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MD 46,10
Internationalisation of Bharat Forge Limited: a case study
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Management Development Institute, Sukhrali, Gurgaon, India and Northumbria University, Newcastle upon Tyne, UK
Rajesh K. Pillania
Abstract Purpose – The purpose of this paper is to follow the internationalisation of an Indian company, Bharat Forge Limited. It studies how a small company from India becomes one of the leading players in the global forging industry. Design/methodology/approach – This is a case study approach for studying the process of internationalisation in one particular firm. Findings – Bharat Forge Limited has followed the traditional stages model of internationalisation. It started global foray with exports and continued with that for more than three decades before going for acquisitions way. The company has gone for related-diversified using its strengths in technology to diversify its products, markets and customers over the years and today has a global footprints in terms of sales and manufacturing locations. Practical implications – It shows the way for companies even small ones and from developing countries, that how one can go for internationalisation and emerge as a leading global player. Originality/value – India is one of the fastest emerging markets and there is growing interests in Indian economy and Indian firms. But there are few case studies on internationalisation of Indian firms and this study tries to fill that gap. Bharat Forge Limited is an Indian multinational company and has become a leading player in global forging industry. Keywords International business, Emerging markets, Exports, Globalization, India Paper type Case study
Baba Kalayni, the Chairman-cum-Managing Director (CMD) of Bharat Forge Limited, is in a reflective mood. Tomorrow, he is going to address the 47 Annual General Meeting of the company. He is looking back at the progress of Bharat Forge Limited over the years from a small domestic Indian company to an emerging market multinational and one of the leading international players in global forging industry. As he is looking back, his mind ponders over many issues. What motivated the company to go for international markets? Has the recent strategy of inorganic growth for internationalisation paid off? Was the de-risking strategy a critical foresight? How is the company going to face recent challenges of domestic and international markets? How to further realize the dream of “global leadership”?
Management Decision Vol. 46 No. 10, 2008 pp. 1544-1563 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740810920038
An overview of forging industry Forging is among one of the oldest and basic industries affecting the day-to-day life of people. Forging is the process by which metal is heated and is shaped by plastic deformation by application of pressure. It refines the grain structure, creates structural uniformity free from hidden internal defects and improves physical properties like strength, ductility and toughness of metal. This makes forgings ideal for applications where reliability and safety are a concern. Forgings can be economically produced from almost any size or shape and thus offer great design flexibility.
The key driver of demand of forgings is the automobile industry as about 65 percent of the total forging production is utilized in this sector. Other industries that consume forgings include the engineering industry, railways, defence, chemical process industries, oil exploration, cement, steel industry, etc. Table I gives an overview of global forging Industry. Industry performance The Indian forging industry has emerged as a major contributor to the manufacturing sector of the country in recent past. The Indian forging industry has been growing at a compound annual growth rate (CAGR) of 29 percent from 2003 onwards, and on an average exports contribute around 10-15 percent of the industry’s production as shown in Table II. The capacity of the industry is estimated to be around 1.5 million tones and the industry currently operates around 70 percent capacity utilization producing around 1.0-1.2 million tones of forgings. Riding on outsourcing and technological developments, India exported forgings worth US$ 472 million in 2007-2008. The industry’s major markets are USA, Europe and China. However, only about 30-35 manufacturing units are currently contributing to exports directly. The industry is one of the leading industries, which have gone for foreign acquisitions in Europe and USA because the auto ancillary industry in these countries has been collapsing (AIFI, 2008). Industry structure The Indian forging industry is highly fragmented consisting of around 400 units and out of those only 9-10 are large units. Table III gives comparative performance of seven major forging companies. The SMEs form the backbone of the industry. The organized sector accounts for about 65-70 percent of the total forging production in the country, while unorganised players (who are mainly small and tiny units) cater mainly to job work and the replacement market or tier 3 or tier 4 component manufacturers. The unorganised sector caters mainly into Open Die Forging segment having lower capital costs whereas the organized sector dominates the Closed Die Forging segment. Closed Die Forging contributes 70 percent, Open Die Forging Die contributes 15 percent and Precision Die Forging contributes rest 15 percent to total forgoing production in the country. It has investment of US $ 700 million and provides employment to 200,000 directly and indirectly (AIFI, 2008). Historically the industry was labour intensive but now it is becoming more capital intensive with opening up of the economy and globalisation. Product range Indian forging industry makes a wide range of products, each being a diverse market structure and technology requirement, meeting not only the needs of the country but also supplying to global markets. The automotive industry is the main customer for forgings. However, the industry’s efforts in upgrading technologies and diversifying product range have enabled it to expand its base of customers to railways, construction, petro-chemicals, power, diesel engines, aviation, defence, agriculture, mining, oil and gas, industrial machinery, shipping, space etc.
Internationalisation of Bharat Forge Limited 1545
Table I. Global Production of Forgings (metric net tons £ 1,000), no. of plants and employees 289
438 130 419 45 2.541 360 14.882 September September 07 07
125
79 386
868 1.306 80 5.918 619 78.344
125
1.952
398
1.554
307
406 4.146
299
373
3.068
Japan
August 07
371 50 2.378 355 33.000
297
297
1.707
1.707
USA Canada Mexico
190
20
20
700
700
India
2
25
25
300 345
5
0
40
Australia
0
314
3
311
Brazil
0
100
100
Korea
9
79 0
295
80
103
112
Taiwan
1.128
854
806 11.659
384
1.277
9.192
World
1.000 25 2.023 1.200 190 27 0 0 9 3.522 20 20 215 3.400 930 397 314 100 304 16.282 1.000 330 26 100 20 60 2.870 100.000 38.000 1.800 23.431 5.000 4.000 298.457 January September September August January 07 2006 07 0 Estimated 07
200
80
80
100 2.100
400
1.600
China
Notes: Euroforge members include Germany, Italy, France, Spain, United Kingdom, Belgium, Sweden, Czech Republic, Poland, Slovenia, Finland and Turkey Source: Euroforge (2008)
1. Drop forging, press and upset forging Production of forging industry (subcontracting) In-house production of the automotive industry In-house production of the finished assembly subcontracting Forged catalogue items (i.e. producers of flanges and fittings, piping, connectors, armatures, tools, machineries, etc . . .) Total 2. Cold forging Production of cold forging industry In-house production of the final consumer industries Total 3. Open die forging (Total) From it: Ring rolling Other open die forging(excluding forged steel bar, blanks and railway rolling stocks) Total 4. Close die forging for non ferrous metal Total production Number of forge plants Number of employees
Euroforge members
1546
Country forging types
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Year 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Production (in ’000 tones)
Export (million US$)
435 382 440 600 732 878 983 1,200 *
90 110 145 178 250 310 360 432 *
Notes: *Excluding captive and tiny units; * closely estimated Source: Association of Indian Forging Industry (AIFI), 2008
Outlook The industry is facing various challenges in domestic and export markets as shown in Table IV. The Indian automobile sector in general and auto components sector is particular has been on a spectacular growth trajectory over last 8-10 years (Pillania, 2008). Within the auto industry, commercial vehicles remain the mainstay of the forging industry, with passenger cars still an important segment. The newer generation cars will require better quality forgings. Looking at the overall long term picture, the vehicle industry seems well poised to achieve a figure of 3 million passenger cars by the year 2015. The estimates for the Indian Auto component industry are US$ 30-40 billion by 2015 (Pillania, 2007). The growth is expected to be led by exports which could be worth US$ 20-25 billion by 2015. Going by these estimates a conservative estimate (15-20 percent) of the production of forgings by 2015 would be to the tune of US$ 6 billion (AIFI, 2008). Bharat Forge – an indian success story Bharat Forge Ltd, the flagship company of the US $ 2.4 billion Kalyani Group, is a leading global “full service supplier” of forged and machined – engine and chassis components. Kalyani group is one of the leading industrial houses in India, having diverse business interests in engineering steel, forgings, automotive components, non-conventional energy and specialty chemicals. Bharat Forge Limited is the largest exporter of automotive components from India; leading chassis component manufacturer in the world; and, the second largest auto forging company after ThyssenKrupp of Germany. Starting from a small city of Pune in western India in 1961, today it is a global firm with footprints across the triad-North America, Europe and Asia-in terms of sales and facilities. Around three-fourths of its sales comes out of India and it has manufacturing facilities spread across six countries and 12 locations – four in India, three in Germany, one each in Sweden, Scotland, USA and two in China. It owns the largest single-location forging plant in Asia and globally the largest plant for manufacturing axles. It has made rapid strides in global markets as shown in Table V and Table VI. The company manufactures a wide range of safety and critical components for passenger cars, SUV’s, light, medium and heavy commercial vehicles, tractors and diesel engines. The company has also moved into non-automotive business and manufactures specialized components for the aerospace, power, energy, oil and gas, rail
Internationalisation of Bharat Forge Limited 1547 Table II. Performance of Indian forging industry
Source: Capital line Database, 2008
200806 200803 200803 200803 200803 200803 199709
Ahmednagar Forg. Amforge Inds. Bharat Forge Kalyani Forge M M Forgings Mahindra Forging Patheja Forgings
Table III. Comparative performance of seven major forging companies Year end 34.92 2.96 44.53 3.64 6.04 80.26 26.00
Equity 393.92 26.02 2,029.64 111.75 212.06 247.77 338.04
Gr. Blk 661.16 50.79 2,141.83 190.48 190.91 214.13 390.61
Sales 63.44 2 1.84 252.50 9.42 14.79 3.71 2 153.58
2 3.00 0.00 3.00 2 15.00 5.00 122.00 0.00
Full year (Rs Cr.) NP NP Var%
0.00 0.00 175.00 22.00 50.00 0.00 0.00
Div%
118.40 25.90 66.20 196.60 144.80 96.60 22.20
B.V Rs
23.80 0.00 17.00 48.80 53.70 1.90 0.00
CPS Rs.
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Company name
18.20 0.00 10.70 25.90 23.60 0.50 0.00
EPS Rs.
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Domestic/Foreign market
Major challenges
Domestic market
Volatile international and domestic prices of inputs Compliance with stringent environment norms Practical difficulties associated with consolidation of capacities High attrition rate, at all levels High interest rates Impact of a rising rupee on export realization Reluctance of suppliers and end users to compensate for increasing costs Inadequate investment in technology up gradation, due to high costs of capital Cost competitiveness adversely affected due to constant cost escalation without adequate compensation coupled with the impact of a rising rupee
Exports market
Source: Association of Indian Forging Industry (AIFI), 2008
and marine, mining and construction equipment, and other industries. With a global forging capacity of over 700,000 TPA, it is producing complex large volume parts in both steel and aluminium. It undertakes Close Die Forging, Open Die Forging and Machining It has over 7000 global employees. Backed by a full service supply capability and dual-shore manufacturing model, Bharat Forge provides end-to-end solutions from product conceptualisation to designing and finally manufacturing, testing and validation (BFL web site, 2008). The company has won many laurels along its journey of internationalisation. BFL is a recipient of several national and international honours, recognition and awards: . Forbes Magazine has listed it for consecutive three years in its global “Best under a Billion” list. . Automotive Component Manufacturers Association of India (ACMA) has honored it over past four years for its export excellence. . BFL has also been awarded the Indo German Chamber of Commerce (IGCC) Award for “Outstanding Contribution towards Promotion of the Indo-German Economic Relations for the Year 2005”. . Bharat Forge received GKD-NIQR award for “Outstanding Organization” on 23 April 2005. . Outlook recognized BFL as the Best Value Creator for 2004 among large companies (Source: BFL web site, 2008). A global company with global presence From a small Indian firm focused on Indian market, BFL limited has come a long way. For past several years, exports have consistently contributed more than 40 percent of sales and in 2008 74 percent of consolidated revenues are from sales outside India. The geographic spread of revenues global as shown in Table VII.
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Table IV. Major challenges/key issues faced by the forging industry in India
1,990.84 1,835.04 110.49 1,857.51 1,396.5 45.9 541.22 459.11 441.42 359.31 240.95 340.75 836.1 179.48 0 82.48 59.13 7,012.36 14.66 10.18 175 34.36 295.77 2238.62 173.71
200703 1,651.44 1,530.52 100.17 1,560 1,167.11 41.98 442.23 387.44 369.19 314.4 206.97 280.01 718.75 137.55 0 223.46 51.92 9,886.79 12.12 8.83 150 34.03 218.24 2680.5 939.54
200603 1,258.63 1,167.06 59.24 1,194.83 851.06 37.67 333.99 300.43 281.43 247.87 161.63 214.19 534.86 65.28 0 114.98 106.81 5,457.68 51.61 38.32 125 35.61 137.26 2270.84 153.11
200503 866.92 796.67 54.28 793.88 571.52 24.31 259.14 226.78 213.37 181.01 124.91 170.68 346.49 49.61 0 37.9 58.72 2,764.02 43.14 31 100 32.25 222.95 2 114.76 2 122.93
200403
Notes: 1 Crore ¼ 10 million; INR ¼ Indian National Rupee (43 INR ¼ US $1 at end of 2006) Source: Capitaline Plus data base, 2008
2,314.37 2,141.83 173.49 2,162.47 1,667.54 67.15 640.91 535.92 501.97 396.98 273.59 412.53 1,067.24 178.25 0 162.67 66.16 5,952.55 17.89 11.65 175 30.03 345.63 2 618.75 2 298.17
Gross sales Net sales Other income Value of output Cost of production Selling cost PBIDT PBDT PBIT PBT PAT CP Revenue earnings in forex Revenue expenses in forex Capital earnings in forex Capital expenses in forex Book value (unit curr) Market Capitalisation CEPS (annualised) (unit curr) EPS (annualised) (unit curr) Dividend (annualised %) Payout (%) Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities
Table V. Bharat Forge financial overview (Rs crores) 200803 648.01 597.14 47.49 628.34 450.33 16.81 195.68 154.85 153.92 113.09 81.09 122.85 282.4 45.8 0 23.43 37.57 908.09 31.02 19.94 60 30.08 167.53 2 48.97 2 104.53
200303 459.02 410.41 24.03 408.49 316.88 5.61 119.49 74.12 79.77 34. 21.29 61.01 116.05 17.61 0 0.32 41.45 402.42 15.85 5.31 35 65.87 142.38 254.04 281.91
200203 525.35 468.52 19.44 461.95 356.92 5.17 132.71 75.41 93.02 35.72 32.65 72.34 94.1 33.41 0 8.57 36.86 308.79 18.52 7.99 30 37.55 209.91 156.51 2379.14
200103
558 496.22 27.28 512.5 382.17 0.35 133.39 89.16 103.52 59.29 49.29 79.16 121.39 38.12 0 60.9 103.83 547.3 20.24 12.31 50 40.59 201.93 2142.08 249.37
200003
1550
Year/Performance
450.95 404.58 35.81 402.76 325.11 0.4 113.29 70.84 84.16 41.71 37.32 66.45 78.42 32.16 0 14.11 108.34 301.44 17.24 9.51 40 42.07 164.38 2 59.01 2 120.61
199903
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11.88 1.19 16.98 16.25 16.72 20.13 6.73 18.42 16.73 13.72 10.48 13.55 21.07 27.65 20.69 2 15.11
Net worth (%) Capital employed (%) Gross block (%) Gross sales (%) Net sales (%) Cost of production (%) Total assets (%) PBIDT (%) PBDT (%) PBIT (%) PBT (%) PAT (%) CP (%) Revenue earnings in forex (%) Revenue expenses in forex (%) Market capitalisation (%)
Source: Capitaline Plus data base, 2008
200803
Years/Rate of growth 14.09 26.52 37.15 20.55 19.9 18.59 19.21 22.38 18.5 19.56 14.28 16.42 21.69 16.33 30.48 2 29.07
200703 173.13 150.64 33.34 31.21 31.14 36.66 92.07 32.41 28.96 31.18 26.84 28.05 30.73 34.38 110.71 81.15
200603 91 60.29 15.43 45.18 46.49 54.93 48.17 28.88 32.48 31.9 36.94 29.4 25.49 54.37 31.59 97.45
200503 56.28 8.41 6.79 33.78 33.41 21.68 27.71 32.43 46.45 38.62 60.06 54.04 38.93 22.69 8.32 204.38
200403 2 9.35 2 11.33 8.85 41.17 45.5 49.76 16.24 63.76 108.92 92.95 228.75 280.88 101.36 143.34 160.08 125.66
200303 12.43 2 0.61 11.19 2 12.63 2 12.4 2 10.2 2.52 2 9.96 2 1.71 2 14.24 2 3.7 2 34.79 2 15.66 23.33 2 47.29 30.32
200203 264.5 230.68 2 6.05 2 5.85 2 5.58 2 8.75 228.96 2 0.51 215.42 210.14 239.75 233.76 2 8.62 222.48 212.36 243.58
200103
199903 4.86 2 5.58 33.87 2 23.05 2 23.91 2 19.54 2 2.54 2.8 8.05 2 2.76 2 0.48 3.07 11.01 2 16.6 2 39.64 2.24
200003 24.16 0.81 44.07 23.74 22.65 19.9 5.28 17.74 25.86 23 42.15 32.07 19.13 54.79 18.53 81.56
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Table VI. Bharat Forge growth statistics
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The geographic spread in actual sales in rupees is shown in Table VIII. The sales have grown by 17.8 percent for year 2007-2008 which has been a challenging year for due to currency appreciation, significant slowdown in key markets, and increasing fuel and steel prices. Bharat Forge Limited today has manufacturing facilities spread across six countries and 12 locations – four in India, three in Germany, one each in Sweden, Scotland, USA and two in China. It has a global presence with foot prints in each of triad region i.e. North America, Western Europe and Asia. This is highlighted in Figure 1. Bharat Forge Limited has more than 35 OEM and Tier 1 customers, which include the top five passenger car and top five commercial vehicle manufacturers in the world. It has a diversified product portfolio as shown in Table IX. In 2000-2001, chassis components for commercial vehicles in India was the major product for the company, which by 2008 contributes only 35 percent to total sales as shown in Table X. Now it is targeting to have more than 40 percent of business in non-automotive segment by 2011-2012. Mr B.N. Kalyani, an MIT graduate in engineering, is the CMD of the company and the management team is shown in the list below, the organisational structure is shown in Figure 2. . Chairman & Managing Director – Mr B.N. Kalyani. . Dy. Managing Director – Mr GK Agarwal. . Executive Director – Mr Amit Kalyani. . Executive Director – Mr Praveen Maheshwari. . Executive Director – Mr Subodh Tandale. . Executive Director – Mr B.P. Kalyani. Geographic Region
Table VII. Geographic spread (2008)
Europe India North America Asia Pacific (excluding India) Total
49 26 17 8 100
Source: BFL Annual Report, 2008
Geographic region
Table VIII. Geographic spread
Contribution to total sales (percentage)
Europe India USA Asia Pacific (excluding India) Total Source: BFL web site, 2008
2007 2,366 11,131 4,910 237 18,644
Sales (Rs million) 2008 4,299 12,355 4,855 456 21,965
Growth (%) 81.7 11.1 (21.1) 92.4 17.8
Internationalisation of Bharat Forge Limited 1553
Figure 1. Global presence . . .
Executive Director – Mr Sunil K. Chaturvedi. Non-Executive Director – Mr Prakash C. Bhalerao. Senior Vice President, Chief Compliance Officer, Company Secretary – Mr Beejal Desai.
The triggers for internationalisation There are various reasons for firms to go for internationalisation. Though Bharat Forge Limited started in 1961, but the company’s real journey to become a global player began in 1997. Three factors determined the need to go global. First, we appreciated what globalisation could do in improving quality, delivery, costs, supply chain, R&D, productivity and business processes. We therefore, wanted to venture out and learn best practices. Second, while we had sufficient faith in domestic demand, we wanted to grow beyond the Indian market. Third, we recognized that different geographies often follow separate business cycles. We wanted to not only reduce our over dependence on single market but also take advantage of differential growth opportunities across varying geographies (Annual report, 2003-2004). Thus learning opportunities, growth aspirations and de-risking were the major triggers for internationalisation of BFL. Further, the aspirations of MIT graduated CMD for going global provided the continuous support and guidance for fighting it out in highly competitive international markets. Internationalisation journey Bharat Forge Limited started its international journey with execution of maiden export order to Greece in 1972. It followed the export mode of internationalisation for over three decades as shown in Table XI. The 1985 entry into erstwhile USSR provided a stable export market in USSR but the US and Western European market was difficult
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Table IX. Product portfolio
Automotive
Non-automotive
Crankshafts (forged and machined) Front axle beams (forged and machined) Pistons (forged) Steering knuckles (forged and machined) Steering knuckles (steel and aluminium) Connecting rods (forged and machined) Camshafts (forged) Rocker arms (forged) Control arms (steel and aluminium) Steering arms (forged and machined) Spindles Wheel carriers Piston crowns
High technology, highly engineered critical and safety forged and machined components such as large crankshafts for marine and power, landing gear, engine and structural parts for aircrafts and helicopters, connecting rods for locomotives and equalizer bars and spindles and other heavy products for construction equipment Forged and machined components such as gate Valves, wellheads, etc. for oilfield industries Oil and gas Gate valve bodies, bonnets, chokes, wellheads, shells and plugs Shaped forgings for both surface and subsea Marine and power generation Engine components like crankshafts, connecting rods, propeller shafts Energy sector – windmill Main shafts, sun gear shaft – gear boxes, spur gears – gear boxes Aerospace Engine components, structural components, landing gears Construction Engine components like crankshafts, connecting rods Ground engaging tips Railways Engine components like crankshafts, connecting rods, pistons Signaling equipment, axle components
Source: BFL Annual Report, 2008
Product
Table X. BFL product mix (2008)
Commercial vehicle chassis Passenger vehicle parts Desigel engine parts Non-automotive business Total
Contribution to total sales (percentage) 35 22 25 18 100
Source: BFL Annual Report, 2008
to crack. The first big break came from Rockwell International, a partner in one of group companies in the parent Kalayani Group. Starting 2004 it moved ahead with inorganic growth path with acquisitions. In January 2004 BFL acquired Carl Dan Peddinghaus (CDP), the 2nd largest forging company in Germany that is mainly engaged in the manufacture of passenger car
Internationalisation of Bharat Forge Limited 1555
Figure 2. Organisational structure
components. The company was renamed CDP Bharat Forge. The company was turned around by 2005. This acquisition made BFL the second largest forging company in the world. In October 2004 acquired another Germany company CDP Aluminiumtechnik, a manufacturer of forged aluminium components for hi-end customers like BMW, Audi, Volkswagen, Ford and others. The company is now renamed as Bharat Forge – AT. Aluminium is progressively becoming the preferred material for specialized automotive applications due to its significantly lighter weight that translates into better fuel efficiency. While Bharat Forge already had a strong market presence in steel forgings for commercial vehicles and passenger cars, the new acquisition will contribute in widening the product offering and enable it to provide customers with a larger bouquet of steel and aluminium components from a single source. In 2005, BFL acquired Federal Forge now known as Bharat Forge America Inc., which provided BFL with a manufacturing presence in USA – one of its largest markets. This was followed by the acquisition of Imatra Kilsta, AB, Sweden along with its wholly owned subsidiary Scottish Stampings, Scotland (together called as Imatra Forging Group). In December 2005 Bharat Forge signed a JV with FAW Corporation – the largest automotive group in China. Through this JV, BFL made a powerful entry into the large and fast growing Chinese automotive market. The Forging Company of the FAW group is the largest in China, and by joining hands with them, BFL instantly became the largest forging company in China.
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Year
Milestones in International Journey of BFL
1972 1985
Execution of maiden export order to Greece Entry in the erstwhile USSR market by winning a large contract for under carriage components Major breakthrough in the developed markets of Japan, USA and UK for the critical suspension and engine components like front axle beams and machined crankshafts Implementation of a large US $ 50 million forging facility up-gradation programme by commissioning of 16,000 MT’s and 6,000 MT’s Weingarten (Germany) make of screw press lines Implementation of a US $ 30 million forging facility expansion programme by commissioning of second 16,000 MT’s Weingarten (Germany) make screw and 2,500 MT’s mechanical press lines Major breakthrough in exports by catching Toyota for supplying small forgings for its global and Indian operations Exports of front axle components of trucks to Renault Vehicle Industries, the second largest truck manufacturers in Europe Successful entry into US passenger car markets by exports to Ford Motors and Daimler Chrysler Acquired Carl Dan Peddinghaus GmbH & Co. KG (CDP), one of the largest German Forging Companies with plants in Ennepetal and Daun Acquired CDP Aluminiumtechnik now known as Bharat Forge Aluminiumtechnik. Provided an entry into the hi-end and fast growing aluminium component business Acquired Federal Forge now known as Bharat Forge America Inc. Provided BFL with a manufacturing presence in USA – one of its largest markets Acquired Imatra Kilsta, AB, Sweden along with its wholly owned subsidiary Scottish Stampings, Scotland (together called as Imatra Forging Group) Signed a JV with FAW Corporation – the largest automotive group in China. JV named FAW Bharat Forge
1990-1991
1556 1991 2000 2002
2003 2004
2005
Table XI. Major milestones in international journey of BFL
Source: BFL web site, 2008
BFL global acquisition strategy comprised two key elements. The first is to widen and broaden the company’s customer base by bringing in a wider portfolio of product offerings to a larger group of customers. And, second, to have global facilities that enable us to work with OEMs as an engineering and development partner. The strategy, therefore, focused on acquiring such companies that had product complementarities and manufacturing facilities, which were synergistic and could be leveraged for cost effective and flexible production systems (BFL, 2006). Thus Bharat Forge Limited has used exports, acquisitions and recently joint venture in its internationalisation journey. It has used two-part strategy, the first being expanding its capacity in India, which was used for supporting exports and the second of acquisitions path. Integration success Merger and acquisitions has a poor success rate. Most acquisitions and alliances fail. A few may succeed, but acquisitions, on average, either destroy or don’t add shareholder value (Dyer et al., 2004). However BFL has been able to create value out of acquisitions.
The company has used a two-stage policy for integration. In the first phase, the company focused on alignment of the acquired company with BFL in the first six to eight months after each acquisition. In the second phase focus was on alignment in all the business processes. The firm has derivative manufacturing council, global innovation council and common marketing organization where global best practices are shared. All of the acquired companies except Sweden were making losses when BFL acquired them. Now all of these are making profits (Anand, 2007). I am happy to inform you that we have laid a lot of emphasis on the integration between Bharat Forge and its global operations. The objective was to bring people from across the world together and create a common understanding of the goals and objectives of our company, and help build strong working relationships to enable quick implementation of our strategic plans (Baba Kalayni, CMD (BFL, 2005)).
Growig focus on non-automotive sector Bharat Forge Limited has developed technology, engineering and manufacturing capabilities in over the years. To leverage that, the company is focusing on high value added niche business in the non-automotive areas like energy, power, aerospace, oil and gas exploration, mining and metals, rail and marine which are seeing steady demand growth and capital investments globally. These sectors, on a global basis, need critical components in forged and machined condition. These are high value, high value added components. BFL has the unique advantage of having the domain knowledge, technology and resources to manufacture these products. We have also developed relationships with key global customers in these fields. Keeping all these factors in view, your company is taking effective steps to establish a strong global presence in these businesses in the next 3 to 4 years. This would be achieved through a judicious combination of organic and inorganic growth. Your company is planning a capital outlay of close to Rs.350 crores over the next three to four years and is targeting an incremental global revenue of close to Rs.1,000 crores (Kalayni, CMD (BFL, 2006)).
Organizational philosophy, vision and strategy The organizational philosophy, vision and strategy of Bharat Forge Ltd are shown in the list below: . The Philosophy. To use our specialized skills and innovative technology to contribute to the welfare of society. It is our intention to grow along with our employees and to aid and encourage them to participate in our goals in order that they realize their full potential. Our prosperity is linked to the prosperity of our customers (Baba Kalayni, BFL web site, 2008). . Vision. To be the no. 1 forging company in the world by 2008. . Strategy. In expanding global markets, technology based innovation is the most important driver of growth. We have been building world class manufacturing plants and reaching global scale capacities in our line of businesses. We are permanently extending our partnerships with major global OEMs and Tier I companies around the world, offering our support as full service supplier. Innovation runs through everything that we do. Our task is to move fast in the
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direction set by our highly focused strategies. We believe that fast execution of our strategies imparts tremendous velocity for us, and our customer’s progress. It has put in efforts for developing strategy and making it relevant with the changing scenario. It has progressed from the beginning made in 1997 with help from Tata Strategic Management Group, to global leadership and recent focus towards innovation. In 1997, BFL worked with the Tata Strategic Management Group (TSMG) to draw up a five-year strategic plan. The objectives were to grow the business aggressively by accessing global markets; to be among the top three global players in the chosen industry segment; to set global industry benchmarks in cost, quality, technology, speed-to-market and customer service; and to create sustainable competitive advantage by taking strategic initiatives in areas of marketing, technology and product development, operations and human resources. With increasing success in the twenty-first century in international markets, BFL focused on creating a position of global leadership in engine and chassis components for passenger and commercial vehicles and has embarked upon a three-pronged strategy to offer customers dual-shore design capability, dual shore forging manufacturing capability, and dual-shore machining capability. That means offering these facilities from different centres, whichever is the most appropriate in each individual case. It has also set up a centre of excellence in Germany with a specific focus on frontline product development capability and participation in the product development initiatives of customers (Thomas, 2006). Recently BFL has recently unveiled a new identity with focus on innovation. Key elements of Bharat Forge strategy De-risking business model De-risking has been at the core of BFL business strategy. The company followed this strategy to diversify markets, products and customers to develop resilience and avoid being overly sensitive to any product, industry, geography or customer. It started exports and than diversified the geographic scope and toady more than seventy percent of the revenue comes from international markets. It has diversified its product portfolio, manufacturing base, and customer base over the years. In 2000-2001, chassis components for commercial vehicles in India, was the major product for the company, which by 2008 contributes only 35 percent to total sales. Now it is targeting to have more than 40 percent of business in non-automotive segment by 2011-2012. BFL is upbeat about opportunities in power and aerospace (Reuters, 2008). The de-risking has paid off over the years: The year 2007-2008 has been a challenging year for BFL due to currency appreciation, significant slowdown in key markets, and increasing fuel and steel prices. The strategies that we have followed in past ten years have resulted in significant de-risking of our business and have contributed towards your company successfully addressing all these challenges (Kalayani, CMD (Moneycontrol, 2008)).
Dual shore model Global automobile industry is the major buyer of forging industry. The industry has been going through tough times and resorted to increasing outsourcing to reduce costs
as well as sharing responsibilities through supply chain integration for better sharing and minimization of risks among supply chain partners. “Dual shore” concept revolves around establishing more than one manufacturing location for all core components. It involves best of both worlds by having one close to the customer for working closely with the OEM/Tier 1 for design/development and another at a low cost location like India for taking cost advantage. BFL today has a design and engineering and forging manufacturing capability for all its core products at least at two locations and in most cases more than two locations as shown in Figure 3.
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Customer relationships Today the company has a big customer base and almost all the big OEMs and Tier-I firms are in the customer list. The company has put efforts for developing customer relationships and moved from a supplier to development partner and full service provider for customers from design to delivery of finished products. The company has focused on building strong design and engineering capabilities to each of its global locations to respond to the global customers’ preference for suppliers having such facilities close to their product development facilities. Fortunately for your company, we have strong and durable relationships with all our customers, both domestic and international. Our contracts with them have pass through clauses, which enable us to recover steel price increases. Transparency coupled with mutual trust and confidence with customers has therefore, enabled us to minimize the impact of higher input costs on performance (Kalayani, CMD (Moneycontrol, 2008)).
Scale and low cost BFL has the world’s largest forging capacity of over 700,000 tones per annum. It is engaged in investing in state-of-the-art capacities to meet significantly higher and growing demand for its products. These are under execution at Mundhwa, at Baramati and in China.
Figure 3. Dual shore manufacturing
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BFL has been able to bring operation efficiency among the units it has acquired internationally. We have always given concerted attention to costs and productivity. I can assure you that however large we are, we will always be concerned about productivity, throughputs and costs. It is part of our DNA. We could build scale and created an environment to share best practices across the organization through flexible product lines. We now have the capability to manufacture large volumes of forged and value-added machined products. We have further been able to enhance growth in rated capacities by sharing best-in-class shop floor practices within our group companies which have resulted in increases in productivity and throughput (Kalayani, CMD (BFL, 2008)).
Full service supplier capability Over the years, Bharat Forge has been investing in creating state-of-the-art facilities, world-class capacities and capabilities. The facilities include, fully automated forging and machining lines, the largest of its kind and comparable to the best in the industry. Bharat Forge has built up a strong capability in design and engineering, including a full fledged product testing and validation facility, which gives Bharat Forge a full service supply capability – from product conceptualisation to designing to manufacturing and product testing and validation. Today, Bharat Forge has transformed itself from being a mere supplier of automotive components to becoming a preferred technology and engineering driven development partner, thus providing more value to its customers. It has various certifications like ISO/TS 16949:2002; ISO 9001:2000; ISO 14001; API-6A; and AS 9100 (under certification). Bharat Forge has always been a strong technology driven company. I believe that our technology backbone is one of our key sources of competitiveness. We are committed to continuously strengthen our technical skills and capabilities and to invest in infrastructure that would enable us to maintain our lead on this crucial parameter. This would be in manufacturing, operations and all other areas. Technology leadership in manufacturing, operations and all other areas will always remain a top priority at Bharat Forge and I am personally directing our work in this critical area (Kalayani, CMD (BFL, 2008)).
Conclusion A lot of interest has been there in internationalisation process since long in international business research (Berkema and Drogendijk, 2007). Internationalisation is a topic at the core of the international business field, as most questions dealt with in international business research emerge as a consequence of the interaction between the firm and the different locations (Hutzschenreuter et al., 2007). There are two broad approaches to internationalisation namely, the traditional stages approach and the more recent born global approach (Pillania, 2009). Firms embody disadvantages in competing with indigenous firms in foreign markets and therefore internationalisation is about overcoming the inherent disadvantage of liability of foreignness (Hymer, 1960, 1968; Hutzschenreuter et al., 2007; Pillania, 2009).The famous Uppasala model (Johnson and Vahlne, 1977, 1990) suggests that companies internationalise in small, incremental steps and the internationalisation of the firm should be interpreted as an incremental learning process (Cyert and March, 1963; Berkema and Drogendijk, 2007; Hutzschenreuter et al., 2007). The liability of foreignness and information asymmetry were the major reasons
for firms to follow the traditional and more widely accepted stages model of internationalisation (Pillania, 2009). However, starting with the McKinensey findings of 1993 in Australia, born global is an alternate approach which has gained some more support from similar studies in Europe. Born global firms go to international markets soon after their operations and go at a fast speed (McKinsey, 1993; Rasmussen and Madsen, 2002; Pillania, 2009). In the case under study, Bharat Forge Limited has followed the traditional stages approach for internationalisation. It started global foray with exports and continued with that for more than three decades before going for acquisitions way. Based on the accumulated leanings and resources, it has gone further in the internationalisation process. Further, in international business strategy, there has been considerable debate and questions on global strategy, both for (Hamel and Prahalad, 1985; Govindarajan and Gupta, 2001; Yip, 2002) and against global strategy (Rugman, 2000; Rugman and Brain, 2003; Ghemawat, 2001, 2003). Even by the recent empirical evidence and view that a global firm with global strategy must have a reasonable (at least 20 percent) of sales coming from each of the three triad regions of North America, Europe and Asia (Rugman, 2003), Bharat Forge Limited has become a global firm with global strategy. References Anand, M. (2007), “We want to be in every BRIC economy: Baba Kalayani”, Outlook Business online, available at: www.outlookbusiness.com/print.aspx?articleid ¼ 464&editionid ¼ 18&catgid ¼ 11&subcatgid ¼ 9 (accessed 12 June 2008). Association of Indian Forging Industry (AIFI) (2008), “Current trends: Indian forging industry”, AIFI web site, available at: www.indianforging.org/current_trend.aspx (accessed 14 June). Barkema, H.G. and Drogendijk, R. (2007), “Internationalizing in small, incremental or larger steps?”, Journal of International Business Studies, Vol. 38 No. 2, pp. 1132-48. BFL (2005), “Annual report 2004-05”, BFL web site, available at: www.bharatforge.com (accessed 12 June). BFL (2006), “Annual report 2005-06”, BFL web site, available at: www.bharatforge.com (accessed 12 June). BFL (2008), “Annual report 2007-08”, BFL web site, available at: www.bharatforge.com (accessed 12 June). Cyert, R.M. and March, J.G. (1963), A Behavioral Theory of the Firm, Blackwell Business, Cambridge, MA. Dyer, J.H., Kale, P. and Singh, H. (2004), “When to all & when to acquire”, Harvard Business Review, Vol. 82 No. 7, pp. 109-15. Euroforge (2008), “Industry portrait”, Euroforge web site, available at: www.euroforge.org/page/ industry_portrait.html (accessed 12 June 2008). Ghemawat, P. (2001), “Distance still matters: the hard reality of global expansion”, Harvard Business Review, Vol. 79 No. 8, pp. 137-47. Ghemawat, P. (2003), “Semiglobalization and international business strategy”, Journal of International Business Studies, Vol. 34 No. 2, pp. 138-52. Govindarajan, V. and Gupta, A. (2001), The Quest for Global Dominance, Jossey-Bass/Wiley, San Francisco, CA.
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Hamel, G. and Prahalad, C.K. (1985), “Do you really have a global strategy?”, Harvard Business Review, Vol. 63 No. 4, pp. 139-48. Hutzschenreuter, T., Pedersen, T. and Volberda, H.W. (2007), “The role of path dependency and managerial intentionality: a perspective on international business research”, Journal of International Business Studies, Vol. 38 No. 2, pp. 1055-68. Hymer, S. (1960), “The international operations of national firms: a study of direct investments”, PhD dissertation, Sloan School of Management, Massachusetts Institute of Technology (published by MIT Press under same title in 1976). Hymer, S. (1968), “La grande firme internattionale”, Revue Economique, Vol. 14(b), pp. 949-73. Johanson, J. and Vahlne, J.E. (1977), “The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments”, Journal of International Business Studies, Vol. 8 No. 1, pp. 23-32. Johanson, J. and Vahlne, J.E. (1990), “The mechanism of internationalization”, International Marketing Review, Vol. 7 No. 4, pp. 11-24. McKinsey & Company (1993), Emerging Exporters. Australia’s High Value-Added Manufacturing Exporters, McKinsey & Company and the Australian Manufacturing Council, Melbourne. Moneycontrol (2008), “Bhart Forge-Chairman Speech 2008”, Moneycontrol web site, available at: www.moneycontrol.com/stocks/company_info/chairmans_speech.php?sc_did ¼ BF03 (accessed 18 August 2008). Rasmussen, E.S. and Madsen, T.K. (2002), “The Born Global Concept, 28th EIBA Conference, Denmark”, available at: www.aueb.gr/deos/EIBA2002.files/PAPERS/S4.pdf (accessed on 23 March 2008). Pillania, R.K. (2007), “Indian automobile components industry: a global perspective”, NICE Journal of Business, Vol. 2 No. 2, pp. 32-41. Pillania, R.K. (2008), “Knowledge management in SMEs in India – a study of auto components sector”, International Journal of Electric and Hybrid Vehicles (IJEHV), Vol. 1 No. 3, pp. 308-18. Pillania, R.K. (2009), “Internationalisation of Essel Propack Limited”, Management Research News, Vol. 32 No. 2 (in press). Reuters (2008), “Bharat Forge betting on power, aerospace”, Reuters online, May 21, available at: http://in.reuters.com/article/businessNews/idINIndia-33686620080521 (accessed 12 August). Rugman, A.M. (2003), “Regional strategy and the demise of globalization”, Journal of International Management, Vol. 9 No. 4, pp. 409-17. Rugman, A.M. (2000), The End of Globalization, Random House, London and Amacom-McGraw-Hill, New York, NY. Rugman, A.M. and Brain, C. (2003), “Multinational enterprises are regional, not global”, Multinational Business Review, Vol. 11 No. 1, pp. 3-12. Thomas, C.P. (2006), “The road ahead”, India Brand Equity Foundation web site, available at: www.ibef.org/download/corporatebharatforge_june06.pdf (accessed 12 June 2008). Yip, G. (2002), Total Global Strategy II, Prentice-Hall, Upper Saddle River, NJ.
Further reading Google Finance (2008), “Bharat Forge Limited”, Google Finance Online, available at: http:// finance.google.com/finance?q ¼ BOM:500493 (accessed 12 August 2008).
Levitt, T. (1983), “The globalization of markets”, Harvard Business Review, Vol. 61 No. 5, pp. 92-102. Mukherji, S. and Ramachandran, J. (2005), “Bharat Forge Limited: forging leadership”, case study, Indian Institute of Management, Bangalore. About the author Rajesh K. Pillania is a prolific researcher with more than 70 papers in international/national journals and conferences. His areas of expertise are International Business & Emerging Markets, Strategy & Competitiveness, Innovations & Knowledge Management. He is an advisory/editorial board member of more than 40 international research journals, 30 international conferences and professional bodies consisting of leading international academicians/industry leaders/policy makers. He is a sought after guest editor for special issues by number of international journals. Professor Pillania academic experience includes the Business School, Panjab University (Chandigarh, India), R.H. Smith School of Business, University of Maryland (Maryland, USA) and most recently Northumbria University (Newcastle UK) as a Visiting Fellow until 2009. Currently he is a faculty at the Management Development Institute, Gurgaon, India. He holds a PhD and MBA. Rajesh K. Pillania can be contacted at:
[email protected]
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