“Reinventing Construction – A Route to Higher Productivity”, published by McKinsey’s Global Institute in February 2017, presented facts about labour productivity in the construction industry. This article reflects the phenomenal growth prospects available for Indian contracting companies compared to their global peers.
The global spending on construction-related services during 2015 was $10 trillion, representing 13 per cent of global GDP. It was projected to increase to $14 trillion by 2025. Currently, the construction industry employs 7 per cent of the world’s working population. Every dollar spent on this sector generates up to three times the economic activity in other sectors. It is crucial to note that global labor-productivity growth in construction has averaged only 1 per cent a year over the past two decades, compared with a growth of 2.8 per cent for the total world economy and 3.6 per cent in manufacturing.
The McKinsey report estimated that the world must spend $57 trillion on infrastructure by 2030 to keep up with the global GDP growth. This is excellent news for the construction industry as it can work on identifying solutions to transform productivity through new technologies.
The infrastructure report card of the American Society of Civil Engineers gave the US an overall grade of D+ across 16 infrastructure categories in 2017. It recommended that it was time to make a significant investment to address the $2 trillion funding deficit to meet the needs of today and ensure our infrastructure is built for the future.
The report card offered a comprehensive assessment of America’s civil engineers in 16 major infrastructure categories including aviation, bridges, dams, drinking water, energy, hazardous waste, inland waterways, levees, ports, parks and recreation, rail, roads, schools, solid waste, transit and wastewater. Using a simple A-to-F school-type report format, the report card examined the current infrastructure conditions and needs, assigning grades and making recommendations to raise the assessed rates.
A similar rehabilitation of infrastructure scenarios can be seen in other countries, providing opportunities to players in the construction industry.
Scope for big growth in the Indian construction industry
The share of countries/regions in the construction market vis-à-vis their GDP share on a PPP basis extracted from this report is presented in Table 1. Based on its population and position globally in terms of size of the economy on a PPP basis, it can be inferred that there is immense scope in the Indian construction industry to increase its global share from the minuscule 2 per cent.
At the current levels, China’s GDP is close to thrice of India’s on a PPP basis, whereas its construction business is 15 times larger than India. Meanwhile, the US is at twice the Indian GDP level, whereas its construction spending is nine times that of India. It is time that policymakers and big-time players understand this and come out with an action plan to catch up with the rest of the world.
Performance of Indian construction companies vis-à-vis global players
As per Deloitte’s Global Powers of Construction 2019 report, the revenue share of the top 100 construction companies during 2019 stood at $1.462 trillion. The accompanying Table 2 show the revenue share of companies from different countries.
The region-wise share of the top 30 global companies and the number of companies contributing to market capitalisation are compiled in this report and presented in Graphs 1 and 2.
Market capitalisation is the market price per share multiplied by the number of shares outstanding. It is an index of the value of a company as perceived by the equity market. It is a fair measure as faceless investors acting at arms’ length distance evaluate it.
It is interesting to note that of the 30 companies, one company from India L&T, contributed 6 per cent of the combined market capitalisation performance. Region wise marketing capitalisation status is presented in Graph 3.
The information about earnings before interest and taxes (EBIT) achieved by 30 companies, including the share of different companies in construction services and other businesses, is shown in Table 3.
Most of the construction companies are involved in different lines of business other than the construction industry. This enables them to remedy the profitability risks from the construction business.
For example, in the case of L&T, during 2019-20 its revenue share from the construction industry stood at 65 per cent recording 8 per cent EBIT, and the remaining 35 per cent came from defence, heavy engineering manufacturing, developmental projects, IT and technical services, financial services and others recording 15 per cent EBIT. On overall basis EBIT for the year stood at 11 per cent.
European and Indian companies substantially benefitted from profitability of other businesses. Other companies from the US and Asia maintained the same levels of profitability. On an overall basis, Indian companies stood first in achieving EBIT, European companies stood next to the US and other Asian companies at the next level.
Global spread of the business
All the companies have spread their footprint in other geographies as well. On this count also, L&T has done reasonably well by generating 32 per cent of its overall revenue from global operations. Graph 4, given above, may be referred.
Introspection and the way forward
While it is heartening that L&T has penetrated the big league, it is essential that other companies benchmark against this behemoth and, over time, become a global major.
This information provides us with an opportunity to introspect on why Indian companies cannot grow big compared to other companies from small countries, and take remedial measures to tap significant prospects in the future.
Collective efforts are needed for reforming the current tender practices, setting up massive infrastructure for meeting the skilled manpower requirements, creating a conducive environment for bringing new construction technologies to India, putting in place a mechanism for the speedy redressal of contractual claims, exposing students to the industry through internships and other programmes, providing a reasonable time frame for megaprojects involving complexities in bid documents, and organising more training programmes for construction engineers. Improvement in these key areas can help improve the lacklustre performance of the Indian construction industry on the global front.
Based on inputs from G.Venkata Prasad, Director of Operations, Deep Foundations Institute of India