After a rather stressed 3-4 years, the construction equipment market is witnessing growth once again. While many manufacturers, both domestic and international, seem optimistic about future growth prospects, it could be a case of misplaced enthusiasm. Or, is it?
Samir Bansal, General Manager – India, Off-Highway Research throws light on the Construction Equipment market in the country and why the hey days are back again.
How do you see the Construction Equipment market shaping up over the past year?
The Indian construction equipment market has witnessed cyclical trends and exceeded 50,000 units for the first time in 2007. However, as a result of the global crisis, it declined in 2008-2009 before peaking at nearly 72,500 units in 2011.
After 2011, for various reasons such as delays in policy decisions by the government, approvals not coming through, high inflation and the legal issues, the market declined to about 48,000 units in 2014 and witnessed only a marginal growth in 2015.
Construction equipment demand grew by an impressive 36 per cent in 2016, and this momentum continued in 2017. In my opinion, the market will grow by about 10 per cent in 2017 and is expected to surpass the level witnessed in 2011.
What would drive this growth?
The road sector has been, and will continue to be, the major demand driver as a large number of projects have been awarded/announced by the government. The sector saw little activity during 2011-2014, but initiatives taken by the present government gave a big boost to the sector. Further, a lot of planning has been done in other sectors as well, which would help in boosting the future demand.
The government did bring about many structural changes, along with announcing many projects, such as NHIDCL, leading to considerable euphoria amongst construction equipment manufacturers. But, nothing much came out of it. And, recently too, the government announced the Bharatmala project, besides the Sagarmala and many others. In your view, do you think that equipment manufacturers’ hopes will rise again to be let down, or is it too early to write it off?
India has witnessed a growth of over 35 per cent during 2003-2007, 2010 and in 2016. Such high rate of growth is not normal and sustainable. A steady 10-15 per cent growth every year will be preferable to the industry instead of cyclical variations every year. There is enough work to be done in every sector for the next 20-25 years and a lot of groundwork has been done by the government for infrastructure development in the country. Also, remember that it is not just road projects that have been planned.
Money is not the problem; rather, it is the ability of the government to execute the projects that governs the market growth. The government is ultimately the facilitator, it formulates the projects, is the one to give approvals and frame the policies. The present government is trying its best to do all that is necessary to make sure that the projects are taking shape. And, I would say, for the first time, we are seeing an integrated approach in terms of focus on roads, railways, power, waterways, ports, and airports.
Swachh Bharat is a big project which, ultimately, would require a lot of investment in solid waste management, laying of sewage pipelines and effluent treatment plants. Along with Swachh Bharat, you have tourism, healthcare, education, Skill India, Make in India, rural infrastructure development and the MGNREGA scheme, an approach towards providing all facilities in the hinterland so that the migration from rural to urban areas is slowed down.
Then, there is the focus on urban infrastructure, Smart Cities, the river linking project, Housing for All by 2022...there is quite a bit of work to be done and you will need a whole lot of equipment for all of these schemes. There is no dearth of work. So, to answer your question, there is no misplaced euphoria amongst equipment manufacturers. There is bound to be a genuine demand for equipment for all of these projects.
Further, India is slowly turning into a manufacturing hub, because of which every manufacturer in the construction equipment industry or otherwise, is establishing its manufacturing facility here, if they haven’t already opened one yet.
Land Acquisition continues to rear its head.
See, in a democracy, issues relating to land acquisition will continue, but, one needs to find a way out. Things are being streamlined and land acquisition rates have gone up. States are competing with one another to attract investment and promising easy land availability and better infrastructure. So, land acquisition problems have eased to a large extent.
There was a time when every project was on the PPP model. In your opinion, do you think that the government has to now go back to the PPP model rather than the HAM-BOT model that it has been adopting of late?
The government is trying to implement the PPP model as, at the end of the day, large sums of money is required for the projects, and the government cannot invest all of it. HAM-BOT model is also a form of PPP in which the government participation is higher and provides assurance to the financiers and asset owners.
There was nothing wrong with the initial PPP model, the only problem was that everyone went overboard. All concessionaires were the contractors who became asset owners and found PPP a very good business opportunity. Funding will automatically flow once you get the contract come and get assured returns for the next 30 years. Therefore, projects were being bagged with very high negative grant and very optimistic traffic growth projections were considered.
It was only when the loan could not be serviced that the reverse cycle started and that is why you find all the big contractors in a soup. They need to clean up their balance sheets by selling off their assets! But, once that is done, the contractors will come back.
In the construction equipment industry, what are the key developments that you see going ahead?
All the big international manufacturers are already present in the country and they are already expanding their facilities and their capacities, new products are being launched and indigenised. Most are looking at not just the domestic market but exports to the Middle East, South East Asia, and Africa. So, if there is stability in our economy and around the world, I see no reason why the equipment industry in India cannot grow over the next few years.
Most manufacturers today seem rather upbeat with the introduction of telematics in their machines. No doubt that telematics offers immense benefits to the user of the machine as well as the manufacturer. But, it is a technology that was prevalent for many years in the developed world and only coming into the country now. Do you think that it would be a game changer for manufacturers here in India?
That is a generalised statement as all these technologies have been present in India for some time. What you need to keep in mind is the use of technology in terms of application and its requirement. Now, if an excavator is going to be used for 1,500-2,000 hours a year, why would anybody invest in the latest technology, high productive machine? The contractor could use a low-cost machine, or may be a used machine.
A contractor will buy a machine with the latest technology if it helps him make money. Otherwise, there is no reason for him to invest in an expensive machine. So, one need to see what is the technology, how you are going to benefit from that and only then make the investment. And, contractors will do just that.
Today, you will find machines of all technology levels being used in India, from very old to the latest. However, do you really need the latest, or will one that is a generation old do? A contractor needs to take a call on that based on his projects and job outputs, and not because the technology is available.
What do you see as one big change that has impacted the industry lately?
I think the introduction of GST has made a huge impact on the industry, more so in the unorganised sector. Players in the unorganised sector, who used to deal in cash component, are now forced to shift to the organised. The impact of it will be largely seen in the rental companies, what we used to earlier call ‘Plant Hirers’. Moreover, with the introduction of GST, the movement of machines has now become much easier and hassle free.
Do you see e-commerce coming into construction equipment market?
A lot of companies are trying that, especially for rentals and used equipment. SREI launching iQuippo is one such example. People would like to see the equipment, touch it, see its performance, evaluate before making a purchase. It is not the same as buying clothes, or shoes, or electronic devices. It is a production machine and a contractor’s livelihood depends on the same. So, an e-commerce site could be there to provide a good understanding of the machine and its attributes, and make a comparison. It will have to be supported by a depot where a customer can physically see, touch and feel the machine, see its working, evaluate the service and parts support he can get, often in remote areas.
So, yes, e-commerce in construction equipment market would grow, but at what pace and to what extent remains to be seen.
The new terms seem to be hybrid and electric vehicles even in the construction and mining equipments. Do you think that these could be brought to India any time sooner?
The whole world is taking about electric, but we are still far away from the reality. We need high capacity storage and low charging times. The technologies are still at a development stage. So, there is still some time before they come in.
Going ahead, which are the equipment categories that you see growing rapidly?
Excavators would see good growth. It will see the largest growth amongst large volume equipment, because that is the equipment for developing infrastructure. Backhoe loaders would be, for a few more years, the largest selling equipment, but we don’t expect the growth rate to be high. It will see marginal growth as sustaining such high level of sales is in itself a challenge.
Wheeled loaders would see a growth, but their base itself is small. Mini Excavators would also see a growth. All specialised machines, I think, should see growth.
Lastly, would we see the construction equipment market peak and surpass the 2011 levels in 2018?
It is estimated that the sales of construction equipment in 2017 has surpassed the 2011 level.
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If an excavator is going to be used for 1,500-2,000 hours a year, why would anybody invest in the latest technology, high productive machine? The contractor could use a low-cost machine, or may be a used machine.
Backhoe loaders would be, for a few more years, the largest selling equipment, but we don’t expect the growth rate to be high. It will see marginal growth as sustaining such high level of sales is in itself a challenge.
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