Equipment Market: Demand to grow due to rising construction activity

Demand to grow due to rising construction activity

The construction equipment segment constitutes a major component of the construction industry. It serves key sectors such as highways, railways, mining, urban infrastructure/transport, ports, irrigation and power. Given the huge investment lined up in these sectors, the demand for construction equipment is expected to remain buoyant. As per industry estimates, growth in India’s earthmoving equipment fleet is highly positively correlated to the growth of the construction industry.

Market size and growth

The Indian construction equipment market (in terms of revenue) is estimated to be worth Rs 330 billion-350 billion. It has grown at a compound annual growth rate (CAGR) of 18 per cent over the past six years. The total sales of equipment amount to 55,000-60,000 units per year.

Between 2010 and 2014, the equipment market grew at a CAGR of around 21 per cent. As per Off-Highway Research, the sale of construction equipment in India is estimated to have fallen by 7 per cent in 2014 to about 52,000 units compared to 2013.

Equipment categories

Broadly, the market consists of five categories: earthmoving equipment, concrete equipment, material handling equipment, road construction, and material processing. The largest category, earthmoving equipment is primarily deployed in mining operations. Earthmoving equipment includes excavators, backhoe loaders, bulldozers, skid steer loaders, trenchers, motor graders, motor scrapers, crawler loaders and wheeled loading shovels.

Backhoe loaders are the most used earthmoving equipment and accounted for about 50 per cent of total construction equipment sales in 2013 (latest available data). This is mainly because first-time and small-scale contractors want to own equipment within five to seven years of operation and backhoe loaders are the best choice to execute projects. Notably, the share of backhoe loaders has increased significantly since 2009, while the share of crawler excavators has declined.

Equipment manufacturers in India

The earthmoving equipment segment is witnessing stiff competition. The Indian construction industry has also become a lucrative market for several major international players. The key players include BEML, JCB, Caterpillar, Volvo Construction Equipment, Case Construction, Hyundai Construction Equipment, Tata-Hitachi, Terex Construction, Doosan, LiuGong, Sany, Schwing Stetter India, Kobelco, Volvo Construction Equipment, and Wirtgen India. Almost all of these players have set up manufacturing bases in India.

The focus among manufacturers, therefore, has been to come out with as wide a range as possible, catering to present demand. The end-user has an option to choose from a wide range of products. Earthmoving equipment manufacturers are also coming out with more fuel- efficient and environment-friendly products.

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Rental and leasing market

Rental and leasing allow contractors and developers to save on capital-intensive machines. Given the availability of a variety of contractors, developers can concentrate on their core business and increase their projects’ internal rate of return (IRR). On the other hand, equipment owners can earn returns on idle equipment, while saving on maintenance, repair and associated costs.

The equipment rental market comprises several small regional companies (with fleets of less than 10 units of equipment each) and only a handful of large players from the organised sector. Some of the key players in this segment are Gmmco Limited, Gemini Equipment and Rentals Private Limited, Quippo Infrastructure Equipment Limited, Sanghvi Movers Limited, and TIL India. According to industry estimates, the top 10 rental players account for 30-40 per cent of the total market. There are about 10,000 rental companies that operate as small players in the unorganised segment.

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Policies supporting the growth of equipment segment

The government has undertaken several measures to boost the growth in the equipment segment. On the foreign direct investment (FDI) front, the government has allowed 100 per cent investment under the automatic route for the equipment industry. Besides this, the Make in India initiative is also likely to facilitate the state-of-the-art technologies. Also, a supportive special economic zone policy has helped India emerge as a leading manufacturing base in the South Asian region.

Further, the government has removed tariff protection on capital goods allowing competition among equipment manufacturers. Customs duties on a range of raw materials/parts that are used in the manufacturing process have also been lowered. Meanwhile, road construction equipment imported duty-free can be sold within five years of import. This is, however, subject to the payment of customs duty on the depreciated value, and only individual constituents of the consortium whose names appear in the contract can import goods without payment of duty. The government has also stated that the requirement of certification by the Ministry of Road Transport and Highways for availing of customs duty exemptions on specified goods required for the construction of roads will be eliminated.

FDI in earthmoving equipment segment

Hikes in FDI inflows have benefited the equipment industry, both in terms of volume and quality. According to the Ministry of Commerce, a cumulative FDI inflow of Rs 16.07 billion has been reported in the earthmoving machinery segment between April 2000 and September 2015. Notably, FDI inflow jumped from a low of Rs 0.3 billion in 2012-13 to about Rs 4.7 billion during the first half of 2015-16.

Challenges faced by the segment

The construction equipment market, including the earthmoving segment, faces long-standing issues and concerns, which need the urgent attention of all stakeholders. One of the primary issues is the high demand for low-cost, inefficient equipment from foreign countries. Equipment manufacturers of China, Korea and Hong Kong have been taking advantage of the lower cost of production. Rising import of cheaper equipment is mainly due to export incentives given by the respective countries and India’s favourable import duty regime. Meanwhile, the Indian Construction Equipment Manufacturers’ Association has urged the government to regulate the import of second-hand equipment to protect the domestic sector.

Another major challenge is the lack of soft financing by financial institutions and commercial banks. The mining equipment industry is highly capital intensive and involves high manufacturing lead time. In addition, equipment manufacturers face the issue of high cost of borrowing and lower depreciation rates at around 15 per cent. Further, banks and non-banking financial companies face the issue of bad assets ratio in the mining equipment market.

Besides this, the lack of adequate skilled manpower is a key concern. It is estimated that about 2 million trained operators/mechanics would be required in the construction equipment market by 2023. The Skill India initiative and the constitution of the Infrastructure Equipment Skill Council by equipment manufacturers augurs well.

The way forward

The growth of the construction equipment industry is dependent upon the level of construction activity in the future. Given renewed efforts towards infrastructure development, especially in power, roads and railways, the demand for equipment is expected to pick up in the near future. The construction equipment market is poised to grow at a CAGR of 19-20 per cent during the next five years. The key categories that are likely to witness higher growth in demand include earthmoving equipment (backhoe loaders, crawler excavators, etc.), material handling equipment, and road construction equipment.

Going forward, construction equipment manufacturers must expand production capacity, and at the same time, they need to focus on developing efficient and environment -friendly products. The industry also needs to concentrate on providing integrated services, including after-sales maintenance schemes. The government could support the industry by promoting the adoption of high-end technologies in construction equipment.