ABC Ltd: An Investment Dilemma

On a fine day in June 2019, XYZ Ltd, a German-Spanish company, came up with a proposal
to ABC Ltd with an expected revenue of Rs. 13.5 crores attached to a sales figure of 1200
pitching and yawing gear boxes per year. The proposal was attractive and the core team from
both the companies was in discussions for quite some time now. After a gap of two years due
to the pandemic, the proposal is again on the table for review. During the review it was also
observed that the one-time certification cost for manufacturing pitching and yawing gear boxes
is to be borne by ABC Ltd.
Mr Keshav Reddy, Head - Marketing and Strategy, ABC Ltd, is well aware that pitching and
yawing gears are typically used in the wind turbine industry and manufacturing them requires
a mass production manufacturing infrastructure that will require further investment from the
existing infrastructure of ABC Ltd. Although the proposal is attractive in terms of revenue
generation, there are quite a few challenges to consider before the project is accepted. Before
having a discussion with Mr. Israr Shaikh, the Managing Director of ABC Ltd, Mr. Keshav is
considering various options that are available over a spectrum of expanding the company’s
production capacity to outsourcing it.

ABC Limited
ABC Ltd, India a very well-known name in the Indian manufacturing industry. It is a
diversified product company serving key sectors viz. Industrial, Oil & Gas, Infrastructure &
Food processing markets. It has four main divisions along with one supporting division. To its
air compressors and pneumatic tools product lines, the company has added many product lines
such as air conditioning and refrigeration systems, marine HVACR, etc. ABC Ltd. is widely
spread into the domestic market and is trying to cover the international market as well. It
supplies gears and gearboxes for all critical applications where wear resistance at surface is
critical and core toughness to be retained simultaneously. (Exhibit A)
The company’s Transmission Division has state of the art Gear manufacturing facilities
consisting of CNC Machining and Turning Centres, special purpose machines like, HOFLER
Gear hobbing & grinding machines, In-house heat treatment furnaces which contribute to
enhanced molecular structure of gear. The Division specially caters to the need of customized
power transmission solutions. It has been in the transmission business since 1972. It has an
edge in the areas of different types of gears and gearboxes with a capacity range from sub-
megawatt to higher megawatt range. Transmission division caters to niche market segments in
rail traction gears; marine gearboxes and renewable energy areas like wind turbine & hydro
turbine gearboxes. Over the years, it has established a strong presence in the power, steel, sugar,
marine and plastics industries. It faces strong competition from B T Pvt Ltd and SE Drive Ltd.
(Exhibit B) Majority of these companies are into small gear manufacturing as well and pose a
potential threat into manufacturing the pitching and yawing gear boxes.

Wind Turbine Industry

Market intelligence reports in 2020 indicated that wind power business in India is on the rise,
boosted by the increasing energy demand and government initiatives. One of the government's
initiatives is to tap wind energy along a coastline of about 7500 km to generate green energy.
This surely will give rise to increased demand for industrial gearboxes. Although the Indian
government has offered numerous subsidies to promote the use of renewable energy (which
encouraged numerous small-scale businesses to enter the market), a few rules was altered later
causing elimination of the subsidies. As a result, many small-scale businesses had to stop
producing the parts needed for wind turbines. Worldwide, XYZ Ltd has 48% market share in
this sector followed by GE with 21% market share.

XYZ Limited
In the field of renewable energy, XYZ Ltd. is a technology leader on a global scale. It holds
31% of the market shares (In India). Since the 1980s, the business, which specializes in the
development, production, installation, and maintenance of wind turbines, has supported the
global shift to sustainable energy. It was established on January 28th, 1976. It is a German-
Spanish wind engineering firm with headquarters in Zamudio, Biscay, Spain. In addition to
offering onshore and offshore wind services, it manufactures wind turbines. It is the second-
largest producer of wind turbines in the world. As part of the UK's initiative to increase offshore
wind energy production, XYZ has committed to spending £133.7 million on a production
facility and other facilities there. The net income of XYZ Ltd. was €302.396 million (2016).

The Dilemma
Since 1972, ABC Ltd. has existed in the gearbox sector. They are dealing with the main drive
gear box business and have good infrastructure & capacity of manufacturing such large gear
boxes. During the year 2019, they received a great offer that would have created new business
opportunities. An Enquiry was foliated by XYZ Ltd, a German-Spanish wind engineering firm.
They required a well-known, established manufacturing business in India to partner with in
order to access the Indian market. They discovered ABC Ltd. to be among their greatest
business partners in India. Due to the company's prior involvement in the gearbox industry,
they were aware of ABC Ltd.’s capabilities. They proposed manufacturing pitching and yawing
gearboxes. They approached ABC Ltd, with a forecast of 1200 pitching and yawing gearboxes
annually.
While ABC Ltd excels at producing substantial main drive gear boxes, there are some
restrictions when it comes to mass-producing compact gear boxes. The infrastructure,
machines, and production facilities are adequate for making big size gear boxes in a customised
manner. The equipment and shop floor layout at ABC Ltd, however, preclude the production
of smaller gear boxes in large quantities. Prior to compact gearboxes, the company has already
received certification from international organizations for main drive gearboxes. Wind turbine
gears require international certification from reputable, well-known quality certifying
organizations since they are so crucial. The certification process for gear box designs with these
organizations is a herculean task that calls for a very capable design and engineering team as
well as significant financial outlays.
The pandemic severely impacted every industry. Before the pandemic issue, they had a very
strong design and development team, but afterwards, some very good engineers from D&D
(design and development) left the organization and moved elsewhere owing to unforeseen
circumstances as well as their own aspirations. The price of the products increased as a result,
and the company was having a difficult time dealing with all of these difficulties. Rising
tensions between Russia and Ukraine raised concerns about rising raw material costs. The
eventual impact on yaw gear production costs was something that buyers did not anticipate.
For the business, completing this project was a significant challenge. To enter such a niche
sector, the company didn't want to endanger its meticulously crafted reputation in the
marketplace.
The critical scenario compelled Mr. Keshav and Mr. Israr to discuss whether or not to accept
this business offer. If they are willing to take a risk, they should either outsource this and make
a small profit or develop internal manufacturing capacity that will benefit them in the long run.

Pros & Cons

The proposal was both intriguing and difficult. A very good offer and significant obstacles
were both included in this proposal. The possibility existed for ABC Ltd. to expand its business
and establish a position in the worldwide market. One of the most critical elements that
compelled them to give this serious consideration was the offer they received because it would
result in significant financial gains. For this project, they had budgeted for revenue of
approximately 13.5 crores.
With this offer, they opened themselves up to equally difficult problems. They already knew a
few facts, mainly that there were not enough infrastructures for small gear boxes. As a result,
they required large investments, roughly 20–30 crores; just to build up the manufacturing
facility. The one-time certification cost, which was worth Rs. 20 lakhs, was another cost that
was stated in the offer. As the virus spread and afflicted every country on earth, businesses
everywhere suffered. They had to overcome several obstacles because, in contrast to the IT
sector, they were in the manufacturing industry. Due to the nature of the work, which also had
an impact on the supply chain, not everyone could work from home. There were also numerous
other significant difficulties. The cost of raw materials increased, which had an impact on the
final product's price.
Less manpower difficulties also had to be dealt with by the organization. In these sectors, the
design and development (D&D) department is crucially significant. People started leaving the
company as a result of the pandemic & because of the virus the remaining were less productive.
Thus, it had an impact on production as a whole. It was calculated that outsourcing a few
significant processes would cost about Rs. 120 crore. The company found it difficult to pay
this enormous expense at the time.
One of the top global market leaders, XYZ Ltd., has a 31% market share. Having a partnership
with a company of this size will undoubtedly increase profits. The opportunity to enter the
global market is enormous. Both domestically and internationally, there is a significant need
for gear boxes. In the future, the industrial gearbox market is anticipated to be dominated by
Asia-Pacific. In 2020, the Asia-Pacific region accounted for a sizable portion of the global
industrial gearbox market. Countries like Australia, China, Japan, Korea, and India are among
the major donors to the region. (Source: Mord or Intelligence)

Conclusion

This renowned manufacturing company in India aspires to expand its business and reach
worldwide. The business is still in development even after two years. They find it difficult to
decide anything at the present.
As a result, the organization's leaders are looking for solutions to successfully accomplish this
project. Mr. Israr Shaikh, the company's MD, is opposed to moving further with this project
because he perceives a significant danger of failure. Furthermore, he wanted to be open about
the tough circumstances they are experiencing rather than keeping the Spanish firm in the dark.
The offer might be withdrawn as a result of this.
The head marketing strategist, though, is unwilling to pass up this chance. He is adamant about
his choice and thinks they can come up with some solutions. He doesn't want to have a narrow
view because he is capable of seeing beyond these obstacles. This organization might reach its
peak under his futuristic approach.

Questions:
Q.1. What strategy ABC Ltd should adopt in order to have the best potential for this major
project?
Q.2.What would be the long term & short term business plan for the company in order to
enter into new business?
Q.3.Do you see any gap in the approach of ABC Ltd?
Q.4.Do you think ABC Ltd should go with the bulk production (small gearbox) or just focus
on their customized production (big gearbox)? Justify your answer.

Exhibits
Exhibit A: Gearboxes
A gearbox is a transmission device which is used between the engine's or any prime mover’s
(like a motor or a turbine) output shaft and the final drive in order to transfer required torque
and power to the driven machine , a gearbox consists of the set of gears.

Gearbox requirement for wind turbine: A gearbox is often used in a wind turbine to increase
the rotational speed from a low-speed main shaft to a high-speed shaft connecting with an
electrical generator. Gears in wind turbine gearboxes are subjected to severe cyclic loading due
to variable wind loads that are stochastic in nature. ABC Ltd. Manufactures wind turbine gear
boxes in two ranges, namely, sub megawatt (250 - 350 kW) & megawatt class. Megawatt class
range has single / multistage, planetary, helical, speed increaser gearbox. The Pitching &
Yawing Gearboxes are small & compact gearboxes that are required in a Wind Turbine to
change the Blade Angle & Rotation of complete Stem, respectively, to face the direction of
flowing Wind.

Exhibit B: Domestic Manufacturing units & Supplies:

Name of the Origin Total Turnover

Companies

B T Pvt Ltd Italian 450 cr.

STM Spa Italian 20 cr.

SE DRIVE German 278 cr.

RG Private Limited Italian 70 cr.

PB Pvt LIMITED Indian 200 cr.

B G Motor German 60 cr.

Other Information:
1. Cost of main drive gearbox - INR 15,00,000
2. ABC Ltd.’s Capacity of manufacturing main drive gearboxes - 60 per annum
3. Market price of pitching & yawing gearbox is around INR 100000.
4. Items sold (Main gearboxes) - 32-50 Annually
5. For pitching and yawing gearboxes : One time Certification cost: 20 Lakhs