BHARAT FORGE LIMITED Forging Leadership

Winner of 2005 AIMS Best Case Award

This case has been written by J. Ramachandran, BOC Professor of Business Policy and Sourav Mukherji, Assistant Professor of Organisational Behaviour, both at the Indian Institute of Management Bangalore. The authors are grateful to the management team at Bharat Forge Limited for their help and support in writing the case. This case was developed solely as a basis for class discussion. It is not intended to serve as an endorsement, source of primary data or an illustration of either effective or ineffective management. © 2005, Indian Institute of Management Bangalore.

1

Mr. Baba Kalyani, Chairman and Managing Director of Bharat Forge Limited received an email from two of his people who had gone to visit the company’s recently acquired subsidiary, CDP Bharat Forge GmbH, in Germany. The email read:

Dear Sir

We had been to CDP two weeks back as part of Technical Exchange Programme.

When we entered the facility in Daun we found something missing at the entrance.

It was the signboard that did not have Bharat Forge name included. We made a

request to our colleagues in Daun to change the name to CDP Bharat Forge. Our

colleagues in CDP responded immediately and we could see the signboard at the

entrance in four days.

Well the incident does not end here!

Few days later, we met one Indian gentleman, Mr. Hans Raj Bally in front of

factory gate. Mr. Hans Raj Bally has been living in Daun for 23 years and works

in Daun. He told us how proud he felt seeing an Indian flag in Germany and that

too in a small town like Daun. He got down from his car to salute the Indian flag

and the person who made the Indian flag flying high in Germany. He added that in

his entire career of 23 years in Daun he never saw this happening and never could

imagine that something like this would ever happen.

Thankfully and proudly we would like to convey the salute of Mr. Bally to our

Chairman and Managing Director, whose entrepreneurship and great vision has

made it happen.

Regards,

Niyaj/Raskar (CDFD-ENGG).

Baba Kalyani smiled as he read the email. He and his management team (Exhibit 1) had done what many believed to be rather difficult for manufacturing companies from an emerging economy like India to do: achieve global scale. In mid 2004, BFL was the second largest forging company in the world, behind ThyssenKrupp Automotive Group of Germany and ahead of Sumitomo Metal Industries of Japan. More importantly, the planned expansion of its capacity and its willingness to pursue other acquisition opportunities could very well see the company emerge as the global leader in the near future. In his annual report to the shareholders, Baba Kalyani wrote:

In an atmosphere where Chairmen and CEOs are advised not to say anything about the future, I have no hesitation in saying that my management team and I are optimistic about our future performance. Looking at the order books, and the de-risking of the business model that we have carried out, I see Bharat Forge continuing on its growth path.

2

Baba Kalyani’s optimism stemmed from the stellar performance of the company over the last decade. During this period, even as it coped with severe downturns in its major markets, the company had more than doubled its turnover and nearly quintupled its profits (Exhibit 2); expanded capacity (Exhibit 3), improved productivity (Exhibit 4), moved up the value chain (Exhibit 5), diversified its product-market portfolio (Exhibit 6), improved its speed to market, upgraded its technology, became India’s largest exporter of auto components and emerged as the world’s largest axle component manufacturer with a market share of over 25%. To sustain its growth momentum, BFL is investing Rs 3.5 billion to double its forging capacity, expand its machining capacity and set up a new product testing and validation facility. The new capacity was expected to be fully operational by the last quarter of the financial year 2004-05. BFL’s decision to invest in fresh capacity was influenced in part by the buoyant market conditions in both domestic and overseas markets, and in larger part by the changing dynamics in the global automotive industry. Faced with renewed competitive pressures, the global auto majors are triggering a fresh wave of rationalization in the industry supply chain (see Annexure). The traditional suppliers to the auto majors out of Europe and America were finding it difficult to meet the further reduction in prices that was being demanded of them. The earlier waves of restructuring had resulted in erosion in the profits and capital efficiency of the auto parts suppliers, as the OEMs had typically been unwilling to compensate them for the additional capital they had invested. The search for lower cost was leading the OEMs (and their suppliers) to low cost destinations like India, China and Thailand. Among the low cost destinations, India was fast emerging as a destination of choice because of the superior design and engineering capability of the Indian auto component industry (Exhibit 7). Several global auto majors including Daimler Chrysler, Toyota, Cummins, Ford, Volvo etc set up offices in India to source auto components from here. The global OEMs were, in addition to low costs, placing significant emphasis on the suppliers’ ability to undertake value added services such as design, engineering, product testing and validation. BFL, with its state of the art technology, global scale & presence, membership of the Kalyani Group (Exhibit 8) was best positioned to exploit this growing trend of sourcing from India. BFL estimated its addressable market opportunity to be of the order of US$5 billion. Baba Kalyani said:

Fundamentally our competition today is vulnerable on cost. My cost even 25 years ago was lower than theirs, but I was not able to match their quality. Today our manufacturing side is on par with best anywhere in the world and at a cost that is lower by almost 20-25%! The challenge for us now is to move from just being a manufacturing enterprise into a full service enterprise. We need to be able get into in an automotive platform right at the beginning - right from the concept design stage. And that is the front end that we are now putting together. It will take us about 4-5 years to build up the capability. And once you build that capability, then the world is at your feet – you can do anything

3

The Foundation Dr. Neelkanth Kalyani, Baba Kalyani’s father, established BFL in 1961 at Pune1 in India. The Kalyani family was based in Karad, a small town near Pune, where they were involved in farming and agriculture. Over several generations they had become close friends of the Kirloskars – an industrial house with a strong presence in engineering industries. The Kirloskars, who resided in neighboring Kirloskar Wadi, would pay a visit to the Kalyani household every time they went to Mumbai as Karad was en route to Mumbai. In the early sixties, the Kirloskars needed a supplier of forged components for their engine manufacturing unit and they encouraged Dr.Kalyani to enter the forging industry. While the idea was mooted in 1961, it took Dr.Kalyani four years to get the license from the Government of India, and finally the plant was setup in 1966. Since there was no technological base available in India at that time for setting up a forging plant, technology was obtained through a technical collaboration with a Cleveland, US, based company. The collaborators provided ten engineers who stayed in India for the next 5 years and helped Dr. Kalyani establish the forging plant. Baba Kalyani joined the organization in April 1972, after completing his masters in engineering from MIT in Boston. Baba Kalyani recollected:

I did a three-month stint at our collaborator’s plant before coming back. I became the plant manager in December 1972 and remained one for the next 21 years! I could run every machine on the shop floor and knew the business like the back of my hand.

By the middle of eighties, BFL had established itself as the market leader. The company had also made a foray into export markets with mixed results. While its exports to Russia were steady, its participation in the more developed markets of the world was highly sporadic. Baba Kalyani said:

Right from the beginning my dream was to export. Having studied in the US, I felt a strong desire to export our products to the developed markets of the world. But it took us almost ten years to get our first export order. I worked very, very hard, my people worked very, very hard – I had a willing workforce; a willing management team, and of course I was willing to do whatever it took. But it took a long time and those were very frustrating ten years. This was because we were just not capable of producing consistent quality across several lots of production. We could not produce 5000 pieces of crankshaft of consistent parameters. Nobody in India could do it at that time. In fact, very few in India can do it even today! It then became clear to us that we got to change the way we produce. It is simply not possible to consistently produce high quality products with a manual process, however good and well trained our people are. And our people were very good. I realized that to compete in advanced markets I would need to modernize our facilities and deskill the process. We needed to replace muscle power with

1 Pune is ~ 200Kms South-East of Bombay

4

brainpower and design our processes in such a way that we use brainpower as inputs rather than muscle power as an input.

Until the late 1980s, BFL, like all other forging companies in India, had a conventional hammer shop for making forgings. The capacity of the plant was enough to meet the monthly demand of 3000MT. Since most of the hammer shop operations are manual, it took anywhere between three and five minutes to make one forging. Also there is little consistency in the jobs that are done. In sharp contrast, the alternate method of producing forgings in a press shop was substantially superior both in terms of consistency in quality (due to high degree of automation) and productivity (it took about 40 seconds to make the same forging in a press shop). Mr. Gopal Agarwal, Executive Director, said:

One of the key factors for succeeding in the developed market is to make the customer comfortable with your facility. They expect to see facilities that are comparable to facilities abroad. But when they saw our old forge shop it was difficult to get business from them because of the impression our plant and technology gave them. They would not buy even though our price was much lower because they did want to risk disruption in their supply. So the first step was to upgrade everything. Mr. Kalyani took that decision in 1987, which created a foundation for us to be able to talk in the language that our customers wanted to hear from us.

Modernizing Operations BFL upgraded its technology by installing fully automated press lines for manufacturing forgings. Baba Kalyani recalled:

There were two directions to follow at this stage. We could have gone with smaller capacity presses and be one of the few hundred forging plants that exist across the world. Or we could go with the biggest and break into the top five of the world. We chose the second option. I was confident that we could do it. The experience of being here, running the plant successfully all these years – all contributed to the confidence. I knew that if we leveraged our intellectual capabilities, we would be a winner in the global market.

Between 1987 and 89, BFL invested about Rs. 1500 million and installed two state-of-the-art forging Press lines from Muller Weingarten, Germany with a combined capacity of 22000 MTs. Such an investment was way ahead of its time and was written off as a ‘white elephant’ by popular press; especially since even the old hammer shops were not operating at full capacity at that time. Internally too, there was plenty of skepticism, not all of which was without a reason. The technology was new and except for a select few, nobody knew how to operate a fully automated press line. Baba Kalyani said:

Forging as a technology is not very complex. But there are lots of ‘touch-points’ that are technology intensive. This adds to the complexity. There is a little bit of

5

‘black-box’ that needs to be dealt with. But this is also what makes India competitive; we are extremely good at dealing with technology intensive touch points. Indians do not have superior manual skills or the strength and energy of a European or an American. Our capability is more intellectual. But, to leverage that, we need to do things differently. We needed to run the operations with knowledge workers. That is what we did.

Reengineering Work BFL decided against upgrading the existing workforce, as it would have called for changing the then prevailing work culture. It opted instead to staff the new press shop with freshly recruited white-collar employees, each of them, at the very minimum, a science graduate. The company made conscious efforts to ensure that the work practices and attitude existing in the old shop did not influence the freshly recruited workforce. For example, while the hammer shop work force was characterized by narrow specializations like a ‘fitter’, a ‘grinder’ and a ‘machinist’, the employees in the press shop were trained to be multi skilled. The new recruits were paid higher salaries and provided with facilities and infrastructure that would help them to deliver high productivity. A new canteen was built very close to the facility so that the employees could adjust their schedules and there was no stoppage of work during the lunch hour. This was in contrast to the working of the hammer shop where the lines were stopped for an hour for the employees to have their half hour lunch break. The employees recruited for the Press Shop were a younger lot – mostly in their late twenties and early thirties - comprising engineers, technical experts and computer literates. The young work force took to the new facilities and demanding work norms very enthusiastically. Teams on the shop floor were also given considerable autonomy to decide the best way to run the operation and continuously improve it. As a consequence, shop floor issues got resolved in half-as-much time as before, since engineers on the shop floors used their discretion rather than refer them to higher levels of managers. This directly led to faster response times. Baba Kalyani noted:

Our aim was to become a global organization. In a global organization, you don’t break a problem into tasks. Rather, you take a problem, put cross functional teams in place, put a time frame and business processes and fundamentally bring together people from different fields of expertise like engineering, manufacturing, quality and so on and allow them to solve the problem. The challenge was to institute a system driven management rather than one that is driven by the hierarchy. This transformation was imperative. But bringing about this change is difficult because this is where we, as Indians, are very weak. We are great individually, but we do not know how to conform to systems and work as a team.

Predictably, the new recruits in the press shop were seen as a ‘privileged’ lot and that caused dissatisfaction among the older employees. However, it did not snowball into a crisis, largely because of the trust that employees had in Baba Kalyani. Dr. Chandak, Vice President (Human Resources), remarked:

6

All our employees have seen him slogging on the shop floor every day and have developed tremendous respect for him. He used to come to office at 7:30 in the morning and work till 7:30 in the evening, and of those 12 hours, he would spend more than 6 hours on the shop floor. He would know at least 60 to 70% of the shop floor employees by their names. And he would share lots of information with them - both good and bad. This was not the prevalent norm in manufacturing companies in those days, especially in the shop floor. Mr. Kalyani would tell them what he was doing and more importantly why. He was able to convince the employees that what he was doing and (what he) was asking them to do were in the best interests of the organization and its people.

BFL also gave the older employees an option to retire early and many chose to do so. For the remaining employees, BFL initiated several training programmes to upgrade their skills in technology, operations, inspection and handling of instruments. On the financial side, they were provided with perquisites like loans to buy two-wheeler etc. Implementation of the new press lines took two and a half years, which was more than what was initially planned for. This was largely because, apart from four people at the top who had significant experience, the entire team was made up of fresh recruits straight out of college. However, once the line was stabilized, it resulted in dramatic cost reduction on the shop floor. It enabled the company to save about Rs. 6000 / MT in variable costs alone. Other savings included extension of the life of the die – impression of a piece that is used to make a forging – by nearly two and a half times. If BFL could make 1000 pieces with a singe die in a hammer shop, it could make 2500 pieces with the same die preparation on a press line. Acquiring Customers The first big break came when Rockwell International2, a joint venture partner in one of the companies in the Kalyani Group invited BFL to send in its proposal for supply of forgings. Rockwell planned to shut down its forging plant in Newcastle, Pennsylvania and source its requirements from the market. BFL’s proposal was cost competitive and it was short listed along with suppliers from Brazil, Hungary and Japan. Rockwell employees visited the facilities of all the short listed candidates and gave a very positive report about the technological capabilities of BFL. And, BFL was awarded the contract to supply 30% of Rockwell’s requirements. BFL performed extremely well on all parameters of cost, quality and delivery. Extensive efforts were made to remove any apprehensions that the customer had about dealing with a supplier who was located several thousand miles away. A resident engineer was posted in the US; stocks were kept in a local warehouse and potential bottlenecks in the supply chain resolved. Agarwal remembered:

Initially there was a lot of resistance, at least psychologically. How can one deal with a supplier who is 10000 miles away? Can they match the levels of services that are being currently provided? For example, in our business, the customer needs

2 currently known as ArvinMeritor

7

supply of parts two to three times a day. And they do not want to stock. The service is not only in terms of delivery, but also in dealing with complaints and doing some joint development. So they want a person to be available there, one whom they can meet and monitor etc. We therefore stocked 30 days inventory in warehouses located close to the customer such that we can deliver them as many times as was needed. We posted a resident engineer there. Our key people who interact with them were ready with multiple entry visas so that they could be with the customer at short notices. Over and above that we had weekly telephone conferences with teams comprising experts from quality, production, technology along with sales personnel.

Within two years, following the failure of the principal supplier to cope with the volatility in customer’s demands as efficiently as BFL did, BFL was supplying 70% of Rockwell’s requirement. Agarwal explained:

Suppliers from the developed nations work on a business model of predefined capacity allocated to a steady set of customers. But we have flexible capacity to accommodate any incremental demand. Our old shop acts as a reservoir of capacity, and we can also start a third shift, if required. Thus, if somebody’s requirement goes up, we can absorb it. More importantly we never charge them a premium for it. Obviously this is risky, but one can live with it provided one has a good sense of the market and the potential customers.

I remember the Vice-President of Purchasing of one of the customers asked me ‘Gopal, what is your capacity?’ And I told him, ‘my capacity is what you want it to be.’ He asked, ‘what do you mean?’ He thought that I did not understand his question. So he said, ‘no, no, I want you to tell me about your production – how much you are selling to somebody else, and how much more you can do for us?’ So I said, ‘Craig, I will do what you want me to do’. Then he said, ‘can you do 9000 front axle beams?’ I said yes. So it became 9000 beams!

There are two ways of making an investment decision in our industry. One is to look at total demand, analyze how much the existing suppliers will be able to meet and then plan for meeting the residual demand. However, we do it the other way round, based on one-to-one relationships. If we come to know that Meritor is investing and we sense that they are willing to increase their involvement with us, we go ahead and invest. Sooner or later, they will increase their purchase from us. Mr. Kalyani is always very aggressive in making such decisions. That has gone a long way in making Bharat Forge an agile and dynamic organization in the eyes of our customer.

Widening the Footprint

Notwithstanding the successes it met with in the export market, BFL continued to depend heavily on the domestic market. The growth in domestic demand fuelled by the economic reform program undertaken by the Government of India in the early 1990s to accelerate growth of the Indian economy, resulted in BFL further consolidating its leadership of the

8

domestic forging industry. BFL had a well-diversified customer base that included virtually every OEM in the country. Even though many of these OEMs had historically built up captive forging capacity, they increasingly preferred to source forgings from BFL to meet their growing demand, as the company was cost and quality competitive. By mid 1990s, BFL had 55% share of the market for heavy forgings and 85% market share in machined crankshafts. The company offered the widest product range in the domestic market. In addition to supplying forgings to the automotive industry, the company supplied non-automotive forgings to customers in sectors such as diesel engine, earthmoving, cement, sugar, steel, and oil and gas industries. The burgeoning growth in the domestic market prompted BFL to further expand capacity. In 1996, it entered into a technical agreement with MetalArt Corporation, Japan for small forgings and set up two mechanical lines with a total capacity of 6500 MTs for manufacturing small forgings. The company also decided to set up new machining facilities for crankshafts, front axle beams and heavy steering knuckles that would make it one of the largest independent crankshaft manufacturers in the world. But even as the company was implementing the capacity expansion projects the domestic market went into a steep downturn and the company found itself in a crisis. Baba Kalyani said:

Until the previous year 1995, every one of our customers was projecting huge growth. They were constantly urging us to expand our capacity. And when we did, the demand collapsed! It took us all by surprise. Nobody anticipated it, including our major customers like Tata Motors etc. We had spent so much capital in creating capacities that we were in a bad shape. We started by doing the standard things like delaying the commissioning of the new facilities, working three days a week, and when that was not enough, started laying off people etc. But then we sat back and started analyzing what happened. I have to give credit to our senior management team who thought about this in great depth. We came to the conclusion that this is not a recession. This is not a down cycle that is going to get over in a year or 18 months, but this is a structural change. And the only way to survive was by getting a larger portion of the global market. So we started to shift gears.

Restructuring Finance and Operations The downturn in 1996 led BFL to actively focus on its cost structure. One of the cornerstones of its cost reduction strategy was to focus on its financing costs. As a first step, in 1997-98, the company repaid two major high cost loans amounting to Rs 1000 million. Next it moved towards what it called “dollarizing” its balance sheet. It started mobilizing debt from the international capital markets as the interest rates where much lower and by 2004, 88% of its debt was in the form of foreign currency loans. While overseas capital subjected the company to currency risks, its exports acted as a natural hedge against this risk. To improve its ROCE, the company decided to reduce its exposure to financial assets. In 1996 over half the company’s total assets was invested in financial assets, which yielded substantially lower returns than its manufacturing assets3. It first divested its portfolio investments, then divested the holdings in group companies, and finally spun off the remaining assets that were not core to its manufacturing

3 One internal analysis found the difference to be an order of magnitude (20% on manufactured assets vs 2% on financial assets)

9

operations – that included the investment in windmills it had undertaken to take advantage of tax and power tariffs credits that reduced its cost of power – into a separate entity called BF Utilities Limited through a process of de-merger. By the financial year 2000-01, BFL emerged as a fully focused manufacturing company with only those assets that were relevant to the core business in its balance sheet. Efforts were made in parallel to reduce operating costs. BFL reduced its energy costs by optimizing its operations, which included optimization of motor loads, modification of furnaces and transferring jobs to energy efficient units. It cut its manpower costs by eliminating non-value added jobs through a voluntary retirement scheme and by redeploying workers to direct production related areas. Simultaneously it rolled out a programme called “Vikasachi Navee Dalane” (New Horizons for Progress) in vernacular Marathi. Almost all employees were taken through workshops that ran them through the evolution of Bharat Forge over the past three decades, and where the organization was poised to go in future. The company also launched several initiatives like ‘Kaizen’, ‘TPM’ and ‘5 S’ to constantly upgrade the competencies of the workforce and keep them up to date with the latest tools and techniques in operations and management. Later, BFL entered into an agreement with Birla Institute of Technology and Science, Pilani, a leading engineering school of India, under which employees of the company could pursue a part time engineering course for a B.S (Manufacturing Engineering) degree. To reduce the material cost the company streamlined its vendor management processes. It reduced its vendor base and only engaged with what it called the “chosen and trusted” few – those that had the scale and quality standards to meet with its increasingly demanding standards. To reduce transaction costs it developed a low cost system where even the smallest vendor could log into its supply chain system. It deployed an integrated supply chain system, which provided the operating managers with real time visibility of material requirement and inventory throughout the chain and provided decision support at all stages of the operations. BFL replaced its multi-level organization, where shop floor feedback of manufacturing changes took ages to implement, with a three-layered structure. The first was the operating layer comprising employees who run the manufacturing process. The second layer comprised the middle management who had been converted from their supervisory task-oriented roles to becoming problem solvers. The third layer consisted of the senior management that provided leadership and strategic direction over and above managing organizational performance. To bring about greater transparency and objectivity in its performance management practices, particularly to identify and reward performers, the company rolled out a new performance management system. Dr. Chandak remarked:

While we had HR practices in place from early nineties, we felt the need for change and revitalization. Today we actively involve the departmental managers in understanding the pulse of the organization – aspirations, level of confidence, gaps, if any, in the alignment of both people and processes, with the organizational vision – and in formulating performance evaluation parameters.

The above measures, which were rather demanding on the management team, enabled the company to improve its cost structure. In a letter to the shareholders, Baba Kalyani wrote:

10

Any management team can deliver results during booms. The test of a disciplined, proactive management is not only how it can weather slumps, but also use the period of adversity to reengineer the company to widen its footprint, cut costs and implement strategies that overcome adversity.

Growing Exports Simultaneously the company embarked on the exercise of reducing its dependence on the domestic markets. It actively searched for opportunities to grow its exports. Its existing relationships with overseas customers enabled it to achieve fresh breakthroughs. Its relations with Meritor proved to be particularly helpful. One of the plant managers of Meritor had joined Metaldyne, a company that was a supplier to Caterpillar. Metaldyne was facing quality issues with its existing US based supplier and the plant manager recommended BFL as a potential supplier to his new firm, since he had, while at Meritor, good experience in dealing with it. BFL was asked to send a response to their query. Agarwal recollected:

Our response went within five days and it ran into sixteen pages. Over and above the price, we explained our manufacturing process in detail with diagrams and flow charts. They were quite impressed, both with the response time as well as by the comprehensiveness of it and asked for a teleconference. This ran into couple of hours, where they clarified a lot of their doubts. At the end of it, they told us that they would like to visit our facilities for evaluation. Three weeks later they flew down. We took them around to show our facilities. When they came to the press shop, they asked, “Whose part is being forged? It looks very similar to ours.” We told them it was their part that was being forged. This took them completely by surprise and they asked “How can you be making our part, when we never gave you the order”. We said, ‘if four of you are coming all the way from the US, it means that you are seriously interested. Now what you want to find out is whether we can make the part or not. Two of you would say, ‘yes, you can’, and two of you might say, ‘I am not sure’, so how do we prove it? The best way we thought was to show the actual product to you! We thought if you are spending 5000 dollars to come here, we should be willing to spend 20,000 dollars and develop this part’. When they were going back, we gave them the sample so that they could test it in their lab. After the testing, they called back and told us, ‘the program is on!’

It was during this time it became apparent to BFL that to break into the fiercely competitive global market it would need to stretch itself and respond faster than the existing suppliers of their potential customers. While its willingness to create capacity ahead of demand provided it with opportunities to gain a toehold with customers, it realized that to gain a pole position in the customer’s account it would need to redefine its value proposition in a fundamental way. It sought to do this by radically improving its designing skills and adding value to its product offerings.

11

Building Design Competence Designing is an important part of the process of manufacturing forgings. An optimal die design improves the life of the die and an optimized forging sequence reduces the number of forging stages. Additionally, a faster design process reduces time to respond, a parameter that is important in export markets. Hence, BFL decided to revamp its designing process from a manual one in which draftsmen developed the design with pen and paper, to a computerized one using CAD/CAM/CAE4 systems in which the design is first done on the computer and then directly downloaded on to the forging shop to be converted into a forging. State of the art three-dimensional finite element based computing simulations enables the designer to create a virtual forging shop and carry out multiple forging experiments. This dramatically increases the success rate of actual forging operations in terms of accuracy, consistency and life of dies. Correlation analysis is continuously carried out on multiple parameters between the simulation and actual results obtained and the results stored in a database. These results help designers refine their simulation models and draw better conclusions from the simulation results. BFL describes this entire engineering process as “Print to PPAP5” (Exhibit 9). Mr. Madan Takale, Senior Vice-President (Engineering) said:

Today, we have the capability of developing forged components based on two-dimensional drawing supplied by our customers. While the customer provides details in terms of the product specification, geometry, microstructure and properties of the desired component, our design engineers convert these into a three dimensional model, analyze its metallurgical requirement and develop a suitable process for forging. The design specifications are fed into CNC6 machines for manufacturing the die of required specifications.

Baba Kalyani added:

Our entire tool making skills and knowledge is sitting in our CAD / CAM software and processes. Till mid 1990s, we used to have a skilled operator called the toolmaker. A toolmaker is the most expensive blue-collar employee you can have, because he understands the precision and intricacies that are involved in three-dimensional tool making. Globally, 50% of the organizations use a toolmaker. In India, it is as high as 90%. However, thanks to our design facilities, we have deskilled the job. Today we recruit fresh engineering graduates and give them rigorous training. In two months they can make tools with these machines. So the engineer, who is generating the CAD CAM programmes, quickly imbibes the toolmaker’s knowledge. The engineer’s intellectual abilities do come to bear during the design, when the CAM and machining programmes are generated. By suitably investing in technology and instituting the right processes, we have dramatically increased the bandwidth of our design engineers. It is possible to do the same in the US, but such employees will be four times more expensive. Thus, it

4 Computer Aided Design / Computer Aided Manufacturing / Computer Aided Engineering 5 Production Part Approval Process 6 Computer Numeric Controlled

12

is not factory labour cost arbitrage that we are leveraging. We are gaining from intellectual capability arbitrage. Today we are a low cost operation and not a low price operation. We don’t need to be low priced; we are not a commodity player. If you become a commodity, you lose. If you lose your pricing power to your customers, you are finished – they will make sure that you operate at a 2% margin! That is where intellectual competition comes in. We have strategically positioned ourselves by offering them seamless capacity, faster speed to market in terms of development time. We simply deliver far better value than our competitors.

Diversifying Product and Customer Portfolio As its engagement with automotive majors in the world markets increased, BFL witnessed a growing preference among them to have components in a ready to assemble form. It then embarked on a strategy of further maximizing supply of components in the machined form instead of raw forgings. Despite the continued slow down in domestic markets, it took the decision to implement the project for manufacture of finished machined crankshafts that it had embarked upon earlier but deferred due to the down turn. BFL believed this would enable it to transform itself from being a “generic” supplier of forgings to a “preferred supplier” and “partner of choice” to the best automotive and engineering companies in the world. The company soon emerged as a reliable vendor of machined components to the automotive sector as well as the oil and gas sector. The share of value added machined components in the company’s turnover increased over the years. More importantly, supply of specialized components for drilling equipment used in the oil and gas sector constituted almost a fifth of the company’s total exports. Historically BFL had concentrated on manufacturing large forgings. The explosive growth of passenger car industry in India (in sharp contrast the downturn in the commercial vehicle sector, the traditional focus area for the company) prompted the company to increase its presence in the small forgings segment. The passenger car segment was estimated to be 4 times the size of commercial vehicles segment, the traditional area of focus for BFL (Exhibit 10). The small forgings segment of the industry was highly fragmented with a host of small and medium sized units supplying parts using old technology. BFL believed the then prevailing wave of vendor consolidation in the auto sector afforded it a window of opportunity to emerge as a major player by offering products using state of the art technology. It went ahead and installed three new forging press lines aggregating to a total capacity of 9000 MT to manufacture small forgings. In 2002, the company achieved a major breakthrough when it entered into a contract with Toyota to supply small forgings (transmission components) for the latter’s Indian and global operations. In 2003, BFL entered the passenger car market in the US with the first batch of exports to Ford Motors, US. In the same year it also received an initial order from Daimler Chrysler for supply of passenger car forgings. The company’s efforts to de-risk its business by focusing on exports did insulate it to some extent from the continued downturn in the domestic markets. However a slowdown in the US heavy truck industry, its major export market (it had over 50% share in the US truck axle component segment) resulted in the company experiencing a steep decline in its export turnover in 2000-2001. BFL was conscious of its vulnerability to a simultaneous down cycle in both of its major markets (India and the US) and had taken

13

steps to improve its geographical spread by reaching out to customers in Europe. However, customer acquisition in the global automotive markets for the supply of components was a long drawn affair. Typically it took a few years before a company became a “regular” supplier to the auto majors (Exhibit 11). While, the company had procured a few contracts from some marquee customers like Volvo and Daimler Chrysler, the volumes were not sufficient to make up for the lost sales in the US market. Additionally in that year its exports to Europe suffered a setback due to an overvalued rupee against currencies in the Euro-zone. The company’s problems were further compounded by the fact that it had, buoyed by the successes it had met with in the earlier years in overseas markets (for example its exports nearly doubled in 1997-98), expanded capacity by installing the 16000T Press line it had suspended during the downturn. Though the company remained in the black in that year, when the rest of the industry was awash with red, clearly it was a testing time for the company. That year, in his letter to the shareholders, Baba Kalyani wrote:

Economic downturns are not new to this industry. This is the third in the last decade. On every occasion your company has emerged stronger in all aspects; it has gained market share, emerged stronger financially and strengthened its commitment and focus…I am sure we are well on our path of achieving our long term goal of making BFL one of the top forging companies in the world in the next three to five years. Together, we shall make it happen.

It did happen. In January 2002, BFL concluded an agreement for supply of forgings to Dana Corporation’s Spicer Europe Limited operation in Kirkstall, Leeds, UK. The agreement was unique. Mr. Prakash Bhalerao, Executive Director, explained:

It actually is an acquisition. Not their assets, but their order book. Dana had put the Kirkstall facility on the block. The deal came to us since the word was out that we were looking for acquisitions. We looked at it. We found the order book interesting and not their assets - we already had excess capacity here! We offered to pay 3 million pounds for the order book. It was twice the best offer Dana had received until then for the entire facility! But Dana wanted to divest the whole block, including the physical assets, and was looking realize 10 million pounds. We then worked out an interesting deal structure. We did not use an investment banker. We structured the deal ourselves. We helped them find others who were interested in the individual parts of the physical assets - plant, land and buildings etc. That way Dana ended up getting what it wanted! And we got what we wanted. We paid 3 million pounds for the order book and got 10 million pounds worth of orders per year, for the next 7-years! And we also got the dies and tools.

Under the agreement, BFL assumed Kirkstall’s responsibilities as a supplier to the Cameron Division of Cooper Cameron. Under supply agreements with Dana, BFL was to supply Dana with certain forgings used by its Kirkstall axle operation and its commercial vehicle axle operations in North America. The supplies were to be made by BFL from India over a seven-year period from its Indian manufacturing facilities. The Kirkstall order book also strengthened the company’s position in the oil and gas sector. Soon after the acquisition, BFL cemented its ties with the world’s largest oilfield equipment manufacturer and was given the status of “ preferred and primary supplier”.

14

Immediately after the Kirkstall acquisition, BFL’s concerted efforts to penetrate the burgeoning Chinese market7, the least cost producers of forgings in the world, met with success. The decision of the Chinese government to enforce new road regulations in terms of haulage capacities, which made larger trucks with heavy-duty diesel engines a superior value proposition, and to adopt Euro II emission norms provided BFL with a new window of opportunity. Both these developments required major engine upgrades (higher compression ratios etc) by the Chinese truck manufacturers. The new engines require solid steel forged crankshafts, as against cast iron crankshafts, as only steel forgings offer the requisite higher torsional rigidity and dimensional stability. Here BFL had a competitive edge as the local Chinese companies did not have the requisite technology. As a consequence, BFL entered into a long term agreements for supply of steel forged crankshafts and other engine components to two of the largest engine manufacturers in China, Wuxi First Autoworks and Guangxi Yuchai Machinery Company. These engine manufacturers were associates of the giant OEMs of China – First Auto Works and Second Auto Works respectively. And within two years, China emerged as the second largest export destination for BFL after the United States. The two OEMs also awarded BFL the contract to develop new crankshafts for their new engines under development. In the same year, BFL achieved a major breakthrough in Europe when it received an order from Renault Vehicle Industries (RVI), the second largest truck manufacturer in Europe for supply of front axle components. In his annual report to the shareholders for the financial year in 2002-03, Baba Kalyani wrote:

I can see the DNA of each of us in the company changing. Several years of ordeal by fire tempered our steel; increased speed to market; and made us more hungry and competitive.

Global Leadership

In January 2004, BFL acquired the assets, intellectual property and labour force of Carl Dan Peddinghaus GmbH & Co. KG (CDP), a €120 million German forging company in an asset purchase deal worth €29 million (Exhibit 12). CDP, which was founded 1839, was well known for its extensive technology, product design and development capabilities. It typically provided end-to-end solutions to its customers. Baba Kalyani said:

CDP has phenomenal capabilities. For example, when BMW starts designing a new car, it would invite CDP to develop the suspension components from scratch. CDP engineers would work along with engineering department of BMW for the next two or three years to develop a prototype. And CDP would get the rights to be the sole supplier for seven years, the lifetime of that vehicle. We were looking to acquire a technology and engineering beachhead in Europe and CDP provides us that. After this acquisition, our technical front is very strong. And OEMs will start looking at

7 According to an analyst estimate, the Chinese truck market was nearly twice the size of the Indian market with annual volumes of close to 1.5 million units.

15

us differently. They will look at us from a long term perspective and partner with us for future products and models.

BFL had been preparing for an overseas acquisition since 1999, when it first took the decision to acquire companies in Europe and/or USA. It took this decision as it found manufacturers, especially in Europe, displaying a strong preference for component manufacturers located close to their factories. Preparation involved developing acquisition criteria, identifying and tracking potential targets, building local relationships in these countries, developing an understanding of how these markets operated and understanding customer expectations. CDP was among the companies that BFL had tracked actively. BFL chose CDP over four other strong acquisition candidates because of its strength in technology and engineering and its portfolio of high-end customers. Bhalerao said:

The Kirkstall acquisition gave us a lot of confidence that we can do it; that we can make it happen. And the benefits were tremendous. The downside of that was that we still didn’t have a base in Europe; we only got the marketing side of it. We didn’t have our footprint in Europe. CDP gave us that. It also gave us a lot of synergies on the customer, product and market side (Exhibits 13 & 14).

Negotiation for CDP took about eight months. Baba Kalyani explained:

Unlike the US, where it is a very time sensitive process, in Germany the acquisition process is a very informal affair, and it can go on for a year or two. When we acquired it, CDP was under receivership because it had run out of cash. When a German company is in that position, under a receiver or an administrator, as it is called, there are four constituents who are involved in the process of sale. First are the banks, which put the company into administration, because they are the ones who have to get the money; Second are the employees, who are generally represented by the unions; third is the existing management; and the fourth are the customers. In our presentation we informed them that we will not shut CDP down or move it to India; and we gave a road map of how we would grow the business there. Finally two of us – ThyssenKrupp was the other – were left in the fray. ThyssenKrupp was willing to pay more money than us, but the unions opposed it, and the management opposed it, and even some customers opposed it. And we ended up acquiring it.

BFL retained the entire CDP top management team. In his first address to all 790 CDP employees, Baba Kalyani assured them that he intended to nurture and grow the operations of the newly formed 100% subsidiary CDP Bharat Forge GmbH (CDP-BF). And soon thereafter, even though there was no hurry to make the investment, he announced a € 4 million investment in building a new production line at the German plant. Baba Kalyani said:

The success of any acquisition boils down to people and mindsets. When a firm is bought, people are uneasy, pain level is very high. The pain comes out in all kinds of concerns. (Thus) you need to send out the right signals and instill confidence in

16

the management team. Never say one thing before the acquisition and do the opposite after. If you lose people’s trust, you will never win it again.

Integrating the Acquisition BFL believed that if the acquired firm were not integrated with the parent within the first hundred days, it would never be! It therefore launched a ‘100-day integration plan’. Interestingly the integration process was planned, initiated and executed without the involvement of any external consultants. The 100-day integration plan had the twin objectives of integrating people and capturing synergies. Synergy teams were created in four areas, namely business strategy, marketing, manufacturing and engineering. The idea was to seek opportunities for both organizations to benefit from each other’s best practices. While BFL started learning about CDP-BF’s process for manufacturing key components, BFL’s equipment maintenance practices were adopted in Germany. During the first 30 days after the acquisition, a series of cultural workshops were held in Germany for all the Indian and German managers. The Indians learnt about German discipline, and the Germans started appreciating the flexibility of Indian managers. To facilitate and speed up the process of integration and transfer of best practices, BFL introduced a part-time German language course for its managerial personnel. Efforts at cultural integration were complemented with detailed review of manufacturing costs, product mix and value addition for each activity. The German management, with their focus on technical excellence, was not focused on some of these aspects. At first, such discussions were sacrilegious, but soon they started appreciating the business logic because it was objective and undisputable. In the first quarter after the acquisition CDP-BF earned a total income of Rs.1838 million and a net profit of nearly Rs 100 million (Exhibit 15). In his first public statement, four months after the takeover, Mr. Michael Kasperski, Director of CDP paid a glowing tribute to the new organization, stating

It was a great surprise for the employees that the acquisition worked so well in both directions. We can learn a lot from the speed and discipline of the Indians. We have once again achieved what we had lost since a couple of years. The employees are enjoying their work once again and we look forward to an optimistic future8.

In BFL too there was excitement, especially about CDP-BF’s product design and development skills. These skills would provide the leverage BFL was seeking to make a push for global leadership. There was also an additional unexpected spin off. Baba Kalyani said:

It’s not easy to describe, but the acquisition is doing wonders for us in India. Our employees suddenly have a new sense of pride!

8 Westfalenpost, 3rd May, 2004

17

Post Script

In December 2004, BFL acquired CDP Aluminiumtechnik (CDP-AT), a significant player in the area of aluminium forged components used in passenger cars and other automotive applications. BFL was funding the €6.30m all cash deal through a mix of equity (€3.80m to be infused over the next six months) and non recourse debt (€2.50m).

Aluminium is progressively becoming the preferred material for specialized high end automotive applications due to significantly lighter weight and consequent advantages of fuel efficiency. CDP AT, which has a turnover €35m and employs 130 people, is located at Brand-Erbisdorf, near Dresden, Germany, an area fast emerging as major automotive hub with new plants being set up by Porsche and BMW. CDP AT has developed and patented its technology of aluminium forgings in Germany and its customers include BMW, Audi, Volkswagen, and Ford.

18

Bharat Forge Limited Exhibit 1

ORGANISATION STRUCTURE

CHAIRMAN AND MANAGING DIRECTOR B.N.Kalyani

(Source: Company)

Executive Director

P C Bhale Rao

Executive Director

G K Agarwal

Executive Director

Amit Kalyani

Group CFO

P K Maheshwari CFO and Sr. VP

(Finance)

S G Joglekar

EXECUTIVE VP Legal & Secretarial

S S Seth

Sr. VP (Chakan)

MT Pathak

Sr. VP (MCD Engg)

R Radhakrishnan

Sr. VP (CDFD)

B P Kalyani

Sr. VP (Engg)

M U Takle

Sr. VP (Sales)

V K Jain

Sr. VP (Exports)

S Tandale

VP (HR)

S VBhave

VP (Materials)

MG Dattawadkar

Sr. VP (MCD)

MN Deshmukh

EXECUTIVE VP Corporate Affairs

D R Moorthy

Executive VP (MCD Projects)

B Swaminathan

19

Bharat Forge Limited Exhibit 2

FINANCIAL PERFORMANCE

A. PROFIT AND LOSS ACCOUNT (Rupees million)

94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04

INCOME

Gross sales 3236 4536 5572 5737 4595 5677 5233 4718 6863 9020

Less: Excise duty 424 534 661 543 438 594 558 470 505 700

Net Sales 2812 4002 4911 5194 4157 5083 4675 4248 6358 8320

of which Export Sales 276 490 482 892 746 1149 894 1108 2717 3330

of which Domestic

Sales 2536 3512 4429 4302 3411 3934 3781 3140 3641 4990

Operating &Other Income 347 429 394 315 273 176 215 113 92 191

Total Income 3159 4431 5305 5509 4430 5259 4890 4361 6450 8511

EXPENSES

Raw material, Components,

Die block 1286 1832 2262 2571 1659 1824 1879 1576 2223 3181

Staff Cost 253 347 401 412 440 465 464 427 462 537

Other manufacturing

expenses 591 781 960 867 855 1114 858 789 1244 1518

Other expenses 221 326 711 556 343 388 361 372 562 682

Total expenditure before IDTA 2351 3286 4334 4406 3297 3791 3562 3164 4491 5918

EBIDTA 808 1145 971 1103 1133 1468 1328 1197 1959 2593

Interest 383 459 518 446 424 442 573 454 408 323

Depreciation 166 176 209 236 291 299 397 390 418 458

Total

Expenditure 2900 3921 5061 5088 4012 4532 4532 4008 5317 6699

PBT 259 510 244 421 418 727 358 353 1133 1812

Provision for tax 1 1 58 59 45 101 32 133 322 563

PAT 258 509 186 362 373 626 326 220 811 1249

EPS 6.97 12.32 4.17 9.56 9.90 12.88 8.28 5.50 20.71 32.28

RONW 10.36% 12.31% 4.77% 9.30% 9.14% 15.60% 21.89% 21.53% 47.26% 49.70%

NAV / Equity

share 58.05 103.14 100.14 102.58 107.84 103.57 33.85 18.96 34.54 56.57

(Source: Company Annual Reports)

20

Bharat Forge Limited Exhibit 2 (continued)

FINANCIAL PERFORMANCE

B. BALANCE SHEET (Rupees million)

94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04

SOURCES OF

FUNDS

Shareholders'

funds 2490 4135 3900 3893 4082 4013 1489 1022 1716 2513

Capital 481 768 497 377 377 477 477 577 677 677

Reserves & Surplus 2009 3367 3403 3516 3705 3536 1012 445 1039 1836

Loan Funds 3569 3578 4273 4621 3957 4092 4129 3823 3236 2856

Secured Loans 2053 2520 2940 2938 2220 2598 2623 2203 2530 2191

Unsecured loans 1516 1058 1333 1683 1737 1494 1506 1620 706 665

of which Foreign Currency Loans 1224 1228 1692 2708 2419 1979 1549 1664 2067 2402

Share Appln.

Money - - 75 - - - - - - -

Deferred Tax

Liability - - - - - - - 740 819 850

TOTAL 6059 7713 8248 8514 8039 8105 5618 5585 5771 6219

APPLICATION

OF FUNDS

Fixed Assets 1864 2290 2433 3249 3698 5045 4405 4475 4566 5389

Gross Block 2523 3130 3124 3510 4699 6769 6359 7071 7697 8220

Less:Depreciation 935 1108 1330 1571 1825 2121 2463 2859 3270 3708

Net Block 1588 2022 1794 1939 2874 4648 3896 4212 4427 4512

Capital WIP 276 268 639 1310 824 397 509 263 139 877

Investments 1080 1752 1725 1707 1663 928 12 - - 344

Def. Tax (assets) - - - - - - - - 39 45

Current Assets, 3973 4798 5439 4966 4308 4206 2814 2939 4014 5228

Inventories 812 891 950 796 759 932 879 860 1264 1332

Sundry Debtors 749 1039 1334 1142 823 663 837 716 813 1001

Cash & Bank Balances 110 132 408 204 51 156 29 93 233 86

Other Cur. Assets 35 46 45 33 134 144 113 150 384 443

Loans & Adv. 2267 2690 2702 2791 2541 2311 956 1120 1320 2366

Less: Current

Liabilities 866 1177 1377 1437 1650 2086 1727 1937 2963 4869

Liabilities 769 1027 1154 1143 1229 1635 1364 1511 2192 3381

Provisions 97 150 223 294 421 451 363 426 771 1488

Net Current

Assets 3107 3621 4062 3529 2658 2120 1087 1002 1051 359

Miscellaneous

Expenditure 8 50 28 29 20 12 114 108 115 82

Total 6059 7713 8248 8514 8039 8105 5618 5585 5771 6219 (Source: Company Annual Reports)

21

Bharat Forge Limited Exhibit 3

FORGING CAPACITY

Year Total Forging

Capacity (TPA)

Capacity

Addition (TPA)

Presses Added

(Tonne)

Capital

Expenditure

(Rs.million)

1991 n.a. One 16000 T & one 6000 T 2,300

1996 70,900 n.a. One 4000 T & one 2500 T n.a.

2000 100,900 30,000 One 16000 T & one 2500 T 1,434

Apr 04 – Jun 05 200,000 100,000 One each of 2500 T, 5000 T,

5500 T, 6000 T & 12,500 T

1,388

(Source: Company, HSBC Analyst Report 2004)

Bharat Forge Limited:

Exhibit 4

PRODUCTIVITY PERFORMANCE

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

Forging production

per employee (Tons)

20.64

24.30

25.37

21.75

16.78

22.23

18.32

19.53

27.11

30.95

Revenue per

employee (Rs. in mn)

1.326

1.773

2.094

2.120

1.669

1.938

1.707

1.730

2.499

3.131

Employee Cost (%

of Total Income)

8.01

7.83

7.56

7.48

9.93

8.84

9.49

9.79

7.16

6.31

No. of Employees 2383 2499 2533 2598 2655 2714 2865 2521 2581 2718

Capital Output ratio 1.27 1.57 1.70 1.66 1.08 0.92 0.74 0.65 0.87 1.07

Capacity Utilization 69 86 91 80 63 60 51 48 68 82

Interest Cost (% of

Total Income)

12.12

10.36

9.76

8.10

9.57

8.40

11.72

10.41

6.33

3.80

(Source: Company)

Bharat Forge Limited: Exhibit 5

SHARE OF MACHINED COMPONENTS IN TOTAL TURNOVER

(%) FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

Machined Components N.A N.A 25 26 43 42 42 44 49 49

(Source: Company)

22

Bharat Forge Limited Exhibit 6

PRODUCT MARKET PERFORMANCE

(A) KEY CUSTOMERS

1994 2004

India:

Tata Engineering, Ashok Leyland, BEML, Eicher Motors, Mahindra and Mahindra Escorts, Kirloskar Group, Bajaj Tempo

North America:

Arvin Meritor

India:

Tata Motors , Ashok Leyland, Maruti Udyog, Mahindra and Mahindra, Cummins, Toyota Kirloskar

Asia:

Toyota, Honda, Ford, GM, Renault Vehicle Industries First Auto Works, China Second Auto Works, China Isuzu.

North America:

ArvinMeritor, Dana Corporation, Ford, GM, Caterpillar, Cummins

Europe:

Daimler Chrysler, Volvo Trucks, Renault Trucks, IVECO, Ford, Caterpillar Perkins, Volkswagen, Cummins

(Source: Company)

(B) OTHER INDICATORS

(i) Distribution of Number of Clients

Per Client

Revenue

FY 94 FY02 FY03 FY04

Rs 25 - 50 m N.A 5 8 10

Rs 50 - 75 m N.A 4 5 3

Rs 75 – 100 m N.A 2 3 1

> Rs 100 m N.A 9 11 18

(Source: Company)

(ii) Share of Exports by Region (%)

FY 94 FY02 FY03 FY04

USA N.A 89 63 44

Europe N.A 8 11 24

Asia Pacific N.A 3 26 32

(Source: Company)

(iii) Product wise Revenue Distribution (%)

FY 94 FY04

CVs N.A 61

Diesel Engines N.A 18

Passenger Cars N.A 8

Oil & Gas N.A 5

Heavy Engg 8

(Source: Company)

23

Bharat Forge Limited Exhibit 7

A. Benchmarking Indian Auto Component Industry with Other Low Cost Destinations

Parameter India China Thailand Taiwan

Quality of supply 1 4 2 3

Ability to supply consistent quality 3 4 2 1

Price competitiveness 4 1 3 2

Design and engineering capabilities 1 4 3 2

Customer / after sales support 3 4 1 2

Maturity of auto component industry 1 4 3 2

Government regulations 4 3 1 2

Attractiveness of domestic market 2 1 3 4

Compliance and transparency 2 4 3 1

(Source: Frost and Sullivan/Company)

B. Benchmarking Indian Auto Component Industry With Component Majors

0

5

10

15

20

25

30

35

40

45

Delphi Dana Visteon ARM JCI Magna BFL Ucal MICO Denso(I)

Global average : 12.6%

Indian average : 36.4%

% Margin (Sales –COGS as % of Sales)

Comparing global and Indian auto component manufacturers’ margins

Source : J P Morgan

Comparison based on FY2002 results for international companies & 9 months FY03 results

for Indian companies

0

10

20

30

40

50

60

70

80

90

100

US ancillary manufacturer Indian ancillary

manufacturer

Material & Capital Labour Depreciation Overheads Profits

Comparative cost structure of US and Indian auto

component manufacturers Source : MOST- Inquire , September 2004

20-30 %

savings

24

Bharat Forge Limited Exhibit 8

KALYANI GROUP

Bharat Forge Ltd (BFL) is the flagship company of the Kalyani Group, which has significant presence in

the auto component industry in India. Presence of the group in several major auto component sectors

provides BFL with a common pool of knowledge that leads to a superior understanding of the business

dynamics, and identification of opportunities ahead of rivals. For example, Automotive Axles

manufacturers rear axle assemblies while Kalyani brakes manufacturers braking systems for passenger cars

and utility vehicles. Presence of group companies in upstream processes ensures that there is greater

control, which translates into greater reliability and consistency of products as well as supply schedules.

Thus, up to 80% of required steel, which is critical to the determination of strength of forged components,

is procured from Kalyani Carpenters Special Steels Ltd. and Kalyani Steel Ltd. • Automotive Axles (AAL): A joint venture between Meritor and the Kalyani group, AAL is the only

company to provide complete axle solutions to the customer. Ashok Leyland, Telco, M&M and BEML

are the large domestic clients while they make substantial exports to Meritor.

• Kalyani Carpenter: Kalyani Carpenter Special Steels Ltd is a joint venture between Kalyani Steels

Ltd and Carpenter technology Corp, US. Kalyani Steels is a leading manufacturer of forging and other

engineering grade carbon and alloy steel, while Carpenter Technology Corp is recognized

internationally for its speciality and high alloy steel. It supplies nearly two thirds of BFL’s steel

requirements.

• Kalyani Steel: It is a leading manufacturer of forging and other engineering grade carbon and alloy

steel that is manufactured in electric arc furnace. Over the years, it has continuously upgraded its

technology and infrastructure, starting with its technology collaboration with AICHI Steels of Japan. It

supplies nearly 15% of BFL’s steel requirements

• Kalyani Lemmerz (KLL): The company manufacturers wheel rims for utility vehicles, light and

heavy commercial vehicles and tractors. Lemmerz is a world leader in wheel rim technology and

supplies to leading automotive manufacturers like Daimler Benz, General Motors, Ford and Volvo.

Lemmerz is now part of Hayes, USA, the world’s largest manufacturer of automotive wheel rims. KLL

manufacturers wheel rims using the flat stock, cold pressing and flow forming method pioneered by

Lemmerz, which gives it a significant competitive edge over other wheel rim manufacturers.

• Kalyani Brakes (KBX): KBX is a leading brakes manufacturing company in India, promoted in

collaboration with Robert Bosch. It is present in the two-wheeler disc brake market and in the CV and

passenger car market with a range of air, air over hydraulic and hydraulic brakes.

25

Bharat Forge Limited Exhibit 9

ENGINEERING PROCESS OF FORGING

AUTOCAD, VERA-CAD, HEAT TREATMENT DATABASE, APQP

DEFORM 2D/3D, FORGE3, Hypermesh, UG-NX2

VDMIS –CMM integration

PPAP SAMPLE SUBMISSIONPPAP SAMPLE SUBMISSIONDimensional Verification.PPAP & APQP Review

ENGINEERING DATABASECRANKSHAFT BALANCING BFL CUSTOMISED SOFTWARE

ENGG STUDY OF MODEL/DRG ENGG STUDY OF MODEL/DRG Product Geometry (CAD)Metallurgical RequirementsForge ability / ComplexityPast Experience, Methods

ENGG PREDEVELOPMENT ENGG PREDEVELOPMENT

REVIEWREVIEWForging Sequence Design Processing Specifications Post Forging Treatment

Mfg. Quality Plan (Control Plan)

ENGINEERING ANALYSISENGINEERING ANALYSISDeformation Analysis, Die Stress Analysis, Load, Energy, Velocity Vectors, Max Principal Stress, Die Deflection, Defect Detection

ENGINEERING

PROCESS

‘PRINT TO PPAP’

‘INSTRON’ Servo-Hydraulic Actuators

(630 kN, 250 kN) / ‘UD’ Electro-Dynamic Shaker (2200 LBF) & ‘NCODE’ For Fatigue

Evaluation.

ANSYS-8.1 & HYPERMESH-6.0, UG, Pro-E, ENGINEERING DATABASE

Trial Strategy

HASS,DMG,MAKINO,MAZAK

DIE MANUFACTURINGDIE MANUFACTURINGPre-Sized Die Blocks High

Speed CNC milling

FATIGUE TESTING AND VALIDATION PRODUCT DESIGN & PROTOTYPINGPRODUCT DESIGN & PROTOTYPINGEnvelope Data Given By Customer

“PRE“PRE--TRIAL MEETING”TRIAL MEETING”Trial plan with CFT

Trial Conclusion Report

PRODUCTION TRIALPRODUCTION TRIAL“Integrated Press Line”

UG NX2, FFAUT, TEBIS, NC Speed Optimization

CAM GENERATIONCAM GENERATIONNC Tool Path with DNC Network (Fiber Optic)

TECHNICAL REVIEW FORMAT

TECH REVIEW WITH CUSTOMER TECH REVIEW WITH CUSTOMER Product Geometry, Metallurgical

& PPAP Requirementsσmax δmaxσmax δmax

Cross Functional Input/Feedback

CROSS FUNCTIONAL TEAM REVIEW CROSS FUNCTIONAL TEAM REVIEW Key Design / Process Parameters Billet Spec, Heat Treat,Processing

Freezing Design Parameters

UG, PRO-E, CATIA, C3P,EDI –FTP, FDX, SWAN Translators: IGES/STEP/DXF/STL

CUSTOMER DETAILSCUSTOMER DETAILSProduct Specification –Geometry,Chemistry,

Micro-Structure, Mech-Properties, Test Requirements

Source: Company

26

Bharat Forge Limited Exhibit 10

MARKET FOR FORGED COMPONENTS

Bharat Forge Limited Exhibit 11

TYPICAL CUSTOMER ACQUISITION PROCESS

27

Bharat Forge Limited Exhibit 12

CDP ACQUISITION: FINANCING DETAILS

Euro (m)

Cost of Acquisition

Purchase price 28.00

Expenses incurred for purchase 1.00

Total 29.00

Means of Finance

Shareholders’ contribution (BFL) 6.00

Internal accruals of CDP-Bharat Forge 5.00

Non-recourse long term debt

Deutsche bank AG, IKB Deutsche Industriebank AG & Commerzbank AG 18.00

Total 29.00

Liabilities taken up by Bharat Forge Pension Early Retirement Jubilee (30 yrs in service) payment

Total

1.70 0.30 0.30 2.30

Source: BFL IPO document

Bharat Forge Limited Exhibit 13

SYNERGIES BETWEEN BFL AND CDP

Feature CDP BFL Combined entity

Size and scope Germany’s second largest company with strong design and engineering capabilities

Largest single location facility, 3rd largest in the world

Emerges as world’s second largest

Geographical spread Europe centric operations (~80%)

Asia and US dominant Acquires a near global footprint

Product breadth Strong in passenger cars (50%+) components, CVs(20%+) and others

A major in CVs (60%+) and diesel engines (15%)

Covers requirement of most product markets

Facilities Adequate capacities in small forgings

One of the world’s only two companies in heavy forging

Complete range of forging facilities

Value proposition A shop renowned for high end technology operations based close to the customer

Destination for low cost operations, most suited for certain components

End-to-end solutions

(Source: BFL, Kotak Institutional Equities estimates)

28

Bharat Forge Limited: Exhibit 14

BFL AND CDP: REVENUE DISTRIBUTION

BFL CDP BFL + CDP

Geography

USA 18 16

India 59

China 13

Germany 53

Rest of Europe 26

Others

Product Segments

Commercial Vehicles 61 23 45

Passenger Cars 8 51 26

Diesel Engines 18 6 13

Construction - 15 6

Railways - 5 2

Heavy Engg 5 - 4

Oil & Gas and others 8 - 4

Bharat Forge Limited: Exhibit 15:

CDP- BHARAT FORGE GMBH PERFORMANCE

INR (million) Jan-Mar 2004 Apr – Jun 2004 July-Sept 2004 Oct-Dec 2004

Sales & other

income

1,838 1,858 1,913 2,175

PBDIT 231 192 226 351

PBT 160 97 137 278

PAT 97 54 87 161

29

Bharat Forge Limited

ANNEXURE

Outsourcing in Global Automobile Industry

Increased competition, rising costs and pressures to provide additional comfort and safety features resulted

in the global automobile industry supply chain undergoing a phase of restructuring in the late 1980s

through the 1990s. Global automobile manufacturers dramatically reduced the number of suppliers they

dealt with and focused on procuring from a select few ‘systems integrators’ (Fig 1).

Figure 1

Following the example of General Motors, manufacturers encouraged outsourcing of components in order

to stay competitive. These trends helped the large automobile manufacturers to improve margins in early

nineties (Fig 2). Figure 2

Vehicle manufacturer

System integrators

Sub-assembly manufacturers

Component manufacturers

Toyota , Honda, Renault, DaimlerChrysler,

Caterpillar,Volvo

ArvinMeritor, Dana,

TKAP, Macimex

Bharat Forge

Source: Asian Development Bank , J P Morgan

0

5

10

15

20

25

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

% Margin (Sales – COGS as % of Sales)

Faster volume growth and restructuring of

industry aids rise in margins

D ownturn in m argin brings

Second wave of cost reduction

Vehicle manufacturers face margin pressures : GM Ford

Source : Bloomberg

30

Today, outsourcing has become the accepted practice of the industry. OEMs source nearly 75% of the

vehicle from component manufacturers, while they themselves focused on core activities like design,

research and development, vehicle assembly, marketing and brand management.

The sustained pressure imposed by ruthless extractions of price concessions by the OEMs impacted the profitability and return on capital employed of the systems integrators and component manufacturers in the West. Many of them seemed to have traded capital efficiency for growth (Fig 3). Unable to grant any more price cuts, these players too were aggressively looking out for opportunities to cut costs by sourcing globally.

Figure 3

Asset Turnover of Key Global Auto Component Suppliers

Auto Component Suppliers’ EBIDTA margins Auto Component Suppliers’ ROIC

31

Global Forging Industry ThyssenKrupp Automotive Group of Germany and Sumitomo Metal Industries, Japan along with its joint

venture partner International Crankshaft Inc. USA and American Axles and Manufacturing are among the

largest suppliers of forged parts to the global auto industry include. However, forging constituted a

relatively smaller minor share of their turnover. System integrators like Dana Corporation and

ArvinMeritor also have large captive forging units but they are increasingly outsourcing their forging

requirement so that they can focus on higher value added activities like system design and assembly.

However sale of metal forgings by independent plants in the developed countries has been declining for the

past few years (Fig 4). According to analysts, forging has become a ‘sunset’ industry for the developed

world and they believe orders from global auto OEMs would increasingly go to companies from the

emerging economies of the world.

Figure 4

North American Forging Industry Sales

Estimates of the global export opportunity for automobile forgings vary between US$ 5 –15 billion.

Manufacturers of custom impression forging (BFL’s area of specialization) from the US, Canada and

Mexico reported aggregated sales of US$ 4 billion in 2002.This was the total output from 300 plants of 250

forging companies in these nations. Automotive applications at US$ 1.5 bn accounted for 37.5% of total

sales, followed by aerospace applications at 24%. Since US automobile accounts for only 30% of the total

global production, the global market for automotive forgings alone is estimated at US$ 5 billion. However,

other estimates suggest that there are close to 10 international auto giants whose individual annual

requirements of high-grade auto forgings are approximately US$ 1 billion. Another 50 auto and related

companies buy forgings to the tune of US$ 100 million a year. These would add up to US$ 15 billion for

global requirement of high-grade auto forgings.

Indian Forging Industry The Indian forging industry comprises suppliers of forging components ranging from crankshafts,

camshafts, connecting rods, axle beams and steering knuckles for the 4-wheeler industry to kick starters for

the motorcycle industry. The total capacity of the industry is estimated to be 800,000 tons per annum (tpa).

There are three broad segments in the industry. The top tier comprises about 9-10 large players; the middle

consists of 31 players while the small sector is made up of close to 250 units. The small sector caters

32

primarily to the replacement market. While 75% of these organizations employ less than 250 workers,

about 40% have between 20 and 99 employees. BFL is the largest player in the organized sector, followed

by Amtek Auto, Amforge, M M Forgings and Super Auto Forge Ltd (See Table 1). Apart from these, some

auto majors like Tata Motors have their own captive forging plants. Following the footsteps of global

OEMs, domestic auto majors are also reducing vertical integration and increasing outsourcing. Thus, their

captive forging plants are being shut down, increasing opportunities for merchant forging organizations.

Table 1 Performance of major listed companies in the Indian forging industry (Figures in Rs. Million)

Company Sales Exports PAT

Bharat Forge 8669 3331 1249

Amtek Auto 4122 - 424

Amforge 1481 16.7 53.9

MM Forging 832 576 66

Super Auto Forge 636 371 193

Taparia Tools 541 - 30

IFDS Ltd 635 13 65

Krishna Engg 365 - (120)

Micro Forge 270 NA 11.4

El Forge 399 NA 1.4

BCL Forging 153 - (3.9)

Figures for year ended March 03, except Bharat Forge & IFDS (March 04) Super Auto Forge (March 02)

and Amtek Auto (June 03 – 15 months)

(Source: Company, Capitaline Plus)