ELSTEEL

BUSINESS ENVIRONMENT TERM PAPER

Submitted By: Section B, Group 6 2010073 - Chandramouli Muthiah 2010083 - Isha Arora 2010085 - Kalpak Ramesh Iyer 2010106 -Sarat Gopinath 2010114 - Swapnil Kamat

ELSTEEL

Acknowledgement
Our deep sense of gratitude to Mr.Sidharth Bhatnagar, HR Manager, Elsteel, Goa for allowing us to write our Business Environment term paper on Elsteel. We are thankful to him for devoting his precious time and sharing his valuable knowledge with us during our visit to Elsteel.

Our thanks and appreciation to Ms. Sophie, Finance Head, Elsteel, Goa and all the employeesofElsteel, Goa for their help and support.

Our thanks to Prof. Amarendu Nandy and Prof. Joy Chowdhury for theirvaluable guidance from time to time.

We would like to thank all the people who helped and supported us to writeour Business Environment term paper.

ELSTEEL

Table of Contents
Introduction ................................ ................................ ................................ ................................ ...... 3 Products ................................ ................................ ................................ ................................ ............ 3 Elsteel Goa ................................ ................................ ................................ ................................ ........ 4 Internal Environment................................ ................................ ................................ ......................... 4 External Environment ................................ ................................ ................................ ........................ 5 Porter s 5 Forces for Elsteel ................................ ................................ ................................ ............... 6 1. 2. 3. 4. 5. Bargaining Power of Buyers Low................................ ................................ .......................... 6 Bargaining Power of Suppliers Low ................................ ................................ ...................... 6 Threat of Competitors Low ................................ ................................ ................................ .. 6 Threat of New Entrants Low ................................ ................................ ................................ 6 Threat of Substitutes Low ................................ ................................ ................................ .... 6

Regression Analysis................................ ................................ ................................ ............................ 7 Observations ................................ ................................ ................................ ................................ ..... 7 References................................ ................................ ................................ ................................ ......... 9 Appendix ................................ ................................ ................................ ................................ ......... 10 Exhibit 1 Elsteel Product Map................................ ................................ ................................ .... 10

ELSTEEL

EL
Introduction

EEL

Elsteel is a multi national corporation headquartered in Denmark. It is a privatelyowned companywith the owners, a Danish couple, functioning as the Joint Directors.Their manufacturing plants are in Sri Lanka, Poland and India. The plantin Sri Lanka was started 25 years ago and is the main manufacturing hub for Elsteel.Their R&D division is based out of Sri Lanka. Elsteel has a huge network of distributors in 53 countries around the world. Their customer base is spread world-wide with Australia, South Africa, Russia and Spain being their primary markets.Out of these, Australia with a 60% share is the dominant market for Elsteel.

Products
Elsteel is a one stop supplier of all electrical enclosures from the smallest terminal boxes to the largest panel boards. They provide the very best and innovative enclosure system in the market. (Refer Exhibit 1 Elsteel Product Map) Elsteels Techno Module is the most modern of all modular systems and they are constantly developing and type-testing the system to make sure their customers get the latest technology available at all times. Techno Module can accommodate all brands of electrical equipment since it is not linked to any breaker manufacturer. They differentiate their products on the following parameters:y High quality products y Vast range of board systems y Solid documentation behind every product and solution y Superior support y Flexible setup and easy-going processes y Swift way from planning to action

ELSTEEL

Elsteel Goa
Elsteels Indian plant is located in the town of Honda in Goa.It was set up 2 years agowith a capital cost of around 25 crores. The reasons for a setup in Goa are:y Good Infrastructure y Incentives from GIDC (Goa Industrial Development Corporation) y Proximity to Port for transportation y Cheap Labour y Proximity to Sri Lanka y Similar climate as that of Sri Lanka It is a 100% export oriented unit and there are no Indian customers. Elsteel has a lot of orders in hand and plans to cater to the export market in the short term before entering the Indian market in the long term, after around 4-5 years. Right now, there is no sales team in Elsteel Goa and surplus orders from Sri Lanka come to Goa. In the future, a sales team will be developed here and customers will be acquired, internationally and domestically.

Internal Environment
There are 175 employees in Elsteel Goa, from which around 80-85% employees are from the nearby villages of Honda and Valpoi. They work in a general shift from 8 am to 4:30 pm and two regular shifts; a morning shift from 6 am to 2 pm and an afternoon shift from 2 pm to 8 pm. If required there is an additional night shift from 10 pm to 6 am. As a CSR initiative the labourers involved in the construction of the plant in Goa were later employed as workers there. They were given training to operate the machinery,which took quite some time since their educational qualifications and skill levels were low.During the first year some of the workers left Elsteel Goa for Government jobs but now the attrition rate is negligible. The top management in Elsteel Denmark trusts its employees in Elsteel Goa and does not interfere with their decisions. For example if the Sri Lankan product design is faulty then the plant in Goa can take the decision to fix it without consulting the management in Denmark. The HR Manager in Elsteel Goa is not a local due to which there was a language barrier initially and employees hesitated in talking to him. But now he has overcome this barrier and built good relationships with all employees who feel free to speak with him without hesitation. The performance management in Elsteel Goa is very basic since the employees are not highly educated. Going ahead, they have plans to hire more educated workers like ITI and Diploma engineers and then go for performance based appraisals. Their machinery is primarily from Europe and Japan.

ELSTEEL

Currently Elsteel Goa uses Navision as its ERP tool for manufacturing but payroll is done manually. They are searching for a new ERP package which can be used for both these functions. The Quality department in Elsteel Goa is working towards ISO 9001 certification. They are also on the path to implement 5S for reducing wastage. They have achieved 3S so far. Their main focus right now is bridging the productivity gap between the plants in Sri Lanka and Goa.

External Environment
 Duty Exempti on Import of Raw Materials. Elsteel imports all its raw materials and hence benefits from the governments duty exemption on imported raw materials for 100 % export oriented units. As a result it is able to save on its cost of production.  No Forward Contracts.Only Spot Payments. Elsteel Goa does not enter into forward contracts. All transactions are in the spot market. Although forward contracts are less risky, Elsteel prefers to deal in spot transactions because there is no certainty of when the customer will order next. The customersorder will be based on projects that it is able to secure and orders to Elsteel will be on a needs basis. The boxes supplied are not inventories like FMCG products and so forward contracts are not preferred.  Tax Holiday till 2011. The Government has a tax holiday schemefor different sectors till 2011. In the current union budget 2011-12, this tax holiday scheme was extended by a year for the power sector only. Elsteel Goa has not yet broken even and hence doesnt have to pay taxes. However if the tax holiday for its category is not extended beyond 2011, then it will have to start paying taxes once it starts making profits.This could have a detrimental effect on its pricing.

ELSTEEL

Porter s 5 Forces for Elsteel

1. Bargaining Power of Buyers Low
Elsteel manufactures customized products which are made to order as per their customers requirements. The quality check is stringent and accuracy is measured in microns. The demand for these customized products is very high and there are no comparable competitors. Hence Elsteel enjoys a very high margin on these products. Most of Elsteels customers have a long-term relationship with them due to which they share a good rapport. The sales teams in Denmark and Sri Lanka negotiate the prices with their customers. The selling price is kept constant for a year neglecting minor fluctuations in raw material costs. However, in case there are major variations in raw material costs, then the selling price is changed during the year.Elsteel also manufactures standardized products on a smaller scale which are sold to a few customers. These standardized products have a relatively lower margin.

2. Bargaining Power of Suppliers Low

Raw material for all manufacturing plants is purchased from a single supplier. For example, Elsteel buys powder coatings from Indonesia. Since Elsteel buys raw material in bulk, they carry out negotiations with the supplier and get a sizable discount.

3. Threat of Competitors Low

There are a few Chinese companies which make modular enclosures but these are of inferior quality. No other company in India or abroad manufactures on the same scale as that of Elsteel. Elsteel is unmatched in its process and product quality due to which it does not have any competitors.

4. Threat of New Entrants Low

Elsteel shares a long-term relationship with its customers, which cannot be easily destroyed. Due to Elsteels brand equity and customer loyalty, any new entrant will find it very tough to capture market share from Elsteel. This effectively acts as a barrier to new entrants.

5. Threat of Substitutes Low

The R&D team in Elsteel, Sri Lanka is constantly researching for new materials and processes which can be used to improve their products. They continuously innovate and launch new products and forestall any substitutes from replacing them.

ELS EEL

Elsteel is a private limited company and so they do not disclose any financial data. Since we were unable to acquire any data from Elsteel, we decided to collect and analyse data about the Indian steel industry. The Indian steel industry has grown rapidly since 1991 -92 when the economy was liberali ed, privati ed and globali ed. Licenses w no longer required for expansion in ere capacity, except for a few areas and foreign technology was flowing into our manufacturing processes. A lot of FDI was also made in the Indian steel industry. As a result we have reached a position where India produces nearly 7 per cent of global steel output. Production has more than tripled from 14 mt in 1992 to 46 mt in 2008. The following are some of the key contributors to this growth in productionDependent ( variable) y Govt. relaxation on excise duties and taxes y Easy availability of iron ore (input) y Easy availability of pig iron (input) y Rising domestic consumption of steel y Strong sectoral demand The following table shows the Independent variables that represent these indicators in our regression analysis. Indicators Representing variable in Regression Analysis

Govt. relaxation on excise duties and taxes Excise duties Easy availability of iron ore (input) Easy availability of pig iron (input) Rising domestic consumption of steel Strong sectoral demand Pig iron price Iron ore price Consumption of steel GDP

This regression has been run using quarterly data from December 2001 to December 2010.

Obser

From the Model Summary table, we can see that the 83 % of the variation in production is explained by the variation in the selected variables.
7

Regressi

l sis

ELS EEL

From the ANOVA table, we can gauge this multiple regression model is significant.

From the Coefficients table, we observe that excise duty and consumption of steel are most significant in the explanation of Indian steel production. This indicates that if the government increases excise duties or ends the tax holiday that is due to expire for export oriented steel units in 2011, there could be a fall in production of steel in India. This could affect the production of a company like Elsteel that is currently a beneficiary of the tax holiday that the government is providing to EOUs. Another observation is that the constant term s significance is high. This could be a sign that irrespective of changes in the other variables, there will be a healthy annual production of steel in India. This could be because India enjoys the benefits of abundant cheap labour, iron ore and pig iron availability that act as a good base for it to export despite a drop in domestic demand. Consumption is also fairly significant. Domestic consumption and production have been moving in the same direction as each other over the years despite imports and exports of steel. It can be said that they are positively correlated from their movements It can be . inferred from this, that India has sufficient capacity to meet its demand and export over and above this. This is verifiable from the excess production over domestic consumption. In 2008, production exceeded domestic consumption by 3 million to nnes (46 v/s 43 mt).

ELSTEEL

References
http://www.elsteel.com CMIE Database www.economywatch.com www.steelworld.com www.imf.org www.sail.co.in www.tatasteel.com www.essar.com

ELS EEL

Appendix
Ex ibi 1 Elsteel Pr duct Map
  

10