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Construction Equipment: Driving growth in a challenging market
Perspective DocumentDecember 15, 2014
bC India, 2014
Anil KumarManaging Director, RedSeer Consulting
India is the 5th largest and fastest growing construction equipment market in the world
473 785 625 679 718
Global Construction Equipment Market1
By country, in ‘000 units
RegionShare of global
CAGR (2013-17)
0%6%
17%8%
Japan
India
| 1Source: Industry reports; RedSeer Analysis
3%12%
5%17%
2%29%
1. Includes only China, North America, Europe, India and Japan which accounts for more than 80% of the global construction equipment market
Europe
North America
China
India will see the highest surge in infrastructure investment on absolute and % terms in next 10-15 years
Investment on InfrastructureBy countries
| 2Source: Industry reports, Company annual report, RedSeer analysis
Indian demand is largely driven by backhoe loaders and excavators
Market Segmentation# of units sold in FY12, in ‘000 units
Earth Moving /
Concrete~10.0 units /
Road Construction~7.8 units /
Material Handling~8.9 units / 350
XMarket size in million US$
XIn ‘000 units
~10.0 units 350~10 1,400~51 250~9 150~8
| 3Source: Industry reports; RedSeer analysis
Backhoe Loader
Excavator
Wheel loader
Skid steer loader
Compaction
Asphalt Pavers
Wheel loader
Skid steer loaderConcrete recycler plant
Transit mixer
Concrete Pump
Batching plant
Foundation equipment
Mobile crane
Tow truck
Tower crane
The stalled projects in mining and infrastructure have put brakes on the industry growth
Major challengesIllustrative list
DescriptionChallenges
� 200 major infrastructure projects are delayed
due to land acquisition issues
� Revised land acquisition bill on hold in
parliament and is expected to be approved in
first half of 2015
� US$ 46 Billion worth projects are stuck due to
Land Acquisition
A
Financial Performance (EBITDA%)
| 4
� US$ 46 Billion worth projects are stuck due to
lack of environmental clearance
� The Cabinet Committee on Investment (CCI)is instituted in 2013 to revive the stalled
projects
� Supreme Court of India banned mining
operations in states such as Karnataka, Goa,
Meghalaya and Odisha since 2010
� Mining ban was lifted in Goa in April 2014 but
restriction on total output was imposed
Environmental Clearances
B
Illegal Mining & Scams
C
Source: Industry reports, Company annual report, RedSeer analysis
Dealer view OEM view
Now the sentiment in industry is on upswing…
Market Views On TurnaroundIn # of months, N=90 (OEM-25, Dealer -65)
Q. In how much time do you think the construction equipment market in India is going to turnaround?
< 12 months
Dealer View
< 6 months
OEM View
% o
f re
spondents
| 5
Dealer speaksOEM Speaks
Source: Expert interview from OEMs, Dealers, RedSeer analysis
Dealer View
Current 6 12 18 24
Expected Months
% o
f re
spondents
Turnaround time
“We see positive sentiments in market with the approval on projects in Telangana and launch of hydro projects in North East”
- Director, Global OEM
“Market is at an all time low. There are noprojects. High interest rates is another area of concern. We don’t see any upswingin 6-9 months”
- Dealer
“Construction Equipment industry has gone throughthe bad times but now is the time to expect growth due to expected revival in mining and road construction projects”
-National Sales Manager, Global OEM
“There is a liquidity crunch in the market now. Most of the road projects are on halt asthere is no cash flow, a turnaround mighthappen in next 10 months”
-Dealer
… and the industry is expected to reach the peak sales in 24 months
Market Views On Reaching Peak In # of months, N=90 (OEM-25, Dealer -65)
24 months
Dealer View
18-24 months
OEM View
Q. In how much time do you think market is going to reach back to its peak position?
Dealer view OEM view
% o
f re
spondents
| 6Source: Expert interview from OEMs, Dealers, RedSeer analysis
Peak
Dealer speaksOEM Speaks
Current 6 12 18 24
Expected Months
% o
f re
spondents
“Announcement of Eastern and Western railwaycorridor for dedicated freight would increase demand of equipment”
- Business Head, Sales
“Small retail buyers doesn’t have money to buynew equipment because existing equipment are already underutilized. For the purchase of a newequipment they must have finance support and Projects”
-Dealer
Market growthConceptual
Phase llPhase lll
Turnaround Time
Peak
Eq
uip
me
nt
Sa
les
1
Our view is that industry would start picking up in next 6 month and is expected to see the growth in three phases
Present day
Phase l
| 7
12 6
Timeline in Months
Source: Industry report, RedSeer analysis
Accelerationll
Consolidation
� Release of new projects
� Increase walkins
� Release of new projects
� Increase walkins
� Reaching out to new opportunities
� New product launched
� Bulk Buying
� Reaching out to new opportunities
� New product launched
� Bulk Buying
� Consolidation on customer segments
� Consolidation on customer segments
lll
1. The range is not up to the scale
6
Phase l
Preparationl
Mining and road construction is expected to drive the near term growth of the construction equipment industry
Q. What are the key infrastructure sector that will lead the growth of construction equipment in India? Rate the sectors on scale of 1-5, where 5 is exceptional growth
Key Infrastructure SectorsRating on a scale of 1-5, N=90 (OEM-25, Dealer -65)
3.9 Mining
3.4 Road Construction
Exceptional growth
Mining sector
� The single window clearance
system of the Government for
coal mining
� The projected target of coal
mining to be double from 500
| 8Source: Primary research; RedSeer Analysis
Urban Infrastructure2.9
Thermal Power2.8
Railways1.7
Irrigation1.5
Modest growth
mining to be double from 500
million tonnes in 2014 to 1000
million tonnes in 2020
Road construction
� Govt. announcement of new
project and restarting of the
halted project
� NACI (National accreditation
council of India) is assessing
the projects to be rolled out in
Road construction
� Customers are large EPC
customers� Large fleet size with broad
portfolio of products� More focus on total operating
cost as opposed to acquisition
cost
OEMs need to position their strategy along the strong customer segments of Indian market
Customer Segments
A
InstitutionalInstitutional
Key Priorities
Customer SegmentationConceptual, In % Fuel efficiencyFuel efficiency Service qualityService quality PerformancePerformance PricePrice Must HaveGood to have
Description
30%
|
cost
� Customer with one or two
equipment more focused to
upfront price of equipment� New emerging customer in the
segment – operator cum owners
9
B
C
InstitutionalInstitutional
Large contractor/HirerLarge contractor/Hirer
Small contractor/HirerSmall contractor/Hirer
Source: Industry report, OEM and Dealer interview, RedSeer analysis
60%
10%
� Fleet size is ~10 units and
largely consists of smaller
equipment� They typically rent out the
equipment on daily / weekly
basis
Large contractors/Hirers will drive growth in the Indian construction market
Customer Segments
A
InstitutionalInstitutional
Customer DescriptionLarge contractor/Hirer
30%
Large contractor/Hirers:
� This segment of customers is going to drive the
Description
| 10
B
C
InstitutionalInstitutional
Large contractor/HirerLarge contractor/Hirer
Small contractor/HirerSmall contractor/Hirer
Source: Industry report, OEM and Dealer interview, RedSeer analysis
60%
10%
� This segment of customers is going to drive the market
� Due to uncertainty in the market Institutional customers are turning towards more of hired equipment
� Price sensitive customer, seek reliability at low cost
� Likely to subject equipment to severe load cycles with low maintenance and use of inferior quality fuel
Further, there are 4 key trends observed in the market
AAIncreased expectation of service qualityIncreased expectation of service quality
Shift in purchase criteria from Shift in purchase criteria from
� OEM sees that competition being
high, high service quality can be
the mantra to hold the customer
� Customer prefer brand based
on how is the service quality of
that brand is.
� Institutional buyers are always
concerned about ownership cost,
� Value segment customer give
more preference to the upfront
Dealer speaksOEM Speaks
Key TrendsConceptual
Customer trends
Strong trendNot Substantiated
| 11
BB
CC
DD
Shift in purchase criteria from upfront cost to ownership costShift in purchase criteria from upfront cost to ownership cost
Increase in equipment leasingIncrease in equipment leasing
Willingness to pay for technological up gradationWillingness to pay for technological up gradation
concerned about ownership cost,
small retail customer look at
upfront cost
more preference to the upfront
price
� Due to high uncertainty and under
utilization of the equipment,
buyers now prefer leasing
� In India, unless there is any specific
need of some feature, customers
are not willing to pay for additional
features
� Customers in mining sectors are
ready to pay for additional
technology up gradation where
as small retailers doesn’t want
to pay any extra amount
Source: Expert interview from OEMs, Dealers, RedSeer analysis
… and the industry is largely aligned on their initiatives with these market trends
Future Course of ActionConceptual, N=25
Q. How are you preparing for the expected growth in coming years?
New Product Launch
Export to other countries
Restructuring of
Increasing distribution
network New CRM initiative
New product launch
� India customer centric products� Focus on mid value segment variants� 95% OEMs plan to launch new products in
next one year
� High tax and interest rate on equipment� OEM exploring new financing options to
serve the market� Tie-ups with Banks and NBFCs
High
|
Distribution network
� OEM are not much interested in increasing distribution. They want to assess the order book and market base of the geography first
� Need to look at low cost frugal solutions
12
Imp
ort
an
ce
OEM Focus
Restructuring of Financial options
Capacity Expansion
Financing option
� Tie-ups with Banks and NBFCs
New CRM initiative
� Increased competition has made CRM inevitable
� Looking at the customers in a differentiated manner
� Capturing the customer feedback on a strong basis
Source: Expert interview from OEMs, RedSeer analysis
Low
HighLow
� Except for a few retail
customers, other customers are
not in favor of having Chinese
engines in their machinery
� Poor perception of durability of
Points of Discussion
Customer preference for Chinese engines is limited due to assumed low product reliability and poor service quality
Chinese engine preferences of customersN=21 corporate customers, N=27 retail customers interviews
Q. Will you consider buying a construction machinery with a Chinese engine, if the capex and the fuel consumption both are very low?
Points of Discussion
Corporate contractors Retail contractors
|
� Poor perception of durability of
such engines and spares
availability after sales is the
major reason
� Perception has been created
after unsatisfactory past
experience or market feedback
� Except for Liugong in the grader
space, no other Chinese
manufacturer has left a major
mark on the Indian road
equipment market
Source: Industry Interviews ; RedSeer Estimate 13
Q. What are your major concern areas with Chinese engines?
Customer verbatims on their view of Chinese engines
Chinese engine preferences of customersN=21 corporate customers, N=27 retail customers interviews
Q. Will you consider buying a construction machinery with a Chinese engine, if the capex and the fuel consumption both are very low?
Retail customer view
“ We have used some Chinese
products like Sany before and our
after sales experience was not
good, with spares unavailability a
regular issue. We will not go for a
product with a Chinese engine”
“ Although we have not used a
Chinese product ourselves, the
market perception is that such
machines are low in reliability. We
cannot take risks with such an
engine in our machinery”
|Source: Industry Interviews ; RedSeer Estimate 14
Corporate customer view
product with a Chinese engine”- Retail customer, Orissa
engine in our machinery”- Retail customer, Uttarakhand
“ For someone like us who is
involved in multiple road projects of
large value, we cannot afford to buy
machines whose reliability is
suspect as it would jeopardize the
project and our reputation”- Corporate customer, NCR
“ We don’t trust the durability of
Chinese engines. As a leading player
in the infrastructure space, we are not
concerned with price of machines and
out prime area of concern is machine
durability and minimum breakdowns. “- Corporate customer, Mumbai
50-60% of the future market will be driven by the value segment product
Expected Sales of EquipmentBy # of equipment, in ‘000, # of OEM-25
Descriptions
~45~45
~25~25
BackhoeBackhoe
Expected sale in 2016 Value vs Premium
� Suitability for small scale construction
works which is highly prevalent in India
will drive the sales growth
� At present, crawler excavator account
for ~25% of the CE market
40%
| 15Source: OEM interviews, RedSeer analysis
Acceleration Phase
~25~25
~16~16
~6~6
ExcavatorExcavator
Wheel loaderWheel loader
Fork liftFork lift
~12~12
Mobile craneMobile crane
for ~25% of the CE market� Expected infrastructure growth would
lead to increase excavator sales
� Increasing growth in warehousing and
need for fuel efficient vehicle is going to
boost the sale of Fork lift truck
� Power project, expansion of cement
plants and high business potential of
ship building/repairing are expected to
boost the mobile crane market
� New projects in coal mining, power
utilities, quarry owners will drive the
growth of wheel loaders
Flexible in Approach, Firm on Results
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