Construction equipment forms the backbone of construction activities in an economy. Of the equipment deployed in India, a large proportion is manually operated and mechanised versions are yet to be adopted on a large scale. While the major construction players are moving towards greater mechanisation, it is yet to become the new normal, as a large part of the industry remains informal and unorganised in nature.
After the sluggish growth in sales witnessed during 2013-15, the construction equipment market has witnessed a marked improvement in 2016. According to industry estimates, sales volumes have risen by 25-30 per cent during the year. The government’s current focus on infrastructure development also augurs well for equipment manufacturers looking to expand their business in domestic markets. Further, initiatives such as Make in India that are encouraging domestic production are also nudging these firms to export their equipment to overseas markets.
Market size and structure
Size: The construction equipment industry in India is highly fragmented. On the one hand, it comprises the organised segment consisting of private firms and independent contractors who operate on small, medium as well as large scales, while on the other, it encompasses the unorganised segment with several stand-alone private contractors who operate on a small scale only. The size of the construction equipment market was estimated to be Rs 332 billion in 2015. Between 2010 and 2014, the market grew at a sluggish growth rate, owing to a number of factors such as a general slowdown in GDP growth, a lack of new projects, extended payment cycles, and stretched balance sheets of a number of companies.
Another trend witnessed during the slowdown was that firms started focusing on the optimisation of equipment usage through several strategies such as using the same equipment for more than one project, improving efficiency, enhancing operating standards, as well as renting equipment to reduce operational costs. This was driven by the constrained flow of funds from banks which were wary of lending to the sector owing to a backlog of stressed loans and the poor financial standing of the loan seekers.
Structure: The equipment industry consists of four broad segments – earthmoving equipment, construction equipment, material handling equipment, and vehicles used for carrying out construction works. Of these, earthmoving equipment has the highest market share at about 60 per cent. The second most widely used type of machinery is construction equipment, which includes concrete equipment like asphalt finishers, transit mixers, concrete pumps and batching plants.
Considering the revenue from segment-wise equipment sales in proportion to the value of total equipment sales, earthmoving equipment tops the list with a share of 56 per cent, followed by concrete equipment (19 per cent), material handling equipment (13 per cent), road construction equipment (9 per cent) and material processing equipment (3 per cent).
In terms of type of equipment, in 2016, the market was dominated by backhoe loaders, crawler excavators, mobile cranes, mobile compressors, compaction equipment and wheeled loaders. According to industry estimates, these six equipment types are likely to account for 94 per cent of the market.
Precast technology: Also known as off-site construction, modular construction and prefabricated construction, precast technology has started making inroads in the domestic market. Precast components are fabricated and assembled offsite, transported to the project site and then installed on a prepared foundation.
Though the market for precast technology is at a nascent stage of development, it is a lucrative alternative method of construction and has a number of benefits. These include reduced time for construction, lower generation of
construction waste and better cost economics, depending on the type and size of project. Besides, as the industry is struggling with issues such as a paucity of manpower, precast technology appears to be a better bet as it requires fewer labour hours. Apart from lower project costs and timely project completion, buildings constructed using this technology are more robust than traditional brick-and-mortar constructions. However, with the country’s varied geography, the industry faces issues related to the transportation of precast components. It is hoped that the improvement of the road network will resolve this issue in the future.
Technology trends: Technologically advanced construction equipment remains unpopular in the Indian market, as compared to developed markets, for instance, in the Middle East. While the main issue is that of financing, which has been difficult for construction companies to secure, the requisite investment in research and development (R&D) by domestic equipment manufacturers has been lacking. Several technologies such as advanced software packages, internet of things, artificial intelligence, video analytics and unmanned aerial vehicles, remain only as long-term plans of these companies with no clear timeline for their adoption.
Manufacturers targeting foreign markets: According to industry reports, construction equipment providers and manufacturers are eyeing India as a manufacturing hub. Players are ramping up their manufacturing capability, network and spare parts availability. Currently, domestic construction equipment companies are earning almost 20 per cent of their revenues from exports. The aim is to increase not only overall revenues but also the percentage of revenue earned from exports. India’s geographical location provides easy access to a number of markets in Africa and Southeast Asia and that bodes well for increasing export revenues.
Apart from geographical proximity to export markets, factors such as competitive costs, advanced technology and favourable policies for the export of machines are also key enablers going forward.
Growing focus of equipment manufacturers on enhancing customer experience: There has been a shift in the approach of equipment providers as they respond to pressing issues raised by buyers. Products with more power-
efficient engines and better performance are now being developed in response to the increased focus on saving fuel costs. It has been estimated that fuel savings of up to 13 per cent could translate into an average saving of Rs 50,000 per year. Further, equipment manufacturers are working to enhance their equipment’s performance, uptime and the ease of operation and maintenance to enable customers to focus on their core activities. The business model for construction equipment is also evolving – a sale no longer ends at selling a machine, as after-sales service is becoming increasingly important. Besides, services such as training of personnel to operate the machinery and sending representatives to the site for the initial period of equipment use are also emerging.
Key issues and concerns
Fluctuation in equipment demand: The sale of construction equipment is dependent on user industries and cyclical fluctuations. In the past few years, the equipment market has witnessed a slowdown in demand, especially due to reduced construction activity in the highways, mining and power sectors.
Competition from imported equipment: Equipment manufacturers in China, Korea and Hong Kong have lower costs of production, which gives them a cost advantage as compared to Indian manufacturers. It thus proves economical for domestic construction players to import such equipment. Foreign manufacturers are further aided by export incentives given by their respective countries and India’s favourable import duty regime. In light of this, the Indian Construction Equipment Manufacturers’ Association has urged the government to regulate the import of second-hand equipment to protect the domestic sector.
Poor after-sales service: The after-sales revenue component in the total revenue of Indian equipment manufacturers is currently much lower than the world average of 12-20 per cent. A key reason for this is the easy availability of non-original equipment manufacturers’ spare parts and cheaper services offered by players in the unorganised segment. The situation, however, has started to change as providing after-sales service has become an important part of equipment manufacturers’ business strategy to retain their clients.
The construction equipment industry has bright growth prospects in the medium term, though in the near term some slowdown is likely on account of the recent demonetisation that has halted activity in sectors such as real estate. Moreover, a pick-up in the infrastructure sector is always gradual and requires time to get under way. A number of government initiatives such as the Smart Cities Mission, Make in India, Housing for All, Sagarmala, Regional Connectivity Scheme, Jal Marg Vikas, and the Atal Mission for Rejuvenation and Urban Transformation are likely to drive demand for construction, which in turn, will result in a higher demand for equipment. Manufacturers, meanwhile, must focus on ramping up production capacities and investing in R&D to create low-cost, efficient and technically advanced products to cater to the growing and varying needs of construction companies.