Overview

Equipment sales and FDI on the rise

Earthmoving equipment constitutes 20-25 per cent of the cost of a construction project. Thus, most of the demand for earthmoving equipment comes from the highway, railway, mining, urban infrastructure, irrigation, port and power sectors. Given the huge investment envisaged by the government in these sectors, going forward, the demand for construction equipment is expected to be significant. For instance, in the mining sector, the government has set a target of doubling coal production to about 1 billion tonnes by 2020. This is likely to create a massive demand for earthmoving equipment like excavators, backhoe loaders and shovels.

Key earthmoving equipment

The Indian construction equipment industry consists of four broad segments – earthmoving equipment, road equipment, material handling equipment and construction vehicles. Of these, the earthmoving equipment segment, which consists of machinery like excavators, backhoe loaders, bulldozers, skid steer loaders, trenchers, motor graders, motor scrappers, crawler loaders, wheeled loading shovels, etc., comprises about 60 per cent. Within this segment, backhoe loaders are the most widely used earthmoving equipment and account for about 50 per cent of total construction equipment sales. This is essentially because for small-scale contractors, who want to own equipment within five-seven years of operations, backhoe loaders are the best choice.

Market size and sales

In terms of revenue, the Indian construction equipment market is estimated to be worth Rs 330 billion-Rs 350 billion. It grew at a compound annual growth rate (CAGR) of 18 per cent between 2010 and 2015. According to international construction equipment industry management consultancy Off-Highway Research, India is one of the only major markets, besides Europe, to have recorded an increase in equipment sales during 2015. As per the latest data available, earthmoving construction equipment (ECE) sales stood at 60,655 units during 2014 as against 55,946 units during 2013, an increase of about 8.5 per cent. Specifically, sales in key equipment categories like backhoe loaders, crawler excavators, mobile cranes, skid-steer loaders, and wheeled loaders increased significantly during 2014.

Market structure

The construction equipment industry in the country is highly fragmented. It is divided into an organised segment consisting of private firms and independent contractors who operate on a small, medium as well as large scale, and an unorganised segment with several stand-alone private contractors operating only on a small scale. According to the Department of Heavy Industries (DHI), there are 20 large Indian as well as global manufacturers and over 200 medium and small manufacturers currently operating in India. The big players (about 50) in the organised space account for around 90 per cent of total industry revenue and the unorganised segment accounts for the remaining 10 per cent.

Further, partnerships with global majors have provided domestic construction equipment companies access to advanced technology and experience in project management. Some of the key private equipment manufac-turers are Caterpillar, JCB India Limited, Greaves Cotton Limited, Escorts Construction Equipment Limited, L&T Construction Equipment, Volvo Construction Equipment and Tata-Hitachi Construction Machinery. Most of the global players have set up their manufacturing base in India and have started exporting their products to other countries. BEML Limited is the only public sector company in the construction equipment industry in India.

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Policies for supporting growth

The government has undertaken several measures to enhance growth in the equipment segment. One key step is that 100 per cent foreign direct investment (FDI) has been allowed under the automatic route for the industry. The Make in India initiative will help by bringing in state-of-the-art technologies while a supportive special economic zone policy has helped India emerge as a leading manufacturing base for equipment in South Asia.

Moreover, the government has removed tariff protection on capital goods, and thus allowing competition among equipment manufacturers. Customs duties on a range of raw materials and parts that are used in the manufacturing process have also been lowered. Meanwhile, the government has allowed road construction equipment (that has been imported free of duty) to be sold within five years of import, leading to a robust secondary market. This is, however, subject to subsequent payment of customs duty on the depreciated value. Also, only individual companies of a consortium whose names appear in the contract can import goods without payment of duty. Further, the government has stated that the requirement for certification by the Ministry of Road Transport and Highways for availing of customs duty exemption on specified goods required for road construction will be done away with. This will ease the process of importing equipment for road construction.

FDI in the earthmoving equipment segment

The earthmoving equipment segment witnessed record FDI inflows during the past fiscal year. Inflows jumped from a low of Rs 0.3 billion during 2012-13 to Rs 6.6 billion during 2015-16. This rapid growth can be attributed to an increase in investments by foreign players on the back of the Make in India initiative as well as growing infrastructure activity in the country. This, in the long run, will benefit the equipment industry, in terms of both volume and quality.

According to the Ministry of Commerce, a cumulative FDI inflow of Rs 17.99 billion has been reported in the earthmoving machinery segment between April 2000 and March 2016.

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Export and import of equipment

India exports domestically manufactured machinery to over 100 countries. The key export destinations include the Middle East, Southeast Asia and Africa. Overall, there has been an increasing trend in the export of machinery across all categories. Between March 2015 and February 2016, there has been a huge increase in the export of transporter cranes, gantry cranes, bridge cranes, bulldozers, excavators, etc. The value of exports in all categories has also increased considerably in the past five years.

With regard to imports, core infrastructure and mining sectors have been the key areas using imported machinery, which is primarily imported from Korea, Japan, China, Russia and Germany. The value of imports during 2015-16 remained at almost the same level as in 2014-15. Category 8428, which consists of lifting and loading machinery, reported the maximum share in total imported equipment during 2015-16 (till February 2016), at about 28 per cent (in terms of value), followed by Category 8426 (which include cranes and lifting machinery) at 26 per cent.

Impediments faced

The earthmoving equipment segment faces several issues, which need to be resolved as soon as possible to facilitate growth in the sector. One of the major concerns is the high demand for low-cost, inefficient equipment from foreign countries. The rising import of cheaper equipment is largely due to export incentives given by the exporting countries and India’s favourable import duty regime. Equipment manufacturers in China, Korea and Hong Kong have thus been taking advantage of their lower cost of production. There are also issues related to after-sales service and the high cost-low revenue structure associated with this equipment.

Another key concern is the lack of availability of soft financing from financial institutions and commercial banks. The earthmoving equipment industry is highly capital intensive and involves high lead time for manufacturing. In addition, equipment manufacturers face the issue of the high cost of borrowing and low depreciation rates of around 15 per cent. Further, banks and non-banking financial companies suffer from bad assets in the equipment market. Lack of skilled manpower is also a big issue for the ECE industry.

Conclusion

The demand outlook for the sector seems positive as infrastructure projects are being fast tracked and mining fields are being speedily awarded. As per the DHI, the demand for earthmoving equipment is expected to remain buoyant in the near term. This will be backed by the government’s focus on the road, railway, power, mining and urban infastructure sectors. Going forward, the production of earthmoving equipment is also expected to increase, with more fuel-efficient and higher capacity products being in demand. According to the Indian Construction Equipment Manufacturers’ Association, India’s earthmoving and construction equipment market is expected to grow by a healthy 20-25 per cent over the next few years. It is expected that 94,730 units of ECE will be sold in 2018, up 11 per cent from the projected sale of 85,100 units in 2017.

With regular monitoring being undertaken by the Prime Minister’s Office, investment in the country’s infrastructure sector is expected to increase in the coming years. This is likely to enable the ECE segment reach the projected growth figures.

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