Diversifying Indian Machine tool Production: Key to Sustainable Trade Competitiveness

By Rijesh Raju, Research Intern, Centad

Introduction

Production of machine tools in India has a long history. As the growth and development of machine tools have significant linkage with the rest of the manufacturing sectors, the government has laid various policies for its indigenous development. As a result, India was able to build a diversified machine tool sector over the years¹. Although heavy import substitution was exercised, imports remained significant in the sector. This was mainly due to the complex and heterogeneous nature of the sector.

The trade liberalisation policies have significantly changed the economic environment of the sector. Now the major issue is to attain better export performance to reap economies of scale, technology diffusion, employment creation etc. And to succeed in external market, industry has to be competitive. So, this paper focuses on the export performance of Indian machine tools during the period of liberalisation. Main concern would be to analyse the export competitiveness of machine tools during this period.

Machine tool export Performance

It was during the Eighties that some sign of export activity was visible in this sector. But, during this period, export was seen as a residual activity by most of the Indian firms. This was mainly due to the late entry in the international market and the negative correlation between domestic consumption and exports ². It was during the Nineties that the situation began to change. Indian machine tool exports registered a steady increase in the early 1990s, picked up in 1997 and started growing from 1999 onwards (see figure 1).

Figure 1 Machine tool Export (1980-2005)

Source: Own calculation based on UN COMTRADE.

In 1991, export was $48 million, increased marginally around $50-60 million till 1996 and jumped to $80 million in 1997. Thereafter it increased progressively and by 2005, India exported $240.7 million worth machines abroad. An examination of the growth rate of machine tool exports during 1980-2005, reveals that the growth rate was significantly higher during the Nineties (12%) compared to what was recorded in the Eighties (7%) (Table 1).

Table 1 Growth rates of Machine tool trade

Since machine tools are complex and consist of heterogeneous groups, it is necessary to exa­mine the product profile of its exports. This will help us identify the nature of specialisation of Indian exporters. For this we have categorised the trade statistics into different groups and find out the corresponding share in total machine tool exports. We first categorised machine tools into two major sub categories, i.e. metal cutting and metal forming machines (see table 2). We can see that Indian machine tool export is primarily concentrated in metal cutting variety but during the Nineties its share has shown a declining trend. In 1980s, the export of metal cutting machines was 55%, which declined to 37% in 1994 to 20% in 2000 and further to14% in 2005. Metal-forming machines, which was only 7% in the Eighties increased marginally to 10% in 2005.

Table 2 Share of MC and MF in India's Machine tool Exports (%)

Table 3 Machine tool export composition (Share in %)

Source: Own calculation based on SITC rev 3, and HS 1992; UNCTAD, COMTRADE.

Table 3 provides information regarding machine tool exports according to different types. Over the years the share of lathes, milling machines and grinders have reduced significantly. On the other hand, the share of tool holders and accessories has increased. Also, the share of forging, hammering and die-casting machines has shown a marginal rise. But, on the whole, there is hardly any dynamism in India's export basket. It is still dominated by low to medium technology intensive products. For example, the share of technology intensive product like computer numerical controls (CNC) machines in total export has declined from 6.9% in 1989 to 3.2% in 2005 (table 4).

Table 4 Share of CNC machines in total machine tool Exports (%)

Source: Own calculation based on SITC rev 3, UNCTAD COMTRADE online database

If we look at the direction of machine tool exports we can see that during the early Nineties the demand for machine tool suffered due to the collapse of the USSR. Developing countries share continued to decline till 1998, thereafter it increased marginally (figure 2).

Figure 2 Destination of Machine tool Export 1993-05 (% Share)

Source: Own calculation based on UN COMTRADE and CMIE, Foreign trade Review.

But since mid 1990s Indian tools are catering to OECD countries. The share has increased from 32.6% in 1993 to 48.5% in 2005. During 1999-2001 the share was within 50-55% range. The share of developing countries has remained around 30-20% over the years. The increase in export since 1997 is largely propelled by demand generated from advanced developed countries. The share is almost stable over the years and recent period has shown an increasing trend. Ten countries namely, the US, UAE, Germany, Belgium, Italy, Singapore, China, Indonesia, Bangladesh and Sri Lanka , are the largest consumer of Indian tools. There too, the US, UAE, Germany, Belgium and Italy accounted for more than 40% share. Major types of machines that India supply to these countries are of simple variety such as capstan turret, central lathe, die-casting and tool holders and machine tool accessories (Exim Bank, 1996).

Competitiveness of Indian Machine tools Exports

During 1980s, most of the exporters moved up the value chain and began to manufacture technology intensive tools. But India failed to diversify its product range and exported mainly conventional machines (Mehta, 1990). Besides, uncompetitive price of products lowered world preference for our products ³. Since the de-licensing of the industry in 1991, already established firms faced increasing competitive pressure from the emerging domestic as well as foreign players. This has made domestic manufactures to become highly competitive not only in the domestic market but also in export business.

Competitiveness is generally identified as the relative efficiency in producing tradable goods. Although the concept of competitive advantage or competitiveness has been widely used in the literature, there seems to be no agreement on what the term really means ⁴. The issue of competitiveness is less controversial at the industry and firm/industry level ⁵. A firm is competitive if it can produce products and services of superior quality and at lower costs than its domestic and international competitors (Buckley, et al , 1998). The ability to compete implies doing better than comparable firms/rivals in terms of sales, market share and profitability.

Traditionally, the basic indicator of cost competitiveness is the unit labour costs, where a relative lower value is expected to provide competitive advantage in the international market ⁶. But attributing competitiveness in terms of prices can be misleading especially in capital good sector where markets are generally imperfect. This is much more relevant in machine tool sectors where international competitiveness requires the use of more advanced design and skill in production process. This shows that while measuring competitiveness one should consider non-price factors ⁷ too . Since there are a variety of factors involved, the empirical analysts often resorted to measures that will be a reflection of these two features. One common measure is revealed comparative advantage (RCA), an ex-post market share measure.

Revealed Comparative Advantage of Indian Machine tool Exports (1980-2003)

RCA was developed by Balassa in 1965 ⁸. The Balassa index tries to identify whether a country has a "revealed" comparative advantage rather than to determine the underlying sources of comparative advantage ⁹. In case of machine tool exports, RCA is defined as the ratio of the share of machine tool export in India's total exports to the share of world machine tool export in the world's total manufactured exports ¹⁰. Since the index is not comparable on both sides of unity (asymmetry) revealed symmetric comparative advantage (RSCA) index has been used to assess machine tool export competitiveness ¹¹. RSCA ranges from -1 to +1 and is positive if the RCA is higher than one (competitive advantage) and negative if it is lower than one (competitive disadvantage).

Table 2.1 India's Machine tool Export competitiveness (1980-2003)

Note: RSCA= Revealed Symmetric Comparative Advantage

Source: Own calculation based on UNCTAD Handbook of Statistics, online database .

The result shows that Indian tools were not competitive during 1980-2003 as the index value remained negative for the entire period (table 2.1). The competitive disadvantage of machine tools increased steadily from -0.16 in mid 1985 to -0.61 in 1996. Since then, there was a marginal improvement in the index and it recorded -0.19 in 2003 ¹².This may be due to the upward trend in exports during the period.

Concluding observation

The analysis of machine tool export behaviour and competitive performance revealed that the export of machine tools witnessed significant expansion during the late Nineties. But the export basket did not exhibit dynamism as India exported simple to medium technology intensive tools. During this period, the direction of trade has shifted to stable markets like OECD. But one area of concern is that we are largely exporting simple machines which are on the end of its life cycle. Moreover, the value addition of these products and their contribution to growth are generally low. Since the demand for these products are transitory, the cost efficiency of making more complex products may become economical in the long run due to increased automation. Therefore, it is necessary for Indian tool producers to shift the level of specialisation to superior value-added products like CNC lathes, turrets etc, which have high-income elasticity. Since such products are fairly competitive in the world market, India should focus on providing low cost, but quality, machines.

The analysis of export competitiveness revealed that Indian tools are uncompetitive in the world market during the trade liberalisation period. It was expected that greater competitive pressure and market opportunity would induce the industry to increase its productive capacity and supply products at the international market without losing its market share. Although some sign of an improvement in the latter part of 1990s was visible, more thrust has to be given to the development of supply capabilities. One posi­ti­ve aspect of export competitiveness has been its changing trend, which means the degree of comparative disadvantage has been coming down with time.

The building up of competitive strength in machine tools industry largely depends on a policy structure which would ensure the stability in the value of its currency along with the necessary infrastructure for skill development. The government should assist the industry to enhance capability by providing it with efficient institutional infrastructure like a highly skilled and well-trained workforce and encourage domestic R&D. The research effort of the industry has to be supplemented by an active supplementary role by institutions like Central Manufacturing Technology institute (CMTI) and Institute of Machine tool Technology (IMTT). To achieve this objective, an improvement in the overall educational system and the establishment of strong linkage between university and industries are essential. Such an improvement would enhance technological capabilities essential for efficient production.

The government should also alter the demand structure for products of the machine tools industry by providing it with a competitive currency in the world market. For this objective to be realised, the maintenance of an exchange rate, which fluctuates within a specified narrow band and a lower inflationary conditions, have to be ensured. Under such a regime, the Indian machine tools industry would be expected to penetrate successfully in the world market.

Notes

¹For a detailed discussion on Indian machine tool industry, its historical development, production and trade see Kumar (2004) and R ijesh ( 2007 ).

²For a description of the development of Indian export prior to 1991, see Dua, (1992), Suvrathan (1991), Mathews (1988).

³Wograt et al, (1993) argue that India's inability to break into the world market is due to factors such as high steel prices in India, lack of quality infrastructure, poor export incentives, lagging exchange rate system and the change in user demand for advanced CNC machines.

⁴One major issue is related to the use of the term competitiveness and comparative advantage synonymously. Although both are related, they are not same. Comparative advantage is driven by differences in the cost of inputs such as labour or capital. But competitive advantage is driven by differences in the capacity to transform these inputs into goods and services at maximum profits. According to Siggel (2006) , the distinction between competitive advantage and comparative advantage depends on the measurement of costs. But these two concepts are closely related because competitive advantage is built to some extent upon the factors that determines comparative advantage and how we manage to maintain this advantage.

⁵Since an industry is an aggregation of all firms involved in similar economic activities, the discussion regarding competitive performance at the firm level largely applies to industry also. Therefore, these two levels will be discussed interchangeably.

⁶This can result for any or all of three reasons: wage rate decreases faster than its competitors, a faster rise in labour productivity than in other countries, and finally a currency depreciation related to that of other countries.

⁷The non-price factors consist of a range of variables, which are often difficult to quantify empirically. These includes market knowledge, marketing skills and ability, and ability to adapt products according to demand, product differentiation, productivity growth, reliability, quality, after-sales services, financing arra ngements, technological innovation, and investment in physical and human capital.

⁸For a detailed overview and application of RCA approach, see for example, Balassa (1965, 1979) and Lee (1995).

⁹According to Siggel (2006) RCA reflect competitiveness rather than comparative advantage because export success is often due to government intervention like subsidies or other incentives provided like exchange rate misalignment.

¹⁰Defined as such, the RCA can be presented as

RCA = --------------- (1)

Where X i m = value of exports of machine tools by India, X w m =value of world exports of machine tools, X i t = value of total manufacturing exports by India, X w t = value of total manufacturing world exports.

Equation (1) shows the ratio of India's export share of machine tools in the world's exports of machine tools to the export share held by India in the world's total export of manufactures. Defined as such, machine tool industry show revealed comparative advantage if its market share of world exports is above its average share of world exports, i.e., RCA is greater than one.

¹¹The index ranges from one to infinity for products which countries have competitive advantage but only from zero to one competitive disadvantage (Lapadre, 2006). The Revealed Symmetric Comparative Advantage index is defined as

RSCA =

¹²We were unable to extend the analysis because of non-availability of world export of machine tools and manufacturing exports for the latest years.

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February 14, 2008