To move to a parallel story, here's an extract from Report to Greco, a semi-autobiographical novel by Nikos Kazantzakis. In the middle of August when all the villagers in Crete spread out their half-dried grapes, the skies opened and heavy rains came down pouring, washing away their whole year`s labour. One man stood motionless, amidst all the chaos. What follow below is his son's account.
I found him standing motionless on the threshold biting his mustache. My mother stood behind him, weeping. "Father," I cried, "our grapes are gone!" "We are not gone," he answered. "Shut up."
That could well be uppermost in the minds of the stakeholders in the CE sector, that the worst is over; and that if there's any movement, it can only be upwards; that the industry has already bottomed out, and even if it has to wait another couple of quarters for the momentum to pick up, the long-term growth looks to be intact. In spite of the continuing global slowdown and resultant sluggishness in the CE market, the long-term growth prospects look good. Experts view the huge infrastructure deficit as a major growth driver and prudent steps from the government can bring India back on the growth trajectory.
Weathering the storm
India still holds huge potential where infrastructure development is concerned, and consequently, it may mean a boom for CE though the actual pace of growth has been well below planned levels. To compound matters, many players had prepared for enhanced demand and now have substantial idle capacities.
Over the last two years, charting stormy waters with much patience and prudence, many OEMs, and component and aggregate suppliers have been preparing for the much awaited upturn. Fortunately, at present, this seems to be just a matter of time. They have been investing in innovation, diversifying into new product lines, enhancing spares availability and service networks, and even venturing into untapped overseas markets.
Companies have adopted innovative strategies to sustain themselves while keeping an eye on the coming boom, and a lot depends on the post-2014 election scenario. A stable government which can take some tough decisions to propel the economy forward is what most of the stakeholders are hoping for. These are challenging times considering the unfavourable market dynamics. However, these compelling circumstances bring out the best in the organisations which survive. Innovative strategies are developed to retain existing customers, value-additions and customer benefits are highlighted to increase the customer base.
The market scenario
Says Samir Bansal, General Manager - India, Off-Highway Research, "The market for construction equipment in India has been going through a rollercoaster ride for the past few years. After the unprecedented growth during 2003-07, the demand for construction equipment declined in 2008 and 2009 in reaction to the global economic downturn but then recovered sharply by 45 per cent in 2010, with sales reaching 59,139 units, against 40,850 units sold in 2009. This growth trend continued through 2011 and sales peaked at 72,197 units that year, representing a rise of 22 per cent. Throughout 2012, however, the political and economic climate in the country was not conducive to the healthy growth of the infrastructure sector. Decisions on approvals, clearances and execution of projects were delayed as the government struggled with a wide number of social and political issues, resulting in an eight per cent decline in demand for construction equipment in 2012."
By the middle of 2013, the country's performance on a variety of economic fronts started worsening, and its effect was noticed in all the major sectors of the economy. The positive industry sentiment at the beginning of the year turned negative due to the cutback on planned expenditure and the failure of the government's initiatives to speed up infrastructure development. This in turn, had an adverse effect on the construction equipment industry, which witnessed a steep decline in demand during the year.
Samir gives us the stats: "GDP growth in the second quarter ended September 2013 stood at 4.8 per cent compared to 5.2 per cent recorded in the same quarter of 2012. The mining and quarrying sector declined by a marginal 0.4 per cent in the quarter, while manufacturing increased by one per cent. Electricity, gas and water supply grew by 7.7 per cent in 2013 compared to 3.2 per cent in the same quarter of 2012, while construction registered a growth of 4.3 per cent in comparison to 3.1 per cent in the corresponding period of 2012. The financing, insurance, real estate and business services sector recorded a growth of 10 per cent for the quarter ended September 2013."
"The fiscal deficit for the year ending March 2013 stood at 4.9 per cent of the GDP, and the government plans to reduce it to 4.8 per cent in the current fiscal year ending March 2014. The current account deficit also rose to 4.8 per cent of GDP during the fiscal year ended March 2013, compared to 4.2 per cent in the same period of the previous year, and this has led to the recent currency depreciation. Tax receipts are also expected to be lower than planned due to the slowing down of the economy and the expenditure on programmes aimed at gaining popular support is likely to increase in view of the general elections scheduled in April-May 2014. As a result, non-planned expenditure including interest payment and subsidies is expected to remain high, and planned expenditure is likely to be reduced, he further adds.
Mining the potential
Says AM Muralidharan, President, Volvo Construction Equipment, "Though coal mining is going along, it is moving at a slow pace and needs to speed up drastically. Iron ore mining on the other hand, is badly affected, especially in places like Karnataka, Odisha and Goa. We expect Karnataka operations to get back on its feet slowly and reach the level of 30-40 per cent of what it was in 2011. Mining in Orissa is on at a slow pace and in Goa, it has completely stopped due to environmental and mining lease issues. Mining all over the country, except for coal, is currently at 50 per cent productivity level. Growth is expected to come back to 2011 levels, subject to lease agreements approved and signed."
He adds, "Volvo is focused on addressing customer requirements by actively investing in technology for the future. Not only that, our product range is of higher quality and better focused and supported. Ease of operation, productivity, energy efficiency and safety have been the cornerstones for Volvo; they have been one of the earliest pioneers in driving higher fuel-efficiency and one of the earliest companies to acknowledge environmental issue."
S Ananthakrishnan, AVP, Gmmco, is also upbeat. "The urgency to boost coal production to meet demand from power utilities has come to the front burner. There are definite positive signs from the government by way of arranging fuel linkages from CIL, issuing show cause notices to companies who have delayed commencement of mining, etc. The need to minimise coal imports to reduce the fiscal deficit has been voiced and is expected to accelerate government efforts in removing the roadblocks in the coal and iron ore mining sector."
Ananthakrishnan adds, "After a lull in the past three years, mining, especially coal, is set to show significant growth in the next few years. Coal India is doing its best to increase coal production quickly, from the current 465 million tonne per annum (mtpa) to 560 mtpa by 2017. We expect CIL to issue several tenders for mining equipment in the near future, and process them fast. Around a dozen coal blocks allotted to corporates and companies are at advanced stage of environment clearance and all set to kick off in 2014-15. This will open up a fairly large opportunity for mining equipment."
He continues, "On the mineral front, iron ore mining in Karnataka has just commenced again and Goa mining may also commence by mid-2014. With GDP set to rebound, the steel industry is also set to come out of the slowdown and reflect an increase in the demand for iron ore. We should see some mining equipment procurement in this sector, too."
Roads to steady growth
P Ramesh, Managing Director & Chief Executive Officer, Wirtgen India says, "Wirtgen India is using this downturn as an opportunity to strengthen our position in the market by increasing our sales and service network, offering new products to the market, also introducing innovative technologies like cold milling and recycling; we have already initiated many steps in this direction, the results of which will soon be seen. We are also expanding our manufacturing base in India, and will start producing the Kleemann range of crushing and screening plants for the Indian market by January 2015." Ramesh adds, "We have also launched tandem rollers for the Indian market, further to our first Indian product, soil compactors, and will shortly start producing Vogele pavers, too."
Hiten Kapadia, Head - Road Construction Equipment at Atlas Copco India, states, "The CE market is still seeing low demand and the overall activity is sluggish. We saw some positive enquiries in the last quarter of 2013 and we hope that the same continues in Q1 2014. But we are expecting a very slow Q2 in 2014 in light of the upcoming elections. However, if stability comes after the general elections, then we should see some good growth in Q3 and Q4 Q of this calendar year." Kapadia then adds, "We believe that if India has to grow, then the first step would be towards establishing infrastructure to support growth. Atlas Copco, with its continuous product development and maintenance commitment, is definitely geared to serve the future demand for the road construction sector."
B Sridhar, Business Head, SDLG Products, has this to say. "Once a stable government is set up and policies get implemented and infrastructure development is on track, I am sure there will be good growth, and that is what the industry is expecting. It is a matter of time and then, it is about how fast the implementation part takes place." He adds, "We are here for the long haul, and we know we need to be patient. We have a warehouse in Bangalore, and 13 dealers and 36 branches across the country. We are further developing our support systems, spares availability, dealer network and such, so that once the market bounces back, we are there to meet the demand and gain a good share of the market."
Says Nitin Jajal, General Manager, MAIT India, "In the infrastructure sector, there have been two major roadblocks: one, the road sector itself where the PPP model is not really working due to various factors, and the other, the power sector. Even in the power sector, more reforms and changes will be required and once that is done, then there will be an upturn in the market."
Up and mobile
Raman Joshi, Executive Vice- President, Manitowoc Cranes, Greater Asia-Pacific, avers, "Despite the erratic nature of India's economic growth, it is continuing in the right direction and we remain optimistic about the opportunities that are out there. Numerous large infrastructure projects are pressing ahead, each of which will improve the country's ability to operate more efficiently in business terms. We are proud to say that Grove mobile cranes are helping many of these projects along." Joshi further adds, "Over the past ten years, we have steadily developed our dealer network for parts and service support, and can now offer nationwide coverage for Manitowoc Crane Care in India. But we're not finished with developing this service network. In fact, I don't think it will ever be finished. If we are to maintain our market-leading position for mobile cranes, then our ability to offer the best available customer support for our fleet of Grove cranes in India will be a key factor in determining whether or not we succeed."
Says Somnath Bhattacharjee, President & Chief Executive Officer, Material Handling Solutions & Equipment Projects Solutions Business, TIL, "In our perspective, the current demand decline of equipment is a typical cyclic phenomenon. With the domestic economy enjoying a positive long-term outlook, India will see significant levels of investment in infrastructure development over the next decade. As the economic reforms are moved further with key policy changes, equipment demand in construction infrastructure and mining sector is likely to bounce back." He then adds, "The current market trend in the crane demand in India is showing a gradual shift towards higher capacity cranes with better design features, safety standard, quality and reliability. As the growth in infrastructure moves to the next level, the size of lifts is also undergoing a significant change, which is driving the demand for higher capacity yet safer and better quality cranes. The future movement is likely to be more towards higher technology with world class safety standards. The usage of telematics and electronic fault diagnostic systems is also likely to become a future trend in crane design and usage. Over the next few years, the Indian market is likely to follow global best practices and standards for lifting equipment as is seen in construction, earthmoving and other industries."
Anand Sundaresan, Vice-Chairman & Managing Director, Schwing Stetter (India), states, "Overall, I would say, yes, 2013 was a tough year but it is behind us. We must now look to the future. While 2014 is as fraught with challenges as the preceding year was, there are silver linings visible to the discerning eye. The overwhelming response we saw at Excon in November 2013 was very encouraging. Also, whichever government takes up the reins mid-year, it will no doubt have infrastructure as a prime focus area, and so the construction industry should pick up again later this year."
Highlighting the impact of the slowdown on the concrete equipment segment, Sundaresan has this to say. "The reduction of the market size also meant that competition got fiercer and the effects of that competition told on many. Some smaller companies in the industry had to close business, while many have reduced production substantially due to realisation not matching up, making it just not worth their while. The industry also saw consolidation taking place, which has resulted in some competition leaving the field. At the same time, we do see new entrants making their way in."
"With our comprehensive and proven range of concrete pumps, transit mixers, batching plants and accessories, Schwing Stetter was better placed than most to weather the slowdown, since we could adjust our offerings to suit new needs. We also focused on the supply of peripheral equipment such as cement feeding systems, weigh bridges, aggregate conveyors, auto lubricating systems, and many more, broad-basing our portfolio to suit the times. We invested heavily on operator training during 2013. From one training centre in Chennai, we now have four; having added one each in Delhi, Kolkata, and Hyderabad."
Crushing the barriers
According to Bhattacharjee although the crushing and screening equipment (C&SE) sector is facing the brunt of the slowdown in the infrastructure sector, hit as it is by the ban in iron ore mining by private companies in major iron ore reserves, yet C&SE demand has registered better as compared to other construction equipment categories in the recent past. "This segment is poised for growth in India, with the proposed construction of road networks, railway networks, infrastructure development, besides growth in the mineral mining operations. However, with the growth in these sectors, the completion period of contracts will continue to get compressed as project completion schedules will face tough demands. This phenomenon is likely to trigger demand and usage of higher capacity crushing and screening equipment," says Bhattacharjee. According to him constant value engineering exercise makes TIL the most competitive in the cost-vs-value offering equation. He says, "At TIL, our core business model is to introduce world class technology duly value-engineered, products built to a global design at an optimised cost. This philosophy of affordable innovation keeping the customer and his business model in the centre helps us to strike a proper balance between our cost and the offered price to customers, making it a win-win situation."
Says DK Vyas, Chief Excutive Officer, Srei Equipment Finance, "The Indian ICE industry is on a learning curve. Once investments in infrastructure pick up and more end-user industries start using ICE assets, the industry will mature. At this stage, I feel the ICE financiers and the OEMs need to work together in intensifying the dialogue process with the government authorities and increase users' awareness. Once users and policy-makers wake up to the various advantages of the financial tools, this industry as also the ICE financing industry, will experience exponential growth."
Vyas adds, "Leasing has proved to be the most potent and cost-effective form of capital creation worldwide. Renting is another viable option for them as the fast pace of technological progress is leading to the gradual shrinking of the utility life of machines. In fact, renting makes all the more sense if the entrepreneur has to use any machine for a limited period. Used equipment also has tremendous potential. But with no mechanism for registration of ICE assets in India, an organised trading platform for used equipment is yet to develop. I feel, going forward, these trends will become more prominent as users become more aware of the attendant benefits. Once a trading platform for used machines is in place, this sector will also become more organised."
"The equipment rental business in India is yet to evolve from its nascent stage," says HS Bhattacharjya, Chief Executive Officer, Quippo. He adds, "The years gone by have seen regulatory roadblocks, a liquidity crunch and lack of investments, leading to a sharp decline in the demand for construction and mining equipment. Understanding the market requirements, Quippo has come out with various options like dry rental, wet rental, operating lease model through financial institutions, etc, all tailor-made to suit the needs of customers. The company has transformed from a pure rental company to a holistic equipment service provider, with a service basket of equipment rental, operating lease, fleet management, used equipment business, valuation and auctioning and equipment banking/re-rentals."
Then again, issues related to forest and environment clearances, pending litigations, land acquisition and the delay in financial closures continue to be major barriers for mining and infrastructural development. The RBI's stance on monetary policy has led to the tightening of liquidity. The government does not have any quick solutions to these issues but some of the initiatives taken now will yield results in the long term.
All the above factors are adversely affecting infrastructure development activities and the strength of the construction equipment market. Even with regular government announcements for speeding up execution/award of many infrastructure projects, one should not be particularly optimistic about demand in 2014 in view of the current economic situation and general elections in 2014.
However, long- term optimism in the construction equipment market is still evident, as a result of the current 12th Five-Year-Plan (April 2012-March 2017), which calls for an infrastructure investment spend of nearly US$1.0 trillion. In view of the government's resolve to contain the fiscal deficit within the planned target, it will be difficult to spend heavily on infrastructure at the moment but the situation is expected to improve after the 2014 elections.
The market for construction equipment would have declined by 17 per cent in 2013 to 54,853 units, with demand for all equipment types, except crawler dozers, mini-excavators and rigid dump trucks, on the decline. The situation will start improving from the second half of 2014 and the market is expected to recover to over 61,000 units, with a growth of 11 per cent. The future growth in demand is projected to be sustained thereafter at 12-15 per cent, and one can confidently expect the market to grow to 88,000 units in 2017.
Another extract from Report to Greco can well sum up the indomitable spirit and undefeated hope of man, which can also be attributed to the CE industry. "Man hurries, God does not. That is why man's works are uncertain and maimed, while God's are flawless and sure. My eyes welling with tears, I vowed never to transgress this eternal law again. Like a tree I would be blasted by wind, struck by sun and rain, and would wait with confidence; the long-desired hour of flowering and fruit would come."
For its part, the CE industry has put in its best efforts, and is now waiting for the flowers and fruits!