CE INDUSTRY: The Powerful Boost!

The construction equipment industry is stimulated by various government investments focused on the development of transportation and utility infrastructure. Government authorities and construction companies are increasingly investing in automated equipment. Philip Varghese looks into the investment scenario, OEM's expectations from the government, challenges and opportunities in the CE space.

The growing public-private partnerships to implement infrastructure work coupled with wide-scale adoption of the rental business model have induced an increased demand for construction equipment over the past few years. Different types of construction machinery are procured to conduct a set of specific tasks and require technical expertise in operating them. The construction machinery is an expensive commodity, thus not every builder, contractor, or construction firm could afford to buy it. Also, there are many construction projects that require construction machinery temporarily. The cost of machinery has increased over the past few years owing to the incorporation of advanced safety technologies, which has triggered the end user's inclination toward procuring these types of machinery on a rental basis. The rental providers have identified the growth opportunity and have started to upgrade their existing fleet, thereby driving the demand for construction equipment.

Additionally, to save on the cost of machinery and cost incurred behind its maintenance and repairs, small builders, contractors, and construction firms take machinery on a rental basis from the rental service providers. Many companies are entering the construction equipment rental business owing to its high profitability. Construction equipment is very robust machinery with a life span of 7 to 10 years, due to which companies prefer to rent out old machinery for profit. This growing trend of equipment rental business is a significant factor in promoting the market growth.

The demand for construction equipment is high from the residential construction sector owing to speeding urbanization in countries including China and India. The urbanization triggers not only the demand for residential space but also other related infrastructures such as roads, hospitals, schools, and commercial areas. To cope up with the demand for these public infrastructures, the government spends a significant amount on the construction sector. For instance, according to the India Brand Equity Foundation (IBEF), India plans to spend USD 1.4 trillion on infrastructure in the coming five years. The government of India would highly invest in the infrastructure sector, significantly on urban transport infrastructures such as the metro rail network, renewable energy, and highways.

Insights…

The construction equipment market involves earthmoving machinery, material handling machinery, and concrete and road construction machinery on the basis of product. The earthmoving machinery segment dominated the market in 2019, however the concrete and road construction machinery segment is anticipated to grow at the highest CAGR of 6.2% from 2020 to 2027. Among the earthmoving machinery type, the excavators dominated the market in 2019. The need for conducting excavation or digging in confined spaces has contributed to the development of compact excavators. Furthermore, increasing stringency of emission norms and the need for reduced noise emissions have compelled the manufacturers to develop eco-friendly machinery. The earthmoving machinery segment, especially the excavators, are being subjected to the integration of telematics and convenience and safety technologies such as lift assist and touchscreen infotainment systems for delivering enhanced operational capabilities.

The demand for material handling machinery such as cranes is rising in developed countries. Increasing trend of constructing massive infrastructures, skyscrapers, and commercial buildings is expected to raise the demand for these types of machinery globally. Increasing investment in road construction projects has boosted the demand for concrete and road construction machinery such as concrete mixers and pavers. Indian government have taken the initiative to improve the road infrastructure. The Indian government recently announced that it would invest Rs 15 trillion over the next five years in its ambitious plan to improve highway infrastructure, thus driving the demand for the concrete and road construction machinery segment over the forecast period.

Scope…

The outbreak of COVID-19 and the subsequent shutdowns affected the construction industry in several countries. The negative impacts of the pandemic are visible in various major project timelines.

The increasing focus on infrastructure and the development of automation in the construction and manufacturing processes had a significant impact on the market growth. The road construction machinery market witnessed significant growth in the recent past, owing to the increased road development programs undertaken by the central and state governments, especially in Asia-Pacific.

The demand for machines that are cost-effective, with regulatory pressures for lower emissions, is pressurizing construction equipment manufacturers to opt for electric and hybrid vehicles over the traditional hydraulic and mechanical ones.

The renting or leasing of construction equipment has been on the rise, owing to the equipment cost and the cost of the maintenance process. Apart from the cost, there are also other benefits associated with renting the construction equipment. Rental companies provide the machinery, with the required professional machine operators and drivers included in the rent.

The construction industry is getting smarter. Digitalization, connectivity, and automation are driving the development forward, leaving a substantial impact on construction projects. Moreover, renting companies geared up in investing in new technologies to cope with the growing demand for advanced construction machinery and replace the older ones with new or upgraded machinery fleet.

Industry leaders and the spirit of growing investments…

Dimitrov Krishnan, President - iCEMA & Managing Director - Volvo CE India, said, “The industry's growth potential is being limited by some key challenges that need early redressal. These include iincreasing input prices, especially the spiraling steel prices and supply chain disruptions experienced during the pandemic. Uncertainty in the applicable norms such as emission norms for Off -Highway equipment, have been a major cause for concern for the industry. There has have been several instances of projects getting stalled midway due to various reasons leading to demand flow disruptions. This places significant pressure on the CE industry's financial health, specially of the contractors, further impacting demand.”

Speaking about the expectations from the government in terms of investments and policy change, Deepak Shetty, CEO and MD - JCB India, said, “Over the past few years, we have seen a very healthy dialogue emerging between the Government and our industry. This is a welcome change because various issues around policy get highlighted, and the resolution of which is beneficial to the industry. For instance, there was a demand to create a separate Development Finance Institute, which has been accepted. This is important for long term Infrastructure funding of projects. We are very heartened by this move and would like to see this coming into play as early as possible.”

Ramesh Palagiri, Managing Director & CEO - Wirtgen India, said, “The Indian government is planning to increase the national highway network to 2,00,000 km by the year 2022. During the year 2018-19 national highways were constructed at the rate of 30 km per day, the government has set a target of constructing 40 km per day national highway in 2020. The NHAI has achieved a record 3979 km national highway construction during FY 2019-2020 over 3380 km national highway in FY 2018-19.”

According to Sandeep Mathur, Brand Leader- India & SAARC, CASE Construction Equipment, “With the current investment and plans toward infrastructure development, the CE industry is going to grow further. However, we hope that the government continues to introduce more such projects and plans to invest more money in the sector, helping dependent industries to grow further. This will also boost employment opportunities. It is important for the Government to support companies by enabling a viable ecosystem to do business, have transparent and fair regulations and create a level playing field for all businesses to coexist cooperatively.”

According to Farrokh Cooper, Chairman & Managing Director, Cooper Corporation, “Aatmanirbhar Bharat and Make in India are excellent initiatives, but industry in general, and multinational corporations in particular, should be advised that they should not take full advantage of government subsidies and incentive schemes to establish industry while benefiting from low tax rates and infrastructure built by high domestic tax payers while continuing to import from China. The government should deal with this with a strong approach since it not only impedes government income through GST, Income Tax, and other means, but it also has a significant effect on the growth of ancillary industries and unemployment.”

V. Senthilkumar, Managing Director, Propel Industries, said, “The CE industry has faced many a challenge in the last 17 months, due to the pandemic but I wholeheartedly believe that the industry has a huge potential to grow. The Government's efforts to create a suitable environment for the industry's growth is an added advantage. Rising input prices, supply chain disruptions and uncertainty in project implementation needs to be addressed to have a fruitful year ahead.”

He further added, “The Indian CE industry can contribute significantly to help Indian economy become a USD 5 trillion economy soon.  The CE industry is ranked 3 currently with a projected 3X growth but reports suggest that it can upgrade to slot 2 shortly. With 3 million people employed in the industry, it definitely has a promising future.

The government has extended its Rs 111 lakh crore National Infrastructure Pipeline to cover more projects by 2025. As of now, it has been expanded to 7400 projects which augments good news for the CE industry. I am quite excited about the project announcements and am eagerly waiting for its implementation.”

In the Independence speech delivered, Prime Minister Narendra Modi has said that we have to work together for next generation infrastructure, world class manufacturing, cutting edge innovation and new age technology. “The ‘Prime Minister Gati Shakti National Master Plan' is sure to open up newer avenues. I am hopeful that the Rs100-lakh-crore worth infrastructure schemes of the Gati Shakti plan will also act as a booster for the economy. As regards the investment, experts have been stressing on the need for private investment into building a robust physical and social infrastructure. The Finance ministry's Economic Survey 2019 also states that private participation in the infrastructure space is crucial. As per the recent newspaper reports, the Insurance Regulatory and Development Authority (IRDA) is planning to allow insurance companies to invest in the debt securities issued by any pooled investment vehicles, including infrastructure and real estate investment trusts. This could bring more funds to infrastructure through infrastructure investment trusts (InvITs) and real estate investment trusts (REITs). The government is working out ways to bring in money to the sector,” Senthilkumar said. 

According to Harsha Kadam, MD & CEO, Schaeffler India, “With the government's massive push to the Infrastructure sector during the budget of 2021, India is expected to become the third-largest construction market by 2022-23 and will require investments worth 800 Bn USD for sustainable development, which includes railroad connectivity, roads, and airports construction.The construction Equipment industry in India will gain tremendously from this, attracting both domestic and international players. Schaeffler India is already present in the Indian market and is ready for supporting the sector's growing needs. India has a robust Construction Equipment sector. With various initiatives undertaken by the Indian government, the sector is expected to ignite with developmental activities. However, at the same time organizations, are facing challenges on increased manufacturing costs due to rising prices for steel, alloys, and fuel. This is posing a major hurdle in India's road to become a manufacturing hub of quality products and competitive in local as well in Global markets. Additionally, policy support and framework are required for encouraging organizations to adopt digitalization as it will erase system redundancies and lead to an efficient ecosystem.”

India is expected to become the third largest construction market globally by 2022, says Amit Deokule, General Manager, Sales & Marketing, Nord Drivesystems.

“The construction equipment manufacturers witnessed a steep decline in market revenues due to the spread of the Covid-19 pandemic. In the first two quarters of 2020, the industry was challenged by several market factors such as low demand, supply chain disruptions, and suspension of manufacturing operations. On the other side of coin, there is significant demand for hospitals and other medical facilities, laboratories, and shipping and logistics infrastructure. This is expected to impact the demand for construction equipment soon positively. The mining and construction equipment (MCE) industry is poised to grow by 15-20 per cent in CY2021 (5-10% in FY2022). The infrastructure sector including power, bridges, dams, roads, and urban infrastructure development are in limelight, as it has become the biggest focus area for the government of India and it plans to spend US$ 1.4 trillion on infrastructure during 2019-23 for sustainable development of the country, he said. 

Speaking on the economic growth and infrastructure development, he added, “India has been witnessing an unprecedented economic growth and infrastructure construction is at the heart of this wave. Approximately INR 50 lakh crore of investment is required over the next four to five years (2019-23) to sustain this growth; a strong pipeline of upcoming and ongoing projects and large programmes are underway across sectors. FDIs in the construction development sector (townships, housing, built up infrastructure and construction development projects) and construction (infrastructure) activities stood at US$ 26.08 billion and US$ 24.72 billion, respectively, between April 2000 and March 2021. In FY21, infrastructure activities accounted for 13% share of the total FDI inflows of US$ 81.72 billion. The Government's policy to increase private sector participation has proved to be a boon for the infrastructure industry as many private players are entering the business through the public-private partnership (PPP) model.

India is expected to become the third largest construction market globally by 2022. Some of our inherent common manufacturing disabilities such as cumbersome land acquisition process, cost of capital and logistics need to be addressed.”

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