How are the thousands of individual parts that make up a car made? What about the intricate mechanisms inside a watch? Is a child’s toy a child’s play from a manufacturing perspective? We have domesticated our surroundings to such an extent that today technology is ubiquitous. But in the background are scientists, inventors, designers, operators and CEO’s that make this almost invisible technology possible.
At the core of it all are machines tools. These machines can: make the same identical part over and over again at extreme speeds; they can make complex parts as small as human hair to as large as a rocket shell; they can assemble these parts to make mechanisms, and package these mechanisms into machines that we call a mobile phone or a ceiling fan.
These are the machine tools of the industrial age. Industry 4.0 is here and these machines are getting smarter, faster and more precise. Advanced machine tools, are able to course correct and warn and communicate with other machines within their eco-system. The result is a dramatic reduction in human intervention.
Whenever a company is investing in CAPEX, it is likely that the equipment or the machinery it is investing in is a machine tool or a closely allied technology. A vibrant machine tools sector is indicative of the manufacturing gusto of an economy.
Processes used to manufacture things
There are various ways that a part can be made out of the raw material. Let’s look at a brief summary of various processes possible:
Casting: Melting the raw material (RM) and making it flow into a mould: This is the most ancient way of working materials into desired shapes. In case of metals, this process is broadly called casting. Liquid material fills the mould and is allowed to solidify. The solid (end part) takes the shape of the mould cavity.
Forming: Deforming the RM into a new shape. Deformation is done via controlled applications of force and temperature to the workpiece. Common forming processes include rolling, forging, extrusion, drawing and sheet metal working.
Metal cutting/removal: Removing material using tools or other media to achieve desired dimensions. Typically involves relative motion of a sharp hard tool and softer workpiece, such that material is gradually removed from the workpiece. Common Conventional tool based processes are lathing, milling, drilling, sawing, grinding and gear cutting. Unconventional processes use other than mechanical forces to remove material. Examples are: electric spark machining (EDM), elecro chemical machining (ECM), LASER machining, ultrasonic machining, etc.
Joining Processes: Used to join 2 or more components to create a single part. Common processes include welding, brazing, soldering, adhesive bonding and mechanical fastening.
Additive Manufacturing: Uses raw material powders or wires which are melted, and subsequently solidified in layers to achieve final part. Common processes include Direct Metal Laser Sintering, stereo lithography, Direct energy deposition and fused deposition modelling process.
Clearly there are many ways to achieve a desired part. Typically more than 1 process is employed to achieve the end product. What processes to apply depends on the material, quality, cost, time and creativity conditions.
Gillette razors are the best in the world because they have engineered the perfect conditions and processes. Same with the Bosch fuel injector and same with the TTK Prestige pressure cooker.
Before understanding the machine tool business, it’s important to take a look at India’s manufacturing sector.
The Manufacturing Industry
Machine tools are a subset of the manufacturing sector which in turn is a subset of the Industry sector. From fiscal year 2006 to fiscal year 2012, India’s manufacturing-sector GDP grew by an average of 9.5 percent per year. Then, over the next six years, growth declined to 7.4 percent. In fiscal year 2020, manufacturing generated 17.4 percent of India’s GDP, little more than the 15.3 percent it had contributed in 2000.
Covid 19 pandemic has not helped the cause. However, it has put a spotlight on the importance of manufacturing in driving the country’s growth and employment. The sector is reviving rapidly post Covid as is evident by the Index of Industrial Production (see image IIP growth rate). The ‘Make in India’ project envisages manufacturing to contribute 25% to India’s GDP over the next 5 years and become a $1 trillion industry. But will the government efforts be enough to bring back private industry confidence to invest in the necessary CAPEX to drive growth?
Private investment is the key to drive manufacturing growth in India. Below is an infographic which breaks down sector wise competitiveness of the Indian manufacturing value chain published by McKinsey & Company. We can break down these sectors as mature, intermediate and emerging. Machine tools are input CAPEX for each of the below sectors in varying proportions.
The 2 images below show trend of India’s key manufacturing sectors investing in capital infrastructure. It also approximates the share of machine tool sector investment by those sectors in the same period. Data is gathered from Indian Machine Tool Manufacturer’s Association (IMTMA)
The investment data is available only till 2018 as the Annual Survey of Industries publishes with a 2 year lag. It can be seen that there was a spike in investment activity by industry in FY2015. It had since tapered off indicating 3 things: First, a simple majority government in 2014 with a promise to progress did get India’s private industry’s vote of confidence in the form of huge capacity investments. Second, this confidence has since tapered and the sentiment around this is much to do with lack of consistency in reform and sudden measures by the government. Third and most importantly, capacity addition is a cyclical phenomenon.
Years 2010 and 2011 saw a super CAPEX cycle in India the likes of which hasn’t been seen since. Industries add new capacities when they forecast high demand, witness consistent revenue growth and forecast their sales demand to soon outpace their existing production capacities.
On a sectoral level, some companies will do better and some worse off. A rule of thumb is that if the overall sector is running consistently above 75% capacity for a sustained period of time as well as registering growth, big capacity addition can be expected.
The chart below shows that manufacturing sector capacity utilization has been bumpy over the past 5 years. Q1 FY 2020-21 saw a capacity utilization of below 50%.
On the above image, besides fluctuating capacity utilisation, the IIP also paints the true picture of the state of the manufacturing sector. The IIP is an index that tracks manufacturing activity in different sectors of an economy. The manufacturing sector has been lagging India’s growth rate for quite a while now and there has been a gradual decline in volume of production since Q1 FY2020. India’s manufacturing sector was stressed even before the pandemic struck.
However, Covid 19 in many ways can be seen a blessing in disguise as it has made 2 things happen: Huge Foreign investments have found their way to India and the Indian government has embarked on an ambitious plan of reviving the manufacturing sector in India.
Snapshot of some of the many reforms proposed by the government in 2020:
Most of the sectors that the machine tool industry depends on have favourable reforms being announced. The auto sector which is the largest consumer of machine tools too has seen improvement in demand over the last few months. In due course, these reforms will begin to roll out and improve consumption and exports. In turn capacity utilizations across manufacturing could see a sustained rise. This is a precursor to the next big capex cycle.
Machine tool industry
The machine tool industry is broad, but in the context of this it is restricted to mean only the metal cutting and metal forming machine tools (together called metal working machines). Annual consumption of machine tools is estimated to be about Rs. 20,000 crores in India and it has grown at a rapid pace over the past decade. The machine tools are broadly classified as:
CNC machines: Stands for Computer numerical control. These machines are digitally operated by entering relevant code onto a computer which is fed into the machine tool where the machining/forming operation happens. These machines are highly accurate, repeatable and also benefit from software upgrades and sophisticated technologies such as automatic tool change, automatic tool centering, etc.
Non CNC machines: These are manually operated machines and can perform similar operations to some of the less complicated CNC machines. While these are substantially lower in cost, they need a highly skilled operator continuously operating the machine. Manual intervention reduces accuracy and repeatability of parts as compared to CNC machines. Productivity is low with non CNC machines.
The charts below give a depiction of how the industry is spread within India.
It can be seen that this has been overall a high growth sector at a long term 18% CAGR growth rate. One can also observe that half of the mach