How L&T Deals with Labs and Technology

In September 2011, Larsen & Toubro’s shipbuilding division launched a 9,000 tonner built in its Hazira shipyard, Gujarat, into the river adjoining the yard. The amazing part about the launch was that it was sideways instead of stern first, which is the usual way. Among the sounding of klaxons and sirens, the bulk carrier slid gracefully into the water horizontally, then moved downriver into the sea.

The ship, Happy Sky, was among the heaviest to be launched in this manner. It had to be launched broadside because the shipyard is located at a narrow river bank. The innovation that went into this launch, with complex calculations of weight and ballast, is an example of L&T’s approach to research in its business.

The $12 billion conglomerate has divisions that deal in technology, engineering, construction, electrical and financial services. Yet, research and development across the company is mostly application-based. The Heavy Engineering Division, which accounts for almost 40 percent of its total sales, has often had to invest heavily in innovation because much of what it needed over the years was simply not available. The division has three main arms—the Process plant, which makes large reactors and heat exchangers, mostly for the energy industry; the Strategic arm which deals with defence, nuclear and aerospace business; and the Shipbuilding arm.

“The company has patented dozens of innovations in this space—often using machines in a manner that even the supplier wouldn’t have imagined,” says M.V. Kotwal, L&T’s director - heavy engineering. In the defence and nuclear business, many technologies are available with only a handful of suppliers and they are very often not willing to part with it.

L&T’s approach to R&D has been two-pronged. Firstly, it partners with government labs and agencies like the Defence Research and Development Organisation (DRDO) and the Nuclear Power Corporation (NPCIL). Secondly, it does joint ventures with global players that have expertise in the chosen area.

The labs often carry out basic research which is tested, scaled up and applied by L&T. The company has been lobbying for a larger chunk of the defence business for the past several years and has begun scaling up for it by building up capacity, often in advance of orders.

One big move in recent years is a joint venture with NPCIL to manufacture high-thickness, alloy steel forgings needed for the new light water nuclear reactors.

Though the Fukushima disaster has clearly set back the nuclear industry in India by several years, L&T continues to invest in the sector.

A Rs 2,000 crore plant to melt steel and forge it from ingots that could weigh up to 600 tonnes each, will be commissioned in the next few months. The forgings necessary to build the roughly 15,000 MW of nuclear power projects that NPCIL has planned, were being imported so far. Kotwal says, though this is not a strictly commercial venture, it could be a game changer in L&T’s nuclear business, since only four-five companies globally have the technology to make these forgings.

Founded in 1938, L&T had remained India-focussed until liberalisation opened doors in the 1990s. In the years that followed, it has changed tack and is now very aggressively trying to increase its international business to beat the slowdown in orders from India.

Despite spreading wings to the Mid East and other parts of the world, it has lagged behind global competitors like the large Korean chaebol and more recently the Chinese. This, says Kotwal, is because L&T often did not have the scale and used more of the versatility approach—where it made a few of many things. It made, for instance, boilers, reactors and ships largely for Indian customers—but did not invest the millions of dollars needed in machinery and research.

Competition on the other hand, acquired scale by selling to a much larger global customer base. In many businesses, L&T remained a bit-player supplying to a few, niche Indian customers. For instance, in radars and avionics, it had a small capacity and supplied to ISRO—but it could never aim to pitch to international customers.

The strategy has changed in recent years, and the goal is to become a player of international scale. One way to get past the technological barrier was to form a partnership with a global leader. Last year, L&T signed up with European defence and security major Cassidian—which specialises in electronic warfare, radars and avionics—for a joint venture. Two plants, at Talegoan in Maharashtra and Bangalore, will manufacture these high-end electronics on a larger scale.

Another example is in the shipbuilding business. Dozens of shipyards in India and abroad are able to build tankers and general purpose vessels. But high-end builds like LNG (liquefied natural gas) or LPG (liquefied petroleum gas) ships and car carriers need much more investment and capability that only large shipbuilders abroad have. The stakes too are much higher—one LNG ship costs about $200 million, while the largest oil-tanker (supertanker) costs only half as much.

L&T is hoping to bridge the gap with a technology and licensing agreement with Japanese shipbuilder Mitsubishi Heavy Industries. The Japanese company will train L&T engineers and assist in procuring materials. Both companies plan to look for shipbuilding opportunities globally. L&T and Mitsubishi also operate two other joint ventures to make power-related equipment, including super-critical boilers, and steam turbines and generators, which they signed in 2007.

Competition from Chinese companies is also one reason that Indian companies in the heavy engineering business are rapidly upping the ante on research. Many power producers are opting for Chinese equipment which is cheaper and often comes packaged with debt. In the short term, the challenge for L&T is to keep up with its investments in new facilities and innovation, even when the order book is under pressure. Shipbuilding, nuclear and defence are all areas that could turnout to be multi-billion-dollar businesses in the future. However, the picture right know on all three is not very pretty. Orders are slow in coming and keeping the innovation pipeline warm might be the biggest challenge yet.