The Hindu Business Line : ‘Chinese cost advantage is over’

State-run power equipment major Bharat Heavy Electricals is gearing to meet the country’s power demands. At a time when the company is often criticised for delays in commissioning power plants, Mr K. Ravi Kumar CMD, BHEL, clarifies that project delays are more often caused by infrastructure bottlenecks, rather than by equipment suppliers. He outlines how the power equipment giant is prepared to face Chinese competition and diversify its profile.

Excerpts from the interview:

The present expansion is one of the largest in BHEL’s history. While there is a ramp-up in spending on power capacities at present, do you fear over capacities in future?

Power plant manufacturing is not like a process plant where machines should not remain idle. Let us suppose Rs 6,000 crore is invested in machinery and the depreciation per year is Rs 1,200 crore. With a turnover of, say, Rs 30,000 crore, it is not really going to hurt even if some machines remain idle, especially when most of the existing machines have been depreciated. In our case, depreciation on the new additions can easily be absorbed by the top line of Rs 45,000 crore that we expect to achieve by 2011-12. Further, on the manpower front, from 78,000 we have come down to 40,000. From here we are planning for a manpower strength of 50,000. So it would only be a 25 per cent increase in workforce as against the planned two-fold increase in turnover by 2011-12.

A job that is in the queue and waiting to be finished is a more worrying factor than idle machines. Even if 20,000 MW (planned by 2011-12) is not fully utilised, it may not really affect the balance sheet. But, again, we do not expect such a situation to even arise for the next 10 years.

Further, we are into various segments of business. If you look at Siemens, their spares and renovation and modernisation business is quite high. So when we have 1,30,000 MW in the country with our share being 65 per cent, we will get similar business of spares and renovation/modernisation as the existing power plants get old. We are also into other businesses such as oil rigs and transportation. I do not think we will ever be short of business.

Can you elaborate on the other businesses you mentioned?

We have already collaborated for IGBT (insulated gate bipolar transistor) drives in the railways business. We are also looking at companies abroad that make coaches. Electrics and Locomotives would be our key area in the transport segment and we have already got trial orders for 50 coaches from Delhi Metro.

In oil rigs, we have got refurbishment orders and are quoting for some onshore rigs for the Gulf. We are also looking for a technology partner for offshore rigs. We are also exploring solar photo voltaic with wafer facility. We have a 7 MW plant which we want to scale up with wafer facility. We are looking for a public private partnership for this. There are also joint venture talks for the entire line of castings and forgings for domestic as well as export market. This may happen during this financial year itself.

Would the cost of technology transfer for super-critical equipment be higher for you than what L&T has managed in its joint venture with Mitsubishi?

It is to be noted that any facility by any competitor would be ready only after four years. So for the projects in which they are bidding at present, the entire equipment model may have to come from the venture partner. They may not be able to manufacture the same here. To that extent, their costs could be higher.

As for us, today, the manufacturing of a super critical boiler/turbine/generator is pretty much the same as manufacturing a sub critical boiler. The change is only in the material used. There is no unique manufacturing technology involved. Only the thermo hydraulic calculations vary and that is where we get the reference from Alstom/Siemens. The drawings are already with our engineers, with at least 10 delegations having visited Alstom and Siemens.

On the price issue, nobody transfers technology for its own sake. They would want some business share. Hence we will have to import some components from our collaborators in Europe where the costs could be slightly higher. So the initial sets would cost more, not because of technology transfer, but because of the business share we give them by producing components there. If we manufacture the same in a shop established here, it could cost less.

We would be able to completely become indigenous once the agreement on business share is met.

Could this be the reason for losing out on the turbine orders for APGENCO’s Krishnapatnam project to L&T?

It is a question of how much margin we need to cut with an order-book of Rs 93,000 crore today. We already outbid them (L&T) in the refinery project being put up by HPCL-Mittal. Yes, over the long term, we will have to see how competitive we need to be.

The order flow for sub-critical projects still remains high. Could this mean that utilities are not too keen to go for super-critical projects?

Not really. Super-critical projects save energy — by way of lower heat rate/pressure. The savings have to match the additional costs incurred. Let us take our case. Even within the sub critical range we have introduced 600MW — basically an extended version of 500 MW. The turbine heat rate is about 1,930 kilo calories per kg. Recently awarded super critical projects by Sipat or Barh themselves have only about 1,900 kcal. So there is not much change. The one that we have offered for Krishnapatnam is about 1,890 kcal heat rate.

So the overall saving is only about 6-7 per cent on the heat rate (on BHEL’s design). For this saving, about 12-15 per cent more of capital cost is what can be absorbed. If it is beyond that it may not really be advantageous for the customer. The saving is even lower at about 3 per cent for equipment procured from markets such as Russia.

This is not to say that BHEL is sceptical of super critical projects; a capital cost increase of over 15 per cent in our opinion is not justified. In my opinion, a heat rate of probably below 1,835 Kcal per kg would be needed to provide substantial reduction in emissions.

Do you believe Chinese players have a cost advantage over you? If so, what are the areas?

I think that period is over. We are competing with China, no doubt. Our quality standards, which are European, are much better than the Chinese.

Even in terms of capacity, while Chinese have the 600 MW, we have been able to offer similar capacities to private players and SEBs. They have an advantage definitely in terms of subsidised raw materials and an artificially placed yuan. But relatively lower transport costs and at-the-door services are clearly our advantages.

Today, the difference between us and the Chinese players would hardly be 5 per cent (in terms of cost) from 20-25 per cent initially. I think if BHEL is able to deliver the project in the shortest span of time, then nobody would go to the Chinese. However, this is not easy as there are a lot of infrastructure bottlenecks today. This is true for Chinese putting up projects here as well.

The fact is that it has got nothing to do with the power equipment supplier. It has got to do with the infrastructure of the country. Today, we cannot move materials at will, or get raw materials on time.

We hope to solve this by the Twelfth Plan by which time we hope to produce the entire castings and forgings range.

What is the status of the joint venture between NTPC and BHEL for EPC projects?

We have already opened the office and identified two projects to be given to them on EPC basis. They would be sourcing from us. By 2013-14, we expect about 5,000 MW to come from that plant.

I do not think they will presently compete with us. But eventually it may be an independent entity.

Will that become a BHEL II?

Not really. We are moving to 20,000 MW and they may at best go to 5,000 MW. I do not see any real pressure on us. And by the time the venture becomes an independent entity, BHEL should be geared for any kind of competition.

Are you hopeful of achieving the Eleventh Plan target for power generation?

The Eleventh Plan target given by the Power Ministry is about 78,577 MW, out of which 74,037 MW has already been ordered. About 4,500 MW of orders are also likely to be placed by September this year. So there is a good possibility for 90 per cent achievement on the above target. Of course, this does not include captive power plants. The target should be achieved even if there is a slippage of five-six months.

Is there a slippage in project schedules at present?

Compared to the Tenth Plan, most projects are running on a better schedule. But there are some delays happening. This is more on the civil work side, whether being done by us or the customer, due to the cement and steel price scenario. While some contracts do have price variation clauses, in case of fixed price contracts, small contractors are not able to absorb the steep hike in the commodity costs. So, irrespective of whether the utility does the civil work or we do it as an EPC, there are some delays on this account. However, the delays are not very significant and most of the key projects, such as the Commonwealth Games project, and private sector projects are running on schedule.

BHEL's strength has been in making equipment that can best handle the inferior quality coal in India. With a number of private players now scouting for coal mines abroad, would BHEL lose this niche and have to face increased competition?

The advantage of our boilers is the ability to take a lot of variation in calorific value. A customer can also go for blended coal with our equipment, if one does not get coal. Further we are always available at the doorstep to convert the burner or the boiler to suit changes. To that extent, customers enjoy an advantage with us whether they use imported coal or otherwise.

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