‘The primary driver of localization is volume’

Excavator

Volvo Construction Equipment (CE) is one of the world’s largest manufacturers of construction machines, and is a wholly owned subsidiary of AB Volvo. Volvo CE started operations in India in December 1997 from its headquarters in Bangalore. The company plays an active role in major infrastructure development projects in India through its offering of construction equipment such as the Motor Graders, Wheel Loaders and Excavators.

Dimitrov Krishnan

Dimitrov Krishnan

Dimitrov Krishnan, VP – Sales & Marketing, Volvo CE (India) told Sandeep Menezes that as the volume of various product increases, the localization of components will rise.

Excerpts from the interview:
‘Make in India’ is the new mantra nationwide but the CE segment has yet to achieve full localization. What is your view?

The level of localization depends on the kind of components but if you look at ‘Make In India’ as a concept, it focuses to increase the production in India so that it can be exported apart from meeting domestic requirement.

At Volvo Construction Equipment , we have around 60 per cent of our production locally. And depending on the product, the level of localization is different. There are certain products where components are available with local vendors and we are able to localize. We have also done this for engines and major hydraulic components.

Largely, the vendor base in India is strong for fabricated components not for precision components. But I feel this will change. We are seeing global component vendors setting up shop in India, localizing and producing locally not only for the Indian perspective but also for exports. I have met few vendors recently who are doing this in the hydraulics area. This trend will increase and is bound to grow along with the industry.

Do you have any policy suggestions so that localization can be encouraged across the CE segment?

I feel that the primary driver of localization is volume. Hence the CE market needs to go to a certain stable level that it can sustain a vendor investing in high technology precision machinery that can make this kind of components.

In my view the most importing thing is growth of the CE market. There is positive sentiment today although it has not yet translated into numbers but we do hope that in the next one year it will accelerate. Therefore as the volume of various product increases, the localization of components will rise.

The government needs to increase pace of growth across construction and mining industries. The other is the ease of doing business, the most critical of which is the implementation of GST because multiple levels of taxation also complicates matters when it comes to sourcing in India. GST will be a huge enabler since it will bring predictability in costing. If GST is applied uniformly across India, a manufacturing set-up can supply anywhere in India without commercial hindrances.

As CE volumes grow and local manufacturing becomes viable, I am sure there can be other policies such as for short term support to high technology vendors to setup industrial units in India which government can think about.

Many global OEMs complain that lack of high quality local component vendors is hindrance to localization. How can global OEMs support local vendors in improving quality?

If you look at an allied industry such as the automotive sector in India – then the auto component industry in India is extremely sophisticated. There is lot of localization in that area but that is because there are huge volumes. Therefore the global vendors have followed the various brands into the country.

If the Indian CE industry hits the 100 thousand mark – I am sure it will happen even here. The vendors follow the big brands into various places and bring in the technology. Today the vendors are not able to invest in the right equipment to be able to bring that quality along. It’s not about their ability but rather their viability to invest into machinery which will help them to do that.

Today when it comes to CE components especially in the area of hydraulics, I think Japan, South Korea & China take the lead in components since they have invested in large capacities. For us to compete with them, our local volume needs to be there. Technology is available; the issue is how to bring about the RoI (return on investment) for such vendors.

How do you foresee the evolving growth scenario and main demand drivers across the equipment sector nationwide?

The quarter one of 2015 was exactly the same or may be even slightly lower than the year earlier. Therefore it was a bit of dampener from an overall CE market perspective.

If we go slightly in depth, then we will notice that the downward trend was mainly in backhoe loaders. Therefore those OEMs who are into the backhoe loader segment have definitely seen a drop.

Now if we look at excavators, wheel loaders and compactors, which are our primary product segments, we have seen flat market growth in excavators but a shift towards heavier excavators. In the wheel loader segment, the market has been fairly stable and improved slightly although not a big change. While compaction has definitely showed positive trends compared to the previous eight to nine months—this is because of many of the road projects opening up—compactor sales have been higher.

Our hope is that in the coming years, the mining sector which is getting most of the boost as of now will be the first sector to take off in a proper way, especially coal mining followed by iron ore mining.

You spoke about the 100 thousand mark for India’s CE sector. Do you have any estimated timeframe when it could be reached?

I think it should happen in the next four to five years but hopefully the policy environment remains favorable for growth.

Most equipments are purchased through financing mode across India. How will the recent softening of interest rates benefit the industry?

What has happened till now (on the interest rates front) is not good enough; it’s been two steps of 25 basis points. Therefore it has not really generated a momentum for credit availability in the market. There is still reluctance on financing and issues do exist. Therefore it is still too early to tell if any visible impact can be seen of these changes.

Therefore more interest rate reductions need to happen before we can see some momentum in funding. But it is also to do with the fact that there are many corporates in the infrastructure space who have had a bad time in the last four to five years. It will take some time for them to get out of the debt situation that they are having. The financing of equipment needs to open up more than what it is today.

Why has the equipment rental segment not reached its true potential in India?

The rental segment is still a largely unorganized sector and usually consists of mom-and-pop-shops. The machine owner is a first time investor who is renting his equipment. The organized rental market is yet to take shape. There are few players who have tried but yet to witness any success. The credit cycle is the biggest issue since the predictability of collecting money is still not there in India. As long as predictability of collecting money is not there – the organized sector cannot take shape and unorganized small timer will continue renting mostly to the smaller projects.

It has been around six months since you have taken over the reins of Volvo CE in India. Tell us about your current and future business strategy?

The success of any business depends on how the whole organization together with its extended enterprises works in sync in supporting customers. I want to remain customer focused. To have a seamless way of working between our extended organization spread across the country, distribution partners and their branches with the customers. I intend to keep this whole team energized facing the customers. The customer must feel that Volvo cares for them and can deliver to their expectations.

Leveraging on our product portfolio would be my second goal. We have a very wide product portfolio such as hydraulic excavators from small to large, wheel loaders from three tonnes to 50 tonnes, motorgraders, compaction machines, paving machines and others.

How will Volvo CE differentiate itself for its other in-house brand SDLG to ensure market duplication does not happen?

Globally, Volvo has two brands and we market these products to specific customer segments. We don’t see much of an overlap in terms of products. They address very different product and customer needs. Both brands have equally good potential for their respective business segments in India.

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