New found optimism has been felt across the industry with keen focus towards infrastructure development. Since no nation can prosper without adequate infrastructure to support economic growth, Sandeep Menezes feels the construction equipment industry’s expansion rate will be the key indicator of renewed revival nationwide.
India’s Planning Commission has projected an investment of $1 trillion for the infrastructure sector during the 12th Five-Year Plan (2012-17). Till recently, this figure seemed unattainable but with the new government’s huge push towards clearing bottlenecks in infrastructure projects and fast-tracking clearances, hopes have revived. It is this renewed thrust towards infrastructure development that will require huge number of construction equipment in the years ahead.
Evolving Growth Scenario:
The construction industry is a major contributor to the country’s GDP (8 per cent in FY12) and one of the largest employment generators, currently employing around 33 million people but the construction equipment market is still untapped with more emphasis on manual labour or older alternate methods rather than mechanization.
The construction equipment industry’s revenues are estimated to reach $22.7 billion by 2020 from $5.1 billion in FY12. Unit sale of construction equipment is expected to grow to 82,000 units by 2016 from 61,745 units in FY12.
Increased impetus to develop infrastructure in the country is attracting the major global players. There were cumulative foreign direct investment (FDI) inflows of $209.4 million in the earthmoving machinery in the period April 2000-March 2014.
The construction industry demand is driven by the health of the economy and the infrastructure investments. The Indian construction industry will continue to grow at a rapid pace largely due to investments in infrastructure and urbanization.
With a population of over 120 crores, the country needs to invest on basic infrastructure like power, highways, water, sewage etc. India is placed significantly below high growth economies such as China, and developed economies like United States in terms of infrastructure.
“Demand for construction equipment is a reflection of broader macroeconomic trends such as interest rates, infrastructure investment and liquidity, which themselves indicate the health of the overall economy. This equipment demand is expected to grow in line with the expansion of real estate development from India’s key urban centres into tier-2 and tier-3 cities,” Ipsos Business Consulting, a leader in construction research and consulting, observed in its report titled Understanding India’s Construction Equipment Market.
The central government plans to develop 100 smart cities and in this regard an allocation of Rs 7,060 crore or roughly Rs 70 crore per city was proposed in the Union Budget. This is a huge project and will require construction equipment to assist in the execution. Other than 100 smart cities, the state and central governments will also need to set-up hundreds of new planned townships to accommodate India’s rapidly increasing urban population.
On the other side of the spectrum, the construction growth across rural India is also heading northwards due to spiraling incomes and want for better housing. One must also keep in mind that the majority of Indians still continue to live in the villages of India.
Till recently, many OEMs found it economically unviable to set-up additional manufacturing facilities in India. They felt it was better to rather import the equipment from their manufacturing facilities overseas. Even OEMs that were manufacturing locally had a huge proportion of their components coming in from abroad with mostly only the assembling done in India.
Prime Minister Narendra Modi recently launched an ambitious ‘Make in India’ campaign which aims to turn the country into a global manufacturing hub. It includes plans to cut red tape, develop infrastructure and make it easier for companies to do business in India. There are hopes that with a new business friendly government in-place that promotes local manufacturing, the OEMs which are reluctant to manufacture locally will change their outlook.
Costs Vis-à-vis Quality:
The construction industry in India includes a large number of small construction companies, which prefer low – cost products from China. These Chinese products are priced competitively about 5 – 10 per cent cheaper than the Indian construction equipment products. Chinese equipment manufacturers have a strong presence in some segments such as wheel loaders and dozers, where they hold a market share of more than 10 per cent. Therefore, due to the availability of low-cost products from Chinese vendors, the construction equipment market in India had been witnessing an increase in imports of construction equipment from China.
But the quality of these Chinese products is doubtful and after-sales service has been a major unaddressed issue in the past. Also, the Indian customers are increasingly looking towards total-cost-of-ownership rather than only initial purchase price. This has led to customers giving more importance to quality while taking purchase decisions.
The private sector’s share has expanded across key infrastructure segments, ranging from roads and communications to power and airports. Of the total planned infrastructure investments worth $1 trillion during the 12th Five-Year Plan, the share of the private sector is estimated to be 47 per cent, up from 25 per cent during the 10th Five-Year Plan.
None can deny that India’s infrastructure requirements are enormous and this will be the primary driver for increased construction equipment demand. The private sector is traditionally known to be more open towards mechanization rather than manual labour. Therefore as the private sector participation in infrastructure development increases vis-à-vis the governmental or PSU sector, the growth of construction equipment industry will also quicken.
Although growth will happen, the CE industry is facing cost pressures due to increasing raw material and fuel prices, which will continue to hold in the medium term. While there is a visible shift towards adoption of world class technology for better fuel efficiency, higher productivity and profitability, there remain challenges in adopting some aspects that have established themselves in the western world. For example, electronic fuel injection CRDi systems require better fuel quality which is yet to be made available in India, particularly in rural areas.
CE sales are highly dependent on new infrastructure creation. As infrastructure growth is highly volatile and uncertain in India and may remain so in future, it will be always challenging for equipment OEMs to gauge the market and have stable investment and distribution plans.
Further, increasing competition from international players will force the incumbents to spend more on R&D, on increasing market reach and on finding new ways to improve productivity for their customers.
Credit Stress on Key Purchasers:
The construction equipment industry can only witness growth if the construction companies which are the main buyers of these heavy equipments remain in sound financial health.
But as per an ICRA report, over the past two to three years, construction companies in India have witnessed considerable weakening in credit profile with escalating debt levels, stress on working capital and increasing interest costs eroding net margins. Under-utilization of assets, heightened competitive intensity and increase in input/labour costs has also impacted performance.
The growth of the construction equipment industry is almost assured; the rate of itself will depend on streamlining different issues, such as government clearances and approvals, administrative and procedural reforms or generally on the pace of project executions.
Yutaka Goto, President & Managing Director, Kobelco Cranes India
As market in 2014 shrank to almost one third of 2012, we may expect the Indian crane market will recover to the level of 2010 within the next 3-5 years. The main growth drivers are that many infrastructure, metro rail, steel and power projects are cleared, also more FDI in new projects, and new economic reforms, etc.
Ramesh Tiperneni, Country Manager, Caterpillar India
We anticipate that better economic growth should result in an improvement in sales in both power systems and construction industries. The growth will vary in terms of the industries, but the build-out of infrastructure that must occur as the country and the Asia region urbanizes is going to provide a large platform for growth.
S Manjunath, General Manager – Sales, Doosan Infracore India
Post the 2014 general elections, there is an expected revival which will boost the development of India, as there are enormous opportunities with the new government granting infrastructure projects and allowing huge investments in infrastructure industry.
The Indian construction equipment sector is now in the verge of progression driven by growth in investment in the infrastructure sector. India has the potential to become the 4th largest global market for Heavy Equipments and is expected to be one of the biggest emerging markets going forward.
Moreover, if India has to successfully constitute 10 per cent of the global market by 2018, the construction equipment players also need to take key strategic actions such as design and build equipment suitable to the Indian market apart from looking at a unique export business approach.