It may be hard to imagine given just how bad things are at present, but the golden era for Indian power equipment manufacturers wasn’t all that long ago. Until 2009 and 2010, in fact, power equipment companies were exulting over the India opportunity. The country was the world’s second-largest market for power plants (and, therefore, equipment) and order books were overflowing. The vast increase in power capacity addition projected for the 11th Plan (beginning 2007) required a major boost in equipment supply and projections showed that the power sector had the potential to offer orders of 25,000 MW every year for the next two decades.
Now, all that seems like a distant dream. For the past two years, no new ultra-mega power project have been awarded and companies have, in fact, hit the pause button on already-awarded projects. Fuel shortages, environmental concerns and land acquisition controversies, coupled with issues over debt availability and the poor financial health of distribution utilities have taken a heavy toll on the power sector.
The impact has been felt across the board — from consumers who are reeling under extended power cuts to power equipment manufacturers whose orders are drying up. According to data from the Indian Electrical and Electronics Manufacturers Association (IEEMA), the growth of the electrical equipment industry (which acts as a barometer for the power generation equipment market) almost halved between FY11 and FY12, dropping from 13.7% to 6.6% (see: Power cut).
The growth rate of electrical equipment manufacturers has halved in the past fiscal
And against the potential 25,000 MW of annual orders, “barely 5,000 MW (equipment worth roughly ₹20,000 crore) were placed last year”, declares Ravi Uppal, president, L&T Power. (Compare that with FY11, when the state-owned Bhel alone got orders worth ₹8,900 crore.) Meanwhile, competition from cheaper Chinese imports is adding to domestic manufacturers’ pain and by the looks of it, the situation isn’t going to improve any time soon.
the go-go years
The boom really started with the 11th Plan, which projected capacity addition to the tune of 70,000 MW. Large units — 660 MW and above, against the earlier 500 MW — were to be given preference, with the idea of encouraging the adoption of ‘super-critical technology’ to control carbon emissions and improve productivity. The biggest hurdle in the adoption of that kind of technology, though, was the lack of suitable equipment. (Another, less talked-about problem was moving such bulky power equipment through Indian roads.)
At the time, in 2007, the biggest domestic manufacturer of power equipment was Bhel. But, at best, Bhel could roll out 10,000 MW of equipment annually, which was later augmented to 15,000 MW. The government, therefore, decided to give preference for equipment orders for upcoming government power projects to joint ventures between Indian private companies and foreign power equipment manufacturers. The caveat: the foreign company had to set up shop in the country and agree to transfer its technology to the Indian partner.
The strategy worked. The sheer size of the opportunity saw multinational power equipment manufacturers queueing up to enter India and a spate of partnership agreements followed. L&T tied up with Mitsubishi Heavy Industries (MHI); JSW with Toshiba; Gammon India with Ansaldo Caldaie; BGR with Hitachi; Bharat Forge with Alstom; and Thermax with Babcock & Wilcox, among others.
Meanwhile, another queue was forming: of companies wanting to export power equipment into India, especially since the mega power policy allows duty-free import of power equipment. But price was a critical issue in the cut-throat Indian power market and only one group of companies could offer products at prices that were too good to resist: the Chinese.
Each of the three Chinese companies in the heavy equipment business — Shanghai Electric, Harbin Electric and Dongfang Electric — had a capacity to roll out 30,000 MW, that too at prices significantly lower than others, including Bhel, thanks to an undervalued Yuan and low interest rates in China. The result: about 20% of all capacity addition since April 2007 has been on Chinese equipment (see: Turning up the heat).
The Chinese invasion has been especially painful over the past couple of years because orders for equipment have been drying up. “Several of the genuine concerns of the power sector seem to have come to a head, leading to the slowdown,” says Sunil Chaturvedi, executive director and COO, capital goods division, Bharat Forge. He adds that orders from public and state-owned utilities are still coming in, but not from the private sector.
Turning up the heat
Chinese equipment makers account for a fifth of the orders placed in the 11th Plan and a quarter of the thermal projects in the 12th Plan
Bharat Forge, which has a tie-up with Alstom for super-critical turbine generators (the French company also has a partnership with Bhel for manufacturing boilers), expects a 50-80% dip in orders in the coming year, from 15 GW to 8-10 GW. Still, Chaturvedi seems confident that the current slowdown is temporary and will correct itself in 12 to 18 months. “The country needs to add another 600,000 MW by 2030. The government will definitely find solutions,” he says, striking an optimistic note.
Others aren’t as sanguine. L&T Power’s Uppal claims the company’s order book is quite comfortable currently, but admits that the situation will be different if big orders don’t flow in starting this fiscal. He points out that the expectation of capacity addition for the 12th Plan (2012-17) has already been scaled down from 130,000 MW (including the arrears from the 11th Plan) to somewhere around 76,000 MW. In other words, things might not improve any time soon.
Certainly, the government’s track record in achieving power capacity addition targets has been abysmal. It missed its target of adding 41,000 MW in the 10th Plan, adding only 21,000 MW, and was off the 11th Plan target of 78,000 MW by 25,000 MW. Still, the addition of 53,000 MW in the 11th Plan has been the highest ever capacity addition in the country. And, essentially, if you remove the 25,000 MW spilling over into the 12th Plan, the target for the next five years is actually only as much as what has been achieved in the 11th Plan.
But given the issues facing the power sector currently — especially the critical shortage of coal — even achieving this target now seems a monumental task. IEEMA president Ramesh Chandak points out that with 80,000 MW (which includes projects stuck for a very long time) of power plants in various stages of construction across the country, even if Coal India agrees to all conditions of assured fuel supply, it will still cover only about 30,000 MW. This despite the statement from the Prime Minister’s Economic Advisory Council that “the government must set ambitious targets for 2012-13 for both capacity creation in key infrastructure areas and operational performance.” And with no surety of fuel in the form of coal linkages, getting banks to finance new power projects will prove to be next to impossible.
Even as the power sector lurches from crisis to crisis, Chandak feels the other major problem confronting the equipment industry is imports from China: not just turbines and boilers, but also key equipment like transformers and switchgear. As a result, while the capacity addition of 53,000 MW during the 11th Plan was more than double of what was achieved in the preceding five years, this did not set the domestic equipment industry on fire. Compared with a 28% CAGR in power equipment imports from China in the past five years, domestic equipment manufacturers saw growth rates of 20% over the same period.
There are several good reasons why so many power projects continue to opt for Chinese equipment (see: Turning up the heat). First, the price advantage, especially since Indian equipment makers are subject to local taxes and levies. Then, power producers point out that Chinese companies stick to deadlines and make on-time deliveries. Also, Chinese companies offer cheap financing options to their customers, which can be a huge draw given the difficulty in getting financing for power projects in India. Not surprisingly, companies like Anil Ambani’s Reliance Power have placed orders of over $10 billion with Shanghai Electric, where the financing was done by a consortium of Chinese banks.
But it’s not all good news. The availability of spare parts has become an issue at some plants since some of the Chinese products are introduced and taken off the market fairly quickly. Then, questions have been raised on the quality of Chinese power generation equipment, and its suitability for Indian power plants. Over the past few years, there have been instances of problems with equipment that was imported from China, notably at the Balco plant, Haryana Power Genco’s Yamunanagar plant and the Sagardighi thermal power station in West Bengal. While not all the issues were directly related to the equipment (in at least one case, the culprit was poor-quality coal), the Chinese companies’ hesitation to share technical information only compounded the existing problem.
Despite resistance from power companies, for a while now, domestic equipment companies have been lobbying fiercely for imposition of restrictions or at least some level of customs duty and taxes on equipment that is being imported. “There has to be a level playing field. There is a 21% price differential between imports from China and us, because the Chinese enjoy all sorts of subsidies. They can’t just bombard us with turbines,” declares Bharat Forge’s Chaturvedi.
So far, though, no concrete steps have been taken to either curb imports or boost domestic manufacturing of power equipment. Also, opinion is divided within the government on the need for levies on Chinese equipment. In any case, it is highly unlikely that the government will impose a country-specific duty. Meanwhile, Uppal worries that as their domestic markets get saturated, Chinese companies will sell more aggressively to India. And that will certainly not help the cause of power equipment manufacturers in India.