Construction equipment will remain crucial in supporting India’s economic and infrastructure growth. India cannot expect infrastructure growth by relying solely on imported equipment; there should be self sufficiency in this crucial nation-building necessity.
Sandeep Menezes studies the barriers to localization of the construction equipment industry and draws attention to the benefits available to OEMs that adopt it.
The Indian construction industry is one of the most important sectors of the economy as it stimulates infrastructure-building and creates growth opportunities for other industries and economic segments. It is the second largest industry in India after agriculture. Indian construction industry has been contributing 7 to 8 per cent of the nation’s GDP for the past many years. Construction equipment remains crucial to development activity and with mammoth nationwide need for better infrastructure; the equipment market will witness hectic activity over the long term.
According to the Indian Construction Equipment Manufacturers’ Association (ICEMA), the ECE (earthmoving and construction equipment) market has potential to grow at 20-25 per cent to reach 330,000 to 450,000 unit sales by 2020.
Estimates for the size of the Indian construction equipment can vary; different stakeholders tend to quantify it different. However, the size of the industry is roughly estimated to be around $5 to $6.5 billion annually nationwide.
Current levels of localization:
The extent of localization achieved across the construction equipment industry varies across product categories. Mainly, the smaller and less complicated equipments and components have been easier to localize and manufacture in India vis-à-vis the complex ones.
Earlier many MNCs had doubts about product quality if manufacturing activities were transferred to India. Few years ago few MNCs started out local production of smaller equipments although still importing many complex components. But gradually the move towards increased localization intensified in recent years as companies gained confidence in quality of locally manufactured products and components.
The construction equipment industry in India has evolved over the years and is at present in an intermediate stage of development. Technology available in the country has the pedigree from the international majors due to technical collaborations in the past and is one generation behind in few product segments.
Few products manufactured in India by some of the MNCs who have set up assembly plants in India are meeting the global standards. The industry is trying to bring in international levels of technology as demand and scale of operation is increasing.
Nitin Lall, General Manager, Atlas Copco Construction Technique, pointed out the difficulties in manufacturing in India stating that “a lot of innovation happens in the product. Therefore we might see new equipment launch once in two years. Also in this industry which is a capital goods industry, you cannot create multiple hubs and then create that technology being replicated everywhere because to manufacture that type of technology, you need that type of equipments also. Therefore, we put our equipments in one major hub from wherein we would like to produce. From there it is easier for us to innovate faster and implement R&D changes.”
Viraj Naidu, Managing Director, DISA India Ltd, explained: “Localization is not only transfer of rights; it is transfer of knowledge. To make something that looks similar is possible but to make something that works similar requires lot of knowledge transfer and also absorption of that knowledge by the workforce. The drawings will provide the specifications but during manufacturing you will witness some deviations. But that deviation on the component level leads to deviation on the machines level which takes lots of experience to understand.”
Big Volumes Mean More Localization
Localization of products requires new factories, production lines, vendor support and skilled manpower. But mainly it means large investments which need to be economically viable. Few decades ago when the construction equipment segment was smaller – these large investments towards localization were not economically viable because of the small market-size. But in recent years with the construction equipment industry witnessing growth due to the requirement for better infrastructure – the need for localization has been felt and therefore quickened.
B. Sridhar, Head, SDLG Business, Volvo India Pvt Ltd explained that manufacturing products in India is a good option provided there are volumes. Everything is based on volumes. If the total market increases then it is viable to put up a plant. But if the market is flat then it is better to wait for the situation to improve.
Admitting that a large portion of its products or components were still imported Subhasis Chatterjee, Managing Director, Eaton Fluid Power Ltd, stated that “localization is a continuous process and we are doing our best. We are going to customers and understanding their needs then depending on the market-size of that product segment – we are localizing. Many pumps, valves, steering control units etc. that we are localizing were earlier being procured from Japan, China or Germany. Over a period of time we will localize more and increase our exports from India.”
India is a lesser cost-sensitive market than China. When volumes are small, the investment into large technologies becomes unviable. With volumes going up in India, it is driving higher level of technology acceptance which is not available with local suppliers but existing globally. Therefore localization attempts give further boost or accelerate the market. But the primary issue remains volumes or scale which makes technology more affordable through localization, explained Viraj Naidu.
Costs Advantage Pushing Localization:
Although India always enjoyed lower manufacturing costs advantage vis-à-vis developing nations, the country did not witness huge strides by MNCs towards local manufacturing mainly due to product quality issues. But recent fall of the Indian Rupee has led to imports becoming dearer. It has led to a situation where equipment manufacturers have achieved larger quantum of local components in their products, thereby gaining costs advantage in product pricing.
Every manufacturer wants to gain costs advantage over rivals knowing that only competitive pricing can help in gaining bigger market-share. The lowering of costs also ensures that those buyers who could not afford latest technologies due to higher prices are able to make purchase decisions–thereby increasing the overall market-size and penetration.
Currently everyone wants high-end technology, but the costs are prohibitive. If it can be made affordable then the market can shoot up faster. Costs are one of the reasons for localization added Viraj Naidu.
The global economic meltdown had resulted in increased import of equipments from idle global capacities and also sharp rise in import of used and obsolete machineries as second hand equipment. The import of used crawler cranes and mobile cranes was almost 50 per cent to 80 per cent of total consumption in Indian market during last few years. The construction equipment industry also faced disadvantages in duty structures, taxation etc in many situations when compared to imported equipment.
Therefore, the biggest problem faced by domestic construction and earthmoving equipment manufacturing industry was lack of level playing field.
Since last few months, there have been economic recovery signs being witnessed in Western markets – this has led to idle manufacturing capacities being utilized in those nations thereby decreasing the diversion of such equipments to India. But there should be adequate policy safeguards to ensure imports are discouraged while encouraging localization.
The Way Ahead:
The government should seriously look at these issues and work out a package of incentives to make it advantageous to manufacture in India, as compared to importing – this would give a fillip to the local construction equipment industry.
India has the world’s second largest pool of engineers and technicians that is skilled and cheaper than Western counterparts. Therefore India can emerge as a manufacturing hub for construction equipment with high quality standards and with lower prices.
The current economic and market conditions are favourable in pushing towards increased levels of localization across the construction equipment segment. It is only that these favourable conditions need to be supported by an encouraging and stimulating policy framework.