The economic slowdown has impacted the Indian construction equipment industry over the last two years. However the medium term scenario to 2020 seems positive. A rethink is required to survive and grow in this stagnant market and to satisfy discerning customers. A return to basics i.e. listening to customers and differentiating the overall offering will help equipment makers to compete successfully in the next six years to 2020, say Shripad Ranade, Prabhakar Tiwari and Himanshu Singhal of Tata Strategic Management Group.
The short-term economic outlook in India may seem grim, however the medium to long-term economic prospects look encouraging. In fact, consensus has been building among various global banking institutions that India will witness higher economic activity and foreign fund inflows within a few quarters of the current general elections. Sectors such as infrastructure, ports, mining will hopefully see a resurgence and healthy growth in the next 5 to 6 years up to 2020.
Construction equipment industry
Construction equipment (CE) can be classified into four groups – Earthmoving, Road Construction, Concrete and Material Handling Equipment. Earthmoving equipment is by far the largest group, followed by concrete equipment and material handling equipment.
The CE industry normally grows twice as fast as the infrastructure industry. A few years back, the Indian CE industry was excited about the tremendous growth potential and expected up to 15 % annual growth rates in the medium term. This enthusiasm has tapered and companies are now projecting lower volumes. For excavators as an example, as against earlier projections of 42,000 units annually by 2017, the current estimate is down to 25,000 to 28,000 units by 2018. Overall the current size of the CE market is ~ 45,000 units and it is expected to grow at ~8% for the next 4 years. Thus the market would be around ~65,000 units by 2018 instead of 100,000 units projected a few years back. The biggest contributors to total volume will remain excavators, backhoe loaders, forklifts and transit mixers. In terms of value, the market size of CE was ~USD 4.65 bn in 2012 and will be ~ USD 6.3bn by 2018 as against the earlier projections of ~USD 9.3bn.
This slump and consequent oversupply is forcing companies to recalibrate their strategy and focus ever more on improving the total cost of ownership & and equipment productivity through product development and service excellence.
Growth pockets: Earthmoving equipment will remain the biggest contributor in terms of value and volume. However, some categories such as tower cranes and mobile cranes would grow disproportionately, driven by increased investments in large real estate projects (high rise residential real estate, large shopping malls etc.). Road construction and real estate will remain the key growth drivers for construction equipment industry. Augmentation of the highway network and formation of smart cities will provide further thrust to the sector.
Shift in purchasing criteria: Today, the customer is much more aware about product applications and usage patterns. This has led to many institutional buyers buying CE on the basis of total cost of ownership (TCO) rather than just the upfront price, and also looking at equipment productivity, operator’s comfort and fitness for use. Customers seek equipment suitable for their application and sector such as for road construction or port handling or for real estate. It is expected that the increasing focus on TCO will find more takers among both institutional and retail buyers, which implies that owning and operating cost, fuel efficiency and the availability of long-term maintenance contracts and excellence in after sales service will be critical purchasing criteria.
Technology Trends: The entry of global OEMs has led to up gradation in technology-driven product features, such as remote access devices, automatic controls to manoeuvre machines, more efficient (Tier III) engines, and cabin air-conditioning. These are gaining popularity among customers. Some recent product launches in excavators and backhoe loaders feature several additional functionalities, including service enablers such as the capability to send problem logs by sms to the nearest service point, and downloading historical data regarding engine status, hydraulic systems, fuel consumption, and the expected life of critical components. Increasingly, operators attach value to equipment with “smooth” controls and air-conditioning e.g. one operator says “I am very comfortable with this new excavator – it is smooth to manoeuvre, the earlier machines were very tiring”. Customers are hence increasingly mindful that they need to invest in operator comfort, to retain skilled operators.
The IOT (internet of things) could impact CE considerably. IOT describes a system in which objects can communicate internally or with outside entities. According to AEC Big Data, equipment repairs represent the third largest operating cost in the construction industry. IOT helps reduce this cost by enabling machinery to self-detect the imminent need for a repair before it becomes a bigger problem.
Rise in Equipment leasing/rental: Construction companies are under a lot of pressure to trim capital outlay, and hence they increasingly rent equipment on a monthly or hourly basis, or where possible, on the amount of material handled. Leasing/rental of construction equipment is still a very fragmented industry in India, but is expected to show strong growth, possibly higher than 30% annually over the medium term. Several OEMs have already constituted dedicated teams for the rental/leasing services.
Demand for Superior Service: In construction equipment, product functionality has limited scope of differentiation, with domestic players also catching up with new features and options. With rising customer expectations, quality of after-sales service will impact sales of equipment OEMs. Our research shows that for certain categories, customers expect a response in about 24 hours (MTR – mean time to response) and expect repair to take around 72 hours (MTTR – mean time to repair), and and they expect at least 90% on-time delivery performance. Even though several OEMs are not able to meet these expectations at present, they have started augmenting their dealership network for better reach with touch points every 100 to 150 km.
Increased Automation: Social sector schemes, rising prosperity and other factors are causing a shortage of labour and increasing the cost of semi-skilled and unskilled labour across India. This has impacted the Indian construction sector, which has hitherto remained much less mechanized than in China. Our research shows that if just half this gap in mechanization intensity is to be made up, construction equipment demand will have a huge upside.
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.
The CE sector has slowed down in the last two years, and companies have to rethink their plans. Offering producs that fit to the application will help. Larger customers will increasingly look at the Total Cost of Ownership (TCO), fuel efficiency, and service, while buying equipment. This could expand the addressable market for premium products. However, our research in this sector shows that customers of premium products perceive a significant gap between the premium services that they expect vis-à-vis the service they typically receive. A superior service perception would hence be a differentiator in this segment. Meanwhile, first time buyers, will continue to choose value products, but would require improved geographic reach of the dealer network and investments in after sales service and spares.
The Indian construction equipment industry is poised for exciting times ahead, and OEMs should leverage the opportunity by listening to customers and differentiating their overall offering to compete successfully.
(Shripad Ranade is Senior Principal, Prabhakar Tiwari is Engagement Manager, and Himanshu Singhal is Associate Consultant at Tata Strategic Management Group.)