The construction equipment industry has witnessed substantial investments in the recent past with several companies setting up manufacturing bases, and the demand is likely to rise with the focus on infrastructure development.
The slowdown in infrastructure development in the country, a major demand driver for the construction equipment industry, had resulted in demand reduction of construction equipments in recent years. However, post the general elections and with a new government in place, the infrastructure development is expected to be back on fast track soon.
Consequently several ongoing mega projects liketo the Delhi-Mumbai Industrial Corridor (DMIC) with industrial hubs and infrastructure linkages like power plants, water supply, transportation and logistics facilities; 4000-MW Mundra Power Plant, Kishangarh-Udaipur-Ahmedabad highway project, world´s highest railway bridge on river Chenab in Jammu-Kashmir, the Bangalore Metro, Mumbai Metro, etc., are also expected to pick up speed. In addition, with smart cities gaining ground and several other projects in the offing in various infra sectors like roads, highways, ports, power and airports, urban infrastructure etc, the demand for construction equipments is likely to be on the rise.
The industry which was in its nascent stage two decades ago, has witnessed substantial investments in the recent past with several companies setting up manufacturing bases, despite small volumes and uneconomic scales of production. But the growth has been fluctuating between highs and lows.
¨Statistically the industry has grown at a CAGR (Compounded Annual Growth Rate) of around 10 per cent but the growth has not been uniform.
It has ranged between 5 to 20 per cent, followed by negative growth as high as 15 per cent as well. The volumes have grown about six-fold in the past decades wherein the years 2011 & 2012 were the best. Last two years have witnessed negative growth but the demand has started picking up during the last couple of months,¨ reveals Rajinder Raina, General Manager-Marketing, Escorts Ltd - Escorts Construction Equipment. Seconds Ramesh Palagiri, Managing Director and Chief Executive Officer, Wirtgen India Pvt Ltd: ¨The construction equipment industry had witnessed a period of substantial growth from 2002 - 2006 where the market for various products grew almost by 20-30 per cent, but since 2008 there has been a slowdown and (for the) last two years the market has been virtually flat. But now with the new government´s focus on infrastructure and its vision to remove the bottlenecks in the industry, we expect the market to revive and growth to return to this sector in the next 12 months.¨
Historically housing and infrastructure have been the industry´s growth drivers, avers Deepak Nayak, Associate Director, Management Consulting, KPMG Advisory Services Private Limited: ¨Historical driving factors for the industry have been growth in housing and construction, where the residential real estate demand is driven by rising population and growing urbanisation, investment in infrastructure, boosted by robust economic growth (between 2003 & 2008) primarily in roads, bridges, dams and urban infrastructure and joint ventures with global majors which provided domestic companies access to advanced technology and a whole gamut of project management experience.¨
While the major driving factor has been infrastructure projects, other factors too have played a role says Raina: ¨The material handling practices have been changing wherein productivity, safety of man & material has become a must. The need to reduce the dependence on uncertain labour availability and the hassles of managing large forces, easy availability of finance and competitive cost of funds have also helped the market grow. In addition the time-lines of projects and special applications at sites have also been the major driving factors.¨ Escorts manufactures cranes of various capacities and backhoe loaders, soil compactors, tandem vibratory rollers/mini tandem rollers as also traded equipments like forklift trucks, truck cranes, articulated boom cranes, tower cranes & motor graders.
The rising demand will not only be for construction equipments but also for sophisticated and technologically advanced equipments to keep pace with demand and scale of projects. Over the last few years, several renowned international players have entered the market offering sophisticated machinery. Many domestic companies are also expanding their capacities or diversifying their product portfolio through collaboration and tie-up arrangements. Yet the use of technologically advanced equipments today is largely limited to private sector and to big contactors and developers.
An industry professional explains the reasons behind this phenomenon: ¨Heavy competition among the developers to achieve projects at lower competitive cost is one of the prime reasons, as procurement of advanced equipment proportionately increases the project cost. Since manpower cost is cheaper in India, developers leverage this as an alternative to the usage of advanced equipment. Another major reason behind this is lack of awareness among developers about the equipments available for various activities, thus leading to a cyclical effect of lesser buyers leading to higher costs for such equipment.¨
Internationally though the trend is towards more sophisticated and intelligent technologies, says Nayak: ¨Machine-to-Machine (M2M) technology to ensure intelligent machines that can work remotely, Predictive Diagnostics using sensory gadgets to ensure higher asset uptime are some of the emerging technologies abroad. However, Indian construction equipment manufacturing companies are behind in terms of R&D and technology though many are focusing on technical collaborations to combat stiff competition in the market.¨
Apart from competition, the mere size of the project, involvement of international consultants and exposure of Indian contractors to international projects are leading to infusion of new technologies in the equipment industry, says M Murali, Director General, National Highways Builders Federation: ¨In addition, with the initiation of BOT/BOOT models in roads, there is increased emphasis on quality and longevity of roads. There has been a constant and accelerated shift to more productive and advanced equipment across the board in India. Global equipment manufacturers present in India have come a long way in terms of offering quality products. While we might not be at the same levels of equipment utilisation as the developed world, the trend has been extremely positive and encouraging,¨ he opines.
But as of now many developers undertaking projects like Metro rail, sea links, tunnels or high rise buildings are compelled to import required machineries for quality, speedy execution as also to limit the impact on neighbouring structures, particularly in urban settings.
¨Indian manufacturers are not able to totally meet the equipment requirements for execution of projects like Metro Rails, and tunnels. Hence we still have to import some of the equipment like Tunnel Boring Machine, Locomotives, Tunnel Heading and Loading Machine, Tunnel Excavator, Road Header, Higher capacity Wheel Loader (e.g. Wheel loader with 6.5m³ bucket), Telehandler with swivel platform etc.,¨ reveals Anuran Ghatak, General Manager - Equipment, Hindustan Construction Company Limited (HCC). ¨On an average we import 10-15 per cent of the total equipments required in a project, primarily due to non-availability of such equipments in the Indian market,¨
he adds. For instance, HCC had to import Tunnel Boring Machine and Locomotives for Kishanganga Hydroelectric Plant, DMRC CC 30 and DMRC CC 34 and Tunnel Excavator, Tunnel Heading and Loading Machine for J&K Rail Link Tunnel Project - T48 and T49A.
But for Indian manufacturers, it is a battle in a highly price sensitive market where the volumes are very low, says Raina: ¨The largest selling construction equipment, backhoe loader is a completely home grown product for Escorts. However some aggregates will continue to be imported till the critical mass is not reached. Also certain technologies like hydraulics will continue to be imported for a while as India does not have indigenous technology of contemporary class. Developing such high end technologies involves investment of capital and time. Till such time these aggregates are imported, the cost of the equipment goes up and so does the repairs & maintenance cost.
The industry is moving towards that critical mass where local development and manufacturing of high technology components will make business sense.¨
While housing and infrastructure will continue to be the major growth accelerators in the future, other factors are also expected to play a vital role. ¨The recent decision by the Central government to relax FDI norms in construction and real estate sector, its ambitious target to develop 100 smart cities and ´Housing for all by 2022´ are some of the initiatives that are expected to further boost the industry in the future. Moreover, the erstwhile Planning Commission proposed to double India´s infrastructure investments to about $1 trillion for the 12th Plan (2013-17) - raising its share in GDP from 7.8 per cent in FY12E to 10.8 per cent by FY17. Hence a resurgent construction industry and an upbeat real estate industry is likely to drive the demand for road building and construction equipments,¨ says Nayak.
Krishnan too is buoyant about the future: ¨With the new government in power, we are already seeing a few changes in the industry and more is expected in the coming months. The government is terminating PPP projects over a certain amount and is implementing them through the EPC route for quicker results and to avoid projects from lingering on both sides. It is also trying to ease the process of getting various clearances to expedite road projects. The government has also promised revolutionary changes in the mining, road transport and highway sector. With all this the demand for construction equipment is expected to grow multifold along with an increase in the country´s GDP through these sectors.¨
In addition, the industry is being propelled by other factors like higher adoption in traditional applications to speed up projects, demand from new segments like irrigation and agriculture, entry of new players, etc.
No doubt the construction equipment industry has much to do and look forward to in the future.
The major challenges for the construction equipment industry are project delays due to issues like delayed policy decisions, land acquisition, and procedural and approval delays leading to unpredictable demands as evinced by Asit Patel, Managing Director, Ammann Apollo India Private Limited: ¨The main challenge is that of market demand and definite CAGR. Due to various factors, there are delays in commencement of projects leading to peaks and valleys in demand. This makes it difficult for the manufacturers to plan their production and expansion.¨
Seconds Nayak: ¨The major impediments to the industry´s growth are delay in infrastructure projects due to the land acquisition issue. Other challenges are rising steel prices which add to the cost disadvantage as steel is a primary raw material for the equipment industry, fluctuating costs of crude oil that pushes up the risks involved and leads to reduction in the demand for equipment and lack of skilled manpower.¨ Shortage of skilled manpower to operate and maintain the modern equipments often results in failure to achieve expected productivity. ¨Although the industry has the cheap labour advantage, the fact that productivity is low and the equipment downtime is high is a manifestation itself of low level of skills. No classroom or on-the-job training is offered. Enhancing the skills of the workforce is constrained by the high level of illiteracy among the workers and the prevailing lack of quality consciousness and good workmanship in road construction,¨ alleges Murali. NHBF along with CFI, BAI and CREDAI has created a Construction Skill Development Council for mitigating the lack of skilled manpower. Initiatives are also being taken by other organisations like National Skill Development Council (NSDC), Construction Equipment Manufacturers Association, all of which are expected to resolve the skill shortage issue in coming years.
Foot and vehicular traffic, transport problems for equipment, space constraints, and sensitive buildings in the vicinity also make urban construction a big challenge for equipment and construction technology providers. But these issues can be tackled to some extent in various ways, says Patel: ¨With regard to deployment of equipment for works in urban area, the heavy equipment in our product range is the asphalt mixing plant. Normally they are located in the outskirts of the city but our plants can be located in the city itself (subject of course to availability of space) without facing any problems on the pollution front as they are equipped with the latest pollution control devices in line with international standards. Generally city roads are laid during night hours when the traffic is low. The use of paving & compacting equipment is never a problem as these equipments have to be approved by ARAI on various parameters like pollution etc., and registered with the local RTO. These are permitted to be used in the city area on the allotted times.¨ Ammann Apollo´s current range of products include Asphalt Mixing Plants, Wet Mix Plants, Paver Finishers- Sensor as well as mechanical Compactors, Bitumen Distributors and Kerb Laying Machines.
Delivery lead time while acquiring imported products is another major challenge, points out Ghatak: ¨Often we find it difficult to meet the project´s schedule due to long delivery lead time of these equipments. To overcome this for specialised equipments, we suggest that the manufacturers have them in their stock and give us these equipments on hire as a stop-gap arrangement,¨ he recommends.
Further, to enable the industry to achieve its full potential, several measures will have to be taken by the government, equipment industry and others. Speedy land acquisitions and approvals are a must, aver industry professionals . ¨The key to growth of construction equipment lies in sanction of various projects, all of which are directly or indirectly guided by the government of India, the biggest spender as also the apex body for according clearance to land, environment and financial closure. Even the external aided projects need the government nod,¨ points out Raina. ¨This calls for quick and clear decision making by various ministries and their working in tandem to avoid cost overruns. All these agencies have to instill confidence in bidding agencies and act as enablers. The government needs to be seen as an agency meaning business which was missing during the past three years,¨ he explains. Apart from clearances, funding is also an issue that needs to be tackled by the government, avers Palagiri.
¨In the road sector, the government should take steps to clear the environmental and land acquisition bottlenecks for the planned and stalled projects to restart. Also funding for infrastructure projects has to be given priority. For BOT projects to take off, the government should address issues like long-term funding for infrastructure projects and also introduce more stringent prequalification criteria for contractors bidding for road projects. Growth in this sector would pick up if the government ensures a good mix of both BOT and EPC projects,¨ says Palagiri.
Wirtgen India is expanding its manufacturing base in India, and will start manufacturing the Kleemann range of crushing and screening plants for the Indian market by January 2015.
Patel, on the other hand, opines that the government must have a policy to protect the domestic industry, have a consistent policy on construction of roads in a time-bound fashion which will help in sustaining the demand and implement GST (Goods and Services Tax).
GST should be given a nod soon by the government says Dimitrov Krishnan, Vice President, Sales & Marketing, Volvo CE, India. ¨This would further help in improving ease of doing business for everyone. Secondly, this can dramatically alter the tax administration by giving a one-stop solution for excise and value-added tax into a single unified tax,¨ he says. Volvo CE is the first manufacturer to introduce a telematics system called CareTrack that allows remote monitoring and machine diagnostics. Some other industry professionals suggested that Original Equipment Manufacturers (OEMs) should take a more active role in improving the availability of financing for buyers by setting up in-house financing arms or long-term tie-ups with banks and non-banking financial corporations. Other issues that need to be tackled are unavailability of spare parts for equipment, poor rental penetration, non-uniformity of tax rates across States, making inter-State movement of equipment cumbersome, introduction of buyback schemes and used-equipment exchanges and effective after sales service. ¨The customers expect a response in about 24 hours MTR ( mean time to respond) and expect repair to take around 72 hours MTTR (mean time to repair) and at least 90 per cent on-time delivery performance. Even though several OEMs are not able to meet these expectations at present, they have started augmenting their dealership network for better reach with touch points every 100 to 150 km,¨ says Murali. Another major issue all manufacturers would have to consider is the emission norms. ¨All manufacturers are moving to Tier-4 final stage of emission norms in North America, Japan and Europe and most of the other countries would be moving to Tier-3. India is already in Tier-3 since April 2011. In addition all leading manufacturers focus on productivity, less fuel consumption/operating costs and ergonomics for operators,¨ states Palagiri. Wirtgen has several innovative and technologically advanced products like cold milling machines, soil stabilisers and cold recyclers, surface miners, the new Dash 3 generation of Vogele pavers, the EVO series of Kleemann crushers and screening plants, etc.
- Janaki Krishnamoorthi