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Construction Equipment Environment Challenges

India's growth story has witnessed many cyclical changes across a wide range of industries from agriculture and retail to software, IT and real estate, all of which serve as key drivers of the country's economy.

Volatility in real estate and related industries, such as construction equipment, has resulted in demand-supply gaps that hamper analysis of the sector and its trends.

Demand for construction equipment is a reflection of broader macroeconomic trends such as interest rates, infrastructure investment and liquidity, which themselves indicate the health of the overall economy. This demand equipment is expected to grow in line with the expansion of real estate development from India's key urban centres into tier-2 and tier-3 cities.

According to ICRA, the Indian mining and construction equipment industry can expect a small increase of 2-4 per cent in growth during 2014-15 without any major revival in the sector during the first nine months. The investment information and credit rating agency attributes the marginal rise to the current investment environment and sharp de-growth in demand in mining and construction equipment.

“The Indian construction equipment industry is witnessing its second consecutive year of volume de-growth during 2013-14 with volume demand estimated to fall by around 15-17 per cent to around 55,000-56,000 units,” ICRA said in its report. This decline comes close on the heels of 8-10 per cent de-growth witnessed in 2012-13, when industry volumes fell to around 66,000.

Prior to this, the domestic construction equipment sector witnessed two years of healthy annual growth of 21 per cent and 45 per cent. Demand for mining equipment is estimated to have fallen more severely by over 30-40 per cent in the private sector with mining in India continuing to suffer due to regulatory roadblocks. The past six years have typically seen two-year cycles of contraction and expansion in the construction equipment industry, correlating with the economic growth and construction activity in the country, the report noted.

De-growth in mining and construction equipment volumes is a nationwide phenomenon, ICRA noted, adding that some pockets like Tamil Nadu and Kerala appeared to be more severely affected than the others. However, most dealers are pinning their recovery hopes on expected revival in investment cycle after the general elections in April-May this year.

“The customer mix also appears to have undergone a change with subdued volumes from the hirer segment which seems to be weighed down by the idle inventory. While the first time buyer segment has remained relatively resilient, the volumes/ticket size from this segment is generally small thereby having marginal impact,” the report stated.

In spite of the not a huge growth in 2014, ICRA believes that the Indian mining and construction equipment industry has a healthy growth potential in view of the current low levels of quality infrastructure and the limited penetration of equipment. However, any improvement in market sentiment will hinge on how proactive the new political dispensation is on the infrastructure front, particularly the $1 trillion investment proposed to be spent during the ongoing the 12th Five-Year Plan.

 

Challenges in the Ecosystem

In addition to addressing infrastructure [the biggest growth driver of the industry] challenges, the construction equipment industry achieving its full potential will hinge on addressing challenges in three areas of the ecosystem:

Financing

§  Original equipment manufacturers (OEMs) in India offer limited financing options, and payment terms for first-time users are often unfavorable. The result is that access to financing prevents many prospective users from buying

§  Renting is a good option for users with an eye on limiting their large capital expenditures. However, renting penetration in India is much lower (7 to 8 percent) than in other large markets (65 percent in the United States and 35 percent in China) because of a tax regime that makes moving equipment across states unviable

§  India's secondary market for used equipment is underdeveloped

§  Recovery is a big challenge for non-bank finance companies, the major providers of financing for whom regulations pertaining to defaulters and bad debts are not very favorable.

 

Availability of skilled manpower

§  As the CE industry continues to grow, the need for trained operators and mechanics will increase proportionately. Availability of skilled workers is likely to be an issue. Multiple entities from the government, CE companies, and industry bodies are working to solve the skill gap issue, but coordination among these agencies can be improved.

§  Most construction-equipment users are small players who prefer on-the-job training for operators and mechanics and are unwilling to pay a premium for qualified workers.

§  Specialized courses on construction equipment operations are not a part of vocational training at industrial training institutes because the high cost of equipment makes hands-on training expensive. CE training institutes run by OEMs tend to be expensive for low-income groups.

§  There is a lack of uniform national guidelines for safety and quality. On-the-ground enforcement is a challenge because of the fragmented nature of the industry. (Small contractors make up about three-fourths of the industry.)

 

Components

§  There is a high variability in OEM demand owing to market fluctuations, which makes capacity planning difficult for component providers.

§  India is a market where component suppliers tend to focus on items at the lower end of the technology spectrum, while relying on imports for high-tech items. Consequently, there is a gap in terms of technology adoption at the supplier end, where the market demand for higher connectivity and compliance to fuel economy regulations is not met with indigenously manufactured components.

§  Suppliers are also constrained for operating margins because the market is very price and value conscious.

 

Imperatives to Addressing the CE Ecosystem Challenges

An array of initiatives can be taken up and expanded, based on best practices in CE and adjacent industries, such as automotive.

Financing

§  OEMs can take a more active role in improving the availability of financing for buyers. Setting up in-house financing arms or long-term tie-ups with banks and non-banking financial corporations (NBFCs) can also be considered. Financing availability can also be addressed through dealers. For example, some OEMs have been active in this space through exclusive contracts with NBFCs and by launching dealer-run rental operations to improve rental penetration for their equipment.

§  Financing penetration can be further strengthened by reforming laws pertaining to equipment rental and usage. A nationwide general sales tax could help bring uniformity in imposed taxes (for example, as implemented in Australia), rather than the varied indirect taxes currently being collected by individual states. A national CE registration can also eliminate the need for paying multiple lifetime registrations with regional transport offices, as is the current norm

§  Buybackschemes and used-equipment exchanges can help deepen the secondary sales market. Atlas Copco, Caterpillar, and Volvo all offer buyback schemes in developed markets.

 

Availability of skilled manpower

§ In developed nations such as the United States, stringent requirements and mandatory qualifications for operators and mechanics ensure that there is a high demand for skilled manpower from the user industry. Better awareness of the benefits of using skilled manpower, along with mandatory qualifications, can also help boost demand in India

§ Countries such as Australia also ensure availability of funds for training manpower through levies on construction projects, the proceeds of which go to the Construction Training Fund. Dedicated grants and scholarships for manpower training in India can help the long-term sustainability of such programs

§ Industry-body coordinated training program guidelines can help standardize training requirements, along with periodically evaluating the training needs of the sector and devel­oping plans to address those needs. Global benchmarks can help identify best practices for manpower development

§ OEMs can take proactive steps in setting up training avenues through tie-ups with different types of players. Tie-ups with industrial training institutes to provide vocational training have already started. OEMs are also looking at partnership opportunities with professional training companies in collaboration with state governments and are using the support and network of non-governmental organizations to offer subsidized training programs for under­privileged youth.

 

Components

·   OEM-supplier collaborations and risk-sharing contracts have been used in the automotive and aerospace industries and have helped suppliers in capacity planning to meet market demand. For example, Maruti and other automotive OEMs often engage in supplier capability development to raise quality standards. The CE industry can identify areas for closer collaboration with suppliers to ensure their healthy growth with the industry

·   OEMs can support suppliers through technological collaboration and help raise R&D standards. R&D establishments can be further set up with industry and government backing to drive indigenous technology. Laws mandating local technology can also help improve technology adoption. This has worked well in the aerospace industry, where adopting the offset clause, which mandates more than 30 percent local sourcing for foreign aerospace contracts, has helped improve technology standards at local suppliers

·   Focus on indigenization can also help suppliers develop India-centric, cost-competitive offerings with frugal designs tailored to domestic needs. This will go a long way to improve margins for suppliers otherwise constrained by low-cost sourcing from other countries

 

The Road Ahead

Under-penetration for most key aspects of India's infrastructure highlights the need for development. The government has signalled its intent by earmarking $1 trillion for infrastructure in the 12th Five-Year Plan, but restricted sources for funding could delay achieving targets in certain areas.

Regardless, the opportunity is huge for CE players. Reaching this potential will require addressing some tough challenges in the infrastructure sector and resolving issues in the CE ecosystem. Best practices from other countries can point the way, but India's success will depend on close collaboration among government, industry, and regulatory bodies to ensure the challenges are ironed out in time to realize the vision for the country's infrastructure.

 

Source:

ICRA

Road Map to Success for Construction Equipment Industry; by A.T.Kearney

 

     
2015/01/30 by Bharat Vasandani