Reading the future of CE industry

With the government keen to push through industry friendly policies to spurt revival of stalled infrastructure projects while opening avenues for new projects being implemented, Sandeep Menezes tries to gauge the evolving future growth across the construction equipment industry.

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 projects and allowing huge investments in infrastructure.
Though the beneficial effect has yet to reach the construction equipment sector, positive vibes are being felt across the industry due to the various project announcements and policy clearances that the new government has initiated. It is estimated that even if projects take-off, it will take another few quarters for the actual revival to happen because various hurdles such as land acquisition, financial closure and policy uncertainty haunt projects in initials stages – these issues also need to be addressed.

CE Potential

The construction equipment (CE) industry usually 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 per cent annual growth rates in the medium term.

If the government’s proposed infrastructure push takes off as planned, the Indian construction equipment sector is on the verge of progression driven by huge need for better infrastructure facilities nationwide. India can potentially become the 4th largest global market for heavy equipments and is expected to be one of the biggest emerging markets.

While the market is expected to grow at a steady pace—mainly driven by infrastructure investment of $1 trillion during the XII Plan period—booming real estate sector and streamlining of coal and mining operations will support the growth of India’s equipment industry.

Growth Drivers

According to a recent A.T. Kearney report, in the near future across India, the bulk of construction growth is likely to come from growth in transportation infrastructure (roads, rail, airports, ports), urban infrastructure (mass rail transit systems, water supply and sanitation, urban housing) and rural infrastructure (rural roads, irrigation, rural housing). These will constitute the three most important growth planks for driving ECE (Earthmoving & Construction Equipment) demand.

The ECE market is expected to grow by a healthy 20-25 per cent over the next few years to reach 330,000 to 450,000 units sold in 2020, from current levels of about 76,000 units. This would imply a $16 billion to $21 billion market, up from today’s $3 billion. The sector will continue to be dominated by backhoe loaders (more than 40 per cent of total demand), but broad-based growth is expected across products, with each segment expected to see double-digit growth. A rise in the use of concrete will also create demand for concrete equipment in infrastructure and housing projects, the report added.

Mechanization Inevitable:

Till few years ago, the construction sites nationwide used to be hugely dependant on manual labour with least usage of mechanized equipment. But now contractors have realized that manual labour leads to projects getting delayed and also the rise in manpower wages nationwide have made mechanization inevitable.

As specialized products are slowly gaining acceptance compared to products with general applications, the gap in technology between Indian made products and imported equipment us becoming narrower. As we can now witness mechanization becoming inevitable with respect to precision of improvement in product, the need of specialized high-capacity equipment is catching up.

Challenges Ahead:

Going forward, if India has to successfully constitute 10 per cent of the global market by 2018, construction equipment players 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. Thus, India is expected to see more competition among the existing players in the construction and mining equipment industry with such aggressive growth strategies.

There are of course challenges that the construction industry has been facing for a long time now. These need urgent government intervention. For example, there has been delay in infrastructure projects due to time and cost overruns. Shortage of funds, environmental concerns and delay in government clearances have contributed further. Land acquisition challenges are causing project execution delays, in turn resulting in major investment deferrals by companies. There is also a lack of structured regulatory and policy framework for PPP models which needs to be addressed.

Another aspect to look into is ensuring constant upgrade of technologies and method specifications along with introducing new technologies. Increasingly, machines will have to be designed to give better efficiency in terms of fuel consumption and productivity.

Make in India:

Currently most of the bigger equipments are imported into India while the smaller ones are locally manufactured. Even key equipment components like engines are imported while the insignificant ones are locally manufactured. Most OEMs who manufacture locally still have significant proportion of components being imported.

The major reason for OEMs avoiding localization is that most local component vendors have yet to match international quality standards offered by their global counterparts. In the absence of good quality local vendors, the OEMs find it better and easier to import rather than help local vendors to scale up their quality.

The government has launched its ambitious ‘Make in India’ campaign that promotes local manufacturing but there is also an urgent need to strengthen intellectual property laws in India. While patent infringements or design copying in construction equipment sector are not a key irritant across India vis-à-vis China – it still remains an area of concern.

OEMs invest significantly into R&D to improve equipment productivity and launch new variants. The rampant design infringements have led to fear amongst many OEMs that their intellectual property needs to be better protected. If intellectual property laws are strengthened then OEMs will not hesitate to shift their manufacturing operations from high cost overseas centers to Indian locations.

Evolving Scenario:

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 next few quarters. Sectors such as infrastructure, ports, mining will hopefully see a resurgence and healthy growth in the next 5 to 6 years up to 2020.

Conclusion:

The future growth of the construction equipment industry nationwide will not be decided by beneficial governmental policies or lower pricing alone. Though these would definitely assist the market to grow, real growth in the Indian construction equipment industry will take place because of the sheer need for expanding and upgrading the nation’s dilapidated infrastructural facilities.

The quantum of the industry’s growth will be decided by the speed with which the government clears bottlenecks hampering existing projects and opens avenues for new projects.

 

Quotes:

 

Amit Gossain, President – ICEMA, Executive Vice President Asia – JCB India Ltd

 

We were expecting a growth now but it has not happened yet. We think that it will happen in another quarter (three months). I think a growth rate of around 15 per cent can be expected for the industry.

 

Pradeep Agarwal, CEO & CFO – Mtandt Rentals Ltd

 

We feel that the construction equipment sector will see a growth of around 15 per cent in the next two years. The sentiment is positive and if infrastructure growth happens like in China then we should be looking at a good growth rate of around 15 per cent.

 

K. Ilango, Managing Director – Sai Infraaequipments Pvt Ltd

 

We were expecting industry growth to happen in the first six months but it has not happened there have only been announcements.

In the coming financial year, the currently announced plans may start showing results. But over the next two years, I expect the construction equipment industry to witness a growth of around 20 to 25 per cent. Next year should witness an industry growth of around 8 per cent.

 

B. Sridhar, Head, SDLG Business, Volvo India Pvt. Ltd

 

Our feeling is that it will take another six to eight months for the construction equipment market to start growing again. If most of the stalled projects get kick-started by mid of next year – then it may take another two years but going forward there is only growth ahead.

 

Yutaka Goto, President & Director – Kobelco Cranes India Pvt Ltd

 

We feel that the construction equipment industry will witness a growth of around 10 to 20 per cent in the forthcoming year.

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