The Hindu Business Line : Equipped with the pricing power

The power market in India is highly competitive. Ever since the government speeded up reforms in this vital sector, the space has got crowded with many players coming in, particularly for equipment supply that accounts for 70-80 per cent of a project's cost. With Ultra Mega Power Projects (UMPPs) seen as the quick solution to the capacity addition problem — India has slipped by at least 20,000 MW every Plan — there is jockeying among Indian and foreign players to compete for a piece of this Rs 90,000-crore action.

Nine UMPPs are to come up before the end of the Eleventh Plan by which time hopefully about 100,000 MW will be added to mitigate the looming energy crisis. Two UMPPs have been decided on — Sasan in Madhya Pradesh, to be erected by Tata Power and Mundra, by Lanco Industries of Andhra Pradesh. Each is of 4000 MW capacity and will cost at least Rs 10,000 crore based on today's conservative pricing of Rs 2.50 crore a MW. Delays in awarding projects will lead to cost escalations and time overruns.

All the major players in the power sector today — Reliance Energy, Tata Power, Lanco, Torrent, NTPC and NHPC — source equipment from either Indian manufacturers, such as BHEL, or foreign suppliers, such as Siemens, GE, Alstom, Toshiba, Mitsubishi, Hyundai, Doosan and Technoprom.

New Technologies

As India goes in for higher-rated power projects, particularly in the thermal segment, newer approaches such as the supercritical technology become imperative. This technology offers the dual advantage of greater thermal efficiency, in terms of steam generated, and lower coal use.

BHEL, with an order book of over Rs 24,000 crore — multinationals have at most a Rs 1,500-2000-crore order book each — has proactively tied up with three leading equipment manufacturers for frontline technologies — with GE for gas turbines, Siemens for steam turbines and Alstom for boilers. Yet, BHEL has not been able to leverage these with competitive pricing.

Thus, two major NTPC projects — at Sipat and Barh — have been awarded to little known South Korean and Russian firms. The reason: their pricing was much better. NTPC could save costs by at least 30 per cent by ordering equipment from these companies rather than from BHEL or multinationals. NTPC has to look hard at the cost factor because it also has to look at the maintenance aspects; spares are very expensive. Multinationals, particularly European firms, charge a stiff premium for bringing in world-class technologies, and they suffer from their own internal policy contradictions. All of them like to maintain a uniform pricing policy for their products and technologies sold worldwide as they have manufacturing facilities spread across the globe. Thus an MNC would seek to price a gas or steam turbine or a boiler at the same level in India as it sells in the US or any European country. India is still not strong enough to absorb these high prices for equipment as expensive maintenance contracts too follow, not to talk of the prohibitively expensive spares.

Firms in China, Russia, South Korea and Japan prefer to adopt a dual or differential pricing system to capture emerging markets in Asia, primarily India and China. They sell at cheaper rates to developing countries and at higher rates in Europe or the US, where the markets are now getting saturated.

Why don't European firms then drop prices to compete more effectively with the new entrants in the Indian market? Leading foreign firms have gone on record that they cannot adopt dual pricing to capture the emerging markets as the Chinese or the Koreans would do. Such a policy would hit their markets in the US, Canada, Europe, and indeed even Latin America, where there is now a shakeout.

MNCs are thus facing the heat from lesser-known South Korean, Chinese and Russian firms that are bagging major contracts particularly for equipment supply. In a power project, equipment constitutes 70-80 per cent of the price component. NTPC or NHPC prefer to parcel out these orders to different companies to achieve economies of scale instead of awarding single turnkey orders. Is pricing such a major issue? It appears so. All foreign companies focus on their bottom-line and want to achieve the magic figure of 6 per cent plus operating margin. Meaning it would be profitable for these companies to operate in India only if this margin is achieved. It is a fact that some foreign companies have been operating on as low as 3 per cent margin just to remain in the Indian market that promises to open up.

Banking on Indian market

So the bottomline of these companies may not be healthy. They are virtually struggling to make their balance-sheets look up and keep their shareholders happy. Some big multinationals have failed to bag a single major project this year. They live on bread-and-butter projects — orders of Rs 100-250 crore, captive power plants and projects below 500 MW capacity. Little wonder that Indian subsidiaries are hard put to it to convince their parent companies that the Indian market is promising. Some have begun major outsourcing at their world-class Indian facilities — Indian engineers build and deliver equipment from Indian facilities to foreign countries, particularly in Europe, and the Asia-Pacific Region.

The Power Ministry and the Government are not happy with the multinationals relying onoutsourcing equipment for projects in India. They pooh-pooh the argument that protectionist polices have compelled these companies to do overseas projects from Indian facilities. Power Ministry officials say all major projects are put on international competitive bidding and they are won or lost because of the price.

Policy planners feel that multinationals should not take the easy way out but compete more effectively in the Indian market. As the Government has extended so many facilities for them to operate out of India, they should show some more commitment to India. What is the benefit to India if these brains and technologies don't go into projects in India? It is not as simple as it sounds. Multinationals face peculiar problems. When Indian subsidiaries bid for projects in India, they invariably do so jointly with their parent companies, as much of the frontline technologies come from there. And the high cost there inflates their bids in India, making it difficult for them to compete effectively against the new entrants.

With India integrating well into the global economy, aspirations have risen among the working class and wages of Indian workforce now match some of the best in the world. Some multinationals are reportedly thinking of shifting a part of their operations out of India to cheaper East, or even West, European nations to save on the wage bill. And this could be a dangerous trend.

(The author, an energy consultant and freelance journalist, can be contacted at ashnews@yahoo.com)