revival of the indian construction equipment industry · the indian construction equipment industry...

Revival of the Indian Construction Equipment Industry

India would need close to USD 1.5 Trillion in the next 10 years to build

and modernize its infrastructure

Conference on Infra Redux - background Paper

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The need for Infrastructure development in India

Urbanization, population growth, increasing globalization are some of the major factors currently driving

demand for improved infrastructure and connectivity throughout the country. It is a well-established fact

that infrastructure plays a key role in growth, competitiveness and social well-being of any country. It is

no different for India. Requirement for a robust infrastructure has become critical and immediate.

After witnessing some years of sluggish growth, the future looks promising. The Indian infrastructure

sector is seeing signs of revival, largely attributed to some effective policy changes made by the current

NDA government over the last 2 years. Effect of this can also be seen in the recent World Economic

Forum’s global competitiveness report where India’s overall infrastructure has jumped 13 points from 81st

in the year 2015-16 to 68th in the year 2016-17. Though a considerable improvement, there is still a long

way to go.

Figure A

Infrastructure quality index

Source: World Economic forum

Massive investments are currently required to ensure India’s economy growth path for it to be

competitive among other developing / developed nations. Another challenge faced by India is its vast and

diverse geography. Close to 65% of the current population lives in rural India. There are a few states in

North East India, which are still a contrast from some developed states in the country. Investments have

to be justified to ensure that there is parity among all states. Improving accessibility of rural markets is

very important for a balanced development.

Brazil China Germany India Japan South Africa

Quality of overall infrastructure 116 43 13 51 6 59

Quality of roads 111 39 16 51 5 29

Quality of railroad infrastructure 93 14 11 23 1 40

Quality of port infrastructure 114 43 11 48 22 37

Quality of air transport infrastructure 95 49 12 63 24 10

Available airline seat kilometers millions/week 12 2 6 8 4 28

Quality of electricity supply 91 56 19 88 15 112


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The challenges ahead for the country are steep, however they

also present immense opportunities

To meet these challenges, investments alone would not be enough. There are various other aspects,

which are as equally important, like proper planning and management, alignments across key

departments directly or indirectly responsible for the proposed development activities, co-operation

among states and easing of key bottle necks which have been plaguing this sector to name a few.

The fast growth of Indian economy over the last decade has placed immense pressure on the existing

infrastructure. In Railways it is ageing and in the case of roads it is under developed. Infrastructure

development in the country, will always be demand led. Hence efficient use of the existing infrastructure

and fast & timely construction of new assets becomes very important. This importance can be seen in the

investments announced by the NDA government in its budget presentations over the last 2 years

Figure B

Budgeted spend

Source: Budget paper

India would have to do some “hard resets” to meet this challenge

This would require “resets” in various infrastructure segments, the journey which the current NDA

government has already embarked on. Some of the key policy changes made by the government are

Railways

FDI and PPP in Railways: Cabinet has approved 100% FDI in identified areas of Railway sector. Ministry of

Railways has formulated sectoral guidelines on FDI. Ministry of Railways has also issued Model Concession

Agreement for Non-Governmental Railway model, joint venture model and Built, Operate and Transfer

(BOT) model

Department

Budget Revised Budget

Railways 1,00,011 84,853 1,21,000

Road Transport & Highways 86,607 72,274 1,14,279

Rural Development 71,642 77,650 86,000

Power 61,404 66,389 79,883

Urban Development 19,219 19,200 23,666

Coal 13,136 13,864 16,643

Renewable Energy 3,660 5,677 14,192

Mines 2,213 6,029 6,489

Water Resources 3,607 6,431 5,500

Civil Aviation 5,360 6,305 4,417

Ports & Shipping 4,546 3,357 4,183

Total 3,71,405 3,62,029 4,76,252

All values in Rs. crore


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National Highways

Multiple policy changes were done to boost this sector and bring back traction. Key ones are

Hybrid Annuity Model to help private contractors

Minimum 80% acquisition of land to award projects

Eased exit clauses

Coal Mining

MMDR Act, 1957 was amended by the MMDR Amendment Act, 2015 in which Government has replaced

the First-come-First-serve discretionary mechanism for grant of mineral resources by a transparent and

competitive auction process.

Policy on automatic transfer of linkage in case of scrapping of old units and replacing them with new

supercritical plants

Urban Development

National Declaration on Housing for All by 2022

100 Smart Cities: With an aim to achieve “inclusive growth”, the Smart City Mission promotes integrated city planning, where the Government’s Policies such as Swachh Bharat Mission and Atal Mission for Rejuvenation and Urban Transformation complement each other

Airport Infrastructure

Plan to connect all towns by using 400 closed airstrips of the existing 476

Bring down cost of flying between small towns to Rs.2500 / hour

2% tax on some flights between the bigger cities from Jan’16

Sea-Port Infrastructure

In order to give boost to inland water transportation: Bill for declaration of additional 101 waterways has been placed before the Parliament

Inland waterways are now under 1 act from the earlier 4

Sagarmala project

National Highway project continues to be the key driver among

other infrastructure projects.

National highways have been in focus for over a decade now. A lot has been done in this sector to boost

the construction activity. The government has been successful in making this sector attractive to PPP,

bringing in uniform bidding norms, building roads equivalent to global standards etc. It is only in the last

few years that the construction activity was impacted by various issues like land acquisition,


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environmental clearances. Hence this was one of the sectors which was easiest to revive by making

precise policy changes.

This has resulted in the government accelerating the construction activity to a record high of 25 kms /

day, from lows of 13 kms / day 2 years ago. They are targeting 40 kms per day in the following years.

Figure C

Of the total projects announced in 2016, 71% of the projects were awarded between Jan-Mar 2016

Source: NHAI &Feedback analysis

The road construction industry is also witnessing a higher participation from medium and small

contractors, considering the fact that the large contractors are unable to participate due to their financial

liabilities. The government has also offered road construction packages that are much smaller than the

regular sizes, thus enabling medium contractors to also bid for these projects

Figure D

Though number of projects executed by large companies are minimal, value of each project is more than Rs 500 crore

Source: NHAI &Feedback analysis

Year No. of Projects awarded Kms Cost – Rs Crore

Jan-June 2015 27 2,179 21,268

July-Dec 2015 42 2,113 36,404

Jan-June 2016 38 1,874 31,976

Projects awarded

Jan-June 2015– By type of projects

EPC81%

BOT19%

Total projects awarded : 27 nos.

EPC90%

BOT10%


Jul-Dec 2015– By type of projects

Hybrid annuity

45%EPC55%


Jan-June 2016– By type of projects

Total Value Jan-June 2015 : Rs 21,268 Crore

Large27%

Medium21%

Small52%

Total Value Jul-Dec 2015 : Rs 36,404 Crore

Large29%

Medium52%

Small19%

Total Value Jan-June 2016 : Rs 31,976 Crore

Large13%

Medium40%

Small47%


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Another important sector, real estate, which also contributes towards the growth of equipment has been

depressed over the last 2 years. This lag is largely attributed to high prices , lower absorption and over

supply. Many key cities have witnessed a de-growth in project announcements considering the currently

available inventory levels.

Real estate is currently going through its worst phase since the

year 2000

To further worsen the situation, the de-monetization impact could set back the revival by another 2

quarters.

Figure E

@@Title

Source: PropTiger & Feedback analysis

2,24,628

1,53,432 1,52,776

87,368

78,544

13%

32%

0%

43% 10%

0%

20%

40%

60%

80%

100%

0

50,000

1,00,000

1,50,000

2,00,000

2,50,000

Oct 2013-Mar 2014 Apr-Sep 2014 Oct 2014-Mar 2015 Apr-Sep 2015 Oct 2015-Mar 2016

Number of Units Decline

46%34%

46%

11%

36%

68%53%

45%58% 54%

Decline


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The impact of these “Hard resets” on the Indian Equipment Industry

The gestation period for these policy changes to reflect in market growth would take a minimum of one to

two years. These resets in the infrastructure segment will definitely help grow the Equipment industry

from the current USD 3.1 billion to an estimated USD 7.5 billion by the year 2020

Figure F

The last quarter of FY 2016 showed a good surge in overall equipment sales; A positive change of 6% than the estimated figures

Source: Feedback estimates & ICEMA data

From a 3-year decline starting 2012-13, the industry saw some revival in the last financial year. This is

largely attributed to the positive movement in select sectors like national highway roads and coal mining

sector. These 2 sectors have seen a lot of push from the government in the last 2 years. On the national

highways sector, the key reforms brought in by the government has helped the sector move beyond what

was anticipated.

The Indian construction equipment industry continues to be sensitive to the demand for Backhoe Loaders

and Hydraulic Excavators. Backhoe Loader, which singularly contributes to 43% of the overall sales by

volume, is an India specific phenomenon. Backhoe Loaders in China accounts for hardly 0.5% sales while

North America accounts 8.5% sales of their construction equipment respectively. Backhoe loader is the

equipment of choice as the market shifts from manual labour to mechanization. Hydraulic Excavator is

usually the next machine which most customers graduate to. The trend seen across most customers are

that they buy a Hydraulic Excavator within the first 5-6 years of the purchase of a Backhoe Loader.

50,850

65,75073,340

64,110

52,550 50,10056,540

1,20,000

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2019-20 (E)

Volume in Units


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The prospects are getting better for global practices like

equipment leasing, rental and used equipment to be main

streamed in India

Changing customer behaviour coupled with stressed assets could lead to industry evolution. India always

has traditionally been an outright equipment purchase market for project requirements. This could

change. Large contractors who earlier used to outsource only earthwork and other non-essential activity

have begun sub-contracting more activities and modules. Consequently leasing options with its attendant

tax benefit opportunities is becoming more attractive. There are signs among finance companies that the

market is becoming more receptive to alternate financing options.

Figure G

Trends in renting, leasing and used equipment

Source: Feedback analysis

Direct employment by the construction equipment sector is over

a million

The growth in the construction equipment has also led to the requirement of skilled operators, mechanics

and supervisors. This has been one of the serious challenges for the industry. The industry provides

employment to more than 830,000 Operators and Mechanics, who have largely been trained by OEMs

and through on the job training programs over the years. Given that most workers in this sector would be

primary earners for the family, this in addition to the associated impact on other allied sectors (repair

shops, small scale manufacture, construction workers, etc.), the overall impact would approximately be

ten times of direct employment levels in the construction equipment sector.

There is potential for a 15% growth in direct employment over the next 4-5 years. With improving

technology and higher emphasis on safety, there is wide spread requirement for training institutes which

could cater to skilling needs through a structured program including certification. The Industry association

(ICEMA) along with National Skill Development Corporation (NSDC) and CII have instituted a Skill

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1.5

3

8

5

8

Rental Leasing Used

2010 2015

% Penetration


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development program to cater to this need. The Infrastructure Equipment Skill Council (IESC) has already

instituted 19 job roles for 8 products with another 20 more products on the anvil.

Figure H

Direct Employment Estimates

Source: Feedback analysis

Strategies that will lead to increase in use of equipment across segments

Going forward there could be some disruptions in the industry both from a product & service perspective.

Some likely developments:

Growth in pre-fabricated concrete business o This could lead to reduced use of concrete equipment like Transit Mixers, Concrete pump

and Boom placers o Concrete equipment could see a spurt in sales

Increase usage of specialized equipment o There could be a movement towards more specialized equipment, which could impact the

Backhoe Loaders business in a small way through competition from Excavators and Wheel Loaders under 14 T capacity

Rising manual labour costs o In spite of considerable mechanization across key infrastructure project segments, Real

estate, Rural roads etc., the need for manual labour will continue to be considerable. Projects will face inflationary pressures due to rising labour costs.

o The stagnant or low volume sales of products like Skid Steer Loader could see increased demand

Digital drive o Higher penetration of e-commerce is increasing the acceptance among customers. This in

turn is slowly penetrating to construction industry also o There are e-commerce portals providing men and material for the construction industry o An exclusive equipment financing institution which caters to the need of the entire eco-

system could very well emerge.

8,05,000

14,55,000 27,000

48,000

2015 2020

Operator Mechanic


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There is scope for a few innovative disruptions; it would be

interesting to see what would set these in motion.

The industry is currently in a wait and watch mode. The sentiments are positive and faith partly restored

with the recent push in the roads and the coal mining sector. There is hope that more reforms would

follow in other sectors too, boosting construction activity and in turn equipment sales.

Some of the enabling activities that government could undertake for the industry:

One of the major expectations from the government is the speedy implementation of the GST bill. Differential tax rates and rules in different states need to be removed and a uniform structure required

Land acquisition role has been shifted to the states and more progressive states could benefit by being proactive here. Ease of doing business at the central level through DIPP initiatives and the state level through regional action could bolster the investment climate.

Like in the case of the coal sector, innovative action is required in iron ore licensing through transparent processes.

Quarry blocks need to be allotted once they have received the required clearances from the environment and pollution boards

Common emission standards and rules need to be implemented for tyre and chain mounted equipment

To eliminate financial stress, the industry needs quick and easy access to capital as well as reduction in interest rates for construction equipment.

Each stakeholder will have a specific role to play in order to put

the industry on a faster growth path

Equipment manufacturers (OEM’s)

OEMs need to evolve from equipment manufacturers focus to full solution providers. This will help them

demonstrate a better understanding of customer needs and develop a superior response mechanism to

those needs. Sales strategies should focus on customer need instead of product push.

OEM’s needs to present / partner with firms to provide broader canvas options like new machines, used, rental and lease options

There is a need to continually understand customer needs in order to align equipment design and features as per changing and evolving requirements.

Large customers would drive the use of technology like GPS, telematics, electronic control systems. Focus should be on educating such customers on productivity gains.

Most dealers are single brand and focusing on select products. As proprietorship firms they were under serve pressure to ensure that their business was profitable. OEM’s need to enable their dealers with alternate revenue streams like renting, leasing etc. This can only be possible with the active involvement of the OEM


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OEM’s cater to only 40-45% of the overall spares market, a lot needs to be done on this front. Customer should be provided attractive schemes like AMC financing in partnership with finance companies. Options like reconditioned components could be considered.

In an over capacity situation, OEMs can consider India as a base to export equipment to other countries. Large multinational corporations can use India as a base to supply products to cater to SEA and ME markets

With GST bill on the horizon, movement of goods will be relatively simple and cheaper. This will help create large rental companies as currently they cannot move equipment to other stated without paying high taxes

OEMs need to partner with finance companies and government to create equipment banks for customers. This will help improve mechanization.

Financial institutions

Evaluate needs of the customer not only by customer profile but also by the nature of their business that they are currently into. Financial institutions should also look at the profitability of their contracts and then assess the customer.

Provide complete support to the customer from equipment sales to buy back. Can partner with the OEM at the backend

Create a customer merit program, a CIBIL equivalent to evaluate customer and reward or punish accordingly. Will help reduce non-performing assets (NPA)

Offer more innovative solutions to the customers in order to help them chose the best available option rather than insisting on outright purchase of the machine - Equipment leasing, Sale-Lease back option, etc.

Component manufacturer

Partner with OEM’s to constantly upgrade performance of the component

Conduct joint survey’s with the OEM. This will provide OEM confidence and also provide valuable customer inputs. This can be an annual exercise

Support OEM export ambitions by providing relevant supply services.

Government

Uniform and simplified taxation along with benefits could help promote global practices like Used Equipment, Leasing and Rental Business.

Work with industry and develop safety and better operator working conditions. Construction Equipment operation is a skilled job and with IESC helping create skill levels, government can help in creating mandatory requirements of skilled personnel to operate equipment in the interest of safety of both the operator and workplace.

Create a separate authority and act for construction equipment. This will help promote safety and to monitor the industry.

Create better infrastructure and beneficial tax regime to promote export of equipment

Making technology affordable. To help create equipment finance institutions across the country to enable better utilisation of equipment. Government could collaborate with the industry body


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and finance companies to create such institutions across the country. Benefits could be provided to customers using these banks for government projects.

Encourage industry to enable guidelines of equipment usage for different sectors and projects. Subsequently, these best practices could be mandated in tenders to help reduce overall project cost and a faster implementation

Industry Association

Promote use of technology in construction equipment among customers by setting up a working committee for the same. The working committee can conduct research amongst various customer categories which should help drive measures for technology adoption

Work with customer associations in key centres o A platform for customers to voice critical concerns. o The group will also work as a sounding board to various needs of the industry – like a test

platform for new technology o Understand market sentiments o Promote safety among customers while using construction equipment

Create a global business development cell to promote export of equipment o Can also provide global market reports o Search for international distributors for various products

About Feedback Business Consulting

Feedback is an Indian Research based Consulting firm that specializes in providing market information,

insights, ideas & implementation services to Indian and global firms. Our DNA, while rooted in market

research, is focused on making a tangible difference to our clients. Our track record includes enabling 7

billion USD of investments in the Indian market through over 4000 engagements for 600 + clients. Customer

(and Employee) experience services and solutions are an integral part of our service offering.

About ICEMA

Founded in 1949 as Tractor and Allied Equipment Manufacturers and Importers Association Ltd., the

association started with 10 Indian member companies, primarily manufacturers and importers of tractors

and earthmoving and allied equipment. In 1986 the association was renamed Indian Earthmoving and

Construction Industry Association Ltd. (IECIAL), with the objective of making the body a national point of

reference for the Indian earthmoving and construction equipment industry. In 2012 the association

redefined its role to become a truly representative body of the Indian construction equipment industry and

to expand its scope of services, and became the Indian Construction Equipment Manufacturers’ Association

(ICEMA). ICEMA represents 65 leading companies that manufacture, trade, and finance a variety of

products, including hydraulic excavators, wheel loaders, backhoe loaders, motor graders, vibratory

compactors, cranes, dumpers, tippers, forklifts trucks, dozers, pavers, batching plants, and diesel engines.


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About bC India

bC India (Bauma Conexpo Show) is an international exposition on construction equipment and technology

taking place December 12-15, 2016 at the Huda Ground, Sector 29, Gurgaon. The exhibition is organized

jointly by Messe Munchen International and the Association of Equipment Manufacturers. Simultaneously,

a one-day conference on Infra Redux - New & Sustainable Horizons is being held on December 13, 2016.

The conference is organized by the Indian Construction Equipment Manufacturers’ Association (ICEMA).

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