forgings. An optimal die


design improves the life of the die and an optimized forging sequence reduces the number
of forging stages. Additionally, a faster design process reduces time to respond, a
parameter that is important in export markets. Hence, BFL decided to revamp its
designing process from a manual one in which draftsmen developed the design with pen
and paper, to a computerized one using CAD/CAM/CAE4 systems in which the design is
first done on the computer and then directly downloaded on to the forging shop to be
converted into a forging. State of the art three-dimensional finite element based
computing simulations enables the designer to create a virtual forging shop and carry out
multiple forging experiments. This dramatically increases the success rate of actual
forging operations in terms of accuracy, consistency and life of dies. Correlation analysis
is continuously carried out on multiple parameters between the simulation and actual
results obtained and the results stored in a database. These results help designers refine
their simulation models and draw better conclusions from the simulation results. BFL
describes this entire engineering process as “Print to PPAP5” (Exhibit 9). Mr. Madan
Takale, Senior Vice-President (Engineering) said:

Today, we have the capability of developing forged components based on two-


dimensional drawing supplied by our customers. While the customer provides
details in terms of the product specification, geometry, microstructure and
properties of the desired component, our design engineers convert these into a three
dimensional model, analyze its metallurgical requirement and develop a suitable
process for forging. The design specifications are fed into CNC6 machines for
manufacturing the die of required specifications.

Baba Kalyani added:

Our entire tool making skills and knowledge is sitting in our CAD / CAM software
and processes. Till mid 1990s, we used to have a skilled operator called the
toolmaker. A toolmaker is the most expensive blue-collar employee you can have,
because he understands the precision and intricacies that are involved in three-
dimensional tool making. Globally, 50% of the organizations use a toolmaker. In
India, it is as high as 90%. However, thanks to our design facilities, we have
deskilled the job. Today we recruit fresh engineering graduates and give them
rigorous training. In two months they can make tools with these machines. So the
engineer, who is generating the CAD CAM programmes, quickly imbibes the
toolmaker’s knowledge. The engineer’s intellectual abilities do come to bear during
the design, when the CAM and machining programmes are generated.

By suitably investing in technology and instituting the right processes, we have


dramatically increased the bandwidth of our design engineers. It is possible to do
the same in the US, but such employees will be four times more expensive. Thus, it

4
Computer Aided Design / Computer Aided Manufacturing / Computer Aided Engineering
5
Production Part Approval Process
6
Computer Numeric Controlled

11
is not factory labour cost arbitrage that we are leveraging. We are gaining from
intellectual capability arbitrage. Today we are a low cost operation and not a low
price operation. We don’t need to be low priced; we are not a commodity player. If
you become a commodity, you lose. If you lose your pricing power to your
customers, you are finished – they will make sure that you operate at a 2% margin!
That is where intellectual competition comes in. We have strategically positioned
ourselves by offering them seamless capacity, faster speed to market in terms of
development time. We simply deliver far better value than our competitors.

Diversifying Product and Customer Portfolio

As its engagement with automotive majors in the world markets increased, BFL
witnessed a growing preference among them to have components in a ready to assemble
form. It then embarked on a strategy of further maximizing supply of components in the
machined form instead of raw forgings. Despite the continued slow down in domestic
markets, it took the decision to implement the project for manufacture of finished
machined crankshafts that it had embarked upon earlier but deferred due to the down
turn. BFL believed this would enable it to transform itself from being a “generic”
supplier of forgings to a “preferred supplier” and “partner of choice” to the best
automotive and engineering companies in the world. The company soon emerged as a
reliable vendor of machined components to the automotive sector as well as the oil and
gas sector. The share of value added machined components in the company’s turnover
increased over the years. More importantly, supply of specialized components for drilling
equipment used in the oil and gas sector constituted almost a fifth of the company’s total
exports.

Historically BFL had concentrated on manufacturing large forgings. The explosive


growth of passenger car industry in India (in sharp contrast the downturn in the
commercial vehicle sector, the traditional focus area for the company) prompted the
company to increase its presence in the small forgings segment. The passenger car
segment was estimated to be 4 times the size of commercial vehicles segment, the
traditional area of focus for BFL (Exhibit 10). The small forgings segment of the industry
was highly fragmented with a host of small and medium sized units supplying parts using
old technology. BFL believed the then prevailing wave of vendor consolidation in the
auto sector afforded it a window of opportunity to emerge as a major player by offering
products using state of the art technology. It went ahead and installed three new forging
press lines aggregating to a total capacity of 9000 MT to manufacture small forgings. In
2002, the company achieved a major breakthrough when it entered into a contract with
Toyota to supply small forgings (transmission components) for the latter’s Indian and
global operations. In 2003, BFL entered the passenger car market in the US with the first
batch of exports to Ford Motors, US. In the same year it also received an initial order
from Daimler Chrysler for supply of passenger car forgings.

The company’s efforts to de-risk its business by focusing on exports did insulate it to
some extent from the continued downturn in the domestic markets. However a slowdown
in the US heavy truck industry, its major export market (it had over 50% share in the US
truck axle component segment) resulted in the company experiencing a steep decline in
its export turnover in 2000-2001. BFL was conscious of its vulnerability to a
simultaneous down cycle in both of its major markets (India and the US) and had taken

12
steps to improve its geographical spread by reaching out to customers in Europe.
However, customer acquisition in the global automotive markets for the supply of
components was a long drawn affair. Typically it took a few years before a company
became a “regular” supplier to the auto majors (Exhibit 11). While, the company had
procured a few contracts from some marquee customers like Volvo and Daimler
Chrysler, the volumes were not sufficient to make up for the lost sales in the US market.
Additionally in that year its exports to Europe suffered a setback due to an overvalued
rupee against currencies in the Euro-zone. The company’s problems were further
compounded by the fact that it had, buoyed by the successes it had met with in the earlier
years in overseas markets (for example its exports nearly doubled in 1997-98), expanded
capacity by installing the 16000T Press line it had suspended during the downturn.
Though the company remained in the black in that year, when the rest of the industry was
awash with red, clearly it was a testing time for the company. That year, in his letter to
the shareholders, Baba Kalyani wrote:

Economic downturns are not new to this industry. This is the third in the last
decade. On every occasion your company has emerged stronger in all aspects; it has
gained market share, emerged stronger financially and strengthened its commitment
and focus…I am sure we are well on our path of achieving our long term goal of
making BFL one of the top forging companies in the world in the next three to five
years. Together, we shall make it happen.

It did happen. In January 2002, BFL concluded an agreement for supply of forgings to
Dana Corporation’s Spicer Europe Limited operation in Kirkstall, Leeds, UK. The
agreement was unique. Mr. Prakash Bhalerao, Executive Director, explained:

It actually is an acquisition. Not their assets, but their order book. Dana had put the
Kirkstall facility on the block. The deal came to us since the word was out that we
were looking for acquisitions. We looked at it. We found the order book interesting
and not their assets - we already had excess capacity here! We offered to pay 3
million pounds for the order book. It was twice the best offer Dana had received
until then for the entire facility! But Dana wanted to divest the whole block,
including the physical assets, and was looking realize 10 million pounds. We then
worked out an interesting deal structure. We did not use an investment banker. We
structured the deal ourselves. We helped them find others who were interested in
the individual parts of the physical assets - plant, land and buildings etc. That way
Dana ended up getting what it wanted! And we got what we wanted. We paid 3
million pounds for the order book and got 10 million pounds worth of orders per
year, for the next 7-years! And we also got the dies and tools.

Under the agreement, BFL assumed Kirkstall’s responsibilities as a supplier to the


Cameron Division of Cooper Cameron. Under supply agreements with Dana, BFL was to
supply Dana with certain forgings used by its Kirkstall axle operation and its commercial
vehicle axle operations in North America. The supplies were to be made by BFL from
India over a seven-year period from its Indian manufacturing facilities. The Kirkstall
order book also strengthened the company’s position in the oil and gas sector. Soon after
the acquisition, BFL cemented its ties with the world’s largest oilfield equipment
manufacturer and was given the status of “ preferred and primary supplier”.

13
Immediately after the Kirkstall acquisition, BFL’s concerted efforts to penetrate the
burgeoning Chinese market7, the least cost producers of forgings in the world, met with
success. The decision of the Chinese government to enforce new road regulations in
terms of haulage capacities, which made larger trucks with heavy-duty diesel engines a
superior value proposition, and to adopt Euro II emission norms provided BFL with a
new window of opportunity. Both these developments required major engine upgrades
(higher compression ratios etc) by the Chinese truck manufacturers. The new engines
require solid steel forged crankshafts, as against cast iron crankshafts, as only steel
forgings offer the requisite higher torsional rigidity and dimensional stability. Here BFL
had a competitive edge as the local Chinese companies did not have the requisite
technology. As a consequence, BFL entered into a long term agreements for supply of
steel forged crankshafts and other engine components to two of the largest engine
manufacturers in China, Wuxi First Autoworks and Guangxi Yuchai Machinery
Company. These engine manufacturers were associates of the giant OEMs of China –
First Auto Works and Second Auto Works respectively. And within two years, China
emerged as the second largest export destination for BFL after the United States. The two
OEMs also awarded BFL the contract to develop new crankshafts for their new engines
under development.

In the same year, BFL achieved a major breakthrough in Europe when it received an
order from Renault Vehicle Industries (RVI), the second largest truck manufacturer in
Europe for supply of front axle components. In his annual report to the shareholders for
the financial year in 2002-03, Baba Kalyani wrote:

I can see the DNA of each of us in the company changing. Several years of ordeal
by fire tempered our steel; increased speed to market; and made us more hungry
and competitive.

Global Leadership
In January 2004, BFL acquired the assets, intellectual property and labour force of Carl
Dan Peddinghaus GmbH & Co. KG (CDP), a €120 million German forging company in
an asset purchase deal worth €29 million (Exhibit 12). CDP, which was founded 1839,
was well known for its extensive technology, product design and development
capabilities. It typically provided end-to-end solutions to its customers. Baba Kalyani
said:

CDP has phenomenal capabilities. For example, when BMW starts designing a new
car, it would invite CDP to develop the suspension components from scratch. CDP
engineers would work along with engineering department of BMW for the next two
or three years to develop a prototype. And CDP would get the rights to be the sole
supplier for seven years, the lifetime of that vehicle. We were looking to acquire a
technology and engineering beachhead in Europe and CDP provides us that. After
this acquisition, our technical front is very strong. And OEMs will start looking at

7
According to an analyst estimate, the Chinese truck market was nearly twice the size of the Indian market
with annual volumes of close to 1.5 million units.

14
us differently. They will look at us from a long term perspective and partner with
us for future products and models.

BFL had been preparing for an overseas acquisition since 1999, when it first took the
decision to acquire companies in Europe and/or USA. It took this decision as it found
manufacturers, especially in Europe, displaying a strong preference for component
manufacturers located close to their factories. Preparation involved developing
acquisition criteria, identifying and tracking potential targets, building local relationships
in these countries, developing an understanding of how these markets operated and
understanding customer expectations. CDP was among the companies that BFL had
tracked actively. BFL chose CDP over four other strong acquisition candidates because
of its strength in technology and engineering and its portfolio of high-end customers.
Bhalerao said:

The Kirkstall acquisition gave us a lot of confidence that we can do it; that we can
make it happen. And the benefits were tremendous. The downside of that was that
we still didn’t have a base in Europe; we only got the marketing side of it. We
didn’t have our footprint in Europe. CDP gave us that. It also gave us a lot of
synergies on the customer, product and market side (Exhibits 13 & 14).

Negotiation for CDP took about eight months. Baba Kalyani explained:

Unlike the US, where it is a very time sensitive process, in Germany the acquisition
process is a very informal affair, and it can go on for a year or two. When we
acquired it, CDP was under receivership because it had run out of cash. When a
German company is in that position, under a receiver or an administrator, as it is
called, there are four constituents who are involved in the process of sale. First are
the banks, which put the company into administration, because they are the ones
who have to get the money; Second are the employees, who are generally
represented by the unions; third is the existing management; and the fourth are the
customers. In our presentation we informed them that we will not shut CDP down
or move it to India; and we gave a road map of how we would grow the business
there. Finally two of us – ThyssenKrupp was the other – were left in the fray.
ThyssenKrupp was willing to pay more money than us, but the unions opposed it,
and the management opposed it, and even some customers opposed it. And we
ended up acquiring it.

BFL retained the entire CDP top management team. In his first address to all 790 CDP
employees, Baba Kalyani assured them that he intended to nurture and grow the
operations of the newly formed 100% subsidiary CDP Bharat Forge GmbH (CDP-BF).
And soon thereafter, even though there was no hurry to make the investment, he
announced a € 4 million investment in building a new production line at the German
plant. Baba Kalyani said:

The success of any acquisition boils down to people and mindsets. When a firm is
bought, people are uneasy, pain level is very high. The pain comes out in all kinds
of concerns. (Thus) you need to send out the right signals and instill confidence in

15
the management team. Never say one thing before the acquisition and do the
opposite after. If you lose people’s trust, you will never win it again.

Integrating the Acquisition

BFL believed that if the acquired firm were not integrated with the parent within the first
hundred days, it would never be! It therefore launched a ‘100-day integration plan’.
Interestingly the integration process was planned, initiated and executed without the
involvement of any external consultants.

The 100-day integration plan had the twin objectives of integrating people and capturing
synergies. Synergy teams were created in four areas, namely business strategy,
marketing, manufacturing and engineering. The idea was to seek opportunities for both
organizations to benefit from each other’s best practices. While BFL started learning
about CDP-BF’s process for manufacturing key components, BFL’s equipment
maintenance practices were adopted in Germany.

During the first 30 days after the acquisition, a series of cultural workshops were held in
Germany for all the Indian and German managers. The Indians learnt about German
discipline, and the Germans started appreciating the flexibility of Indian managers. To
facilitate and speed up the process of integration and transfer of best practices, BFL
introduced a part-time German language course for its managerial personnel.

Efforts at cultural integration were complemented with detailed review of


manufacturing costs, product mix and value addition for each activity. The German
management, with their focus on technical excellence, was not focused on some of
these aspects. At first, such discussions were sacrilegious, but soon they started
appreciating the business logic because it was objective and undisputable.

In the first quarter after the acquisition CDP-BF earned a total income of Rs.1838 million
and a net profit of nearly Rs 100 million (Exhibit 15). In his first public statement, four
months after the takeover, Mr. Michael Kasperski, Director of CDP paid a glowing
tribute to the new organization, stating

It was a great surprise for the employees that the acquisition worked so well in both
directions. We can learn a lot from the speed and discipline of the Indians. We have
once again achieved what we had lost since a couple of years. The employees are
enjoying their work once again and we look forward to an optimistic future8.

In BFL too there was excitement, especially about CDP-BF’s product design and
development skills. These skills would provide the leverage BFL was seeking to make a
push for global leadership. There was also an additional unexpected spin off. Baba
Kalyani said:

It’s not easy to describe, but the acquisition is doing wonders for us in India. Our
employees suddenly have a new sense of pride!

8
Westfalenpost, 3rd May, 2004

16
Post Script
In December 2004, BFL acquired CDP Aluminiumtechnik (CDP-AT), a significant
player in the area of aluminium forged components used in passenger cars and other
automotive applications. BFL was funding the €6.30m all cash deal through a mix of
equity (€3.80m to be infused over the next six months) and non recourse debt (€2.50m).

Aluminium is progressively becoming the preferred material for specialized high end
automotive applications due to significantly lighter weight and consequent advantages of
fuel efficiency. CDP AT, which has a turnover €35m and employs 130 people, is located
at Brand-Erbisdorf, near Dresden, Germany, an area fast emerging as major automotive
hub with new plants being set up by Porsche and BMW. CDP AT has developed and
patented its technology of aluminium forgings in Germany and its customers include
BMW, Audi, Volkswagen, and Ford.

17
Bharat Forge Limited
Exhibit 1

ORGANISATION STRUCTURE

CHAIRMAN AND MANAGING DIRECTOR


B.N.Kalyani

Executive Director Executive Director Executive Director


P C Bhale Rao G K Agarwal Amit Kalyani

EXECUTIVE VP Executive VP EXECUTIVE VP


Corporate Affairs (MCD Projects) Legal & Secretarial
D R Moorthy B Swaminathan S S Seth

Group CFO CFO and Sr. VP


P K Maheshwari (Finance)
S G Joglekar

Sr. VP Sr. VP Sr. VP Sr. VP Sr. VP Sr. VP Sr. VP


(Chakan) (MCD Engg) (CDFD) (Engg) (Sales) (Exports) (MCD)
MT Pathak R Radhakrishnan B P Kalyani M U Takle V K Jain S Tandale MN Deshmukh

VP VP
(HR) (Materials)
S VBhave MG Dattawadkar

(Source: Company)

18
Bharat Forge Limited
Exhibit 2

FINANCIAL PERFORMANCE

A. PROFIT AND LOSS ACCOUNT (Rupees million)

94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04
INCOME
Gross sales 3236 4536 5572 5737 4595 5677 5233 4718 6863 9020
Less: Excise
duty 424 534 661 543 438 594 558 470 505 700
Net Sales 2812 4002 4911 5194 4157 5083 4675 4248 6358 8320
of which
Export Sales 276 490 482 892 746 1149 894 1108 2717 3330
of which
Domestic
Sales 2536 3512 4429 4302 3411 3934 3781 3140 3641 4990
Operating
&Other
Income 347 429 394 315 273 176 215 113 92 191
Total Income 3159 4431 5305 5509 4430 5259 4890 4361 6450 8511

EXPENSES
Raw material,
Components,
Die block 1286 1832 2262 2571 1659 1824 1879 1576 2223 3181
Staff Cost 253 347 401 412 440 465 464 427 462 537
Other
manufacturing
expenses 591 781 960 867 855 1114 858 789 1244 1518
Other
expenses 221 326 711 556 343 388 361 372 562 682
Total
expenditure
before IDTA 2351 3286 4334 4406 3297 3791 3562 3164 4491 5918
EBIDTA 808 1145 971 1103 1133 1468 1328 1197 1959 2593
Interest 383 459 518 446 424 442 573 454 408 323
Depreciation 166 176 209 236 291 299 397 390 418 458
Total
Expenditure 2900 3921 5061 5088 4012 4532 4532 4008 5317 6699
PBT 259 510 244 421 418 727 358 353 1133 1812
Provision for
tax 1 1 58 59 45 101 32 133 322 563
PAT 258 509 186 362 373 626 326 220 811 1249
EPS 6.97 12.32 4.17 9.56 9.90 12.88 8.28 5.50 20.71 32.28
RONW 10.36% 12.31% 4.77% 9.30% 9.14% 15.60% 21.89% 21.53% 47.26% 49.70%
NAV / Equity
share 58.05 103.14 100.14 102.58 107.84 103.57 33.85 18.96 34.54 56.57
(Source: Company Annual Reports)

19
Bharat Forge Limited
Exhibit 2 (continued)

FINANCIAL PERFORMANCE

B. BALANCE SHEET (Rupees million)

94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04
SOURCES OF
FUNDS
Shareholders'
funds 2490 4135 3900 3893 4082 4013 1489 1022 1716 2513
Capital 481 768 497 377 377 477 477 577 677 677
Reserves &
Surplus 2009 3367 3403 3516 3705 3536 1012 445 1039 1836
Loan Funds 3569 3578 4273 4621 3957 4092 4129 3823 3236 2856
Secured Loans 2053 2520 2940 2938 2220 2598 2623 2203 2530 2191
Unsecured loans 1516 1058 1333 1683 1737 1494 1506 1620 706 665
of which Foreign
Currency Loans 1224 1228 1692 2708 2419 1979 1549 1664 2067 2402
Share Appln.
Money - - 75 - - - - - - -
Deferred Tax
Liability - - - - - - - 740 819 850
TOTAL 6059 7713 8248 8514 8039 8105 5618 5585 5771 6219

APPLICATION
OF FUNDS
Fixed Assets 1864 2290 2433 3249 3698 5045 4405 4475 4566 5389
Gross Block 2523 3130 3124 3510 4699 6769 6359 7071 7697 8220
Less:Depreciation 935 1108 1330 1571 1825 2121 2463 2859 3270 3708
Net Block 1588 2022 1794 1939 2874 4648 3896 4212 4427 4512
Capital WIP 276 268 639 1310 824 397 509 263 139 877
Investments 1080 1752 1725 1707 1663 928 12 - - 344
Def. Tax (assets) - - - - - - - - 39 45
Current Assets, 3973 4798 5439 4966 4308 4206 2814 2939 4014 5228
Inventories 812 891 950 796 759 932 879 860 1264 1332
Sundry Debtors 749 1039 1334 1142 823 663 837 716 813 1001
Cash & Bank
Balances 110 132 408 204 51 156 29 93 233 86
Other Cur. Assets 35 46 45 33 134 144 113 150 384 443
Loans & Adv. 2267 2690 2702 2791 2541 2311 956 1120 1320 2366
Less: Current
Liabilities 866 1177 1377 1437 1650 2086 1727 1937 2963 4869
Liabilities 769 1027 1154 1143 1229 1635 1364 1511 2192 3381
Provisions 97 150 223 294 421 451 363 426 771 1488
Net Current
Assets 3107 3621 4062 3529 2658 2120 1087 1002 1051 359
Miscellaneous
Expenditure 8 50 28 29 20 12 114 108 115 82

Total 6059 7713 8248 8514 8039 8105 5618 5585 5771 6219
(Source: Company Annual Reports)

20
Bharat Forge Limited
Exhibit 3

FORGING CAPACITY

Year Total Forging Capacity Presses Added Capital


Capacity (TPA) Addition (TPA) (Tonne) Expenditure
(Rs.million)
1991 n.a. One 16000 T & one 6000 T 2,300
1996 70,900 n.a. One 4000 T & one 2500 T n.a.
2000 100,900 30,000 One 16000 T & one 2500 T 1,434
Apr 04 – Jun 05 200,000 100,000 One each of 2500 T, 5000 T, 1,388
5500 T, 6000 T & 12,500 T
(Source: Company, HSBC Analyst Report 2004)

Bharat Forge Limited:


Exhibit 4

PRODUCTIVITY PERFORMANCE

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04
Forging production
per employee (Tons) 20.64 24.30 25.37 21.75 16.78 22.23 18.32 19.53 27.11 30.95
Revenue per
employee (Rs. in mn) 1.326 1.773 2.094 2.120 1.669 1.938 1.707 1.730 2.499 3.131
Employee Cost (%
of Total Income) 8.01 7.83 7.56 7.48 9.93 8.84 9.49 9.79 7.16 6.31
No. of Employees 2383 2499 2533 2598 2655 2714 2865 2521 2581 2718
Capital Output ratio 1.27 1.57 1.70 1.66 1.08 0.92 0.74 0.65 0.87 1.07
Capacity Utilization 69 86 91 80 63 60 51 48 68 82
Interest Cost (% of
Total Income) 12.12 10.36 9.76 8.10 9.57 8.40 11.72 10.41 6.33 3.80
(Source: Company)

Bharat Forge Limited:


Exhibit 5

SHARE OF MACHINED COMPONENTS IN TOTAL TURNOVER

(%)
FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04
Machined Components N.A N.A 25 26 43 42 42 44 49 49
(Source: Company)

21
Bharat Forge Limited
Exhibit 6

PRODUCT MARKET PERFORMANCE

(A) KEY CUSTOMERS

1994 2004
India: India: North America:
Tata Motors , Ashok Leyland, Maruti ArvinMeritor, Dana
Tata Engineering, Ashok Leyland, Udyog, Mahindra and Mahindra, Corporation, Ford, GM,
BEML, Cummins, Toyota Kirloskar Caterpillar, Cummins
Eicher Motors, Mahindra and
Mahindra Asia: Europe:
Escorts, Kirloskar Group, Bajaj Toyota, Honda, Ford, GM, Daimler Chrysler, Volvo
Tempo Renault Vehicle Industries Trucks, Renault Trucks,
First Auto Works, China IVECO, Ford, Caterpillar
North America: Second Auto Works, China Perkins, Volkswagen,
Isuzu. Cummins
Arvin Meritor
(Source: Company)

(B) OTHER INDICATORS

(i) Distribution of Number of Clients

Per Client FY 94 FY02 FY03 FY04


Revenue
Rs 25 - 50 m N.A 5 8 10
Rs 50 - 75 m N.A 4 5 3
Rs 75 – 100 m N.A 2 3 1
> Rs 100 m N.A 9 11 18
(Source: Company)

(ii) Share of Exports by Region (%)

FY 94 FY02 FY03 FY04


USA N.A 89 63 44
Europe N.A 8 11 24
Asia Pacific N.A 3 26 32
(Source: Company)

(iii) Product wise Revenue Distribution (%)

FY 94 FY04
CVs N.A 61
Diesel Engines N.A 18
Passenger Cars N.A 8
Oil & Gas N.A 5
Heavy Engg 8
(Source: Company)

22
Bharat Forge Limited
Exhibit 7

A. Benchmarking Indian Auto Component Industry with Other Low Cost Destinations

Parameter India China Thailand Taiwan


Quality of supply 1 4 2 3
Ability to supply consistent quality 3 4 2 1
Price competitiveness 4 1 3 2
Design and engineering capabilities 1 4 3 2
Customer / after sales support 3 4 1 2
Maturity of auto component industry 1 4 3 2
Government regulations 4 3 1 2
Attractiveness of domestic market 2 1 3 4
Compliance and transparency 2 4 3 1
(Source: Frost and Sullivan/Company)

B. Benchmarking Indian Auto Component Industry With Component Majors

%Margin (Sales –COGS as %of Sales)

45
Indian average : 36.4% Material & Capital Labour Depreciation Overheads Profits
40
100
35
90
20-30 %
30 80 savings

25 70

20 60
Global average : 12.6%
50
15
40
10
30
5 20
0 Delphi Dana Visteon ARM JCI Magna BFL Ucal MICO Denso(I)
10
0
Comparing global and Indian auto component manufacturers’ margins
US ancillary manufacturer Indian ancillary
Source : J P Morgan
Comparison based on FY2002 results for international companies &9 months FY03 results
manufacturer
for Indian companies Comparative cost structure of US and Indian auto
component manufacturers
Source : MOST- Inquire , September 2004

23
Bharat Forge Limited
Exhibit 8

KALYANI GROUP

Bharat Forge Ltd (BFL) is the flagship company of the Kalyani Group, which has significant presence in
the auto component industry in India. Presence of the group in several major auto component sectors
provides BFL with a common pool of knowledge that leads to a superior understanding of the business
dynamics, and identification of opportunities ahead of rivals. For example, Automotive Axles
manufacturers rear axle assemblies while Kalyani brakes manufacturers braking systems for passenger cars
and utility vehicles. Presence of group companies in upstream processes ensures that there is greater
control, which translates into greater reliability and consistency of products as well as supply schedules.
Thus, up to 80% of required steel, which is critical to the determination of strength of forged components,
is procured from Kalyani Carpenters Special Steels Ltd. and Kalyani Steel Ltd.

• Automotive Axles (AAL): A joint venture between Meritor and the Kalyani group, AAL is the only
company to provide complete axle solutions to the customer. Ashok Leyland, Telco, M&M and BEML
are the large domestic clients while they make substantial exports to Meritor.

• Kalyani Carpenter: Kalyani Carpenter Special Steels Ltd is a joint venture between Kalyani Steels
Ltd and Carpenter technology Corp, US. Kalyani Steels is a leading manufacturer of forging and other
engineering grade carbon and alloy steel, while Carpenter Technology Corp is recognized
internationally for its speciality and high alloy steel. It supplies nearly two thirds of BFL’s steel
requirements.

• Kalyani Steel: It is a leading manufacturer of forging and other engineering grade carbon and alloy
steel that is manufactured in electric arc furnace. Over the years, it has continuously upgraded its
technology and infrastructure, starting with its technology collaboration with AICHI Steels of Japan. It
supplies nearly 15% of BFL’s steel requirements

• Kalyani Lemmerz (KLL): The company manufacturers wheel rims for utility vehicles, light and
heavy commercial vehicles and tractors. Lemmerz is a world leader in wheel rim technology and
supplies to leading automotive manufacturers like Daimler Benz, General Motors, Ford and Volvo.
Lemmerz is now part of Hayes, USA, the world’s largest manufacturer of automotive wheel rims. KLL
manufacturers wheel rims using the flat stock, cold pressing and flow forming method pioneered by
Lemmerz, which gives it a significant competitive edge over other wheel rim manufacturers.

• Kalyani Brakes (KBX): KBX is a leading brakes manufacturing company in India, promoted in
collaboration with Robert Bosch. It is present in the two-wheeler disc brake market and in the CV and
passenger car market with a range of air, air over hydraulic and hydraulic brakes.

24
Bharat Forge Limited
Exhibit 9

ENGINEERING PROCESS OF FORGING

FATIGUE TESTING AND VALIDATION CUSTOMER DETAILS PRODUCT DESIGN & PROTOTYPING
Product Specification – Geometry,Chemistry, Envelope Data Given By Customer
‘INSTRON’ Servo-Hydraulic Actuators Micro-Structure, Mech- Properties, Test Requirements
(630 kN, 250 kN) / ‘UD’ Electro-Dynamic
Shaker (2200 LBF) & ‘NCODE’ For Fatigue
ANSYS-8.1 & HYPERMESH-6.0, UG,
Evaluation. UG, PRO-E, CATIA, C3P,EDI – FTP, FDX, SWAN Pro-E, ENGINEERING DATABASE
Translators: IGES/STEP/DXF/STL

PPAP SAMPLE SUBMISSION


TECH REVIEWWITH CUSTOMER
Dimensional Verification.
Product Geometry, Metallurgical
PPAP & APQP Review σmax δmax & PPAP Requirements
VDMIS – CMM integration
TECHNICAL REVIEWFORMAT

PRODUCTION TRIAL
“Integrated Press Line” ENGG STUDY OF MODEL/DRG
Product Geometry (CAD)
Trial Conclusion Report Metallurgical Requirements
Forge ability / Complexity
Past Experience, Methods

ENGINEERING ENGINEERING DATABASE


CRANKSHAFT BALANCING
PROCESS BFL CUSTOMISED SOFTWARE
“PRE-
“PRE-TRIAL MEETING”
Trial plan with CFT ‘PRINT TO PPAP’
Trial Strategy

ENGG PREDEVELOPMENT
REVIEW
Forging Sequence Design
Processing Specifications
DIE MANUFACTURING Post Forging Treatment
Pre-Sized Die Blocks High Mfg. Quality Plan (Control Plan)
Speed CNC milling
AUTOCAD, VERA-CAD, HEAT
HASS,DMG,MAKINO,MAZAK TREATMENT DATABASE, APQP

CAM GENERATION
ENGINEERING ANALYSIS CROSS FUNCTIONAL TEAM REVIEW
NC Tool Path with DNC
Deformation Analysis, Die Stress Analysis, Key Design / Process Parameters
Network (Fiber Optic)
Load, Energy, Velocity Vectors, Max Principal Billet Spec, Heat Treat,Processing
Stress, Die Deflection, Defect Detection Freezing Design Parameters
UG NX2, FFAUT, TEBIS,
NC Speed Optimization
DEFORM 2D/3D, FORGE3, Hypermesh, UG-NX2 Cross Functional Input/Feedback

Source: Company

25
Bharat Forge Limited
Exhibit 10

MARKET FOR FORGED COMPONENTS

Bharat Forge Limited


Exhibit 11

TYPICAL CUSTOMER ACQUISITION PROCESS

26
Bharat Forge Limited
Exhibit 12

CDP ACQUISITION: FINANCING DETAILS

Euro (m)
Cost of Acquisition
Purchase price 28.00
Expenses incurred for purchase 1.00
Total 29.00
Means of Finance
Shareholders’ contribution (BFL) 6.00
Internal accruals of CDP-Bharat Forge 5.00
Non-recourse long term debt 18.00
Deutsche bank AG, IKB Deutsche Industriebank AG & Commerzbank AG
Total 29.00
Liabilities taken up by Bharat Forge
Pension 1.70
Early Retirement 0.30
Jubilee (30 yrs in service) payment 0.30
Total 2.30
Source: BFL IPO document

Bharat Forge Limited


Exhibit 13

SYNERGIES BETWEEN BFL AND CDP

Feature CDP BFL Combined entity


Size and scope Germany’s second largest Largest single location facility, Emerges as world’s second
company with strong design and 3rd largest in the world largest
engineering capabilities

Geographical spread Europe centric operations Asia and US dominant Acquires a near global
(~80%) footprint

Product breadth Strong in passenger cars (50%+) A major in CVs (60%+) and Covers requirement of most
components, CVs(20%+) and diesel engines (15%) product markets
others

Facilities Adequate capacities in small One of the world’s only two Complete range of forging
forgings companies in heavy forging facilities

Value proposition A shop renowned for high end Destination for low cost End-to-end solutions
technology operations based operations, most suited for
close to the customer certain components

(Source: BFL, Kotak Institutional Equities estimates)

27
Bharat Forge Limited:
Exhibit 14

BFL AND CDP: REVENUE DISTRIBUTION

BFL CDP BFL + CDP


Geography
USA 18 16
India 59
China 13
Germany 53
Rest of Europe 26
Others

Product Segments
Commercial Vehicles 61 23 45
Passenger Cars 8 51 26
Diesel Engines 18 6 13
Construction - 15 6
Railways - 5 2
Heavy Engg 5 - 4
Oil & Gas and others 8 - 4

Bharat Forge Limited:


Exhibit 15:

CDP- BHARAT FORGE GMBH PERFORMANCE

INR (million) Jan-Mar 2004 Apr – Jun 2004 July-Sept 2004 Oct-Dec 2004
Sales & other 1,838 1,858 1,913 2,175
income
PBDIT 231 192 226 351
PBT 160 97 137 278
PAT 97 54 87 161

28
Bharat Forge Limited

ANNEXURE

Outsourcing in Global Automobile Industry


Increased competition, rising costs and pressures to provide additional comfort and safety features resulted
in the global automobile industry supply chain undergoing a phase of restructuring in the late 1980s
through the 1990s. Global automobile manufacturers dramatically reduced the number of suppliers they
dealt with and focused on procuring from a select few ‘systems integrators’ (Fig 1).

Figure 1

Vehicle Toyota , Honda, Renault,


manufacturer DaimlerChrysler,
Caterpillar,Volvo

ArvinMeritor, Dana,
System
integrators TKAP, Macimex

Sub-assembly
manufacturers Bharat
Forge
Component
manufacturers
Source: Asian Development Bank , J P Morgan

Following the example of General Motors, manufacturers encouraged outsourcing of components in order
to stay competitive. These trends helped the large automobile manufacturers to improve margins in early
nineties (Fig 2).
Figure 2

% M argin (Sales – C O G S as % of Sales)

25
D ow nturn in m argin brin gs
Faster volu m e grow th and restructurin g of Second wa ve of cost reduction
industry aids rise in m argin s
20

15

10

0
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

V ehicle m anufacturers face m argin pressures : GM Ford


Source : B lo om b erg

29
Today, outsourcing has become the accepted practice of the industry. OEMs source nearly 75% of the
vehicle from component manufacturers, while they themselves focused on core activities like design,
research and development, vehicle assembly, marketing and brand management.

The sustained pressure imposed by ruthless extractions of price concessions by the OEMs impacted the
profitability and return on capital employed of the systems integrators and component manufacturers in the
West. Many of them seemed to have traded capital efficiency for growth (Fig 3). Unable to grant any more
price cuts, these players too were aggressively looking out for opportunities to cut costs by sourcing
globally.

Figure 3

Auto Component Suppliers’ EBIDTA margins Auto Component Suppliers’ ROIC

Asset Turnover of Key Global Auto Component Suppliers

30
Global Forging Industry

ThyssenKrupp Automotive Group of Germany and Sumitomo Metal Industries, Japan along with its joint
venture partner International Crankshaft Inc. USA and American Axles and Manufacturing are among the
largest suppliers of forged parts to the global auto industry include. However, forging constituted a
relatively smaller minor share of their turnover. System integrators like Dana Corporation and
ArvinMeritor also have large captive forging units but they are increasingly outsourcing their forging
requirement so that they can focus on higher value added activities like system design and assembly.
However sale of metal forgings by independent plants in the developed countries has been declining for the
past few years (Fig 4). According to analysts, forging has become a ‘sunset’ industry for the developed
world and they believe orders from global auto OEMs would increasingly go to companies from the
emerging economies of the world.

Figure 4

North American Forging Industry Sales

Estimates of the global export opportunity for automobile forgings vary between US$ 5 –15 billion.
Manufacturers of custom impression forging (BFL’s area of specialization) from the US, Canada and
Mexico reported aggregated sales of US$ 4 billion in 2002.This was the total output from 300 plants of 250
forging companies in these nations. Automotive applications at US$ 1.5 bn accounted for 37.5% of total
sales, followed by aerospace applications at 24%. Since US automobile accounts for only 30% of the total
global production, the global market for automotive forgings alone is estimated at US$ 5 billion. However,
other estimates suggest that there are close to 10 international auto giants whose individual annual
requirements of high-grade auto forgings are approximately US$ 1 billion. Another 50 auto and related
companies buy forgings to the tune of US$ 100 million a year. These would add up to US$ 15 billion for
global requirement of high-grade auto forgings.

Indian Forging Industry

The Indian forging industry comprises suppliers of forging components ranging from crankshafts,
camshafts, connecting rods, axle beams and steering knuckles for the 4-wheeler industry to kick starters for
the motorcycle industry. The total capacity of the industry is estimated to be 800,000 tons per annum (tpa).
There are three broad segments in the industry. The top tier comprises about 9-10 large players; the middle
consists of 31 players while the small sector is made up of close to 250 units. The small sector caters

31
primarily to the replacement market. While 75% of these organizations employ less than 250 workers,
about 40% have between 20 and 99 employees. BFL is the largest player in the organized sector, followed
by Amtek Auto, Amforge, M M Forgings and Super Auto Forge Ltd (See Table 1). Apart from these, some
auto majors like Tata Motors have their own captive forging plants. Following the footsteps of global
OEMs, domestic auto majors are also reducing vertical integration and increasing outsourcing. Thus, their
captive forging plants are being shut down, increasing opportunities for merchant forging organizations.

Table 1
Performance of major listed companies in the Indian forging industry (Figures in Rs. Million)

Company Sales Exports PAT


Bharat Forge 8669 3331 1249
Amtek Auto 4122 - 424
Amforge 1481 16.7 53.9
MM Forging 832 576 66
Super Auto Forge 636 371 193
Taparia Tools 541 - 30
IFDS Ltd 635 13 65
Krishna Engg 365 - (120)
Micro Forge 270 NA 11.4
El Forge 399 NA 1.4
BCL Forging 153 - (3.9)
Figures for year ended March 03, except Bharat Forge & IFDS (March 04) Super Auto Forge (March 02)
and Amtek Auto (June 03 – 15 months)

(Source: Company, Capitaline Plus)

32

You might also like