Poised for Growth
The Indian tooling market is at an inflection point today. It has grown at 5% CAGR since 2005 and continues to be an ever important cog in the manufacturing wheel. However, in spite of significant enhancements in the capabilities of Indian toolmakers, a significant volume of tools continues to be imported. This trend needs to be reversed to enable Indian players to take the next step in their growth journey. A report…
The tooling industry plays a critical role in the manufacturing value chain. It provides dies and moulds needed to mass produce various parts and thereby forms the backbone of industrial growth. As per the latest estimates, the market size of the Indian tooling industry stands at ~INR 18,000 Cr, with more than half of the total demand attributed to the automotive and auto components sector. Most major global auto manufacturing hubs have a strong domestic tooling industry. India, however, is a notable exception, as a significant portion of its tooling demand is still met via imports.
With an increase in the variety of products and shortening of product lifecycles across the globe, the worldwide demand for tooling is well poised to grow significantly in the future. Countries with superior capabilities and capacities in tooling will be at an advantage. Hence, it becomes imperative to facilitate the growth of Indian toolmakers and enable access to new customers beyond national borders. Tooling localisation would also result in many economic benefits such as employment creation, development of indigenous machine makers, better R&D landscape and more efficient supply chains. Therefore, it is time to understand the hurdles to growth faced by the indian toolmakers and focus on the measures required to overcome these hurdles.
Major highlights of the Indian tooling sector
- The market size of the tool room industry in India is estimated to be ~INR 18,000 Cr with ~70% of demand being met domestically and ~30% through imports.
- Tooling imports into India are ~5x tooling exports from India by value; China and Korea account for almost 40% of the total tooling imports into India.
- Plastic moulds is the biggest segment accounting for 42% of total demand, followed by sheet metal dies at 37%.
- Automotive is the largest end user accounting for 60% of the total demand, followed by consumer durables at 16%.
Role of tool rooms in economic development
India is one of the fastest-growing economies in the world. The country’s GDP has grown 2.7x over a span of 10 years, i.e., from ~1 trillion USD in 2008 to ~2.7 trillion USD in 2018. As per government estimates, India has the potential to reach 5 trillion USD by 2024-25. The Indian manufacturing industry currently constitutes ~15% of the GDP. Under the ‘Make in India’ initiative, the Government of India plans to increase this to 25% of the GDP by 2025.
Tooling enables mass production in any industry and major global manufacturing hubs have grown on the base of a strong tooling industry. However, India is still lacking in this regard.
Clearly, the manufacturing sector is key to attaining the ambitious target of economic growth. Now, let’s understand the role that the tooling industry will play in helping the manufacturing industry achieve its target.
A mother industry
Tool rooms play a critical role in the manufacturing value chain by providing the dies and moulds needed for mass production of various parts. The tool room industry forms an integral part of the production process in almost every industry and is considered the mother industry of all manufacturing units in the country.
Enabler in global manufacturing hubs The global demand for tool producing companies has been continuously rising over the last few years, except during the economic crisis of 2008 and 2009. All major manufacturing hubs have a well-developed tooling industry that forms the backbone of industrial growth in these geographies. For instance, countries with the highest vehicle production are also the ones leading in tooling production. India, however, is a notable exception here.
Economic benefits of localization
India has been witnessing a growing demand for tooling over the past few years. However, a significant amount of tools is still imported. This is not a desirable scenario, as it results in significant value addition happening outside the borders. Promoting indigenous manufacturing provides advantages such as employment creation; development of domestic machinery manufacturers; boost in R&D, and reduction in supply chain inefficiencies and risks.
Key challenges
Indian tool rooms are faced with major challenges such as high financing costs, inverted import duty structure, duty-free moulds from certain countries, lack of skilled labour and lack of an outsourcing ecosystem. However, there are six major obstacles that are currently impeding the growth of Indian tool rooms. They are:
Access to finance: Indian toolmakers face many challenges with respect to easy access to finance. Indian tool rooms avail of interest at much higher rates as compared to their global counterparts due to the higher risk premium for SMEs. Furthermore, in other countries, government loan guarantees are available to SMEs such as tool rooms. This, however, is not the case in India.
Inverted duty structure: It is observed that the import duty on tools is lower than the import duty on raw materials and bought-out components used in manufacturing these tools. This not only lowers the cost competitiveness of Indian tool rooms as compared to global players, but is also resulting in rising tool imports.
Duty-free moulds imports from certain countries: According to the CEPA agreement signed between the Government of India and South Korea in FY2008-09, injection moulds fall under the category of 100% tariff reduction. As a result, there was a 28% increase in injection moulds imports from South Korea during FY2010-FY2019. This has dealt a severe blow to domestic toolmakers and has further accentuated the already dire situation due to the inverted duty structure.
Lack of export Incentives: Toolmakers in other countries receive state-sponsored incentives to explore export markets. But this is not the case in India. Indian tool rooms, majorly being small and medium scale, cannot afford to go abroad and participate in exhibitions year after year on their own to develop a professional relationship with customers in other countries and understand their requirements.
Lack of skilled labour: Indian tool rooms are currently facing a dearth of skilled workforce. This can be attributed to two key reasons. Firstly, insufficient number of training institutions leading to a huge demand-supply gap and secondly, shortcomings in the quality of curriculum due to which the graduating students are not industry ready.
Lack of outsourcing ecosystem: Global tool rooms outsource some of the manufacturing activities, but Indian tool rooms don’t have this option due to lack of a cohesive outsourcing ecosystem. A close-knit tooling cluster for job-sharing and subcontracting are prevalent in major tooling countries such as Taiwan & Korea. This helps tool rooms in meeting the stringent delivery timelines or making up for capacity shortfall at times.
Potential solutions
Reduction in loan interest rates: Making loans at subsidised interest rates available to Indian tool rooms can help them become cost competitive. It will help them increase their net income, which can be reinvested in technological/ infrastructural upgradation. This would help Indian players get more orders from the existing customer base and acquire new customers too. There are additional benefits as well. If the Government of India were to subsidise loans by bearing 25% of the annual financing costs of tool rooms, it would result in additional ~INR 30 Cr net benefit from increased tax revenue on an annual basis (after offsetting the cost of providing subsidy), as well as creation of approximately 4,000 to 8,000 new jobs.
Reduction in import duty on raw materials and components: Removal of the inverted duty structure prevalent in the Indian tooling industry would reduce input costs for tool rooms and aid in enhanced cost competitiveness. As explained in the previous point, this leads to higher revenues and additional economic benefits. It would bring about a net benefit of ~INR 80 Cr annually for the Government of India through increased tax revenue (after offsetting for loss in import duties) and creation of approximately 6,000 to 11,000 new jobs.
Removing moulds from the import duty exempted products list in CEPA: Removing moulds from the list of products with 100% tariff exemption when imported from Korea and subjecting them to usual duty norms applicable can result in additional duty collection of ~INR 80 Cr annually. It will also help Indian mould makers to compete with Korean tool rooms on an even footing without impacting the trade relations with Korea significantly.
Export incentives for tool rooms: Government of India can also look into providing export incentives to tool rooms. Following global benchmarks, such incentives need to be in range of INR 40 lakh-200 lakh per annum depending on the percentage of turnover from the exports for the tool room. This will help tool manufacturers to develop their client base outside India and give them exposure beyond Indian markets, improving their quality standards in an effort to meet global customer needs. It will also give a boost to overall exports from India.
Setting up new tool room training centres: Skill enhancement needs long-term planning to upskill the current workforce and impart relevant skills at the entry level. The Government of India can aim to double the existing number of training centres by opening 20 new Tool Room Training Centres (TRTCs) to match the global benchmark. Also, the existing TRTCs can collaborate with global toolmakers to understand the differences in curriculum and also with end user industries to update the curriculum and training methods as per the current requirements.
Future expectations Future expectations
- The Indian tool room industry is estimated to grow to INR 25,000 Cr-INR 26,000 Cr in value by 2025 on the back of strong growth in key end-user segments.
- OEM’s perception of Indian tool rooms is slowly changing. They are much more willing to trust Indian tool rooms and localize to achieve cost benefits.
- Commercial tool rooms can expect to reap benefits of the localization trend if they are able to invest in capacity enhancement, technology upgrade & worker skill development.
Developing tooling clusters on the lines of Special Economic Zones: To promote colocation of industry players and enable holistic development of a sound tooling ecosystem in India, the Government of India can consider setting up tooling SEZs in automotive hubs such as Delhi-NCR, Maharashtra and Tamil Nadu. Since the automotive sector accounts for major share of tooling consumption in India, this will result in a more efficient supply chain, reduced delivery times and higher levels of collaboration between all the key stakeholders.
What the future holds?
The Indian tooling industry is at a crossroads. The Indian manufacturing sector is poised to grow significantly in the near future. And, to support the higher volumes of production, the demand for tools is likely to increase. However, whether this demand is met by domestic toolmakers or imports are able to tap into a larger share of the pie depends on several factors, many of which are beyond the control of toolmakers.
Talking about the automotive sector, in particular. After localization of vehicle and component production, tooling localization is the next frontier. Several major OEMs are taking active steps in this direction. A major PV OEM has increased tooling localization from 60-65% to 80-85% in their direct procurement in last 2-3 years and is also instructing their Tier-1 suppliers to utilize cost-competitive Indian toolmakers and meet the requirements of quality and delivery time.
Indian tool rooms have to enhance their capacities as well as capabilities in order to be ready to take advantage of the expected increase in demand. Many of them are already doing it. In fact, more than 80% of tool rooms have invested in upgrading their manufacturing setup over the last 3 years and more than 50% have invested in skill development of workforce. This shows that the tool rooms are doing their bit.
However, policy support is needed on several fronts in order to ensure cost competitiveness in the face of stiff competition from imported moulds and dies. Inverted duty structure and duty free imports make it difficult for domestic toolmakers to compete on an even footing. They face higher financing costs than their global counterparts and do not have access to a large pool of skilled labour or outsourcing firms that can support them in manufacturing tools in a more efficient manner and delivering in lesser time. These hurdles to growth need to be tackled to ensure Indian players get a fair chance while competing with global tool rooms.
Indian tool rooms have the potential to be at par with Chinese and Korean toolmakers, but they need a helping hand from the Government of India to realize this potential. Many of these issues can be resolved through policy interventions in the upcoming Union budget. Some of the issues such as lack of skilled labour and outsourcing ecosystem cannot be completely resolved in the short term, but collective effort from toolmakers, OEMs and the government, can be the first step of the Indian tooling industry towards development. The Indian tooling industry is poised for growth. All it needs is attention from all the stakeholders.
This article was first published on Tagma Times Newsletter
