“The most unique feature about the Indian construction industry is that it is highly fragmented. This is partially due to the fact that, for most projects, there are no long-term relationships between contractors and clients and partially due to the fact that the sector in many cases lacks economies on scale. Thus, smaller players may have better cost structures due to lower overhead costs. Furthermore, one has to differentiate between the organized and the unorganized segments of the sector. The organized segment consists of firms and independent contractors who manage their business on a more professional basis and operate on small, medium and large scales. The unorganized segment primarily consists of stand-alone contractors that operate at a small scale,” according to Shushmul Maheshwari, spokesperson of the Research Company RNCOS, and organizer of bC India, and Expo India.
This recent interview with Shushmul Maheshwari and Anna Westenberger, spokesperson of Germany Trade and Investment (GTAI), explain the expected growth of the construction sector in India.
What does that mean for the demand for construction equipment?
Shushmul Maheshwari: India, as the world’s seventh largest country by area and second biggest by population, is one of the most dynamically growing but largely untapped construction equipment markets. In recent years, the country has witnessed massive investment in the construction industry from both public and private enterprises. Multi-billion dollar investments in constructing roads, ports and power plants and the developing telecommunication sector and urban infrastructure have paved the way for construction equipment demand to grow phenomenally. Industry experts predicted the market growing even faster in the coming years. From 2010 to 2020 it is estimated to grow six times to a size of 20 to 25 billion US dollars.
How will the recent slowdown in economic growth affect this trend?
Shushmul Maheshwari: According to our research report, “Booming Construction Equipment Market in India,” the Indian construction equipment industry has been witnessing a consistent double-digit growth over the past few years. Though the economic slowdown had its moderate effects on the industry, it regained momentum in 2010 showing a stupendous growth, which is expected to continue in years to come.
Anna Westenberger: The construction equipment market did indeed grow slower; nonetheless we are still talking about five-percent annual growth. The reason for this decline lies in growing uncertainties regarding the market and its regulations as well as rising capital costs. In the medium term we are still not worried. The demand for low-budget housing will very likely not decline, especially if one takes into account the rapid growth of India’s metropolises.
What are the main drivers for this growth?
Shushmul Maheshwari: The earthmoving segment, in particular has been driving the overall construction equipment industry in India, with strong demand emanating from government-backed infrastructure projects. The segment is poised to register a remarkable compound annual growth rate of approximately 21 percent during 2011 to 2015, as per estimate.
Anna Westenberger: We also expect significant growth from infrastructure. The current five-year plan of the government, which covers the period up until 2017, includes doubling the investments in this sector compared to the recent one. Big investments are planned to expand the country’s energy and water supply as well as roads and the train network. Furthermore, several ports and airports are in planning or already being built.
But India is still behind when it comes to the market for construction machinery and equipment.
Anna Westenberger: As long as labor costs are comparably low, at least smaller firms will shy away from the investments that come with that sort of equipment. India’s highly fragmented building sector still hosts a significant number of these. Especially if we are talking about smaller building projects, the smaller builders often have an advantage, since they are offer cheaper labor compared to the big competitors. But even as we speak, the circumstances are changing. There are two main factors that make a growing construction equipment very likely. The number of larger projects is growing strongly. With those, heavy machinery is without an alternative if companies want to build beyond a certain size. Especially in the metropolises many new buildings have reached a size, which is impossible to build without the help of professional equipment. The second factor is time. The more the sector is professionalized, the shorter the schedules become. Manual labor may still be cheaper, but it will consume more time. And that is time that especially the large builders are not willing to afford.
What can the industry do to foster expected growth?
Shushmul Maheshwari: It is a major task for the industry to adapt to the expected growth. India’s worldwide market share in the industry already tripled to six percent from 2004 to 2010 and will continue to grow. Companies therefore have to adapt on multiple fronts. One of them is collaboration with suppliers; another is improving the competitiveness. This means, for example, to create new products, which suit the Indian customers demands, and to continuously upgrade the skills of the sales force.
For more information visit www.bcindia.com.