Ingersoll-Rand (India) Ltd.: The Air Compressors Business at the Crossroad
About Ingersoll-Rand (India) Ltd.:-
Ingersoll-Rand, Inc., USA is a global major in the manufacture of a wide range of equipment catering to diverse industries. Its equipment have been used in a number of prestigious projects all around the globe like the Panama Canal, the Hoover Dam and the English Channel Tunnel.
Ingersoll-Rand’s business in India dates back to 1871. But, it began major operations when it incorporated a private limited company under the name Ingersoll Rand (India) Pvt. Ltd. at Calcutta in 1921. Some of the key points to note about the company are:- * At first it was only a trading company but in 1965, owing to upbeat demand for engineering equipment, its first manufacturing plant was set up in Naroda, Gujrat to manufacture reciprocating compressors. * Went public in 1977. * In 1978, a second production unit was set up in Bangalore to manufacture engineering tools. * Major capacity expansion of both plants between 1993 and 1997. * A number of additions were made to the product portfolio in 2000.
The current situation (2002):- * Turnover of Rs. 406.2 crores * Employee strength of 1000 * Rs. 80 crores worth of exports. * 22 company offices and more than 80 distributors.
IRL’s Air Compressor Business:-
Air compressors are used in all types of manufacturing industries. They’re classified according to capacity as low (0.5-40 HP), middle (40-100HP) and high (100-200 HP) ranges. They can also be classified on the basis of method of compression as reciprocating, rotary screw and centrifugal compressors.
Products and Applications: * ILR’s compressors have high quality, high reliability, low maintenance cost, use advanced technology and are energy efficient. * The type of compressor and the size of compressor are strongly correlated:- * Small: both Small Reciprocating and Rotary screw compressors * Medium: predominantly Rotary screw * Heavy Industry: Large Reciprocating and Centrifugal * The prices of various types of compressors are as follows:- * Centrifugal: Rs.50 lacs to Rs.125 lacs * Large Reciprocating: Rs.15 lacs to Rs.29 lacs * Rotary screw: Rs.7 lacs to Rs.8 lacs * Small Reciprocating: Rs.60000
Capabilities:
* IRL Factory at Naroda is the only OR unit in the world that manufactures all 4 types of compressors. * Until a few years ago, the compressors were designed by the parent company but recently the design and manufacture has been tailored to Indian market by IRL.
Markets:
* Predominant sources of business are industries like automotive, automotive components, textiles, metals, refineries and PET bottling industries. * Dual sales channel is used: both its own sales personnel and distributors. * Small compressors are handled by distributors, medium by both distributors and IRL and centrifugal compressors are sold solely by IRL.
Competition:
* Highly competitive market. * Atlas Copco, Elgi Equipments Ltd., Kirloskar Pneumatics (KP) and IRl are the key players. * Atlas Copco is a major competitor in Rotary and Centrifugal compressors. * KP is the major competitor in Large Reciprocating and Centrifugal compressors * Elgi Equipments is a competitor in Small Reciprocating and Medium Rotary compressors.
The Deal in Question:-
Deccan Textiles is a very big account with respect to the air compressor market and had been held by IRL’s competitors until now. IRL had not been able to make inroads into this account. After months of hard work on part of a sales executive in Mumbai, IRL was able to bag an order for a Centac Centrifugal Air compressor for Rs.93 lacs. This was considered to be a huge success by the sales executive but the Vice President-Air Compressors had his doubts over the deal. His reservations were:- * The margins are too small at around 2%. * The product is highly undervalued at that price. * He feared, that the company may bleed to death in such circumstances.
The Problems at Hand:-
In view of the above mentioned deal, the Vice President convened a meeting to discuss the problems being faced by the company. Some of the reservations that he and the Financial controller had were:- * Such deals put huge pressure on the bottom line and in some case, even eroding it. * The overall estimated cost of the machine in question comes to around Rs.91.3 lacs and there are also significant hidden costs. The costs are also likely to go up in the foreseeable future. * Such a low price would mean undervaluing the product. * The competitors are driving the prices to dangerously low levels, in such a scenario, both IRL and its competitors will end up bleeding. * Also, the compressor sales had declined in the recent times owing to the economic slowdown.
But, the sales personnel had very different ideas from them. Their points were:- * The demand is already declining. In such conditions, it would not be wise to turn down any deals. * Competitors are ready to reduce prices at the drop of a hat. They’re offering products at significantly lower prices. * Also, the business was profitable at the moment and was showing growth. The sales personnel opined that there’s nothing wrong with the present business model. * Cheaper imports and the unorganised sector also presented a sizeable threat and hence, the prices had to be reduced. * In their opinion, the company would be unnecessarily putting their performance under pressure by not offering the prices that the customers want. They wanted the company to show more flexibility in pricing. * They were already under huge pressure to achieve targets. In this scenario, increasing prices will only make targets more difficult.

Suggested Solution:-
Ingersoll Rand (India) Ltd. offers its clients with machines which are of a higher quality in comparison to its competitors. Due to this, engaging in a price war with its competitors is not the way forward for IRL. We suggest that IRL to take up a consultative approach towards compressor sales. The major features and advantages of such an approach would be:- * Deccan Textiles has about 15 machine trips each year, which result in a direct loss of about Rs.120 Lacs and also, substantial indirect losses. IRL’s better quality machines can help Deccan Textiles cut down on these losses. If IRL’s Sales personnel can efficiently convey this message to the clients, the clients would happily pay a premium for their machines. * As a result of such an approach, IRL will be able to avoid the price war which seems inevitable in the present scenario. * A consultative approach will also help IRL in more efficient client retention. * Such an approach, if successful, will reduce the huge pressure that IRL’s sales personnel are under at the moment. * A consultative approach will also help IRL in reinforcing its position as a thought leader in the market.