RoI key to localization

RoI key to localization

Everyone speaks about localization and ‘Make in India’ but the main issue that remains is that of economic viability. Sandeep Menezes looks at the challenges facing localization and infers that RoI is the key to localization.

While ‘Make in India’ is the latest buzz created by the Modi Government and lot of initiatives are indeed being taken in this direction, the construction equipment industry has not yet achieved localization in its entirety. In the smaller product category of construction equipment, localization has been achieved to some extent but across the bigger product segment – much more needs to done.

In the last few years, the construction equipment market did not witness much growth. Manufacturers were therefore hesitant to make huge investments on setting up local manufacturing capability. But now with the economy picking-up and construction equipment industry showing signs of revival, the hesitation has given way to opportunity.

A lot of innovation happens in product beginning from the designing stage itself. Therefore one might see new equipment launch once in two years. One has to also remember that 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 also need that type of equipment.

Few of the challenges to localization are:

A) Volumes:

Every OEM seeks maximization of RoI and the Indian market has yet to reach adequate levels of volumes to ensure that setting-up of local manufacturing facility is economically viable. In some CE segments, localization is higher than others – it is simply because the volumes in those segments are higher and OEM will therefore invest in setting up local production lines since its economically viable.

B) Innovation and R&D:

Today’s construction equipment is highly cutting-edge compared to conventional systems prevailing a few decades ago. Like the automotive industry, there is constant shift towards advanced, feature packed solution to offer better performance and productivity to customers. This requires constant R&D to bring better features and improve product performance.

It is also easier to innovate and implement R&D changes if manufacturing happens in one major hub rather than multiple locations spread across nations or even continents. The entire process of innovation gets delayed since it needs to be coordinated over different locations; communication and coordination becomes a hurdle.

C) Capex:

The setting-up of manufacturing facilities requires huge investments in terms of land, building, precision machinery and other associated overheads. It is these huge costs that deter heavy equipment manufacturers from setting up local manufacturing units if adequate RoI over long term is not visible.

D) Incentives:

Unless OEMs do not find it more economically viable to locally manufacture rather than simply import they will not be encouraged to set-up manufacturing facilities in India. Therefore the policy environment needs to be suitable altered to incentivize the setting-up of local manufacturing units.

E) Vendor Network:

OEMs cannot simply set up their plants in India until they are assured of vendors who can supply high quality locally manufactured components. One of the major grudges of OEMs is that unlike the automobile segment, the CE segment has yet not been able to attract high quality global vendors to set-up component manufacturing facilities in India. If OEMs are forced to import components due to unavailability of high quality local vendors then it is not localization in its true sense—it will turn into just assembling in India with imported components.

F) Imports:

The fall of Indian Rupee made imports expensive few years ago and led to customers preferring local products. But the construction industry in India includes a large number of small construction companies, which prefer low-cost products from China. These Chinese products are priced competitively about 5-10 per cent cheaper than the Indian construction equipment products. Chinese equipment manufacturers have strong presence in some segments such as wheel loaders and dozers, where they hold a market share of more than 10 per cent. Therefore, due to the availability of low-cost products from Chinese vendors, localization in some product segments will be tougher.
First Push:
Earlier most equipment manufacturers felt it better to import and sell in the Indian market and even wherein the company had local manufacturing operations most of the components were imported. But last few years witnessed the Indian Rupee weakening, thereby making imports more expensive. This was the first big push for equipment manufacturers to source components locally and manufacture in India.
Governmental Initiatives:
Through its ‘Make in India’ campaign, the new government has pushed for the need to raise global competitiveness of the Indian manufacturing sector and its being imperative for the country’s long term-growth. The National Manufacturing Policy is by far the most comprehensive and significant policy initiative taken by the government. The policy is the first of its kind for the manufacturing sector as it addresses areas of regulation, infrastructure, skill development, technology, availability of finance, exit mechanism and other pertinent factors related to the growth of the sector.
Looking Ahead:
India has been showing around 5-6 per cent GDP growth for last few years; the new government has recognized that and now we are moving towards 9–10 per cent of the GDP to be invested in infrastructure. I think apart from government investment lot of private investment is needed as well. The more the government invests; more the private players will also invest. Also, there has to be a business model for the contractors to execute and complete projects faster and hand it over back to the government and implement time bound projects.
There is an evolution of business model and therefore a shift from Build Operate and Transfer (BOT) to Public Private Partnership (PPP). This is evident with the surge in PPP models with Government recently easing the norms for transfer of land allowing acceleration of infrastructure projects in sectors like railways, civil aviation and ports that are required to boost economic growth.
The Government of India has de-licensed the material handling equipment industry and has allowed 100 per cent FDI under the direct route – but going ahead more such incentives will be needed.
Across India as specialized products are slowly gaining acceptance compared to products with general applications, the gap in technology between Indian made products and imported equipment are becoming narrower.
Conclusion:
The huge backlog of projects stuck nationwide needs to be revived and new construction projects encouraged if CE demand needs to be boosted. If volumes rise across the CE segment, then OEMs will be more inclined to opt for setting up of local manufacturing facilities. Therefore RoI will be crucial to localization in the CE segment and this can happen only when volumes are driven up.

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