Adding an additional division is like adding another additional cost, therefore K. Ilango feels that infrastructure developers prefer outsourcing their equipment division to hirers who have an in-depth knowledge of the technology trends in the equipment.
Infrastructure development is the key focus for any country because it not only contributes to the GDP, but also creates growth opportunities for other industries like manufacturing, automobile, steel, export, skill development and more. In India, construction is the second largest industry after agriculture, and has been contributing 7-8 per cent towards the national GDP. It is also one the largest employment generators, currently employing about 33 million people. This is one of the reasons why the central government is planning to invest $1 trillion in infrastructure development during 12th year plan (2012-2017).
A construction project cannot function with just the planning department; it needs its limbs to complete the project. Construction equipment is integral to every project and this is why this division grows twice as fast as the infrastructure industry. The equipment market is expected to grow by 12 per cent CAGR to $4 billion by 2017.
Construction equipment is divided into four major groups: Earthmoving equipment, Material Handling, Road Building equipment and Concrete equipment. Earthmoving equipment which includes backhoe loaders, wheel loaders, tipper and steer loaders, holds the largest share in this segment (close to 70 per cent). This is followed by Concrete equipment which includes batching plant, transit mixer, concrete pumps and aggregate crushers. Material handling falls third and comprises of tower cranes, mobile & hydra cranes and bulk material handling. Lastly is the Road building equipment which includes excavators, scrappers and bulldozers.
Why do developers opt for equipment hirers?
Infrastructure developers have multiple divisions involved for a construction project like planning, plant & machinery, engineering, site inspection and accounting. Adding an additional division is like adding an additional cost. Hence most companies prefer outsourcing their equipment division to hirers who have an in-depth knowledge of the technology trends in the equipment. This has a direct correlation to higher work productivity and profits. Other reasons include:
• Cutting additional investment cost on new machinery and labour
• Focus on high urbanization and infrastructure development has increased the work order for developers. Based on the site requirement they can hire different technology updated machinery from different hirers
• When a project is completed, the machinery mostly remains idle till the next project. A developer can avoid surplus expenses like repair, maintenance, godown space, interest rate, etc that are incurred in the interim
• With new technologies being developed, the requirement for old machines has reduced. In such situations the old machines are usually idle or sold for scrap. Hence a construction company can avoid such depreciation assets
Current scenario and challenges:
A few years ago the construction industry was facing 21 per cent – 45 per cent annual growth rate and had predicted a remarkable growth potential with 15 per cent annual growth rates in future. But unfortunately, in the recent years, the construction industry has witnessed a decline in the work order; 77.1 per cent (Dec 2012) to 11 per cent (March 2014). In addition to this, investment by the government in new projects has also declined. This has directly or indirectly affected the private players as well. The equipment manufacturing companies too have projected low sales volume. For example, the market size of industrial crane segment has dropped from Rs.2500 crore to Rs. 1800 crore in the last two years. The excavation manufacturers had earlier estimated 42,000 units annually by 2017. However the current estimate is only 27,000 units by 2018. Thus the market would be around 65,000 units by 2018 instead of 100,000 units, which was estimated a few years back.
These adverse situations have stretched the financial position and created pressure on the cash flow of private players into new projects. Construction companies and hirers across India are facing low credit profile with escalating debt levels, stress on working capital, lack of access to finance and increase in interest rates. Underutilization of assets, increase in competition, increase in labour costs, low recovery costs, unfavorable taxes and regulations have impacted performance. Price hike for crude oil & steel, and lack of quality aggregates have also affected the operation.
Adding fuel to this situation is the volatile shift in Rupee value. Most of the components have to be imported and this stiffens the margin pressure. Hence a hirer has to reconsider purchasing from global brands, and this in turn has increased the demand for local equipment manufacturers. The Chinese equipment market is one the largest in the world due to local infrastructure demand in China, hence their equipment are priced lower than Indian equipment. This has again led to an increase in Chinese imports thereby affecting the inflation.
The equipment rental market is not yet fully developed and comprises of 25 per cent organized players. But there are a number of companies who are now entering the business encouraged by the low interest regime which has made the market erratic with regard to rental rates, payments and terms of contract.
The current slowdown period is an acid test for manufacturers as this is the time for innovation. Automatic control systems, air conditioned cabins and cloud storage of machine performances are some of the existing innovations. For example, some of the recent launches in batching plant include twin shaft & tilt shaft mix. The twin shaft mixer is provided with additional arms to the blades which can ensure an even mixture of concrete and large output, while the tilt mixer offers a consistent mix with much less maintenance labour and cost. Up-gradation in transit mixer, new optimized turbo charged water cooled engine improves fuel efficiency and also delivers high torque. Another example is the VFD (Variable Frequency Drive) systems installed in tower cranes. In spite of the lifting weight VFD system helps the hoist to function smoothly along with the ropes.
With $1 trillion investment planned in infrastructure development during FY 2013-17, everyone is optimistic about the future market and manufacturers are promising to launch upgraded and cost effective technologies. India being a price sensitive market, operators usually compromise key aspects like comfort, safety and quality. In order to cut back the price of the equipment, Indian manufacturers go easy on safety and quality parameters. Better quality equipment gives 10 per cent extra output which increases the productivity and durability. With easy access to finance, price sensitive hirers can now opt for upgraded equipments. I would also recommend that manufacturing companies focus on the after sales service as it is set to expand USD 0.5 billion by 2015. Revenue from after sales service in India is not more than 8 per cent, however the global average is 12 per cent – 20 per cent. Focusing on this untapped service can also boost spare parts sales. This can help Indian companies to front run the Indian market and help in exports. On the policy front, material handling equipment industry is de-licensed and 100 FDI is allowed. The government has removed tariff protection on capital good and lowered the customs duty. The government and private players have promised new infrastructure projects for the coming year. This definitely indicates a potential demand for the construction equipment rental in India.
(The author is Managing Director of Sai Infraaequipments Pvt Ltd. The company works in the field of construction equipment hiring for the past 15 years. It deals with RMC Batching Plants, Transit Mixers, Concrete Pumps, Tower Cranes, Mobile and Hydra Cranes, Wheel Loaders and Passenger Hoist. It also holds the largest fleet of Tower Cranes in the hiring segment, and the third largest fleet in the overall construction industry in India.)