Context and Objectives
A leading automotive OEM was required to supply on-board CNG cylinders for a CNG vehicle. It wanted to determine the most cost-effective approach for sourcing on-board CNG cylinders. The key question was whether it would be more viable to set up a manufacturing facility in India or import finished cylinders from China.

The decision needed to align with a pre-defined target selling price, making cost efficiency and unit economics central to the analysis.

Study Objectives:
1. Assess the financial viability of manufacturing CNG cylinders in India.
2. Conduct a Make vs. Buy (Import) analysis across different production volumes.
3. Perform a sensitivity analysis to understand scale effects, breakeven points, and long-term profitability.

Financial Analysis - Make vs. Buy Analysis for CNG Cylinder Manufacturing in India

Approach and Methodology


1. Make-or-Buy Decision Framework
Instrex applied a structured, data-driven Make vs. Buy framework that integrated financial modeling with techno-commercial feasibility.

The analysis compared two core scenarios:

  • Scenario A: Setting up a greenfield manufacturing plant in India

  • Scenario B: Importing finished CNG cylinders from China


Both were evaluated at the same target realized selling price to ensure a fair, like-for-like comparison.

2. Techno-Commercial Feasibility Assessment
For the manufacturing scenario, a comprehensive feasibility study was conducted, factoring in:

  • Machinery and layout requirements

  • Power and utility consumption

  • Production yield, wastage, and quality losses

  • Labour and manpower deployment

  • Regulatory and certification requirements (PESO, BIS)

This approach ensured realistic production cost estimates rather than relying on theoretical benchmarks.

3. Capital Expenditure (CAPEX) Estimation
A detailed financial model was developed to calculate the one-time investment needed to start operations.

For Indian Manufacturing:

  • Land acquisition

  • Plant and building construction

  • Machinery procurement

  • Office setup and equipment

  • Pre-launch manpower and overheads

  • Working capital (equivalent to 3 months of operating costs)

For Imports from China:

  • Licensing and regulatory approvals

  • Minimal fixed infrastructure investment

4. Operational Expenditure (OPEX) Build-Up

A bottom-up model was created to estimate recurring monthly costs.

Variable Costs:

  • Raw materials

  • Consumables

  • Utilities and power

Fixed Costs:

  • Staff and labour

  • Administrative and plant overheads

  • Compliance and regulatory expenses

For imports, all logistics-related expenses—freight, customs duty, port charges, and handling—were fully accounted for.

5. Unit Economics and Cost of Production
To determine the true cost per cylinder, both cash and non-cash expenses were included.
- Cash Costs: Raw materials + OPEX
- Non-Cash Costs: Depreciation
- Financial Costs: Interest on total capital employed (CAPEX + 3 months working capital)
This ensured the analysis reflected the complete financial impact of each business model.

6. Revenue, Profitability, and Sensitivity Analysis
Revenues were calculated using the customer’s target selling price.
The profitability assessment included:
- Monthly and annual profit projections
- Breakeven and payback period analysis
A scenario-based sensitivity analysis was run across multiple production volumes to evaluate:
- Economies of scale
- Movement in unit costs
Minimum viable production volume for profitability.

Conclusion and Recommendations

Key Insights
The study concluded that manufacturing CNG cylinders in India from day one would not be financially viable, primarily due to:

  • A steep operational learning curve — achieving regulatory compliance and manufacturing precision could take up to a year

  • High capital investment and fixed overheads

  • Unfavorable unit economics at lower volumes

  • Low or negative profitability in the initial years, even at target prices

Recommended Two-Stage Strategy

Stage 1: Import and Stabilize

  • Import finished CNG cylinders from certified Chinese suppliers

  • Obtain PESO certification for 1–2 partners

  • Begin supplying the OEM with minimal upfront investment

  • Build operational experience and market credibility

Stage 2: Transition to Local Manufacturing

  • Once demand stabilizes and internal capabilities strengthen

  • After establishing strong regulatory relationships (PESO, BIS)

  • Gradually shift to local manufacturing to reduce dependence on imports and improve margins over time

Outcome

This staged approach provided the OEM with a practical, low-risk entry strategy—balancing short-term feasibility with long-term competitiveness.