FILE COPYReport No. 433-IN

IndiaSurvey of the Foundry IndustryA Background Paper in connection with theAppraisal of the Ninth Industrial Imports Credit

April 25, 1974

Industrial Projects Department

Not for Public Use

Document of the International Bank for Reconstruction and DevelopmentInternational Development Association

This report was prepared for official use only by the Bank Group. It may not be published,quoted or cited without Bank Group authorization. The Bank Group does not accept responsibilityfor the accuracy or completeness of the report.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Currency Equivalents

1 Indian Rupee = US$0.125 (parity in effectas in March 1974)

1 US $ Rs8

Time Spans

The Indian Government financial. year runs from April 1 toMarch 31. In this report the financial years are writtenas, for example, 1972/73 designating the financial yearfrom April 1, 1972 to March 31, 1973.

Longer intervals of time are written as, e.g., 1970-1972(two year interval), 1970-1978 (8 year interval).

Abbreviations and Acronyms

BHEL - Bharat Heavy Electricals LimitedDGS&D - Directorate General of Supplies & DisposalsDGTD - Directorate General of Technical DevelopmentEEPC - Engineering Export Promotion CouncilGOI - Government of IndiaICIGI - Industrial Credit and Investment Corporation of IndiaIDBI - Industrial Development Bank of IndiaTTF - Indian Institute of FoundrymenTIT - Indian Institute of TechnologyNIFFT - National Institute of Foundry and Forge TechnologyNiL - National Metallurgical LaboratoryR&D - Research & DevelopmentREP - Import Replenishment EntitlementSISI - Small Industries Service InstituteSSIC - Small Scale Industries CorporationSSIDO - Small Scale Industries Development OrganizationSTC - State Trading CorporationTDA - Trade Development AuthorityTELCO - Tata Engineering and Locomotive Company

INDIA

SURVEY OF THE FOUNDRY INDUSTRY

TABLE OF CONTENTS

Page No.

SUIMMARY AND CONCLUSIONS ..... ................... i - iv

I. INTRODUCTION ........ ........................... 1

A. Background ................................. 1

B. Indian Foundry Industry ..... ............... 2

II. STEEL FOUNDRIES .. .............................. 3

A. Structure of the Steel Foundries .... ....... 3B. Raw Materials and Intermediates .... ........ 8

C. Performance of the Steel Foundries . ........ 10

1. Plant Operations .................. 10

- Product Planning . ............. 12

- Manufacturing ...................... 12

- Materials Management ............ ... 13

- Industrial Relations ... * ........... 13

- Finance ............................ 13

- Organization ....................... 14

2. Prices and Cost Competitiveness ....... 14

- Prices ............................ 14

- Cost Structure and Cost Competitive-ness ........... ........... 14

3. Exports of Steel Castings .... ......... 16

III. IRON FOUNDRIES ................................. 18

A. Industry Structure ...... ................... 18B. Raw Materials and Intermediates .... ........ 22C. Steel Plant Iron Foundries ..... ............ 25

This report was prepared by Mr. M. Iskander of the Industrial Projects Depart-ment. Separate reports entitled India: Steel Foundries; India: AutomotiveGtry rIron Foundries; India: Independent Grey Iron Foundries; India: Special

2perations dated February 21, 1974 were prepared by the Bank's consultants,H. Douglas Rowe Associates, Inc., Detroit, Michigan, USA. These reports containconfidential information on each manufacturer's operations and their use isrestricted to authorized personnel within the Association and Indian Govern-ment officials.

TABLE OF CONTENTS (Cont'd)

Page No.

D. Railway Castings ......................... 25E. Cast Iron Spun Pipes .26F. Industrial Castings ................... 30

1. Automotive Grey Iron Foundries 34

- Industry Structure .34

- Industry Performance .35

Plant Operations ............... 35

11anufacturing . ............ 37Materials Management ... 37Industrial Relations ... 37Finance ................ 38Organization ... 38

Prices and Cost Competitiveness 38

2. Selected Industrial Iron Foundries ... 40

Plant Operations ..... .......... 40

Product Planning ........... 40Manufacturing .............. 42Materials Management ....... 42Industrial Relations ....... 42Marketing .................. 43Finance ........ .. .......... 43Organization ............... 43

G. Small Scale Foundries ................ 43

Plant and Equipment ........ 44Labor and IManagement ....... 44Manufacturing Methods ...... 45Marketing .................. 45Modernization Program ...... 46

it. Iustitutions .48

IV. EXPORTS . .50

TABLE OF CONTENTS (Cont'd)

Page No.

V. CONCLUSIONS AND RECOMMENDATIONS ............... 53

A. Conclusions ......... ...................... 53

B. Recommendations ...... ....................... 54

- Role of Government ..... ............... 54- Role of Industry ....... ............... 56

- Joint Effort-Government, Industryand Institutions ............... 04.. *.* 57

ANNEXES

1. Description of Terms and.Production Processes2. Production of Railway Wagons3. Supply and Demand for Steel Scrap4. Plant Operations Rating System

INDIA

SURVEY OF ThE FOUNDRY INDUSTRY

SUMMARY AMD CONCLUSIONS

i. Since 1964, the International Development Association (TDA) hasextended eight credits to India totalling US$780 million for the import ofraw materials, components, spares and some balancing equipment to increasecapacity utilization and operating efficiency in priority industries andreduce manufacturing costs by helping to provide a timely f1low of neededimported inputs at competitive world prices. Prior to last year the appraisalof each such industrial imports credit entailed a comprehensive, though notfullv detailed, review of all industries supported by the IDA credits. Todeernen the Association's knowledge of each industrial sub-sector and to makea more useful contribution to the Government and the industries concerned,this procedure was modified starting with the Eighth Credit so as to includean in-depth survey of a few IDA-assisted industries in each appraisal supple-mented by a brief updating of the information on the other IDA-assistedindustries.

T

ii. Ln connection with the appraisal of the Eighth Credit, the commer-cial vehicles and tractors industries were reviewed. The principal findingsand recommendations of that review were discussed with the Government andin turn made available to the industries; this has led to a construct:.vedialogue with the Government and industry and to some concrete steps takenby a number of the manufacturers to improve their operations. As part ofthe appraisal of the proposed Ninth Credit, the casting and forging indus-tries, wlhich are critical to the success of a number of IDA-assisted sectors,were surveyed; this report deals with the Indian Foundry industry.

iii. Although the origin of the Indian foundry industry dates back toancient times, in the early 20th century India still had only a few foundriesproducing relatively simple items and it was not until after indeDendencethat significant growth took place to meet the expanding requirements of therailwavs, steel plants, machine tools, industrial machinery as well as thetraditional non-industrial castings. Roughly, there are 5,500 - 6,000foundries in India, producing about 2.1 million tons of castings, and employingsome 250,000 people.

iv. About 85% of the foundries are small each employing fewer than 300

people and producing less than 600 tons/year but together they account forabout one-thircd of the output and half the employment; the remaining 15% ofthe foundries are of medium and large size. mnis structure approximatesthat of the Japanese foundry industry in the mid-fifties before Japan's majorfoundry modernization program got underway. Production of castings nowembraces practically all categories of products ranging from cooking pans torailwav sleepers and thin walled automotive castings. Imports of castings

- fii -

for the production of which India is not yet equipped are therefore small.Ellis is a remarkable achievement for an industry whose modern beginning datescack just about 20 years.

v. For efficient foundry production, a steady flow of consistentlygood quality inputs, i.e., principally pig iron, steel scrap, coke, powerand sand is essential. Unfortunatelv, Indian foundries suffer from shortage,high prices and variable quality of all oGf these inputs. The shortage anderratic supply of foundry grade iron as well as poor quality coke are themore serious problems. The large and more advanced foundries have tried tobypass these difficulties by switching to the more capital-intensive prac-tice of melting scrap in electric furnaces. But this practice is beyond themeans of all the small and most of the medium foundries, thereby limitingtheir output essentiallv to low value castings. Steel scrap, despite recentimports, is still in short supply and generally of low quality. Because ofthe continuing worldwide scarcity and high price of scrap, and India'sforeign exchange constraints, it is becoming even more urgent for the countryto increase its output of steel so as to divert steel scrap now being usedin the prod!xction of ordinary steel in small inefficient electric furnacesto the production of castings. Electric power is rationed by staggeringworkdays, and properly processed and graded sand of foundry purity is notreadily available. All these constraints together with past over-investmentshave resulted in a capacity utilization of only 35%.

vi. Despite these constraints which are largely outside the foundries'direct control, there is considerable scope for improving productivity and3roduct quality at plant level. In the evaluation 1/ carried out by theAssociation, only about one-fourth of the firms in the organized sector,accounting for less than 10% of installed capacity, were found to have thetechLnical know-how to produce quality castings at internationally competitiveprices; an additional 25% could become competitive within the next few yearsif corrective action is taken, while the remaining 50% will require substan-tially more time and effort to overcome major structural deficiencies. Areaswhiere improvements are necessary are: (a) tooling especially through upgradingof pattern-making technology and skills; (b) process engineering primarilyin sand preparation, melting and pouring; (c) production planning and control;and (d) mtaterials management. But the greatest immediate benefits to theIndian foundry industry would be gained from: (a) increasing the knowledge,skill and practical exnerience of Indian engineers and technicians in theprinciples of modern foundry technology, and training them in process andquality control; as well as, (b) adapting existing foundry technology tolocal factor inputs.

1/ A detailed assessment of the operations of foundries visited as well asrecommendations to improve performance are contained in a confidentialreport which was sent to the firms concerned.

- its -

vii. The experience of developed and developing countries alike suggeststhat these sets of services are usually best provided by institutions thatare fi.nanced and controlled by and directly accountable to the industry.The Indian Institute of Foundrymen (IIF), the industry's professional asso-ciation, has expressed interest in developing Lnto an institution that could,by setting uD regional training, advisory and conmon service centers, becomea focal point for an exchange of technical know-how in the industry. Finan-cial assistance from the Government and outside financial ins¶itutions couldplay a catalytic role in initiating and accelerating such a program.

viii. Amorg the most dynamic foundries in India are some of the small-scale foundries. Despite shortcomings in terms of antiquated equipment andworkirg methods, as well as poor working environment, they have demonstratedconsiderable skill and ingenuity in copying machines and equipment and aredelivering much needed goods at below i:he cost of equivalent products fromthe larger foundries. Many of these smialler foundries could be made toimprove product quality and working conditions, and to enlarge the productrange. Indeed, about half of the best of the larger foundries in the organi-zed sector that the mission visited were started on a small-scale basis. Thesefoundries are maaanaged by young technically qualified individuals who haveexpended considerable effort in adapting existing foundry technology to localavailability of raw materials and other factor inputs, and also in traininglabor and supervisory personnel in foundry technology. The objective of anyn)dernization program of the industry should be to diffuse the experienceand knowledge acquired by those firms to the rest of the industry.

ix. An important component for upgrading the foundry industry is thecomprehensive modernization program envisaged by the Government during theFifth Five-Year Plan, specifically directed towards small-scale foundries.This program calls for supplying a number of selected small foundries witha comprehensive assistance package including adequate supply of raw materials;production and testing equipment on hire purchase or concessionary terms;financial incentives; and technical and management assistance and training.This systems approach to modernization is definitely commendable, and itssuccess will depend on the Government's developing a flexible framework forhiring cualified personnel to assist the selected foundries in formulating,imnlerenting and following up plant improvement action programs.

x. There has been a good beginning in exports of castings which overthe past six vears have increased from Rs 18 to Rs 42 million (US$5.5 million)accounted for by a handful of medium and large foundries. Nonetheless, theyaccount for less than 1% of total production at present, despite t'he substan-tial potenxtial that exists for Indian foundry exports. Increased Governmentassistance in export incentives would undoubtedly stimulate exports, butrealiZing India's potential in this labor-intensive activity calls for arestructuring of the industry through improved technical know-how, manufac-turing engineering and a vigorous export marketing effort. A modernizationprogram for medium and large foundries similar to the one currently envisagedby the Government for smaller foundries is, therefore, needed.

- iv -

xi. Besides exporting castings directly, there are substantial possi-bilities in exporting them as part of other engineering goods, such astractors, commercial vehicles, and machine tools. Exports of these itemshave grown by over 16% per annum over the last few years, but the potentialis far greater. To exploit it, and thus help India earn much needed foreignexchange and at the same time utilize full capacity, the Government will haveto develop policies and procedures that will encourage the engineeringindustries to upgrade product design, the major impediment to export growth,to foster local design skills; and review foreign collaboration agreementsin the engineering and foundry industries to ensure a continuous flow of newproducts, processes and operational methods.

I. INTRODUCTION

A. BackgroLnd

1.01 In May 1972, in presenting the Seventh Industrial Imports Projectin India, the Executive Directors of the International Development Association(IDA)were informed that IDA, in close cooperation with the Indian Government,would thenceforth carry out intensive surveys of the priority sectors that hadbeen receiving assistance under the Association's industrial import credits.The purpose of these surveys was: (a) to establish in the Bank a betterunderstanding of sectoral problems, constraints and potential for growth and(b) to suggest possible remedies for improvement of industrial performance.

1.02 Prior to the Eighth Credit, IDA had given equal emphasis in its ap-praisal to each of the 5 to 12 sectors varinbly covered by the seven creditsapproved between 1964 and 1972. This appro.ch adequately served the purposeof producing macro-evaluations of acceptable depth of the sectors. But ithad also become increasingly apparent that meaningful recommendations on morespecific measures affecting sectoral policies and industrial performancewould have to be supported by more reliable data and more incisive analysis.Furthermore, since it was clearly bevond the capacity of any reasonably-sizedmission, time schedule or budget to undertake intensive surveys of severalsectors simultaneously it was recognized that a new appraisal approach wasrequired.

1.03 Starting with the Eighth Credit, the appraisal was implemented intwo steps: (a) an intensive survey of two industries deemed of high priority,and (b) a reappraisal of the remaining IDA-assisted industries based on alimited field survey and the updating of performance data. The commercialvehicles and tractors were surveyed in connection with the Eighth Credit;the foundry and forging industries are surveyed this year in connection withthis Credit. In each future appraisal, it is planned to survey intensivelyone or two of the other IDA-assisted industries. This report reviews thefoundry industry. 1/

1.04 This report reflects the findings of a mission to India in October/November 1°73 which consisted of Mr. M. Iskander of the Industrial ProjectsDepartment (Chief) and Messrs. D. Rowe and T. Weidig, consultants. It is basedon a comprehensive questionnaire returned by selected foundries prior to thearrival of the mission in India; and visits to and discussions with companymanagements and Government officials. In addition, the mission met with alarge ntumber of foundrymen at meetings arranged by the Indian Institute ofFoundrvmen (IIF), the Engineering Export Promotion Council (EEPC) and by theDepartment of Industries in the Punjab (small scale foundries). The missionalso visited three of the five major foundry equipment manufacturers as wellas institutions supporting the industries including: the National Metallurgical

1/ A similar survey of the steel forging industry is attached to thePresident's Report.

-2-

Laboratory (NML) -- an R&D-cum-technical assistance institution -- and theNational Institute of Foundrv and Forge Technology (NIFFT)--a training insti-tution for foundry and forge engineers. A short follow-up missior. took placein March 1974 to fill some data gaps but, more importantly, to review withthe Government the major findings and recommendations for action of thisreport, to which the Covernment reacted favorably. The excellent cooperationextended to the mission by Government officials and company managements andstaff is highly appreciated; without their inputs this report could not havebeen prepared.

B. Indian Foundry industry

1.05 Broadly speaking the art of casting consists in making a cavity insand or other material -- the mould and filling it with a molten metalwhich on cooling assumes the shape of the mould. 1/

1.06 The origin of the Indian foundry industry dates back to ancienttimes, but over the years the industry has undergone substantial changes inits production methods and demand patterns. In the early 19th century, Indiahad only small foundries producing pipes, manholes and structurals. Theadvent of the railways and textile industry during the first part of thiscenturv stimulated the development of medium to large foundries. But themost significant growth took place after independence to meet the expandingrequirements of the railways, steel plants, machine tools, industrial machineryas well as the traditional non-industrial castings.

1.07 There is very little reliable information on the number of found-ries, their total capacity, and the size and composition of their output.This hiatus stems in large part from the nature and structure of the foundryindustry. First, castings are intermediate products produced by a largenumber of manufacturers to satisfy their own requirements, and hence thosefirms do not report either capacity or output of their captive foundries.Puit in another way, casting is more of a process used by a large number ofindustries than an industry by itself. Secondly, roughly 85% of the Indianfoundries are in the small sector on which there are almost no statistics.Consequently, except for the firms registered with the Directorate Generalof Technical Development (DGTD) for the purpose of obtaining raw materials,the capacity and production figures presented here are only approximateindicators of the industry's structure and performance.

1.08 The first foundry industry census was undertaken in 1966 by theIndian Institue of Foundrymen (IIF), the professional organization for Indianfoundrymen; and a second survey is currently under preparation. According tothe 1966 survev, the number of foundries increased from about 1,500 producingabout 250,000 tons of castings in 1950, to about 2,000 foundries producing

1/ Annex 1 gives a descriptions of production processes and terminology.

- 3 -

about 930,000 tons in 1960, and 4,500 foundries producing about 2 milliontotns in 1965. During the recession of 1966-1968, output dropped considerably,but: a major benefit of the recession was that it forced the industry to di-versify its products. Currently, there are roughly 5,500 to 6,000 foundriesproducing about 2,100,000 tons of castings per year and employing some250,000 people.

Table 1

Number of Foundries and Total Castings

Production in India

Year No. of Foundries Production(tons)

1925 300 n.a.1950 1,500 250,0001960 2,000 933,0001965 4,500 2,100,0001970 /1 5,000 1,600,0001972 /1 5,500 2,100,000

TF- IDA estimates.

Source: Foundry Directory 1966, Indian Institute of Foundrymen.

1.09 Castings produced in India can be broadly classified as ferrousfouadries--steel and iron foundries--and non-ferrous foundries. This reportcovers only ferrous foundries which account for over 98% of the totaloutput. Because of the diversified products, production methods and marketstructure of the Indian foundry industry, this report is divided into twomain sections: The Steel Foundry Industry and the Iron Foundry Industry.The latter is further subdivided into five segments: steel plants' ironfoundries, railway castings, cast iron spun pipes, industrial castings andsmall scale foundries (mainly non-industrial castings).

II. STEEL FOUNDRIES

A. Structure of Steel Foundries

2.01 At present there are 61 steel foundries in the organized sectorwith an aggregate installed capacity of 260,000 tons of steel per year, asagainst an estimated licensed capacity of roughly 500,000 tons per year. Inaddition, there are about 20 steel foundries in the small-scale sector withan installed capacity of 10,000 tons/year (Table 2), bringing the total in-stalled capacity to 270,000 tons/year.

-4

Table 2

Steel Foundry Industry Structure1972/73

No. of Installed 'Unit SizeUnits ICacILty Maximum A Minimum

(Tons,'Year) (Tons/Year'

Organized Sector.

- Non-Captive 43 140,000 18,000 3,250 800

- CaptivePublic 8 84,000 45,000 10,600 2,200Private 10 36,000 8,000 3,600 1,500

120,000

Total Organized 61 260,000 45,000 4,300 800

Small Scale Sector 20 10,000 - 500

TOTAL 270,000

Source: IDA estimates.

2§02 About 30% of the total capacity is in eight public sector units;the largest of which is the Foundry Forge at Ranchi with a capacity of 45,000tons per year. This unit was conceived essentially as a captive plant tosupply the adjoining Heavy Machine Building and Machine Tool plants, theBhopal and Bharat Heavy Electricals (BHEL) plants as well as other indus-tries using very heavy castings. The remaining seven units are the Chittaran-Jan Locomotive Works (10,000 tons), the Mining and Allied Machinery Corporation(9,000 tons) which was initiated in 1961 to produce coal mining equipment;three steel foundries with a capacity of 5,000 tons each, attached to theRourkela, Durgapur and Bhilai Steel plants; and two units captive to theHeavy Electricals plants with a total capacity of 5,000 tons.

2.03 The private sector has a capacity of 186,000 tons. About 25% ofthis capacity is in eight captive units, half of which produce railway com-ponents and the other half produce industrial and metallurgical machinery.The remaining 75% is in 43 independent units having an average capacity of3,300 tons per year. Most of those units were initiated in the 1950's andearly 1960's to cater to the requirements of the railways. Only very fewindependent units were established after 1965; they are usually smaller insize (about 800-2,000 tons per year) and produce highly sophisticated alloysteel castings.

2.04 In the foundry industry it is not only the total capacity that isimportant but its capacity to manufacture castings in different weight rangesconforming to different intricate specifications. Private sector units areequipped to produce castings of any specifications up to 15 tons piece weight,and some of these foundries meet the rEquirements of heavy electrical equip-ment. The steel foundry at the public sector Foundry Forge plant is designedto manufacture castings weighing up to 120 tons a piece.

2.05 The investment in fixed assets in the older units of the organizedprivate sector ranges from US$150 to US$250 per ton of installed capacity,while the average for the newer units is about US$500 per ton compared toabout: US$800 to US$1,000 per ton in developed countries. The lower fixedcapital intensity in India reflects the lack of mechanized materials handl-ing equipment, high-pressure moulding machines that are only warranted bysteady and considerable scale of production as well as high labor costs;conditions which do not exist in India. Total employment in the industryis estimated at 15,000 corresponding to a capital labor ratio of US$650 perjob in the older units and about US$3,500 per job in the newer units com-pared to US$25,000 per job for new foundries in the developed countries.

2.06 Steel castings are used in railway rolling stock like wagons, pas-senger coaches, locomotives; in industrial machinery like cement, sugar,machine tools and heavy electrical equipment industries, and by metallurgicalindustries like steel and coal mining. Reliable information on productionis available only for non-captive steel foundries. As shown in Table 3, theproduction of independent steel foundries has not yet recovered from the dropin production during the recession period of 1966 to 1968 and is still about50,000 tons or 10% below the 1965 level. The main reason for the drop incapacity utilization in the private sector was the considerable decrease inthe production of railway wagons (Annex 2), which prompted a large number ofunits to divert their capacity to production of industrial and mel-allurgicalcastings. But the growth of these industries has not been sufficient to makeup for the drop in railway castings. Consequently, capacity utilization inindependent foundries is still about 35%, and is not much larger in captiveunits either. To utilize the excess capacity in electric furnaces, which isthe most expensive equipment in a steel foundry, a large number of foundrieshave also taken up the production of cast steel ingots. In fact, productionof steel ingots by the old steel foundries that were formerly supplying therailways surpasses their production of steel castings. This reflects thedifficulty that some of those units have had in converting to the more tech-nically demanding production of industrial castings especially since demandfor these castings has been rather stagnant over the last eight years, aswell as the relative profitability of producing steel ingots which were, andstill are, in short supply.

Table 3

Production and Imports of Steel Castings

Productior. /1 Imports(Tons) (Tons) (US$ million)

1965/66 56,200 n.a. n.a.1966/67 52,700 n.a. n.a.1967/68 50,400 2,542 1.681968/69 48,000 2,535 1.681969/70 45,900 2,378 1.811970/71 52,000 3,233 2.091971/72 54,000 2,474 2.301972/73 /2 50,000 2,500 2.66

/1 For indepeindent units only. Corresponding figures for captive plantsare not available.

/2 Estimated.

Source: Handbook of Statistics 1971/72, Indian Engineering Association.

2.07 There was a considerable change in the composition of steel foundryoutput over the last decade. In 1971/72 (Table 4), we estimate that only 25%of the production of steel castings was geared to the needs of railway rollingstock compared to 45% in 1964/65 and 65% in 1959/60, while the production ofcastings for industrial machinery and metallurgical industries increased from27% in 1959/60 to 65% in 1971/72.

Table 4

End-Use Distribution of Domestic P:roduction of Steel Castings

1959/60 1964/65 1971/72(x) (%) (%)

Railways 65 45 25Industrial Machinery 24 27 32Steel and Metallurgical Industries 3 16 33Others 8 12 10

Total: 100 100 100

Source: IDA Estimates.

- 7 -

2.08 Capacity utilization in the public sector, has remained exceedinglylow ranging from 15 to 30%. The public investment in heavy engineering unitswith very large foundries, forging and machining capabilities was argued intermis of the considerable size of facilities that was needed for the produc-tion of steel mill and thermal power generation to be economical. However,for heavy engineering production to be economical, a large volume of workmust: be oushed quickly and without major mistakes through existing capitaland manpower resources. A steady flow of orders is, therefore, most impor-tant. But skilled and exp'erienced maanagement, which is on top of every pro-blem of technology, production planning, marketing and finance is also essen-tial.. In the light of experience acquired in the last decade, the investmentat the Foundry Forge at Rancshi (about US$150 million) seems to have beenpremature in terms of (a) the available volume of work for the immediateand even foreseeable future; (b) the necessity of gaining experience frommoderate investment rather than starting out with a giant plant; and (c) thepossibility for some equipment to be economically procured abroad and/orproduced by different techniques from existing smaller engineering shops.

2.09 Consequently, there were few orders at hand, 1/ and even those thatwere, were either only filled after considerable delays or not at all becauseof lack of technicalL know-how (e.g. castings and forgings ordered by BHEL).This obviously resulted in very low capacity utilization (ranging from l0 to35%) together with large inventories of work-in process, delays in other down-stream units, and finally, the decision by BEHEL to set up its own foundry andforge at Hardwar with a capacity of 15,000 tons of castings and 15,000 tonsof forgings per year. In addition, the indirect effect of a large plant pro-ducing widely diverse products was to inhibit technicians, supervisory per-sonn.el and management from quickly absorbing and deepening the experienceindispensable for competitive and dynamic growth. Furthermore, the sizeableirivestment at Ranchi far in advance of demand has resulted in unbalanced faci-lities; and consequently, technology, equipment and machining capabilities donot provide the necessary flexibility to meet the operational requirements forexisting and future demands. For example, there is a severe bottleneck inboring machines while there is a large excess capacity in other machiningcapability. This obviously puts the unit in the difficult position of seekingorders that fit in with its existing production capabilities rather thanexpanding its production capabilities in line with developing demand.

2.10 Tn retrospect, it would, therefore, seem that initial investmentsin smaller plants specializing in a certain class of products might havebeen more economic. This, however, is water under the bridge and the imme-diate task at hand is to effectively use existing capacity before undertakingmajor additional investments. To insure capacity utilization, GOI Will haveto develop the framework for strengthening management, training techniciallns,supervisory personnel and labor in all aspects of manu-acturing, as well as

1/ This remark hol ds even when one takes into account the Bokaro Steel Millorders that HEC was supposed to supply, but which were imported instead.

streamlining Droduction along lines where comparative advantage exists orcould be developed economically. In this context, emphasis should be given,especially in the formative years, to repetitive orders.

B. Raw '4aterials and Intermediates

2.11 Steel castings are produced by melting steel scraD Jin electric arcor induccion furnaces. The molten metal is then poured in a sand mould whereit is left to solidify and the resultant casting is then cleaned, heat-treatedand machined. Tne major raw materials required are steel scrap, power,graphite electrodes, sand and ferro alloys.

2.12 For a smooth production, a steady flow of consistently good qualityinputs, at relatively stable prices, is essential. linfortunately, this isnot the case in India. Steel scrap is procured in the open market at pricesroughly equal to the price of heavy and medium melting steel scrap in the USand Furope. However, unlike in developed countries where steel scrap iscompacted into brickets or bales, steel scrap in India is mostly loose andexcessively rusty which adversely affects production costs. First, excessivelabor is used to sort out the scrap. Secondly, about 10% more scrap is usedto produce the same quantity of liquid metal. Finally, and more importantly,loose and rusty scrap requires longer melting time to adjust the charge tothe required composition which both increases the electricity consumptionfrom an average of 700 KnW to 800 KW per ton of liquid metal, and decreasesthe capacity utilization of the electric furnace, the most expensive pieceof equipment in steel foundries. Compaction of steel scrap would definitelyreduce production cost and should, therefore, be encouraged.

2. 13 Of late, steel scrap, despite recent imports, has been in shortsipply and its auality has been deteriorating. According to a recent studyof supply and demand for steel scrap undertaken by the Steel Furnace Associa-t.ion of TndXia, the supply situation is not likely to improve substantiallyover the next few years, mainly because of the expected increase in theconsumption of scrap by the mini steel plants that have mushroomed to meetthe large shortfall in steel supply. In fact, the study indicates that to-wards the end of this decade the steel scrap shortage will get worse (Annex 3)..Furthermore, due to the continuing worldwide scarcity and high price of scrapand because of foreign exchange constraints, import of steel scrap shouldprobably only be relied upon as a temporary measure. Longer term solutionsshould essentially be based on increased supply of local steel from conven-tional blast furnaces. This would achieve the dual objective of (i) divertingsvailable steel scrap from production of ordinary steel billets in small andinefficient electric furnaces to the production of castings and (ii) puttingpressure on inefficient foundries to improve their foundry operations ratherthan relying on the production of the more renumerative steel ingots to makeup for their foundry losses.

2.14 Sponge iron, which could be produced economically in those regionsof the country where high grade ore occurs near non-coking coal deposits,could also be used as a substitute for, as well as supplement to quality

-9-

scrap iron for use in electric arc and induction melting furnaces. TheNational Metallurgical Laboratories (N1ML), the leading institution for re-search and development in the metallurgical field, has conducted extensivepilot plant experiments to produce sponge iron; and all indications arethat it has solved most of the chemical and heat transfer problems asso-ciated with the production of sponge iron. The next step should be toassemble a multi-disciplinary team consisting of mechanical engineers,chemical engineers and metallurgists to design a commercial prototypeplant. Special emphasis ought to be put on enhancing the economic viabili-ty of the process mainly through reducing heat constmpt-Lon (e.g. throughrecycling of char and designing efficient ore and coal feeding mechanisms).

2.15 Second to steel scrap, electricity is the largest cost componentin steel foundries. Electricity is, however, in short supply and rationedby staggered working hours among plants. But power schedules are not alwaysadhered to, which, according to firms visited, reduces available capacityby over 15%. Some of the more serious consequences of unscheduled powercuts are (a) work spoilage, particularly when power cuts occur during melt-ing, pouring and welding operations; (b) equipment damage where the freezingof molten or heated metal may require major repairs (melting furnaces,cupolas, pouring ladles); (c) reduced personal safety when equipment suchas crane hoists and furnace tilting mechanism becomes inoperative withoutwarning. Since power shortage is likely to persist, it is essential thatpower schedules are strictly adhered to. A partial medium-term relief couldalso be achieved by locating new power intensive investments in areas wherepower supply is relatively plentiful and reliable.

2.16 In India a large proportion of the castings is being produced bythe conventional sand moulding process. The industry currently uses naturalclay bonded sand but growing trends are in the use of synthetic sand bondedwith bentonite, destrine, etc. The NML has compiled statistical data onoccurrences of sand, bentonite and other bonding materials but no attempthas yet been made to lay down process guidelines. Consequently, with theexception of very few foundries that have made an exceptional effort inselecting their sand sources and optimizing the sand mixes, most foundriesuse ungraded and impure sand which reduces its moulding and refractorycharacteristics, and thereby leads to high rejection rates, poor surfacequality and increased cleaning time. This problem will become more acuteas India adopts new moulding and core making methods that are necessary forproduction of precision castings. Collaboration of the industry, researchinstitutions, and financial institutions (ICICI and IDBI) will be neededto increase the supply of graded foundry sand. A joint action programcould include (i) identification of sand deposits which could be economicallybeneficiated to produce foundry grade sand; (ii) development of process datafor sand and binders; and (iii) establishment of 3-4 regional sand plants toserve foundries which cannot, because of small size, individually undertakethis activity in an economic way.

2.17 Among the other constraints affecting the industry are tne dif-ficulty of getting import licenses for vital spare parts such as for mouldingmachines, core blowers and pattern making equipment- thereby contributing toa Door maintenance record. Because of the self-destructive nature of foundryequipment and machinery it is recommended that GOI increase its foreign ex-change allocation for foundry spare parts as it has already done for corrosionprone clhemrdIal idusLries. Tit is also roemmeded -hat the allocation forgraphIte alectrodes arC- cr,icT_le be inrea8ed _o supplement domestic produc-tion of tzheDe imppo-rtarXt in-ats

2.18 3Despite these constraints v ich can onv De relieved through govern-ment measures or through collective acti3n o;f industry, research institutionsand government, there are other nossibil;ties for improving performance bysteps taken at the individual plant 'level. This is the subject of the nextsection.

C. Performance of The Steel Foundries

1. Plant Operations

The mission visited 10 steel f ,undries with a total annual capacityof about 110,000 tons or 40% of the industry's total. Firms ranged in sizefrom 3,000 to 45,000 tons/year producing valves, railway castings, automotivecomponents, industrial castings, etc.

2.19 The operations of seven plants' operations were evaluated in sevenmajor functional areas by the Bank's consultants. A detailed descriptionof the functional areas and the rating system used in these evaluations isgiven in Annex 4 and the performance of each firm and the sector as a wholeare summarized in Table 5. An average performance rating of 85 or more in-dicates that the operation compares favorably with operations in the westernworld; one between 70 and 85 indicates that the firm could achieve interna-tional competitiveness within two or three years if corrective action isundertaken; and a rating of less than 70 indicates that the firm. suffers frommajor structural deficiencies and could not survive in a competitive environ-ment. On this basis about 25% of Indian firms are internationally competitive,an additional 25% could become so in the next few years if a corrective actionprogram is designed and implemented, while the remaining 50% will requiresubstantially more time and effort to correct major structural deficiencies.

2.20 Tn the following paragraphs the principal features of plant opera-tions are briefly reviewed. By necessity, a summary of this type can onlytouch on the differences in performance among individual manufacturers which,as Table 5 demonstrates, are substantial. Detailed descriptions of each manu-facturer's performance as well as recotmmendations to improve plant operationsare given in the consultants' reports which have been made available to thefirms concerned.

Table 5

Summary Performance Rating of Steel Foundries-/

A B C D E F G SectorA B C D E F ~~~~~~~~~~~~~Average

Product Planning 100 90 80 70 60 10 10 60

Manufacturing 99 83 70 60 44 45 33 65

- Facilities 78 87 66 75 71 49 34 65- Plant Engineering 98 86 60 49 48 78 38 68- Manufacturing Engineering 100 73 69 40 35 25 26 55- Production 100 92 80 70 16 39 37 70- Quality Control 100 78 74 60 35 43 33 64

Materials Management 95 90 77 57 46 25 35 63

Industrial Relations 95 64 79 59 70 16 27 57

Marketing 100 86 94 90 0 20 10 67

Finance 85 95 85 95 0 10 10 63

Organization 95 92 75 68 25 40 30 67

Average 96 85 77 67 35 30 27 64

- Top Performance = 100.

- 12 -

Product Planning

2.21 As mentioned earlier, although the output of the steel foundry in-dustry has stagnated over the last 8-10 years, there has been a marked changein the composition of output from railway castings to the technically moredenlanding industrial castings. However, only 20-30% of the firms visitedhave successfully made this transition, as reflected in the low industryaverage rating of 60 for this function, with individual firms' rating rangingfrom 100 to 10. The successful firms are characterized by technically com-petent management with strong marketing organizations, having concentratedtheir effort on producing castings in long production runs (grinding media,valves, etc.) or are producing a diversified but compatible castings programon a jobbing basis. 1/ The weaker firms, on the other hand, are predominatlyjobbing foundries which use over 50% of their capacity for steel ingotsproduction to make up for their foundry losses.

Manuf acturing

2.22 rManufacturing, which consists of facilities, plant engineering,process engineering, production and quality control, on an average is rated65 with individual company ratings varying from an exceptional 99 to a lowof 33. Except for the old steel foundries which constitute about 30% ofproduction capacity, facilities are by and large adequate for the volumecomposition and complexity of the product mix and do not represent a majorconstraint on the individual firms' performance in the domestic market.Export orientation, which is needed to use the excess capacity in the in-dustry, will require inter alia additional investment especially in patternmaking equipment and core blowing and moulding machines. Plant engineering,which consists of plant layout, equipment maintenance and housekeeping, isfair (68): equipment and machine layouts are by and large good, but equip-ment maintenace needs considerably more attention from management. Partof the inadequate maintenance is due to difficulties in obtaining importlicenses for spare parts, but management is also responsible for notdeveloping comprehensive preventitive maintanance programs for operationswhich are intrinsically destructive in nature. This deficiency will becomemore pronounced as Indian industry graduates to more complex castings whichusually require heavv investment in complex equipment. By far the weakestfunction lies in manufacturing or process engineering (55), with the bestfirm- rating 100 and the wqorst 25. The basic deficiency here is in toolingand manufacturing methods. Basic tooling, including patterns, core andmoulding boxes, and related equipment are with very few exceptions, in poorcondition and, in some cases, all the moulds produced require repairs.Exceedingly large gates and risers are used, thus not only increasing con-sumption of oxygen, acetylene and labor in the cleaning department but moreimportantly reducing the yields, a factor that assumes particular importancein view of increased costs of fuel and energy. Though the constraints re-garding availability and quality of sand and sand binders is recognized bythe companies, the mouldings and core sand mixes and refractory moulds andcore paints are seldom oDtimized. As a result of all these shortcomings,

1/ By "compatible program" is meant items requiring similar skills andproduction methods.

- 13 -

yields are on the average 10-20% lower than in developing countries andrejection rates are about 50% higher. Ouality control is rated a low of 65mainly reflecting the lack of process control. The areas requiring attentionare core making, moulding department, sand quality control, pattern controland develoDment of effective feedback mechanisms to reduce rejection ratesand increase yields.

tMaterials Management

2.23 Materials management, which is concerned with control of direct andirdirect materials, work-in-process inventories and finished product inven-tories, has a rating of 63. In most foundries inventories of melting scrapwas high, and scrap or obsolete castings were not properly stored or returnedfor re-melting. Production cycles for railways and industrial castings areestimated at 6 to 8 weeks compared to 2 to 3 weeks in developed countries.Patterns are mostly not properly stored and often damaged in the process.Core storage and core and mould handling methods need to be analysed to re-duce rejection rates.

Industrial Relations

2. 24 The industrv employs some 12,000 people. About 20% of the per-sonnel employed are administrators, technical and supervisory personnel;35% skilled labor; 25% semi-skilled; and the remaining 20% unskilled. Ex-cert for pattern makers, the supply of skilled labor is adequate and laborproductivity on set tasks is about 80% of Western productivity standards.But overall productivity is considerably lowered by the shortage of qualifiedengineers, supervisory Dersonnel and foremen with shop-level experience, aswell as poor materials handling methods, excessive machine breakdown andPxcess capacity. Labor productivity ranges from 200 man hours/ton in thebest units to 800 man hours/ton in the worst one, compared to 30 to 45 manhours/ton in develoned countries for similar steel castings. To fully ex-ploit India's comparative advantage in labor, considerably more attentionneeds to be given to on-the-job training at the supervisory and foremanlevels. Realistic work standards should also be developed to serve as aguide for development of a fair and equitable wage structure and also tosenre as a benchmark for quality and cost control. Increase of labor pro-e.Uctivitv from the current average of 550 man hours/ton to 350-400 man:Icurs/ton in the next two years is a reasonable target.

Finance

2.25 The performance of the firms in the areas above is obviously re-flected in the financial profitability of the firms. Profit on sales andreturn on capital exceed 20 and 25% respectively for the best firm, whichis using its profit for further expansion and deepening of products; whilethe poorest nerformers are losing substantial sums of money, and in twocases are in a very tight financial position. But, the good performance ofsome firms also reflects the excellent financial control system in productselection and in cost control, which is non-existent in all poor performers.

- 14 -

Organization

2.26 As would be expected, the best foundries have an exce:.lent organiza-tion. Their top management appears very competent, progressive, firm and fair;it delegates responsibility to a technically competent middle management thatguides and exercises necessary control at each stage of operations. In theother firms, functions are not properly defined, nor appear they to be staffedby competent management; and in at least two or three cases there are majororganizational weaknesses at all management levels.

2. Prices and Cost Competitiveness

2.27 The purpose of this section is to review the current prices, coststructures, and cost competitiveness of the steel foundry industry as wellas the factors affecting them with a view to identifying some of the ele-ments of a development strategy.

Prices

2.28 With respect to prices, steel castings can be conveniently groupedinto two categories. The first category includes all those products forwhich there are a number of manufacturers with substantial excess capacity,for examnle, railway castings and small and medium industrial castings.Prices for products in this highly competitive category are more or lessequal to the prices of similar products in the developed countries and 10to 20% below the CIF prices of imports. The second group contains heavysteel castings where the public sector has a near monopoly in the Indianmarket. The policy here is to take the landed price (CIF price plus theimport duty of 30%) as a yardstick for arriving at domestic prices irre-spective of production costs.

Cost Structure and Cost Competitiveness

2.29 Because no information is available on the cost structure ofcastings produced by the public sector, this section will be limited to rail-ways and medium industrial castings produced in the organized private sector.Although the ex-factory costs of these types of castings are in line withthose in developed countries, the cost structures of Indian and Western manu-factures are somewhat different (Table 6). The major differences are essen-tially in (i) the cost of raw materials, fuel and power, which raises the costof Indian steel castings by 10%, and (ii) labor content, which lowers it by7%. Part of the high raw materials and intermediates costs is accounted forby the high prices, low quality and erratic supply of raw materials, as wellas the high price of electricity and fuel. But a significant portion is dueto the operational deficiencies described earlier, which not only increasematerial consumption as evidenced by comparatively low yields but also resultin unnecessary use of labor (600-700 man hours/ton of steel casting producedin. 1xota compared to an average 35 man hours/ton in the 'USA), thereby erodingIndia's main source of comparative advantage.

- 15 -

Table 6

Comparison of Indian and Foreign Cost Structures for Railway Castings

Foreign Cost Indian Cost Difference

Materials 40 45 5Fuel and Electricity 4 9 5Labor 35 28 (7)Other Manufacturing Expenses 5 5 0Sales 1 1 0Depreciation 4 3 (1)Interest 3 3 0Profit Before Tax 8 6 (2)

Total 100 100 0

2.30 An idea of Indian potential competitiveness could be obtained bycorlparing the Indian and West European prices and cost structures for X-rayquality high pressure steel valves produced by the most efficient steelfoundry in India (Table 7). Indian prices are roughly 25% lower thanWest European ones, with most of the difference being accounted for by lowlabor wages (200 man hours per ton of steel valves in India at US$50/monthcompared to 45 man hours per ton at US$1,000/month in the USA). A furtherindication of high competitiveness is the fact that domestic resource costof saving foreign exchange by producing this type of castings is aboutRs 5.5|US$, which is even far lower than the official exchange rate, comparedto roughly Rs 7/US$ for steel castings produced by average steel foundries 1/.

I/ Domestic Resource Cost per unit of Foreign Exchange Saved or Earned -defined as the ratio of direct and indirect domestic resource cost, tothe difference between the CIF value of imports (or the FOB value forexports) and the foreign exchange expenditure, direct and indirect,required for domestic production. It provides a measure of efficiencyof the whole sector including the supplier and sub-supplier industriesfor this product. The activity is economic if this index is less thanor equal to the shadow exchange rate.

Table 7

Comnarison of Indian and Foreign Cost Structuresfor X-Ray Quality Hiigh Pressure Steel Valves

Fr -os t hIdian Cos-tBreakdown Breakdown Dif erence

Ex-Factory Sale Price ,00 73 (27)

aw aterial and Supplies 30 32 2

Labor 33 7 (26)

Power 3 6 3

Other Manufacturing Expenses 12 11 (1)Sales 3 2 (1)Depreciation 6 3 (3)Interest 4 5 1Profit Before Tax 9 7 (2)

Total 100 73 (27

3. Exports of Steel Castings

2.31 As in the case of most engineering goods, export of steel castingsstarted during the 1966-1968 recession period and have since registered amarked, if uneven, growth (Table 8). Despite this increase direct exportsof casting represent only less than 1% of the industry's output. The mainexports are castings for cement factories, railways, earth-moving equipmentand rerolling mills to the Middle East, East Africa and Asia.

Table 8

Direct-/ Exports of Castings

Year US$ million

1967/68 0.041968/69 0.011969/70 0.041970/71 0.85

1971/72 0.25

/1 As opposed to indirect exports in otherengineering goods.

Source: Indian Engineering Association,handbook of Statistics 1971/72.

- 17 -

2.32 A significant part of the export growth can be attributed to theGOI export promotion scheme which consists of: (1) import duties and excisetax drawbacks of Rs 159 per ton of steel casting (equivalent to about 3-4%of the FOB export price); (2) cash assistance of 25% of the FOB value ofexports; and (3) an import replenishment entitlement (REP) of 5% of the FOBvalue of exports to cover the import content of exports. On the whole, theexport promotion scheme is well conceived and, according to the fina visited,its administration has substantially improved over the Last two years. Butthe export promotion system still needs some fine tuning. As shown inTable 9, the export incentive no more than compensates the firms for theinherent bias of the protective system in favor of import substitution with-out providing any real promotional push to exports. Understandably, then,the firms would like the REPs and/or cash assistance increased. Given thatthe estimated domestic resource cost of earning foreign exchange is on thelow side if compared to the opportunity cost of foreign exchange, an increasein the REPs or the cash assistance is justified, with preference to be givento increasing the REPs since they could be freely used to import badly neededequipment spare parts. Exporters would also like GOI to ease the shippingconstraints and to negotiate new :reight rates with the Conference Lines.

Table 9

Comparison of Realization from Export and Domestic Sales of Steel Castings

Export Domestic

A. Financial Realization by Firms

1. Sales Price 70 - 80 100

2. Duty Drawback 3 - 4

3. Cash Assistance (25% of 1) 18 - 20

4, 50% Premium on ImDort Replenish-ment (5% of 1) 1- 2

92 -106 100

Profit on Sales (2) - 12% 6%

B. Economic Cost

Domestic Resource Cost per unitof Foreign Exchange Earned orSaved in Rs/US$ /_ 8.5 - 9.5 6.0 - 7.0

/1 The difference between thie domestic resource cost of foreign exchangesaved by import substitution, and earned by exporting stems from thefact tl1at thle CIF price of imports is larger thlan the FOB price of exports.

- 18 -

2.33 Export prospects for steel castings are encouraging. There isincreasing demand for them in the developing countries of Africa, MiddleEast and the Far East. Further, with rising labor costs and stricter en-vironmental standards in developed countries steel castings are in moredemand there too. Increasing the cash assistance or REPs alone will not,however, be effective in increasing exports and will have to be complementedby measures designed to improve the industry structure, notably by improvingdesign skills and manufacturing knowhow and by developing a strong exportmarketing organization. With regard to export marketing the State TradingCorporation (STC) has already made a good start in developing an export con-sortium which has successfully negotiated an export order of 3,600 wagonsto Yugoslavia at US$45 million, representing 10% of India's wagon buildingcapacity. This is definitely a welcome initiative which should be inten-sified and deepened beyond the marketing arrangement to include joint productdesign, product engineering as well as production planning among Indian firmsto ensure economies of scale. Unfortunately, these joint activities were notcovered by STC in its first export order; for example, the mission observedthe same casting being produced by five different manufacturers using at leastthree different production methods with rejection rates ranging from 5% toover 30%0. A co-operative arrangement in design and production would notonly ensure that castings are produced i-n the most economic way but would alsohelp diffuse the technical know-how now available only in a few centers ofexcellence to a broader spectrum of the industry. The casting in whichcooperation in design and manufacturing methods should be initiated as soonas possible is the European Railways Uni-Coupler which could provide a sig-nificant outlet for the steel foundries' excess capacity.

III. IRON FOUNDRIES

A. Industry Structure

3.01 Roughly, there are 5,500-6,000 iron foundries in India, producingabout 1.9 million tons of castings, and employing 250,000 people (50% un-skilled, 35% silled and 15%0 supervisory). Production of iron castings nowembraces practically all categories of products ranging from cooking pans,railways sleepers to thin-walled automotive castings. The iron foundryindustry is, however, still not yet fully equipped to cover the growing needsfor components and parts for a number of capital goods industries such asthe fertilizer and petro-chemical and automotive industries (e.g. heat andwear resistant iron castings like cylinde:c heads and cylinder blocks).Direct imports of these items h1ave averaged about Rs 8.0 million/year in therecent past. Indirect imports such as in completely or semi-knocked downtractors, for which data is not available, adds substantially to the importfigure.

- 19

3.02 Recent statistics on the size structure of the industry are notavailable. Rough estimates (Table 10) given by the Indian Foundry Directory(1965) indicate that its structure compares with that of the Japanese foundryindustry in the mid-fifties before Japan's foundry modernization program gotunderway: about 85% of the foundries are smaller foundries employing lessthan 100 people and producing less than 600 tons/year. These small foundriesaccount for roughly one-third of the output, and half the employment. nTheremaining 15% of the foundries are medium and large foundries.

Table 10

Distribution of Indian Foundries by Size (1965)

By Number of Employees By Tonnage of ProductionProduction in

No. of Employees % of Foundries tons/year % of Foundries

Below 50 70 Below 250 55

51-100 14 251-600 21

101-200 8 Above 600 24

2011-500 4 100

Above 500 2100

Source: Foundry Directory 1966, Indian Institute of Foundrymen.

3.03 In the early stages of industzialization, foundries in India wereconcentrated in the east and the west around the industrial complexes ofCalcutta and Bombay. But with the growth of the industry, foundry centers(ranging from 50 to 300 foundries per center) have sprung up in many otherparts of the country. At present, about 80% of the foundries are located infive states: in and around Calcutta in West Bengal; Bombay and Ahemadabadin the west; Agra in Uttar Pradesh; Batala, Ludhiana and Jullundur in thePunjab; 'ladras and Coimbatore in the south. A distinctive characteristicof the Indian foundry industry is the regional specialization of foundries(Table 11): Foundries in the West are on the average relatively large andpr7eTuceboth traditional items such as pipes, railways sleepers and verysophisticated castings such as for textile machinery and steel mills;foundries in IJttar Pradesh are mainly in the small scale sector and producepumps, engines and pipes to meet the growing requirement of farm mechanization;while foundries in the Punjab, in addition to producing castings for agricul-tural mechanization, also produce castings for machine tools, sewing machines,etc. This regional specialization should facilitate the procurement of rawmaterials, provision of technical assistance and marketing on a collective(or co-operative) basis.

Table 11

Geographical Distribution of Firms

Percentage of Percentage ofRegion Foundries Production M1ajor Products

West Bengal 10 46 Cooking pots, pans, manholes,pipes, ingot moulds, bottomplates, laddles, railway sleepers,locomotive castings,industrial machinery.

Cujerat 13 2) Engines, machine tools,

Maharashtra 8 7 ) automotive castings,Madras 6 4 ) industrial machinery.

Punjab 20 6 ) Pipes, agricultural machinery,Uttar Pradesh 16 23 ) engines, motors, sewing machines,

machine tools.

Others 25 12

Total 100 100

Source: l'oundry Directory 1966, Indian Institute of Foundrymen.

3.04 In order to simplify the study of the diversified structure andoutput of the Indian iron foundry industry, the industry is classified intotwo main groups: A and B (Table 12). Group A includes foundries whicheither produce their own pig iron (e.g., steel plants, and cast iron spunpipes units attached to steel plants); or because they supply governmentagencies, receive their pig iron throlugh government sponsoring agencies (e.g.,Indian Railways supplying foundries producing railway sleepers and theDirectorate General of Supplies and Disposals (DGS&D) supplying cast ironspun pipes units). Group B consists of castings not consumed by Governmentand includes foundries listed with the DGTD and the State Industry Direc-torates for the purpose of pig iron allocations. Group A and B are furthersubdivided into sub-groups, depending on similarity in products, productionmethods, and market structure.

- 21 -

Tab:e 12

Classification of Iron Foundries

Production 1964/65/1 Production 1972/73/2In Metr:ic Percen- In Metric Percen-Tons/Year tage Tons/Year tage

A. I. Steel Plants Foundries 170,000 8.7 210,000 11.1

II. Railways Castings:

- Sleepers 400,00') ) 250,000 )) 27.0 ) 18.4

- Others 127,000 ) 100,000 )

III. Cast Iron Pipes 200,000 10.3 190,000 10.0

Sub-Total "A" 897,000 46.0 750,000 39.5

B. IV. Industrial Castings 400,000 20.6 450,000 23.7

1T. Non-Industrial Castings 650,000 33.4 700,000 36.8

Sub-Total "B" 1,050,000 54.0 1,150,000 60.5

TOTAL "A" + "B" 1 947 000 100.0 1P900P0OO 100.0

/1 > p>mrtr fu the: Foundry 'ig Iron Panel

/2 IDA estimates.

3.05 As shown in Table 12, all Indian iron castings output is just nowreachling its peak pre-recession output recorded in 1964/65. This lacklusterperformance is the net effect of a 33% decline in railway orders whose sharein output declined from 27 to 18%, and a modest increase in output of othercastings. The rest of this report examines the structure, performance, pro-spects and contraints of the foundries groups listed above, with particularemphasis on groups which are either included under IDA Industrial ImportsCredits, such as cast iron spun pipes and automotive foundries; or which areof importance to IDA supported industries, such as units producing industrialcastings, and small scale foundries. The other groups, steel plants' ironfoundries and railway foundries, are only briefly reviewed. Because of thevital importance of raw materials and intermediates for the foundry industry,their supply conditions are reviewed first.

- 22 -

B. Raw Materials and Intermediates

3.06 Tne major raw materials required for production of iron castingsinclude those for making the mould (mainly sand, binders and syntheticresins), the fuel for melting the metal to be cast (coke, fuel oil and elec-tricity), and the metals and alloys which are to be cast and form the finalproduct (pig iron, scrap and ferro alloys). The supply and pricing condi-tions for sand, binders, electricity, scrap, ferro alloys and graphite havebeen discussed in Clapter II on steel castings. The supply of the remainingmain raw materials, namely, pig iron and coke is discussed below.

3.07 In India, a large percentage of foundries use the conventionalblast furnace for melting pig iron; and for the quantity and quality ofproducts presently required, this is undoubtedly the most economic way.For an efficient cupola operation consistent supply of good quality pigiron and coke is essential. Yet, during the mission's plant visits, anda so in their replies to the IDA questionnaire, most firms listed raw mate-rials difficulties in general, and pig iron and coke in particular, as themajor constraints on their operating efficiency and growth.

3.08 The pig iron difficulties include:

(i) Shortage of pig iron. 'Most of the pig iron consumed byIndian foundries is allocated by the Iron and Steel Con-troller on a bulk quota basis to the various sponsoringauthorities which in turn allocate it among their respec-tive foundries. The Railway Board and DGS&D supply foundrieshaving obtained government contracts with their require-rments; and the DGTD and the State Directorates of Industriesallocate their quota of pig iron among other foundries,largely on the basis of the foundries' annual production.In times of scarcity, the impact of shortages on Group Afoundries is nominal either because their metal requirementis captive (e.g. steel foundries) or because they receivedue government priority (e.g., Railways and some C.I. spunpipes units); hence, the full impact of shortages is reflectedin Group B foundries. Of late, there has been a severe short-age of pig iron. Althiough output of iron foundries almosttripled between 1962 and 1972, local availability of pigiron increased by less than 20% from 850,000 tons in 1962/63to one million tons in 1972/73 1/, which is at least 40-50%less than estimated pig iron requirements. Consequently,foundries not only have to pay a high price for pig iron(prices increased from about Rs 480 in August 1973 to Rs 750/ton in March 1974) but have no choice as to the quality orgrade of pig iron they purchase. The pig iron supply is,

1/ Total saleable pig iron produced by Indian steel mills in 1972/73 isestimated at 1.3 million tons, of which 0.75 million was exported.

- 23 -

however, expected to improve as the Government has bannedexports of pig iron after having fulfilled its previousexport commitments. To ensure an adequate supply offoundry pig iron of the 'right' grade composition, it isrecommended that GOI undertake a survey of the foundryindustry, to more accurately determine its structure;current and expected future production pattern; and require-ments for various grades of pig iron.

(ii) Variability in quality of pig iron. There are severalgrades of pig iron, broadly classified as (i) Basic ironfor steel making (silicon content less than 1.25%) and(ii) Foundry iron (silicon content higher than 1.25%).Foundry grade pig iron is further subdivided into grades,usually from I to III, depending on the silicon content.In addition to these two broad categories, there is the"off grade" iron to denote that the iron is off in itschemical composition (usually high sulphur and manganese).The bulk of the "off grade" pig iron is basic and hencehighly unsuitable for foundry use due to low siliconcontent on the one hand and high sulphur on the other.In developed countries modern technology is reflectedby the ready availability of numerous grades of ironwithin close limits of chemical analysis to meet anyrequirement in the wide spectrum of different classesof castings. Modern technology, therefore, does not makeany demand on the skill and ingenuity of foundrymen withrespect to the manipulation of charges. By contrast,Indian foundrymen are required to constantly juggle withalmost any quality of pig iron that they can lay theirhands on. This results in excessive casting defects andconsumption of inputs. The Foundry Pig Iron Panel (1965), 1/appointed by GOI to study the factors affecting the supplyand demand of pig iron, estimated that about 25-30% of thepig iron consisted of 'mixed up' grades and "off grade" pigiron, and attributes the inconsistent quality of pig ironto: (a) operational difficulties and shortcomings at thesteel plants; (b) mix-up of grades at the railway loadingpoints, and during transshipment from broad to narrow gauges;and (c) mix-up at the foundries themselves. All indicationsare that these shortcomings still exist. The variablequality of pig iron necessitates continuous analysis of thecupola charge to adjust its composition. This is an expensiveoperation which requires highly skilled manpower and expensiveequipment both of which are beyond the resources of most of

1/ Report of the Foundry Pig Iron Panel, Department of Industry, Govern-ment of India, September 1965.

- 24 -

the small and medium foundries. The only solution to thisprob1em lies in tackling the problem at the steel plantsand in the distribution systems as suggested by the Foundry PigIron Panel.

(iii) Irregularity in supply. Indian foundries are sufferingfrom snort feast and long famine periods. For example,there may be no foundry iron for six months and thensuddenly a large tonnrage is offerec which has to beaccepted in its entirity or forgone. The problems ofirregular supplies largely arise due to railway transportdifficulties. For example, railway bookings to certaindestinations remain closed for some interval which createstemporary pockets of acute shortage. Furthermore, pig ironis transported in so-called rake loads; and hence the entireannual quota may be received at foundries at one time whicheven in large foundries results in extreme financial dif-ficulties and storage problems. These difficulties are ofcourse particularly acute in small foundries, which there-fore often have to forgo their quotas being priced at acontrolled rate of Rs 480/ton (1972/73 price) and thusforced to pay Rs 560/ton on the open market. Among theother difficulties that force the smaller foundries toforgo their quotas are: (a) the high handling charges (upto 20%) of the Small Scale Industry Corporations (SSIC)which act as distributors of iron and steel materials (b)the shortage of working capital which does not allow themto make large deposits required long before the actualreceipt of materials; and (c) the heavy pilferage in the

open wagons allotted by the railways to transport pig iron.

A possible solution to the difficulties of small scale,oundries lies in developing foundry co-operative associa-tions to purchase and store bulk raw materials and distributethem among their members according to their allotments.

3.10 Foundries also complain about the scarcity and erratic supply of

Indian foundry coke, and even more so about its poor quality: ash contentranges from 25 to 35% compared to 7 to 10% in developed countries; and cokesizing is almost never practised, and the proportion of coke size 2" and

below being very large. These factors not only increase the cost of castingsby increasing consumption of coke, fluxes, refractories and ferro alloys but

more importantly limit the use of the cupolas to low value, high phosphorous

grey iron castings for which demand is not likely to grow. The large and more

advanced captive foundries engaged in engineering castings such as for machine

tools, automobiles and industrial machiinery have tried to bypass the problems

posed by inconsistent and inadequate supplies of pig iron and inferior coke,by switching over to the more capital intensive practice of melting scrap in

clectric furnaces. Tihis practice is, however, beyond the means of the smallfoundries and most of thie medium foundries, thereby limiting their productionto low-value castings. Increased capacity and efficiency of coke washeries

- 25

and coke ovens is definitely called for to increase the supply of coke to thefoundry industry. But the most vexing problem will remain that of the poorquality of the Indian metallurgical coke. A number of alternatives need tobe considered. On a short term basis these include: training small andmedium foundry technicians in hiot blast cupola practice and in duplexing; 1/on a longer term basis these include producing high carbon synthetic coke; 2and benefication of Indian coke through solvent extraction. 3/

C. Steel Plant Iron Foundries (Group I) 4/

3.11 There are at Dresent six captive foundries attached to the steelplants for production of their captive requirements of ingot moulds, bottomplates, slag laddles, pig iron moulds and other maintenance requirements;they obtain their molten metal directly from the blast furnace. These steelfoundries are anong the largest in India ranging in size from 20,000 tonsper annum to 57,000 tons, with an average of 33,000 tons/year. In 1964/65,production of this group was 170,000 tons, or about 8.7% of the all Indiaproduction of castings. Based on an estimated average requirement of 25 kgsof castings per ton of ingot steel produced, current production is estimatedat about 210,000 tons, and is expected to grow in step with the productionof steel ingots.

D. Railway Castings (Group II)

3.12 Despite the substantial decline in production of railway castingsfrom §20,000 tons in 1964/65 to roughly 325,000 tons/year today, the IndianRailways remain the largest single consumer of castings (1?% of total output).Railway castings can be broadly classified into two categories: (i) cast ironsleepers; and (ii) engineering castings for locomotives, wagons and othermaintenance purposes.

3.13 Cast iron railway sleepers are produced by about 40 independentfoundries, mostly located in West Bengal, with individual production capacitiesranging from about 5,000 to 40,000 tons/year. Since 1961 the Railway Boardlaas been getting a separate quota of pig iron from which those foundries pro-ducing sleeners were supplied t'Lrough the Iron and Steel Controller. Hence,unlilke other foundries, railway foundries have not suffered from pig ironshorta,ae. Competition in this group of foundries, which uses highly laborintensive methods of production, is very keen, and conversion costs are re-ported to be at an incredibly low level of Rs 350-400/ton of good castings,

1/ Dtuplexing means using electric arc and induction furnaces in conjunctiornwith cupolas to superheat the metal and adjust its composition.

2/ This coke was developed in the USA especially for foundry appication;it is made by carbonization of a mixture of petroleum coke, pXtch andother varieties of coal.

3/ Currently under development by the Central Fuel Research Institute(CFRI) in India.

4/ Refer to classification in Table 12.

- 26 -

of which about Rs 200 is accounted for by labor cost, and the rest by coke,sand, refractory and profit (about Rs 30/ton). Following the decline ofsleeper orders, a large number of sleeper foundries have successfully switchedover to some other traditional castings such as pipes, pipe fittings, manholecovers and sanitary castings. Some units have also tried to convert tosimple engineering goods, but this has not been an altogether easy task forsingle purpose conventional foundries utilizing piece rate contract laborwith limited skills, not to mention the lack of technical know-how at thesupervisory and management level. The prospects of these foundries are notvery encouraging especially as Railways orders for s'leepers are expected tobe only around 350,000 tons/year during the Fifth Five Year Plan. Accordingly,a special effort should be made to upgrade some of these foundries to produceengineering goods or to produce cast iron pans and barbecues which are becom-ing increasingly popular in the USA, Australia and West European countries.As regards the latter alternative, the Engineering Export Promotion Council(EEPC) and the Trade Development Authority (TDA) could undertake a marketsurvey and channel export orders to competent foundries.

3.14 In addition to sleepers, the Railways consume about 100,000 tons ofengineering castings per year, half of which are produced by 22 or so Railway-owmed foundries, and the rest are purchased from small to medium, 10 to 50year old, foundries (800-5,000 ton/year capacity). Like the independentsleeper foundries, these foundries have suffered from the decline in demandof railway castings, and need to be revitalized and modernized to competeeffectively in the domestic and export markets. The revitalization callsfor upgrading technology, training programs to increase technical know-howat the supervisory and middle management level, the setting up of exportconsortia, and improving the financial structure of some firms.

E. Cast Iron Spun Pipes (Group III)

3.15 Cast Iron spun pipes are manufactured by pouring molten iron alongthe inner wall of a spinning steel pipe mould while the outer wall is cooledby water (for smaller pipes) or compressed air (for larger pipes).

3.16 The total installed capacity is about 468,000 tons/year against alicensed capacity of 545,000 tons. About 30% of the capacity is in one publicsector firm (156,000 tons) and the remaining 70% is divided among 8 privatesector finns with an average capacity of 39,000 tons/year. Geographicallyabout 60% of the capacity is located in East India, near both the main sup-nliers of bulky raw materials - coal mines and steel plants - and a largemarket; thte average plant size of these firms is about 70,000 tons (42,000tons for the private sector and 156,000 tons for the public sector). Theremaining 40% of the capacity, in smaller market oriented firms (35,000tons/year), is about evenly distributed between the West and the South ofIndia. This industry structure - firms size and geographical distribution -allows the firms to capture a significant part of the economies of scalethat characterize this segmenit of the industry.

- 2 7 -

3.17 As over 97% of production is oriented towards the domestic market, theindustry's fortune has been closely tied to investment in water supply systems,which is its major customer. And because investment in social services isamong the first to suffer during periods of economic difficulty, output de-clined dramatically during the recession period (1966-68) from 240,000 tons/year in 1965 to 125,000 tons in 1968; corresporndingly capacity utilizationfell from about 75% in 1965 to about 35% in 1968. As demand ?icked up from1969 onwards, output increased to about 260,000 in 1972/73; but because ofnew additions to capacity, capacity uti'lization is still only 55%, which islow for this highly capital intensive segment of the foundry industry (US$350/ton of pipe/year, USS5,000 per job created). Because urban and rural watersupply systems are given high priority in the Fifth Five Year Plan, even inthe face of the tight economic situation, the industry's prospects are reason-ably encouraging; and production is expected to be about 300,000 tons in1974/75. The foreign exchange requirement for pipe moulds and pipe mouldlubricants at this production level is estimated at about US$2 million.

3.18 The major material inputs are pig iron, hard -oke and pipe moulds,of which oniv the latter are imported. To minimize re`ection rates and toobtain maximum service life out of imported mould, foundry grade III pig iron-:ith phosphorous content of 0.6 to 0.9% is considered essential. Yet,, only twoof the foundries attached to steel mills and representing about one-thlird oftocal spun Dipe capacity are able to obtain their requirements for this typeoi pig iron. Tlle others have to use pig iron and coke that is not suited tothieir requirements, with concomitant hiigh conversion costs.

3.19 The mission visited two firms with a total installed capacity ofabout 90,000 tons/year on a two-shift basis (18% of total installed capacity),producing about 54,000 tons of pipes/year, corresponding to a capacity utili-zation of 60%, compared to an industry average of 55%. The pipes producedhave a diameter .;f 80-300 mm, which is relatively small compared to world-wide trends. Air cooled spinning moulds needed for economic production oflarger diameter piDes are still experiencing teething problems. On the whole,plant and equipment are wqell designed and maintained, production planningand control are efficient; quality control of raw materials and final productis good; materials handling of raw material, work-in-process and final pro-duct is well adjusted to Indian low wage rates; labor relations hiarmonious,and most manufacturing functions are assigned to competent personnel. Areasthat could be furtlher improved are manufacturing engineering especially intooling and operation of spinning equipment; and also in process controlespecially in the melting and annealing departments.

3. 20 On the whole, this branchl of tne industry is quite compezicive evenmore so when taking inlto account the lower capacitly util_zati-o.n rate. Com-parison of tihe Indian and foreign cost structures irdicates Ehat the lowerIndian wages just about compensate for iower operating efficLency (Table h-).About 30% of the output is sold to governmeat and semi--governmenz 6epartmentsat controlled prices, with escalation clauses Lo cake accoun-- or i-ncreases

- 28 -

in price of coke and pig iron. Average Indian prices of spun pipes in 1972/73were about Rs 1,200/ton, which is about equal to prices in developed countriesand 10-15% below CIF prices of both comparable imports and substituteproducts (e.g. PVC pipes and asbestos cement pipes). A further indicationof competitiveness is the fact that the domestic resource cost of savingforeign exchange by producing cast iron spun pipes is about Rs 7/US$, whichis considerably lower than the opportun:.ty cost of foreign exchange.

Table 13

Comparison of Indian and Foreign Cost Structures

Indian Cost Foreign Cost

Raw Materials 45 45

Supplies and MIoulds 11 9

Fuel and Power 8 6

Wages and Administration 14 22

Depreciation 6 4

Interest 7 4

Profit before Tax 9 10To o 100

3.21 To encourage exports, the Government has granted a number ofincentives to manufacturers. Consisting of (i) export and excise duty draw-back; (ii) cash assistance of Rs 200/ton; and (iii) import replenishmententitlement of 5% of the FOB value of exports to cover the import require-ment of exports. As shown in Table 14, the firms' realization from exportsexceeds realization from domestic sales by about 7%, which is quite sufficientto cover the additional cost associated with exports. Exports are also pro-fitable from an economic point of view, with domestic resource cost ofearning foreign exchange, estimated at about Rs 8/US$.

- 99 -

Table 14

Comparison of Realization from Export and Domestic SalesFor Cast Iron Spun Pipes

Export Domestic

A. Financial Realization by Firms

1. Sales Price 87.5 100

2. Duty Drawback 1.3

3. Cash Assistance Rs 200/ton 16.0

4. 50% Premium on REP's (REP's are 5% of 1) 2.2

107.0 100

B. Economic Cost

Domestic Resource per Unit ofForegin Exchange Earned orSaved in Rs/US$ 8 7

3.22 M1otivated by the need to use the existing excess capacity, andencouraged by reasonable export incentives, the industry has made a goodexport beginning in the Middle East and South Asia. Exports, however, arestill modest and constitute only 2-3% of the industry's output (about4,000-5,000 tons/year valued at Rs 4 to 5 million). To further increaseexports the Government has of late put an e.;port obligation on cast ironspun pipes manufacturers (5% of their output), subject to an export floorprice that is Rs 150 (or 12%) less than the domestic prices, which in-cidentally is very close to the current export prices. Although it isstill too early to judge the effect of this new policy, it can be saidthat it combines two essential elements: the carrot of greater monetaryreward by exporting than by selling along with the stick of export quotas.It also has the advantage of pushing manufacturers into foreign markets toget the feel of international competition, hoping that in the process theywill acquire confidence in their capability and also a clearer awarenessof their weakness, while at the same time removing skepticism and indif-ference among foreign buyers.

3.23 To substantially increase exports, however, two major structuralchanges are still necessary. First, the industry will have to convert pro-duction from cast iron to ductile iron pipes, which are becoming increasinglypopular because of their ability to withstand impact especially from the everincreasing road traffic. Furthermore, because ductile iron is stronger thangrey iron, ductile pipes can be made lighter, which means that materials

- 30 -

costs, handling costs and pipe laying costs are reduced. The conversionto ductile iron will, however, be extremely difficult, if not impossible,with existing melting equipment (cupolas). Tnis is primarily so, becausethe 1ligh ash content in Indian coke reduces the thermal efficiency of cupolas,and tnereby limits cupolas' use to melting high phosphorous cast iron.Because the coke problem is not likely to be solved within the next 5-6 years,the only remaining feasible alternative is Lo use induction furnaces inconjunction with existing cupolas to superheat the metal and adjust itschemical composition. The second structural change consists of shifting theindustry's output from smaller to larger pipe sizes. This entails additionalinvestment in air-cooled spinning equipment to increase mould life, a criticalfactor in production cost, as well as training technicians in using andmaintaining the equipment. The experience of South Korea in this field shouldprove quite valuable.

F. Industrial Castings

3.24 Group B foundries, (Table 12) comprise those foundries producingindustrial castings, such as automotive, machine tools, diesel engines andcement plants castings; as well as non-industrial castings, such as manholecovers, pipes and pipe flanges. About one-third of the industrial castingsare produced by large and medium firms which for purposes of allocation ofraw materials are listed with the DGTD, and the remaining two-thirds plusmost of the non-industrial castings are produced by medium and small foundriesListed with the State Directorates. Very little information is available onthe product mix of the foundries listed with the State Directorates; but ananalysis of a random sample indicates that production could be roughly brokendown as shown in Table 15.

Table 15

Production of Industrial and Non-Industrial Castings (1972/73)(In Tons)

Industrial Non-Industrial Total

Firms listed with DGTD 150,000 150,000

Firms listed with States Directorates

- Medium foundries 150,000 250,000 400,000

- Small foundries /1 150,0G0 450,000 6G00000

Total 450,005 700,000 1,150,000

/1 Firms with a capital investment of not more than Rs 750,000.

Source: IDA estimates.

- 31 -

3.2.5 An estimate of the end-use distribution of industrial castings isshown in Table 16. It indicates a breadth and depth of products that com-pare favorably with the foundry industry of Japan in 1959. This is, indeed,ani impressive achievement considering that the modern Indian foundry in-dustry started only about 20 years ago.

Table 16

End-Use Distribution of Industrial Castings (1972/73)(Percentage)

Machinery, except Electrical 68

- Machine Tools 15- Textile Machinery 14- Stationary Diesel Engines 12- Agricultural Machinery 5- Others 22

Electrical Machinery and Appliances 10

Transport Equipment 17

Mfining and Oil Industry 5

Total 100

S)tirce: 1T)A estimates.

3.26 The rest of this section will concentrate on a review of industrialcastings produced by medium and large firms only. Tne discussion of bothindustrial castings produced by smaller foundries, and the non-industrialcastings which are also produced mainly by small foundries will be deferredto.the section on the small scale sector. Iron castings for industrialapplication are broadly classified as (i) grey and alloy castings, (ii)malleable, and (iii) ductile or nodular iron castings. At present, thereare about 82 iron foundries listed with the DGTD. Of these 60 foundriesare grey iron foundries with a total installed capacity of 350,000 tons/year;12 are malleable iron foundries with an installed capacity of 29,000 tons/year; and 10 ductile iron foundries with a capacity of 8jC30 tons/years

3.27 About 25%. of the installed geyirorln capacity is in four publicsector captive foundries producing castings for industrial7. rachinery. Thelargest unit is in the Foundry Forge Plant at Ranchi (72,000 tonls/year),whose structure and performance has been discussed earlier T'lhe others arethe M4ining and Allied Machinery Corporation (MAMC) producin- mining equip-ment (6,000 tons/year); the Hindustan ?4achine Tools Plant (6,030 tons/year);and Jessops (9,000 tons/year). Average capacity utiliz-azion is roughiy 35%,largely reflecting the very low utilization of the Foundry 'Forge Plant andMAMC.

Table 17

Structure of Iron Fotmdries Listed with the DGTD(1971/72)

i.o. of Installed Unit Size CapacityUnits Capacity Maximum Average Minimun Production Utilization

(in -to-n-s) (ton/yr) )ton7- (ton/yr)- (ton/year;)

Grey Iron

Public Sector 4 93,000 72,000 23,250 6,000 33,000 35

Private Sector 56 257,000 15,000 4,600 500 87,000 34

Sub Total 60 350,000 72,000 5,800 500 120,000 34

Malleable Iron 12 29,000 4,000 2,400 400 18,500 64

Ductile 10 8,000 8,000 2,650 33

TOTAL 82 387,000 141,150 36

Source: Directorate General of Technical Development; Handbook of Statistics 1972,Indian Engineering Association.

- 33

3.28 The remaining 75% of the installed grey iron capacity (about257,000 tons/year) is in 56 private units. About 40% of this capacity is inrelatively medium to large captive units (5,000-15,000 tons/year) producingcastings for their own end products such as automobiles and trucks, dieselengines, and textile machinery. Almost all the captive foundries are quitemodern, well equipped foundries, which have the benefit of foreign col-laboration agreements. The independent foundries are usually smaller job-bing foundries (800 to 8,000 tons/year) that were developed around steelplants, sugar, cement, chemical plants, and diesel engines manufacturers.They are, by and large, older plants using more labor intensive methods andlittle testing equipment. Average capacity utilization of grey iron foundriesin the private sector over the last few years has been only around 35%. Thislow capacity utilization, however, conceals wide unevenness in performance.For example, capacity utilization in foundries producing intricate automo-tive castings is 83%; while it is only 20-25% in foundries for diesel engineswhich have still not yet recovered from the diesel engine recession. Butthere is also a difference among individual plants producing the same pro-ducts with the best performers operating at almost 100% while the poor onesat roughly 10% of capacity. The lowest capacity utilization is in independentmedium-sized older foundries which are producing non-intricate castings, andhence are at the mercy of competition from the small scale foundries whichhave very little overheads, and at the same time, because of little technicalknow-how and/or export marketing capability, cannot compete on the exportmarket.

3.291 There are at present 12 malleable iron foundries listed with theDGTD with a total installed capacity of 28,900 tons per year. Their principalproducts are for the automotive industry (45%), railways (9%), agriculturalimplements (8%) and other (38%). Because they supply growing industries,output has increased from 14,000 tons in 1967 to 19,000 tons in 1972; cor-respondingly, capacity utilization increased to 64%, the highest average foriron foundries. Despite this increase about 60% of the current requirementsof malleable iron castings are met from imports, mostly as components ofvarious types of machinery and equipment, for which the quantities requiredare not yet sufficient for local production. In addition to units listedwith the DGTD, there are about 20 units in the small scale sector with acapacity of 80,000 tons per year producing pipe fittings and some automotivecomponents.

3.30 There are also 10 nodular or ductile iron foundries registered withthe DGTD with a total installed capacity of 8,000 tons per year and productionof 2,650 tons per year. Due to an investment limit of Rs 750,000 to qualifyas a small scale unit, ductile iron is not produced in small foundries.Production of nodular iron in India is still exceedingly low when comparedto production figures in developed countries which have converted a largeamount of their automotive components from forgings to nodular castings(e.g., automobile crankshafts) because the latter combines both the strengthof forgings and the machinability of castings. The Indian cars and coxmercialvehicle manufacturers have not yet made this transition as they are stillproducing older models.

- 34 -

3.31 Because it is clearly beyond the capacity of any reasonably sizedmission, time schedule or budget to undertake a plant by plant survey of allgrouns of iron foundries producing industrial castings, the following surveyis conf ined to:

(i) the automotive grey iron foundries which were identifiedduring last year's intensive survey of the commericalvehicle and the tractor manufacturing inadustries as amajor contraint on development of those industries;

(ii) a small number of medium sized grey, malleable, and noduiarfoundries with the purpose of identifying their prob:.ems andprospects; and

fiii) a review of small scale foundries also to identify theirproblems and prospects.

1. Automotive Grey Iron Foundries

Industry Structure

3.32 By automotive grey iron foundries are meant those producingintricate, neat and wear resistant, thin-walled automotive castings suchas cylinder heads and cylinder blocks for commercial vehicles and tractors.In India, this group comprises five foundries with a total installed capacityof 42,500 tons/year. Four foundries are captive units attached to the fourmajor commercial vehicle manufactures with capacity ranging from 4,000 to15,000 tons/year. The fifth foundry is non-captive with a capacity of 9,000tons/year supplying the requirements of the remaining ten or so smallertractors and commercial vehicle manufacturers (Table 18).

Table 18

Production of Automotive Grey Iron Castings(in tons)

ProductionCapacity Actual Estimated

Captive June '73 1970/71 1971/72 1972/73 1973/74

TELCO 15,000 14,400 16,545 12,672 13,000Ilindustan MAotors 9,000 6,291 6,292 7,451 7,665Mahindra & Mahindra /1 5,500 4,500 5,500 5,500 7,000Premier Automobiles 4,000 3,274 3,191 3,141 3,720

Non-Captive

Etnore Foundries 9pQ0 91,293 7^780 6,532 10,127

Total 42,500 37,758 39>308 35$296 41,512

/1 Estimated.Source: IDA Questionnaire.

- 35 -

3.33 There are appreciable economies of scale in the production ofintricate automotive castings. Some of these economies are derived from thesize of the foundry itself; as size influences capital investment in the sandpreparation plant, iron melting, and airconditioning equipment as well asin selling and research and development expenses. But the more significanteconomies are derived from the total output of each product; and from thesize, iron composition and complexity of the product mix; all of which, bylengthening production runs, affect capital investment in tooling, as wellas operating costs of the various manufacturing stages (pattern making,sand preparation, melting, fettling etc.). Although small in size by inter-national standards, the Indian automotive captive foundries have secured asignificant part of the economies of scale by concentrating on a limitednumber of castings in long production runs. Further cost reduction could,lhowever, be achieved by modifying existing designs. The only non-captivefoundry, although in a much more difficult situation than captive foundriesbecause it has to supply over 10 small tractor and commercial vehicle manu-facturers, has, nevertheless, done an exceptional job by (i) lengtheningproduction runs through an excellent production planning and schedulingsystem; but more importantly by (ii) forcing upon the tractor and commer-cial vehicle manufacturers standardization of iron composition of cylinderlieads and cylinder blocks to only four types of iron. By so doing the non-captive foundry has made a valuable contribution towards consolidating thefragmented structure of the Indian tractors and light commercial vehiclesmanufacturing industries.

Industry Performance

3.34 Production in 1972/73 was 35,000 tons and thus fell by 10% shortof the previous year's peak output of 39,300 tons as against an installedcapacity of 42,500 tons (83% capacity utilization). This drop in production,which is primarily due to power shortages, has further aggravated an extremelytight local supply situation; consequently, direct and indirect imports ofcastings needed to supply both the growing replacement market for commercialvehicles, and new commercial vehicles and tractors increased to between3,000 and 4,000 tons per year valued at US$1.5 to 2.0 million.

Plant Operations

3.35 The mission visited all five foundries. The ratings of thesefirms' operations are given in the Table 19. Using the same yardstick forevaluating the steel foundries as spelled out in para. 2.19, two of the fivefoundries, comprising 30% of the installed capacity, are internationallycompetitive considering the complexity of their products, product range andvolume; and two other comprising about 58% of the capacity will need abouttwo to three years of intensive work to correct structural weaknesses. Themajor operational characteristics of this group of foundries are summarizedbelow.

Table 19

Suntmay _Performance Rati of Automotivv Ijron Foundries

A B C D E Sectoral

MAMIXI'ACTURIG 98 87 71 61 49 73

- Facilities 99 85 64 66 73 76

Plz,nt Engineering 91 84 80 64 48 74

- Maniafacturing Engineering 99 87 60 45 48 66

- Production 100 94 86 58 34 75

- Quality Control 100 86 69 72 53 76

MIATERIALS M4IAAGEMEIT 98 92 88 88 65 86

IITDUSTRILQ REELATIOmS 94 72 86 74 34 73

±F IN Mi CE 100 90 85 63 0 67

ORGAUiIZATICN 100 83 78 51 23 68

AVERAGE: 98 8, 79 67 41 74

- 37 -

Manufacturing

3.36 Manufacturing has an overall rating of 73, largely reflectingthe exceptional performance of one plant. Of the manufacturing functions,facilities have the highest rating (76): On the whole, the automotive firmshave the basic building and manufacturing equipment to produce at theirlicensed capacity. In addition, two firms could also expand production withrelatively small investments in equipment, and two others could appreciablyincrease their production by converting to high pressure moulding lines.Plant engineering, which consists of plant layout, equipment maintenance andhousekeeping, is rated somewhat lower than facilities (74), largely reflect-ing the need to improve maintenance of moulding machines. GOI allocationof foreign exchange for spare parts could go a long way toward alleviatingthis problem and would be an economic way of ensuring fuller capacity utili-zation. As is in the case of forgings, process engineering which is oneof the most important manufacturing functions, is by far the weakest one(66): three firms with about 70% of the capacity do not have suitablepattern making or pattern repair staff; sand technology, pouring techniques,molten metal innoculations, and temperature control all need re-evaluationby manufacturing engineering to improve quality and reduce rejection ratesfrom the current industry average of about 22% to 7% actually achieved bythe best firm. As reaards quality control, the automotive foundries, un-like other foundry groups, effectively control direct and indirect rawmaterials, and castings; but their process control needs considerable im-provement especially in moulding, melting, innoculation, and pouring.

MTaterials Management

3.37 Except in one case, materials management or raw materials, work-in-process and finished products management is good to excellent, and in-ventory levels compare favorably with the best foundries in Europe and theUSA.

Industrial Relations

3.38 The industrial relations record is somewhat mixed (73). Employeebenefits are rated good to excellent, but safety conditions could be improvedin most plants. As regards training, except for one, the automotive found-ries wIave not equalled the performance of the forge shops in training skilledlabor and supervisory personnel in both pattern and tooling repair and inpattern making, and in process control. This is reflected in the high rejec-tion rate. Despite these shortcomings, labor productivity ranges between150-200 man hours per ton of good castings shipped, which compares favorablywith the 30-40 man liours per ton of comparable items produced in Europe andthe USA in much more mechanized foundries, and where wages are 10-15 timeshighe]r than in India. This obviously leaves India with a handsome compara-tive advantage which could be further deepened by improving the training ofsupervisory personnel and middle management in both modern foundry techno-logy and in production management and control.

- 38 -

Finance

3.39 It is difficult to comment on the financial structure and per-formance of the captive foundries because they are not considered as separateprofit centers by their respective firms; e.g., no transfer prices are deter-mined and castings are transferred at cost to other departments for subsequentprocessing. N"evertheless, one can reach a rough conclusion based on the coststructures submitted by the firms in response to IDA's questionnaire. Inthis connection it is interesting to note that the sales price of cylinderlheads and blocks produced by, the most efficient foundry, whicn makes a 10.3%profit on sales, is about 5-15% lower than the manufacturing costs of similarproducts of the other Indian foundries. Admittedly this foundry's pricesare among the lowest in the world; but this difference in cost does indeedpoint to the cost reduction possibilities that the other Indian foundriescan achieve if concious efforts are made to improve process engineering andtraining.

Organization

3.40 Deficiencies in organization are reflected in the problems discussedabove. The major weaknesses include (i) the non-existence of, or low prioritygiven to, important positions or functions, especially materials managementand manufacturing engineering; (ii) the failure to group together relatedfunctions and operations; and (iii) failure to clearly assign duties andresponsibilities. One of the major weaknesses is the lack of competent andaggressive middle management and supervisory personnel.

Price and Cost Competitiveness

3.41 Much of the automotive foundries output is internationally com-petitive, quality-wise and price-wise. Prices of Ennore Foundries, the mostefficient automotive foundry, are 5% lower than the Western world lowestprice producers, Yugoslavia and S?ain; and are 10-15% lower than prices inFrance and Germany. Prices of the other Indian foundries are estimated tobe roughly in line with prices of castings in France and Germany. This isindeed a remarkable achievement for such a young industry, especially inview of the difficulties the industry has to face in terms of availabilityand quality of raw materials, high prices and shortage of power and spareparts, not to mention structural weaknesses inherent in castings using-industries (commercial vehicles, tractors and earthmoving equipment). Afurther indication of international competitiveness is in that the domesticresource cost of saving foreign exchange is lower than the opportunity costof foreign exchange and ranges from Rs 7-8.5/US$ (Table 20).

- 39 -

Table 20

Comparison of Indian and Foreign Cost Structures

Indian Foreign

Raw Materials, Supplies and Power 49 45Labor 21 19Maintenance 4 4Administration and Marketing 7 7Depreciation 5 7Interest 4 6Profit before Tax 10 12

Total 100 100

3.42 In view of the low labor costs in India, in an industry, wherethere are substantial possibilities for economic capital labor substitutionwithout affecting quality, it would seem that the manufacturing cost of thecaptive units could be lowered by 10-15% to the level of the most efficientIndian manufacturer. In this connection, a suggested plant improvement actionprogram was prepared by IDA's consultants, and was made available to the firmsconcerned.

3.43 In addition to improvement in plants operations, the major policyobjective for this group of foundries should be to increase production ofhigh valued automotive castings both to cover local demand and to build astrong export base. Currently, local demand for this group of castings isestimated at about 45,000 tons/year compared to a capacity of about 42,000tons/year and local production of 40,000 tons/year. The demand in 1978/79is expected to increase to 85,000 tons to meet the growing demand for commer-cial vehicles, tractors and earthmoving equipment plus the growing spareparts market. Assuming a capacity utilization of 85%, an additional capacityof 45,000-50,000 tons will be required just to meet local demand. About7,000-10,000 tons could be added through rationalization of production inthe two largest captive units, TELCO and Hindustan Motors; and an additional18,000 tons/year of expansion programs of captive units have been approvedby the Government and are expected to be operational in 3-4 years. Bothactions bring the total expected expansion of captive units to 25,000-28,000tons or about 25,000-30,600 tons below what is required to meet local demandin 1978/79. There are also other projects prepared by new independent units,but these are still in the preparatory stages and would probably take morethan 4-5 years to materialize.

3.44 In any case, domestic production of cast"Ings will fall shortof the requirements of the tractor and small commercial vehicles manufac-turers by at least 4,000-5,000 tons/year in the next two years. Thesewould have to be imported at a cost of US$2-3 million. The fastest wayto reduce this drain on foreign exchange would be through the expansion ofEnnore Foundries. The economic benefits of this expansion would be (i)import substitution of 5,000 tons of castings valued at about US$3 millionin foreign exchange, while castings are produced at Ennore Foundries ata domestic resource cost of Rs 7.0/US$ saved, which is far less than theopportunity cost of foreign exchange; (ii) creation of roughly 200 addi-tional jobs, and (iii) furthering Ennore's contribution to strengtheningthe structure of the tractors and light commercial vehioles industry throughstanidardization. The 5,000 ton expansion program at Ennore Foundries, whichis 75% foreign owned, is, however, facing industrial licensing difficulties,in particular regarding the foreign ownership issue.

3.45 As regards exports, a large number of automotive firms in thedeveloped countries are considering importing a large number of their cast-ings requirements from countries where skilled labor is inexpensive. Itwould, therefore, seem opportune for GOI to develop policies and criteriato attract some of these firms at terms that are beneficial to all partiesconcerned.

2. Selected Industrial Iron Foundries

Plant Operations

3.46 The firms included in this operations evaluation (Table 22)have a productive capacity of 1,500 tons/year to 72,000 tons7ear, andproduce grey, malleable and ductile iron for automotive, electrical, dieselengines, and industrial machinery industries. Using the same yardstickemployed for evaluating the steel and automotive foundries, about 25% ofthe firms visited were competitive, 25% could achieve international competi-tiveness in 2 to 3 years if a corrective action program is designed andimplemented, and the rest could not possibly survive in a competitive en-vironment and will need substantially more time to correct major structuralweaknesses.

Product Planning

3.47 A major ingredient of success in the foundry industry is toselect a diversified and compatible product mix with good growth potential.Diversified, to minimize the risk of being at the mercy of the fortune ofone single industry (e.g., diesel engines recession); but compatible inproduct size, weight, complexity and metal composition, to permit standari-zation in technology, management and marketing. This is exactly what wasdone by the two best firms in this group. The best firm produces highlytechnical, small to medium-sized castings for the electrical, automobiles,scooters industries, and industrial machinery for which the demand is growingand the domestic supply is limited; the second best foundry produces highquality diesel engines castings, using highly labor intensive techniques,

Table 21

Summary Performance Rating of G

SectorA B ID EF 0 Average

Product Planning 100 100 100 20 60 10 10 58

Manufacturing 94 91 75 76 51 45 33 66- Facilities 90 90 88 90 71 49 37 73- Plant Engineering 78 96 65 78 48 78 38 69- Manufacturing Engineering 100 87 67 65 41 25 26 59- Production 100 99 89 70 16 39 37 64- Quality Control 100 86 60 76 61 43 33 66

Materials MWnageriert 81 96 75 - 75 75 75 35 59Industrial Relations 90 79 67 73 70 16 27 42 ;

Marketing 100 100 90 62 0 20 10 58

Finance 100 100 74 35 0 10 10 47Organization 100 100 70 65 25 40 30 61

Average 94 93 75 66 35 30 27 60

_ Top Perforrn<-rice = 100.

- 42 -

but with excellent process engineering and control. On the other hand, thetwo weakest performers are old foundries producing simple castings which couldbe produced more competitively by the small scale industry.

Manufacturing

3.48 'k4nufacturing which consists of facilities, plant engineering,production and quality control ranges from 94, which is excellent, to 33,writh a sectoral average of 66. As in most other foundry groups, facilitieslead the marufacturing function (73) followed by a somewhat lower ratingfor plant engineering (69), reflecting the lack of maintenance on accountof both difficulties in getting import licenses for spares, and weak pre-ventative maintenance procedures. As usual, the weakest manufacturing func-tion is in manufacturing engineering (59) which reflects the lack of properattention to process selection, tooling, sand preparation, innoculation andmelting. Quality control and production functions are rated at a low 64 and66 respectively, largely on account of inadequate process control and lack ofproduction scheduling and control. The major distinguishing characteristicsof the best firms is outstanding processaselection, considerable attentionto tooling and process engineering and meticulous process control. In thisconnection, it is interesting to note that the best two firms are the leastcapital intensive medium firms visited in India. In fact, they could be usedas models for the modernization of the small scale foundries.

Mate-.i4als3angmai

3.49 As in the other functions, there is substantial variation inperformance w th ratings ranging from 95 to 25, with a low average of 59.lere, too9 tthe est firms ha-ve developed-very simple and inexpensive materialshandl4ng aids, coupled With tignt material management, and production planningsysteti, all 9)f whi ch result ir very low inventories. By contrast, verylittle attention is paid to work-in-process in most other firms, therebymaking -t di ficult, if uot impossible, to promptly identify and correctcastings defects.

Industrial Relations

3.50 Industrial relations had the lowest rating of all functionsreflecting unsafe working conditions and, with one or two exceptions, thelack of training especially at the supervisory and middle management levels.As regards training, the experience of one of the two best foundries, whichis managed by an extremiely competent entrepreneur,, should be of interest totihe entire industry. It consisted of retaining a retired university pro-fessor with considerable practical foundry experience to (i) train labor andsupervisory personnel in their native tongue; (ii) adapt modern foundrytechnology to local conditions; and (iii) institute process control methodssuited to small foundries. This foundry also .was a very close liaison withlocal universities and researchl institutions and continuously exchanges ideaswith tlhem. In short, this system provides an excellent model that should beexpanded to the rest of the industry.

- 43 -

Marketing

3.51 Competition in the domestic market is fierce, and castings'prices are very close to the cheapest prices in Europe even at the officialexchange rate. As pointed out earlier in product planning, the key tofinancial success lies in producing difficult castings where competitionfrom the small scale sector is limited, or by producing a diversified butcompatible product mix using labor intensive methods but with much higherproductivity than the small scale sector. None of the foundries visitedhas engaged in any meaningful export activity: they are either efficientfoundries operating at full capacity to satisfy local demand; or they arefoundries with unutilised capacity, but because of lack of technical and/orexport marking know-how, are not in a position to produce and export qualitycastings on a sustained basis.

Finance

3.52 The performance of the firms in the areas above is obviouslyreflected in the financial profitability of the firms. Profit on salesand return on capital exceed 20 and 25% respectively for the best firms,which use their profit for further expansion and broading of products;while the poorest performers are losing substantial sums of money, and intwo cases have a very weak financial position. But, the good performanceof some firms also reflects the excellent financial control system in pro-duct selection and in cost control, which is non-existent at all poorperformers.

Organization

3.53 As would be expected, the best foundries have an excellentorganization. Their top management appears competent, progressive,firm and fair; it delegates responsibility to a technically competent middlemanagement that guides and exercises necessary control at each stage ofoperations. In the other firms, functions are not properly defined, norare they staffed by competent management; and in at least two or threecases there are major organizational weaknesses at all management levels.

G. Small Scale Foundries

3.54 As previously indicated, there are roughly 6,000 foundries inIndia, of which about 5,000 (about 85%) are registered in the small-scalesector. The bulk of the small foundries produce grey iron castings with arather small number producing malleable iron and steel. Total annual pro-duction in the small scale sector is estimated at about 600,000 tons at avalue of US$90 million which represents about one-third of India's totaliron castings output. The bulk of the small scale foundries in Indiaare located around Batala, Ludhiana and Jullundur in the Punjab, Agra inUttar Pradesh, Ahemadabad in Gujarat, Madras and Coimbatore in Tamil Nadu,

- 44 -

and Bombay in Marashtra. With ingenuity and determination, and usinginferior raw materials and minimal equipment, they produce castings of aquality and cost which serve local requirements. Their products rangefrom small 2 kg castings to machine tool beds weighing 20 tons. Most unitswork on a jobbing basis to produce components for transport equipment, agri-cultural machinery, sanitary and agricultural fittings and similar industrialcastings, while some produce castings for manufacturing their own end-productssuch as oil engines and threshers.

Plant and Equipment

3.55 Typical small foundries have an average production of 15 to 20tons of castings per month at an investment in equipment of Rs 50,000 to70,000. They usually have one or two cupolas, with one cupola being operatedtwice a week. Practically no other equipment is available. A recent surveyon small scale foundries in India I/ indicates that 60% of them may have notechnical staff, 60% no sand preparation facilities, 80% no machine mouldingand 88% no chemical or physical test equipment. A characteristic aspect ofsmall foundries is that they manufacture most of their equipment themselves.For instance, cupolas are always made by the enterprise concerned, and so alsoare sand mullers, hand-operated moulding machines, overhead cranes and simplemachine tools.

3.56 Layout at the small Indian foundries do not often contribute to anefficient operation. As foundries have grown over the years, new equipmenthas been added in a haphazard manner without regard for materials flow.In many units most of the work is done in the open air without any shelterat all. Using simple planning techniques, the layout of most foundries couldbe improved radically and with only small expense on relocation of someequipment and purchase of simple material handling facilities (bins, wheelbarrows, trolley lines, geared laddles and hand-operated cranes).

Labor and Management

3.57 There is very little information on employment in the smallfoundries. Unlike the medium and large firms, where there is a disincentiveto employ labor on account of increasing labor legislation and tax advantagein expenditure on new equipment, the small scale sector, which manages tostay out of labor legislation, has a distinct incentive to use labor inten-sive methods. Rough estimates put total employment in small scale foundriesat 100,000 to 150,000 corresponding to a capital labor ratio of US$150-250/jobcompared to US$2,500-3,500/job in the organized sector. Despite this lowcapital intensity, as well as extremely poor and often unhygienic workingconditions, labor productivity in the small scale sector, which is estimatedat one-half to two tons per man month depending on the type of castings,sometimes surpasses that of the organized sector. This high productivityis attributed to the tighter supervision in the smaller units, and also tothe fact that the worker is under threat of being fired if his output isunsatisfactory.

1/ Lalkaka, Rusi: Modernization of Foundreis and Re-Rolling Mills inthe Small Scale Sector; ECAFE, Bangkok, June 1973.

- 45 -

3.58 Most of the foundries are generally proprietorships, oftenstarted by a moulder or cupola operator himself, whose functions consistessentially of securing raw materials at reasonable prices--the key tofinancial success in the business--and in marketing the castings produced.The operations on the shop floor are supervised by a foreman ("mistry") whohas a long practical experience btut no theoretical background. Most of theworkers are paid on a piece-rate basis, and much of the work is done by outsidecontract labor. In Batala and Ludhiana, specialized labor gangs of melters,moulders, and fettlers go from foundry to foundry to light the cupola, chargeit and deliver iron to the moulds; to mould, and to fettle resulting cast-ings. Hourly wages in the small scale foundries (equivalent to a monthlyrate of Rs 150/month for unskilled labor and Rs 250/month for skilledlabor) are 25 to 50% below those paid in the organized sector. Some piece-wise workers, however, earn twice or more the minimum urban factory wages.These modest wage rates together with low overheads and small fixed chargeson investment enable small foundries to sell pig iron castings at aboutRs 1,300/ton, and in small places for as little as Rs 850/ton. In mostcases, prices are 50-70% of the corresponding prices of the larger units.

Manufacturing Methods

3.59 The majority of the foundries are 5-25 years old, and in somecases 60-70 years old. Most foundries are still using extremely rudimentaryfoundry techniques, even though foundry technology has advanced considerablyover the past few years. For example, sand is seldom washed, screened,aerated; the design of cupolas, which is the most economic melting unit forthe quantity and quality of castings produced, is rarely satisfactory; andfactors in cupola operating practices which affect day to day efficiency(such as, air blast, bed coke height, charge preparation and analysis, cokeratio and size, and temperature control) are not usually practised, therebyresulting in excessive material consumption (rejection rate as high as 30%and yield seldom exceeding 55%), inadequate product quality and limitedproduct range. The difficult situation is further aggravated by inadequatesupply of consistent quality raw materials (pig iron, coke, sand), whichnecessitates continuous analysis to adjust the cupola charge, and operationwhich requires relatively skilled manpower and equipment both of which arebeyond the resources of the smaller foundries. To alleviate this situation,the National Metallurgical Laboratory (NML), one of the laboratories of theCouncil of Scientific and Industrial Research, has set up four regionaltesting laboratories, staffed with competent personnel and up-to-dateequipment to provide testing services for sand, coke and pig iron. However,testing could in no way be considered a substitute for a consistent qualityraw materials supply. Furthermore, the cost of testing erodes a significantportion of the entrepreneur's profit, and could, therefore, be used onlyoccasionally.

Marketing

3.60 The bulk of the iron castings is sold within a radius of 100 km,at highly competitive prices ranging from Rs 850-1300/ton, or Rs 400-700

- 46 -

conversion cost. These items consist of pipes, pumps, agricultural implementsand simple machine tools used by small scale industry in the neighborhood.Most small units have, however, practically no idea of the market beyondtheir doorsteps. Some progressive small units, usually started by youngentrepreneurs with technical background, or by a son of a foundryman whowent to college, have, however, established long-term sub-contracts withlarger manufacturers of scooters, diesel engines and machine tools.Their success is based mainly on their technical capabilities and individualmarketing effort. Some firms have also started to export low value, laborintensive items, However, in vie-w of the difficulties and costs associatedwith exports, exporting remains only a marginal interest for prestigepurposes. Yet, if properly organized and assisted, the scope for smallfoundry exports could probably be good. The Agra foundries, for instance,were sending a study team to the Middle East to increase their exports ofweights and measures. This cooperative effort should be encouraged andintensified as it seems the only effective way by which the smaller foundriescould collectively overcome their individual weaknesses.

ModerniatinPrga

3.61 Despite its shortcom'ings in terms of antiquated equipment andmethods, and poor working environment, the small scale Indian founicry indus-try has the distinct advantage of a self-generatinig, self-sufficient industryserving local needs with local human and financial resources that wouldotherwise be underutilized. The foundries ha-ve demonstrated considerableskill and ingenuity in copying machines and equipment and are deliveringmuch needed1 goods at a fraction of the cost of equivalent products from thelarge and medium industry. Ma-ny foundries could be modernized to improveproduct quality and working conditions, to reduce costs and to enlarge theproduct range. One of the advantages of the fotmdry industry for developingcountries is that the technology can be progressively upgraded to suit localfactor prices. Indeed, about half of the best large and medium foundriesthat the mission visited, were started in the small scale sector. Thesefoundries were managed by young technically qualifi ed individuals whohave spent considerable effort in adapting existing foundry technology tolocal availability of rawi materials and other factor inputs, and also intraining labor and supervisory personnel in foundry technology. Todaythey are producing intricate castiigs at prices roughly equal to 70-90%of prices in developed countries at a domestic resource cost of savingforeign exchange equal to Rs S-7/US$. The objective of any modernizationprogram should be to diffuse the experience and knowledge acquired by thosefirms to the rest of the industry.

3.62 To do so will require concerted action by government depart-ments, research institutions, financial and trade associations, on a numberof fronts. First and foremost, a mechanism will have to be developed tosupply small foundries with good quality raw materials in the requiredamounts arnd at reasonable prices. No foundry will spend scarce financialresources to modernize unless it is assured of raw materials supplies, andneither will an entrepreneur devote time and effort to improve production

- 47 -

methods as long as he spends most of his time scouring for raw materialseither for himself or for earning a handsome profit by selling on the greymarket the raw materials that he acquired in excess of his requirement. Thehandicaps and difficulties of the small foundries emanating from poor qualityand erratic supply of raw materials as well as recommendations to cope withthose difficulties were described in paras 3.09-3.11; they are summarizedhere for the sake of completeness. At the government level, these include:(i) increasing capacity and efficiencies of coal washeries and coke ovens;(ii) ensuring availability of foundry grades pig iron through increasedproduction at steel plants; (iii) improving the pig iron loading and trans-portation procedures so as to minimize mix up of various grades of pig iron;(iv) since the foundry industry in India is more or less concentrated inspecific areas, distribution of pig iron and coke should be planned so thatquarterly deliveries are made to various areas and zones. At the industrylevel, the main recommendations consist of setting up co-operative associa-tions to balk-purchase, store and distribute raw materials to their membersaccording to their allotment. Financial institutions, such as the IDBI orits affilliate, the State Finance Corporations, could help promote andfinance such an undertaking.

3.63 The second objective of a modernization program should be thedevelopment of an assistance package covering a gamut of services, includingtechnical assistance; testing and laboratory services; training programs forlabor, supervisory personnel and management; and marketing. A number ofthese services are already available to the foundry industry and only needto be enlarged in coverage, or modified to meet with the changing require-ments of the foundry industry; among those are common testing facilities,some technical services and training for engineers. Common testing facili-ties are provided by the NML at four field stations (Batala, Ahmedabad,Madras and Howrah) which roughly cover about half the number of small scalefoundries. These testing facilities have been quite valuable in identifyingand testing sands from local sources and in advising local foundries in sandpractice, as well as in physical and chemical testing of castings and pigiron. Of late, however, the number of foundry users has dropped followinga sharp increase in testing charges; and it would seem that a reconsiderationof testing charges is warranted to attract more users especially in view ofgovernment's plan to modernize small scale foundries during the Fifth FiveYear Plan (1974-1979). Some technical services (mainly engineering drawingand mechanical testing facilities) are also provided, at nominal fees, tofoundries and other small metal manufacturing enterprises by the Small ScaleIndustries Development Organization (SSIDO) of GOI, through its network ofSmall Industries Service Institutes (SISI); but they could be substantiallyenlarged. Training courses of 8-12 weeks duration in modern foundry techno-logy are provided by NIFFT (Ranchi) to qualified engineers with prioritygiven to engineers sponsored by the SSIDO. Although these courses werereportedly found quite valuable by medium and large firms, they do notseem well suited to the small scale foundries. First, there is a very small,though increasing, number of small foundries run by engineers who wouldqualify for the courses, and secondly, few small foundries could affordto stay without either the owner or supervisor for a period of 2-3 months.

- 48

3.64 In short, there is still a need for mechanisms by whichpractical training and advisory services in modern foundry technology couldbe imparted to a large number of labor, supervisory personnel and managementin the small scale sector. A number of Possibilities could be envisagedranging from government sponsored institutions to private management con-sultancy services. All these forms of assistance have a role to play, butexperience in developing and developed countries alike suggests that oneof the most effective ways to render these technical services is throughagencies that are financed by, controlled by, and accountable to industry.Existing industry associations could develop along these lines to providenight training classes for labor and supervisory personnel, to arrangeinter-plant visits, in addition to the previously suggested role in bulk purchase,storage and distribution of raw materials. Government and internationalorganizations could assist the development of these cooperatives boththrough finance and technical support.

3.65 An important component of upgrading the small scale foundryis the comprehensive modernization program envisaged by the SSIDO duringthe Fifth Five Year Plan. This program, which has been accepted in principleby the Government, calls for supplying a number of selected small foundrieswith a comprehensive assistance package including adequate supply of rawmaterials; equipment and testing equipment on hire purchase or concessionaryterms; financial incentives; and technical and management assistance andtraining. This systems approach to modernization is definitely commendable,and its success will depend on SSID0 developing a flexible framework forhiring qualified personnel to assist the selected foundries in formulating,implementing and following up plant improvement action programs. Hopefully,the inherent ingenuity, copying skills, and keen competitive drive that theIndian foundrymen have amply demonstrated would help propagate the moderni-zation program to the rest of the industry. In this connection, it would beappropriate, after an initial trial period, to extend to those remainingfoundries which have a defini.te modernization program the same privilegegranted to foundries selected by SSIDO.

H. Institutions

3.66 At this juncture, it is worthwhile to examine the major characteris-tics of the competitive and non-competitive foundries visited with a view toidentifying ways and means by which competitiveness was achieved; and toexamine policies and measures that might be adopted to spread the positiveexperience of these firms to the rest of the industry.

3.67 Structurally, except for one or two cases, all efficient foundriesare independent medium-sized units, i.e. not part of or connected to otherindustrial enterprises, and hence have to rely for survival on production ofquality castings, delivered on time at competitive prices. In short, theseare the foundries that are subjected to the bracing winds of competition. Theinefficient firms, on the other hand, fall within one of the following cate-gories: (i) foundries that are either captive or associated with other indus-trial units (i.e., quasi-captive), and hence assured of an outlet for their

- 49 -

products with the additional cost being passed on to the consumer in the formof higher priced end products; or (ii) foundries relying on the production ofsteel ingots that are in short supply to make up for their foundry losses.

3.68 The major operational attributes of efficient firms in order oftheir apparent importance are: (i) a well trained labor force supervised byqualified and experienced foremen, supervisors and engineers; and guided bycompetent and progressive management; (ii) producing a diversified, compatibleand well-designed product mix; (iii) starting with controlled raw materials,(iv) using sound and well controlled methods and processes, supported withproper tooling, and materials management; and (v) finally adequate and wellmaintained equipment. Their competitivenes; is usually achieved by devotingconsiderable efforts on adapting existing foundry technology to local factorinputs, and in training labor and supervisor:r personnel. The inefficientfirms, on the other hand, suffer in varying cdegrees from deficiencies inthe factors (i) to (v), but especially in those of (i) and (iv).

3.69 It would, therefore, seem that the greatest immediate benefits tothe Indian foundry industry could be gained from: (i) increasing the knowl-edge, skill and practical experience of Indian engineers and technicians inthe principles of modern foundry technology, and in training them in processengineering and control; as well as (ii) improving foundry methods to thepoint where already developed modern foundry techniques can be adapted andapplied successfully to local conditions. This obviously entails developmentof a framework for training and for providing advisory services to theindustry.

3.70 There are a number of training institutions in India. Foundryengineers are being trained in the theoretical fundamentals of foundry tech-nology at the Indian Institute of Technology (IIT) Kharagpur, and the IndianInstitute of Technology, Bangalore. More recently, advanced level courses havealso been started at the Indian Institutes of Technology at Powai and Madras.In addition, courses in metallurgical science at both undergraduate and graduatelevels are being conducted by over a dozen Indian universities.

3.71 To help alleviate the growing shortage of qualified engineers, andparticularly technicians, foremen and instructors with practical experiencein the foundry and forge industry GOI, with the assistance of UNESCO, has creat-ed in 1968 a National Institute of Foundry and Forge Technology (NIFFT). Thisinstitute offers four study programs: (i) an 18 month course to train annuallyabout 100-150 engineers with industrial experience as technicians in foundryand forge technology; (ii) another 18 month course to train about 30-50 foundryinstructors each year; (iii) a 3 month refresher course for about 30-50industry sponsored foremen per year; and (iv) an advanced foundry trainingprogram for engineers. In a recent progress report on the activities of NIFFT,UNESCO 1/ found that NIFFT has made a valuable contribution in training en-gineers and technicians. But the report also points out that the programs

1/ National Institute of Foundry and Forge Technology: Report on ProjectResults, Conclusions and Recommendations, UNESCO, Paris; December 1972.

are still too theoretical ard recommends that more emphasis be placed on hiringstaff with more practical experience and orieatation. The report recoguises,on the other hand, that- the type of staff that NIFFT needs to attract willbe in equal demand by industry, and unless NIFFT's scales of remuneration equatethose offered in industry, the desired staff caliber, and accordinl;ly thepractical orientation that 4is so badly needed, is unlikely to be achieved.

3.72 On the creation and transfer of technical know-how, the NationalMetallurgical Laboratory (NML) -one of the research centers of the Councilof Scientific and Industrial Research of 0&1-has published more than 10years ago (1962) a monograph on the occurences of sand and bentonite in India;and it has established four extension centers to provide chemical and physicaltesting services for the small scale industries. It has also conducted pilotplant experiments to produce sponge iron, as a substitute for scrap, usingIndia's large deposits of non-coking coall as a reducing agent. But, otherthan these activities which are of immediate benefit to the foundry industry,the NML is concentrating most of its efforts on long range projects relatedto other high priority metallurgical industries. Furthermore, NML does notseem to have, and is probably unable because of its salary structure, toattract technicans with sufficient nractical experience in foundry technologyto provide adequate advisory services to the industry.

3.73 In short, there is still a need for a mechanism by which practicaltraining and advisory services are effectively given to the industry. Theexperience of developed and developing countries alike suggests that thosesets of services are usually best provided byT institutions that are financedby, controlled by and directly accountable to the industry. The textile andjute research associations in India and the British Cast Iron Research As-sociation are good examples of such institutions. The Indian Institute ofFoundrymen (IIF), a professional association for foundrymen, which has un-dertaken a survey of the foundry industry, could be developed into an in-stitution that could serve as a focal point for an. active exchainge of tech-nical know-how in the industry. HF ofiicials have expressed interest inmoving along those lines, but have mentioned finance as a major impediment.Financial assistance from GOI and international organizations would definitive-ly have a catalytic role in initiating and accelerating the development ofIIF as an independent training-cum-applied R&D association But IIF alsorecognizes that the active participation of the industry in formulating,planning, financing and executing such a program is a sine qua non for itssuccess and accordingly, has reportedly formed a task force to draw up concreteplans for establishing regiona-1 training, advisory and common services centers.

IV. EXPORTS

4.01 The need to export arose for the first time from the vast sparecapacit'5 following the 1966t966 recession. Direct exports 1/ registered animpressive growth from Rs 8.1 million in 1967/68 to Rs 45.1 million in

1/ As opposed to castings exported indirectly in other engineering goods.

- 51 -

1970/71; but grew only marginally since then (Table 22). Despite this im-pressive growth direct exports represent only about 1% of the domestic produc-tion of castings.

Table 22

Direct Export of Foundry Products from India(In Rs Million)

Item 1969/70 1970/71 1971/72 1972/73

1. Cast Iron Manhole Covers 4.60 5.45 5.86 5.34

2. Cast Iron Pipes and Fittings 12.89 16.06 16.63 22.55

3. Cast Iron Spun Pipes 4.50 6.76 5.43 2.88

4. Malleable Pipe Fittings 3.30 7.03 9.77 9.57

5. Other Sanitary and GeneralCast Iron Products 1.19 2.28 1.65 3.22

6. Cast Iron Industrial Castings - 0.08 1.01 0.33

7. Steel Castings 2.74 6.44 1.81 3.59

8. Cast Iron Valves 0.87 1.06 1.02 1.06

9. Other Special Castings 0.09 0.13 0.11 0.14

Total 30.18 45.29 43.29 48.68

Source: Engineering Export Promotion Council.

4.02 About 90% of direct exports consist of low value-added items(items 1 to 5 in Table 22) sold in the Middle East, East Africa and SouthAsia; the rest consists of steel and cast iron industrial castings. It shouldbe noted, however, that industrial castings are intermediates which areusually only exported in engineering goods, and these have increased byabout 16% per annum over the past three years.

4.03 To encourage exports, GOI's new export incentive system currentlyincludes (i) import duty and excise tax drawback based on the net weight ofthe castings; (ii) cash assistance up to 20% on the FOB value of exports; 1/

1/ According to the Export Policy Resolution (1970), the cash assistanceis meant "to compensate exporters for the temporary handicaps .. thatstem from transitional difficulties inherent in a developing economyand to alleviate the disadvantages arising from India's fiscal policiesand tariff barriers in developed economies."

and (iii) import replenishment entitlement (REPs) to cover the import contentof exports. The import replenishment licenses are free foreign exchangeimport licenses issued over and above the Actual Users' licenses, and aresupposed to cover Ain value terms the import content of the exports. Theyare valuable because these are in free foreign exchange and are transferablewithin related industrial sub-sectors; they command a premium of about 50%of the nominal value when sold. Furthermore, to facilitate supply of materials,a certain quota of pig iron is allocated to exporters on a priority basisthrough the Engineering Export Promotion Counci±.

4.04 On the whole, the export promotiort scheme is well conceivedand its administration has substantially improved over the last few years.Yet, as was shown in indivia-ual sections on exports of steel castings andcast i.ror. spun pipes, the system falls somewhat short of perfection in the

sense that the subsidies for export no more than compensate the inaherentbias of the protective system in favor of import substitution without reallyproviding any real promotiona'l push to export. And it is for this reasonthat GOI has recently started to rely on export obligations 1/ for sub-stantially increasing exports. Export obligations definitely have theadvantage of pushing manufacturers into foreign markets to get the feel ofinternational competition, hoping that in the process they will acquireconfidence in their capability, and also a clearer awareness of theirweaknesses, while at the same time removing skepticism and indifferenceamong foreign buyers. Export obligations are, however, a two-edged weapon:

they could also force the export of substandard products earning the countrya bad reputation, or could induce dumping of products with the reduction inexport profits being made up on the protected domestic market thus increasingthe domestic resource cost of foreign exchange earned. And it is preciselyfor this last reason that the Government has rightly imposed a floor onthe FOB export price of engineering products. 2/ In short, while an exportobligation could increase exports, its effectiveness seems likely to belimited unless it is part of a broader export promotion policy which includesthe carrot of greater monetary reward for exporting as compared with sell-ing domestically, along with the stick of export quotas. In any case, exportobligations should be viewed only as a transitional measure to move from thecurrent set of policies, where additional direct intervention and bureaucraticprocedures are designed to counteract the bias induced by previous controland bureaucratic procedures, to a set of policy measures where industrialgrowth is guided mainly by a flexible and less bureaucratic system of taxesand subsidies.

4.05 Export prospects of castings are promising, as there is a definiteshift away from domestic manufacture of castings in developed countries.

1/ Some industries are under obligations to export a certain percentageof their production, usually 5%.

2/ The FOB export price should be at least 25% higher than the CIF value oftradeable inputs.

- 53 -

The foundry industry in developed countries is not only restricted by strictanti-pollution measures but it is also a labor intensive activity whichinvolves the type of drudgery that labor in developed countries no longeraccepts. Automation has helped, but has proved so expensive that its benefitshave been confined to those areas where the offtake is extremely large (e.g.,automotive industry). Encouraging as these prospects are, India will haveto be prepared to face competition from Brazil and Mexico which are emergingas major suppliers to the North American market. Similarly, Spain, Portugal,Italy and Yugoslavia are making increasing inroads into Western Europe; andKorea into Japan. If India is to compete in these markets, it will have todevelop the capability of supplying on schedule castings to internationalspecifications. To do so will require concerted actions from Government,industry, financial institutions, training and R&D institutions. First andforemost, the industry should be provided with consistent quality rawmaterials; adequate transport and shipping facilities; effective export incen-tives; and foreign exchange to meet their maintenance needs. But to substan-tially increase exports, especially in high value castings, will also requirea fundamental change in the structure of the industry. As stated above, onlysome 25% of the firms in the organized sector, with less than 10% of theinstalled capacity, have the technical know-how to produce quality castings;and the rest will need substantial upgrading before they can begin to competeon foreigns market. To transform the industry from an inward to an exportoriented one will entail undertaking a comprehensive rehabilitation andmodernization program covering training, technical assistance, equipment andfinance; similar to the one GOI is planning for the small scale foundries.

4.06 Besides exporting castings directly, there could be substan-tial possibilities of exporting castings indirectly in other engineeringgoods, such as tractors, commercial vehicles and machine tools. As waspointed out, exports of these items has grown by over 16% per annum overthe last three years, but the potential is far greater. To harness thispotential, GOI will have to develop policies and procedures to first of allencourage the engineering industries to upgrade product design--the majorimpediment to export growth. A two pronged approach is necessary: (i)encourage development of local design skills; and (ii) review foreign col-laboration agreements to ensure a continuous flow of new products, methodsand processes.

V. CONCLUSIONS AND RECOMMENDATIONS

A. Conclusions

5.01 The growth of the Indian foundry industry during the last 20 yearshas been impressive. Over this period, output increased eight-fold from250,000 to about 2 million tons and production now embraces most categoriesof castings produced in developed countries. This is, indeed, a remarkableachievement for such a young industry, especially in view of the inferiorquality of Indian raw materials. Since the mid 1960's, however, as emphasis

- 54 -

has snifted from import substitution to exports, it has become increasinglyanparent that the industry has been built on a rather narrow resource andtechnological base; and inadequacy which has been compounded by over-stretchingscarce managerial and technical skills.

5.02 To harness this industry's potential for employment creation andexport earning calls for a long range concerted action by Government; industry;financial, training, and research and development institutions to upgrade rawmaterials; train labor, technicians and management; rehabilitate and modernizeproduction capaclty; and undertake an active export promotion program. TheGovernment is already planning to undertake a comprehensive modernizationprogram for small scale industries along those lines. If successful, thisprcgram will not only increase the competitiveness of the smaller units butwill also have a salutary effect on the foundries in the organized sector inthe sense that competition from smaller foundries could spur the other found-ries to upgrade their products and improve their operations. But, unless thesmall. scale foundries modernization program is accompanied by a similar pro-gram for the foundries in the organized sector, it could also displace andweaken a larve number of medium and large firms without a corresponding im-provement in experts. A parallel modernization program to upgrade and re-orient large and medium foundries towards the export market should, therefore,warrant attention. Foundries with definite modernization programs should haveaccess to an assistance package similar in nature, if not in content, to theone currently envisaged for smaller foundries. If the IIF develop into aneffective organization for training, advisory services and applied researchanid development, it could become one of the technical assistance channelsable to assist oiundries in formulating, planning, implementing and followingup a moderniZation program.

B. Recomnwensiatbor.s

5.03 As noted above arn action program for rehabilitation and moderniza-tion of the foundry industry will require close cooperation of Government,industry, and other Ins1itutions. This section summarizes the major recommen-dations of the report ard presents them under three headings to indicate primaryresponsibility-y-Go'v'ernment, industry, and joint effort.

Role of Government

5.04 It is recommended that the Government consider the following:

1. Raw Materials and Intermediates

(i) Undertake a survey of the foundry industry to more accuratelydetermine its structure, current and expected future demandpatterns and requirements for raw materials and intermediates(para. 3.10);

(ii) Review production and allocation policy of pig iron to ensureadequate supp?.a ces oL appropriate foundry grades; in additidn,

- 55 -

to minimize mix up of pig iron grades, consider implementationof the Foundry Pig Iron Panel's recommendations (paras.3.08-3.09);

(iii) To increase supply and improve quality of coke, consider in-creasing capacity and efficiency of coal washeries and cokeovens (para. 3.10);

(iv) To alleviate steel scrap shortage, develop action plans forincreasing capacity utilization of existing steel plants soas to divert steel scrap from production of steel billetsin small and non-efficient electric furnaces to productionof castings (para. 2.13);

(v) Encourage research and development in processes for beneficiationof Indian coke and in developing substitute raw materials (highcarbon synthetic coke and sponge iron) (paras. 2.14 and 3.10);

(vi) Assist the small scale foundries to develop cooperatives for bulkpurchasing, storing and distributing raw materials (para 3.09);

(vii) Since power shortages are likely to persist for some time to come,ensure that power schedules are strictly adhered to and locatenew power intensive industries in areas where power supply isrelatively plentiful (para. 2.15).

2. Import Licensing

(i) Increase allocation of foreign exchange for intermediates, suchas graphite electrodes, ferro alloys and pipe moulds (para. 2.17);

(ii) To the extent spare parts, cannot adequately be supplieddomestically, consider increasing allocation of foreignexchange for spare parts (para. 2.17).

3. Industrial Licensing

(i) Consider favorably the expansion of efficient foundries suchas Ennore Foundries to relieve bottlenecks on thin-walledautomotive castings required by tractors and commercialvehicles industries and thereby avoid an unnecessary drainon foreign exchange (para. 3.44);

(ii) Encourage development of local design skills. and developpolicies and guidelines for foreign collaboration agree-ments with foundries as well as casting-using industries to en-sure a continuous flow of new products processes and methods(paras. 3.45, 4.06).

4. Export lnceut ves

(W) Review the export incentive package to ensure auequate profitability(paras. 2.32, 4.04);

(ii) Relieve shipping and transport bottlenecs (para. 4.05).

Role of Industry

5.05 The recortmendations vresented unkder this heading are designed pri-marily to help improve plar,t operations anid are derived mainly from theoperational problems of the industry. S eczi-1ic recoumlendations for individualmanufacturers are contained in the conf-identiaI consultants' report which havebeen made available to the foundries concerned.

(i) Product PlannThQ and En g - Rationalize product mix toensure longer production runs and review product designs withcustomers to reduce manudfacturing costs (paras. 2.21, 3.47);

(ii) Manufacturing - Revieu and miodify Thnere necessary productionmethods to reduce costs. Special attention. is needed in (a)tooling, (b) process engineering; (c) process control toreduce rejection rates and increase yields; and (d) preventivemaintenance to reduce down time (paras. 2.22, 3.36, 3.48);

(iii) Materials Handlin& - Review materials management procedures toreduce inventories, and review materials handling methods toreduce work--in-process inventories, and workers' fatigue (paras.2,23, 3,37, 3.49);

(iv) Industrial Relations - Develop effect.Jve training programs forsupervisory personnel and middl1e management, andi enforce safetyregulations ('paras. 2a24. 7 3 38. 3e50);

(v) M:arketing - Undertake, e:Lther inditWduelle or jointly with otherfirms, an effective export promotiona ana marketing campaign(paras. 2.32, 3.5i );

(vi) Finance - In most cases financial reports are not timely and areinadequately followed up, and assignments of costs by productand/or department is not usually the practice, Finance departmentsslhould develop cost reduction nlanis in conjunction with manufactur-ing engineering, productlon engineering, material management andmarketing departmients. This plan should include rationalizationof product mix, ipdating product design, reduction of inventoriesand increasing yields k'paras. 2.25, 3.39, 3.52);

(vii) Corporate Organiza,io - Ratioralize and streamline managementorganization and procedures to clarify responsibilities and groupfunctions in: a logical order (paras. 2,26, 3.40, 3.53).

- 57 -

Joint Effort--Government, Industry and Institutions

5.06 It is recommended that the Government, industry, and other institu-tions collaborate in:

(i) Undertaking a study of expected casting demands and use it as abase for an indicative planning system that would guide investmentin the private and public sectors (para. 3.08);

(ii) Developing export consortia and in establishing trade developmentoffices to promote direct and indirect exports of castings(paras. 2.31, 2.51, 3.59);

(iii) Developing the Indian Institution of Foundrymen into a training-cum-advisory services and R&D institution (para. 3.73);

(iv) Developing a comprehensive modernization and rehabilitationprogram for foundries in the organized and small scale sectorsalike (para. 5.02);

(v) Identifying appropriate sources of sand deposits; developingprocess data for its processing in foundry grade sand; andin setting up 3-4 regional sand plants (para. 2.17);

(vi) Reviewing the structure and operations of training andservices institutions assisting the foundry industry ingeneral and small scale foundries in particular (paras.3.63, 3.71-3.73).

lndlustrial Projects DepartmentApril 25, 1974

ANNEX 1Page 1

INDIA: IDA NfI INDUSTARIL IfPwde CREDIT

DESCRIPTION -OF TERMS AND PRODUCTION PROCESSES

1. In a broad sense, the art of founding may be described as making acavity in the sand and filling it with fluid metal. In the cold state, themetal retains the shape and contour of the cavity and becames a metal casting.

2. The term "iron castings" covers a wide range of iron - carbon -silicon alloys containing from 2% to 4% carbon and 0.25% or more of siliconin combination with varying percentages of manganese, sulphur and phosphorous,and sometimes one or more of special alloving elements, such as nickel, chro-mium, molybdenum and vanadium.

3. There are various kinds of iron castings; they are roughly groupedas chilled-iron castings, grav-iron castings, alloyed-iron castings, malleablecastings and nodular-iron castings. In general, castings are made by mixingand Tielting together different grades of,"pig iron, foundry scrap, steel scrapand l erro-alloys or otlher metals dependihg on the type of casting. Furtherdetails may be found in "Cast Metals Hlandbook" published periodically by theAmnerican Foundryman's Association.

A. Types of Castings

Gras Tron Castings

4. Cray iron castings are made of pig iron, of mixtures of pig ironand steel., or of mixtutres of pig iron, steel and other metals in smalleramounlts. They are frequently sold under trade names, such as Mechanite,Cunite, :Ermalite, Ferrosteel, Gun-iron, etc. Chemically, grav iron castingsinclude a large number of metals covering a wide range in composition, withcarbon varying from 2 to 4 percent, and silicon from 0.5 to 3 percent withsmall amounts of other metal according to the type of product produced.

Nodular Iron Castings

5. Nodular iron, also called ductile iron and sheroid graphite iron, isa relatively new grade introduced around 1948 and is gaining in popularityover malleable casting, due to better econcmy in production. It has been usedfor cezEt£ings having section from 1/8 inch up to 40 inches thick. It is producedby treating molten iron that normally would preduce gray castings with magnesiumalloys. The addition of these alloys results in castings which have the carbonpresent in spheroid form, Castings so miade have relatively high strength andbetter ductility than ordinary gray iron. Several types of nodular cast:ngswitlh varying strtuctures can bce develope-d by alloying, or heat treating.

ANNEX 1Page 2

Malleable Castings

6. They are of two kinds, known as white heart, or European; and blackheart, or Anerican; these terms indicate differences in the process and theproducts and countries of origin. Malleable castings are comparatively softand can be bent without breaking. Malleable castings contain 2.25 to 3.0percent car0o0n, 003 to 0.5 percent manganese, 0.6 to 1.15 percent silicon andsmall amounts of sulphur and phosphorous; the exact composition, particularlywith respect to silicon, being varied according to the type of castings.In the "green" satate, these castings are relatively brittle and possess poormechanical rroperties; therefore, annealing of these castings is essential.After annealing a metal similar to soft steel but of much coarser grain andless dut4ile is obtained.

A1lvd 0ast4^ngs

7. Thlese are used most exclusively for applications where resistance

to wear, to lieat (including elongation), and to corrosion; high strength ofcastings, rigidity, damping of vibrations and amenability to heat treatmentare of prine im;portance. The alloying elements - silicon, nickel, chromium,molybdenum, cooper and titanium. - are used in varying quantities dependingon the type of use. hany of these irons are patented compositions and aresold under various trade names such as Ni-resist, Causal metal, Silal, Ni-Crosilal. etc.

chilled-Iron castings

8. These castings are extremely hard on the surface. Cast iron withsome sections is purposely cooled so fast by chills that.the carbon is re-tained in com ;ined fori, while other sections are allowed to cool :gradually,so that the carf.-on i s retained in -the form found in gray iron, Such castingsare used for rolls and various other articles which require a hard, wear-resisting surface.

B. Processes of Prnduction

9. The products of a foundry vary in size, compiexity, the metal used,the type of castings, the nuiber .of castings produiced, the techniques ofproduction e::ployed, the precision of the castings and the extent to whichthey are finisheci; these differences are -most of ten inter related..

There are several important and quite unrelated stages in theproduction of ironi castings

- Design an;d pattern making

- Preparnatlt of Sand

- o e.l,iakU 4 l

ANNEX 1Page 3

Mold-Making

Melting

Pouring

- Cleaning, finishing and inspectin3g.

Design and Pattern Making

10. Design and construction of the pattern is perhaps the most importantsingle factor in the production of castings. Not only the patterns must bedimensionally accurate, but full consideration must be given to making themmeet the requirements of the foundry equipment and technique. To make the sandmold, it is first necessary to make a pattern of the part to be cast, whichwill leave its imprints in the sand. There are several types of patterns,each fulfilling a specific need. Patterrs may be made of wood or metal, asrequired, and used in conjunction with hand-molding or machine moldingmethods, depending upon the number of castings to be made and the degree ofprecision required. When a large number of castings have to be produced, ametal pattern is made in the pattern room by skilled patternmakers.

Preparation of Sand

11. The quality and composition of the molding sand is very important.It muist contain clay as well as silica and be sufficiently loose to allowgases to escape during casting. The particle size of the sand is also impor-tant as it has a bearing on the surface quality of the castings. Clay contentin thp sand should be about 18-20% to achieve the necessary cohesion of themixture In the mold.

Core- Makln

12. A core is nothing more than a solid shape made of sand. Sand isrammed either by hand or machine or blown into a core box. When the corebox is filled with sand and the excess sand is removed with a straight edge,it is turned over and the box lifted from the core thus formed. The rammingoperaclone sometimes includes placement of reinforcing rods, or wires, forstrengthcning purposes. The cores thuts prepared are baked to make them hard,strong :nnd smooth. There are various processes to make cores. The interiorsurrac(s of c.astings are generally formed by cores, which are inserted inthe mold after the pattern has been withdrawn. In some molding operations,cores aro tused to form exterior surface of castings.

14e) d-14aking

13. Tor mTnning molds, the molder places a pattern on a flat plate andthen p i r mndldlng box, or "flask", on this plate and fills it with preparedS\ * Th,- sanai -; colmpa:c(i uI ,' rarani ng and is finished by hand with specialtoool) t. extI his pattern (f irst part) is removed, the molder having made

ANNEX 1Page 4

half a mold. Theen he makes the second half the same -way and, after removingthis pattern (second part), the two flasks are carefully put together to formthe complete mold. A channel, or "runner", is cut in the sand through whichthe molten netal is poured and also other channels known as "risers"o to allowexcess metal to escape. Sometimes, depending upon the type and shape ofcastings, cores are placed upon the type provided for the purpose in the mainmold, before the two flakes are put together to form the complete mold.Fundamnentally, the inachine-molding method differs little from the processpreviously described for the manual or floor-molding operations, the maindifference being that the ramming and the removal of the patterns from thesand are performed by machine. Also construction of gates and risers willbe performed by the machine. However, the placement of cores, patching andfinishing of the mold still remain as the chief function of the molder.There are Various methods of macking molds. A relatively new molding methodknown as "Disamatic mnolding process" - flaskless molding - lends itself tothe product:on of molds by machine methods without using flask.

PIelt ,ms

14. Cenerally, three types of furnaces are or have been employed byfoundries for melting iron. These are. (1) the cupola furnace- (2) thepneumatic furnace; and (3) the electric furnace.

15. The cheapest and the oldest type, and the most extensively used isthe cupola,oh 4hi ish essentially, a vertical steel cylinder lined with refrac-tory materials . Within the cupola are placed alternate layers of coke andiron; air is foreed through them and the iron is melted by contact with hotgases. The mo:lten. metal dri-s down through the incandescent fuel to thebottom of the furnace and, when the plug is removed, the iron runs intoladles keady ffor pouring operations.

16. The tmaU furnace is used to pr6duct.-, cte-ain high-grade castirons, because tests can bS.e made during the melting process and because themetal is more easy to control in it than in the cupola. The entire charge isplaced ir. the furnace at one time, melted down 4n One mass on heartbi, andtapped w1hen the proper teinperature and composition are reached .

17. Becau-se quel ity can be quite accurately controlled and higher temper-atures securedA the electric furnace is sometimes used in melting cast iron.The entire charge is placed In the furnace at one time, Sitnce the cost isordinarily greater than in the cupola, the electric furnace is generally usedonly wlhen special quality control is required.

Pouring

18. The molten mretal withdrain fro-m the furnace is transferred to therefractorv laale which is carried to the pouring bay where the metal is pouredinto the wolds. The casting temperature and the pouring time must be carefullycontrolled to avoid casting defects. Once the castings have been cooled,they are sibaken ot.The gates aTnd risers are broken off and returned tothe £u1flae-e for reme' ting, while the sand is screened and either thrown awayor sent , for reCu.se

ANNFX 1Page 5

Cleaning, Finisbing and Ins2ectLng

19. Adhering sand is removed by brushing or tumbling in a revolvingbarrel, or by the abrasive action of sand blasting. Rough places and fins incastings are smroothed and settled by grinding and chipping. A quick inspectionis generally miade whien castings are delivered to the cleaning room so that nofurther time may be wasted on defective work. After the.cleaning, a thoroughinspection is made and satisfactory castings are selected for shipment.

20. Certain types of castings - nodular iron and malleable castings, -are heat treated to make castings stronger and more resistant to shock and

-fatigue. The finished castings are placed in the annealing furnace, heatedin the furnace to the desired temperature and cooled gradually to the roomtemperature. The temperature at which the castings are heated and the coolingrate depend on the type of castings.

_ ~ u I | / - I1m

----- -------

0 E D C 03

I I ! -°, - --

l,- --------------- ------------- e-----°iI I | L ] [E

i 9lB

_ _ I

_ ~ ~ ~ ~ ~ ~ ~ ~ ~

ANELX 2

T-NDIA: IDA NlNTH INDUSTRIAL IMPORTS CREDIT

PRODUCTION OF RAIILAY WAGONS

Railway Workshops Private Sector Total

1964/65 6,978 27,564 34,542

1965/66 6,697 26,539 33,236

1966/67 4,707 16,501 21,208

1967/66 3,678 13,596 17,634

1968/69 3,078 13,398 16,476

1969/170 2,917 12,001 14,918

1970/71 2,161 8,964 11,125

1971/72 2,141 6,543 8,684

Source: Handbook of Statistics 1971/72, Indian Engineering Association.

Industrial Projects Department.April 25, 1974>

ANrEX 3

INDIA: IDA hINTH INDUSTRIAL INAPORTS CREDIT

SUPPLY AND DEMAND FOR STEEL SCRAP(O0's tonso )

CumulativeProjected Local Surplus

Demand Supply (Deficit)

1969/70 669 1020 351

197C/71 868 1070 202

1 971/72 1370 1200 (170)

1972/73 1750 146o (290)

1973/74 2050 1790 (260)

197h/75 2170 2050 (120)

1975/76 2310 2270 (40)

1976/77 2600 2400 (200)

1977/78 2870 2600 (270)

1978/79 32h0 2810 (430)

Source: Report of the Committee on Perspective Planning forThe Electric Furnace Industry (1971-1981); SteelFurnace Association of India, Calcutta, Jan. 1973.

Industrial Projects DepartmentApril 25, 1974

ANNEX 4Page 1

INDIA: IDA NINTH INDUSTRIAL IMPORTS CREDITPLANT OPERATIONS RATING SYSTEM

PRODTJCT PLANNING

Product DiversificationProduct Compatibility with r'acilitiesCurrent ?and Long Range PlanningNew or Ezpanded Facility Planning

MANUFACTURING

FacilitiesPlant Site (Major Utilities)3uildings (General Utilization)Capital Equipment

Process EquipmentMateriadl Handling EquipmentLaboratory EquipmentMaintenance Equipment

UtilizationLayout and ArrangementCondition and MaintenanceMiscellaneous Tooling and Equipment

Manufacturing EngineeringPattern or Tool & Die ShopPattern or Tool & Die DesignProcess EngineeringWork StandardsValue AnalysisProcess DevelopmentMaterials DevelopmentNew TechnologyProcess Layout Planning

ProductionImplernentation of ScheduleEmployee PerformanceProduction StandardsMaterials Budget

Quality ControlReceiving InspectionMaterials and Process Laboratory

ChemicalSandPhysical Testi±ngMetallurgy

ANEXPage 2

Quality Control (contd.)Casting or Forging LayoutIn-Process ControlFinal InspectionSpecification Control

CustomerInternal

Gages and DevicesStatistical Analysis

Plant EngineeringMachines and Equipment MaintenanceBuildings and Premises Maintenance--Utilities Planning and MaintenanceMaintenance Materials and Spare Parts! StoreswFacilities Engineering.Plant LayoutHousekeepingJanitorial ServicesTotal Environmental Engineering

N -TEHALS M.AIAGE1NT

PurchasingDirect Materials

ReceivingWarehousing

Indirect 1Materials Receiving.Warehousing

Work-in-Process.Process FlowProduct Control (Scrap and Rework)HandlingFinish StoresShippingTrafficSupplier Follow-up

INDUSTRIAL RELATIONS

S af.etyTraining and EducationPersonnel RelationsCommunity RelationsPlant Security and Fire ProtectionEmployee velf arePersonnel RecruitmentMedicalSuggestion Systems

A1n1iX 4~Page 3

MLARKETING

Domestic SalesExport SalesAdvertisingSales PromotionProduction Programming ForecastingDistributionMarket Research

Product IdentificationMarket ForecastsEconomic Forecasts

ServiceCustomer ServiceTechnical Support

FINANCE

BudgetsFinancial Controls and ReportsCorporate Finance - Long TermPricingOperations Accounting

ORGA1NIZATION

Organization StructureCompetence of Staff

Industrial Projects DepartmentApril 25, 1974

IBRD 11072

70' Mn 0 MAY 1974

AFGHANISTAN 1 *-'. _NDIA

,j p*,te C809!'fire. j MAJOR CENTERS FOR THE FOUNDRY AND FORGING INDUSTRIESJAMMU ,,.'KASHM/R .

. lj Srine7Qgor 5 Foundry and Forging Plants

@ State and Union Territory Capitals

- . > * National Capital| 2 HlhtACHA>. t-t' °0 Other Cities

/PRADESh State and Union Territory Boundaries

JlBteun u S "\ -. International Boundaries

PAKISTAN Lr Atnrc SmlLudhianta ohedn

_3o5 5 ' RPUNJAB

. ~ /AC o terdeeror /\._.T I B E T/ <HARYANAIhj ( . 'X.. T IBET/ D~~~~~~~~~~elhi I/ EW DELHI r5 P 5AES.

wv R A y A S rH A t/ > RRA DESH <-~~~~~~~~~~~~~~s >.%~IKKIM?/ BHUTAN > 0 2 r ~~~~PRA DiSH IkMf

RAJASTHAN CAr L.cknro. oottr L'f\5" SSAH

( / ) o ~ ~~~~~~~~~ ~~ Gonakhpur rS A S S A M /

4 ,X Kanpur < Pirno h'n * ~ ~ ~~FHAZAYA T

Ahm.daboOope nch i 0f' N

.. JJA RAT A p 8 N A

BURMA

- 4 / 5 ANDHRA . t h"~~~~~~~~~~~~~~~RISA2e

AHARA SHTRA

SecBoba - X. 0(

Lo Poonns Boy

,I o fn LANDHR

'Arabian PRA DiS

RARNA TA KA

I ;, d~~engnlor37nX < Ab MOdrOs

0 Coimbotore.o- - .\ uTA/MI/8 NADI AU

II I 0 9IT 2q 300 400 O0 MILES' . ' ~~~~~~~~~~CoOhine

RALA 7 9 o o0 IO 2qO 39 490 895 6y T0, 89 KILOMETERS

Trivenoedru

.0' -:. l iSRI LANKA

' \ / 111e b 7<7nes sh7m 7 k 7 0~~~~~~~~[~I :d.1 ,0- by nh

r ~ ~ ~ ~ ~ ~ ;. .e nA&k7,l77hd,'ffb#.4td'7 i'jh