The next China?

25 April 2008

Guest of honour at the Excon opening ceremony was P.G.R Sindhai, Minister of Finance, Industry and I

Guest of honour at the Excon opening ceremony was P.G.R Sindhai, Minister of Finance, Industry and Infrastructure Development for State Government of Karnataka. The states' largest city is Bangalore.

Putting a figure on the size of India's construction sector is a difficult task. Output in the industry is generally estimated at US$ 50 billion per year, which would put it on a par with a medium sized developed country such as The Netherlands or Australia. The difference is of course these countries have populations of 17 and 19 million people respectively, while India is home to 1.1 billion inhabitants. If construction in India took place on the same per capita basis as in these developed nations, the industry's output would be in the region of US$ 2750 billion per year!

In some senses, the figure of US$ 50 billion understates the level of activity in India. Construction is a relatively labour intensive industry, so low wage levels in India tend to reduce the absolute value of construction. According to Parasu Raman, chair of the Confederation of Indian Industry's (CII) Southern Region, construction in India accounts for 5.25% of GDP, with infrastructure work accounting for 55% to 60% of that.

According to the CIA World Factbook, India's GDP in real dollars is US$ 736 billion, which would value the construction industry's output at US$ 38 billion per year. However, measuring GDP on a purchasing power parity (PPP) basis, which takes account of the lower cost of living in India, puts the country's annual economic output at US$ 3678 billion and construction activity would therefore be US$ 193 billion per year using this method.

Another interesting measure of the size of the industry is that, according to Mr Raman, it officially employs 6.2 million people. The true figure may be much higher, and this certainly sounds like an underestimate. In Europe for example, which has less than half the population of India, the European Construction Industry Federation (FIEC) puts construction employment at 14 million people. And this of course is an area where construction is much more mechanised and less labour intensive.

Growth

But whatever the size of the market, it is growth that is the key factor at the moment. According to the International Monetary Fund (IMF), Indian GDP increased +7.1% in 2005, and the forecast for this year is for +6.3% growth. This is good growth in itself, but there is overwhelming evidence that the construction sector is expanding much faster – perhaps +10% to +20% per year.

According to John Patterson, managing director of JCB (the company has had a presence in India since 1979), the Indian construction market grew +150% between 2000 and 2005, and he expects +50% growth in the five years to 2010.

The key reason for this growth is the emphasis on infrastructure investment, the most famous example being the 5500 km Golden Quadrilateral (GQ) road project to link Delhi, Mumbai, Chennai and Kolkata. But this massive undertaking, which began in 1998 and is now all but complete, could be just the start.

Prime Minister Manmohan Singh is widely quoted as saying Indian infrastructure needs an investment of US$ 150 billion to bring it up to modern standards. This includes roads of course, but other key areas are ports, drinking water, sewerage, irrigation and power, including hydro-electric and nuclear schemes. In fact, according to the International Atomic Energy Agency, eight of the 24 nuclear power plants currently under construction around the world are in India. When complete they will provide the country with 3600 MW of electricity.

Equipment

A crucial point about the current Indian construction boom is that it is coming with a greater emphasis on doing things quickly and hitting deadlines, which has not always been the case in the past. This is driving the much needed mechanisation of the Indian industry, and is spurring impressive growth in the construction equipment industry.

The CII puts the value of the equipment market at US$ 2 billion per year, and many within the industry put the current annual growth rate around +20% per year. However, some key sectors are seeing much higher growth.

One example comes from L&T Komatsu, a 50:50 joint venture between the Japanese equipment manufacturer and Larsen & Toubro, India's largest industrial company, which manufactures Komatsu excavators under licence in Bangalore.

Speaking to IC at Excon, L&T Komatsu's construction equipment section manager, Amar Pal Singh said, “The total market for tracked excavators is 7500 units. The biggest sector is 20 tonnes, where it is about 3500 units.”

According to Mr Singh the market for 20 tonne excavators grew between +50 and +60% last year. Growth in demand for 30 tonne class machines was even stronger, with a +70% to +80% rise, although the volume is much smaller – about 500 units per year.

Rather than infrastructure, Mr Singh puts these impressive increases down to the residential construction market. “That growth will continue for at least three years because of the current real estate boom. The growth may come down to +40%, but not less than that,” he said.

The potential for growth in the market is certainly widely recognised. Speaking at JCB's Excon press conference, Mr Patterson said, “On average there are 100 pieces of construction equipment sold per 1 million population in the world each year. In the developed world the figure is 450. In China it is about 100, but in India it is only about 20.”

Most of the mainstream equipment manufacturers active in the Indian market are either joint ventures like L&T Komatsu or Telcon – set up as a Hitachi-Tata Motors partnership – or wholly owned subsidiaries of well-established global players, as is the case with JCB. Import tariffs and the price sensitive nature of the market means all but the largest equipment used in India are built in the country, so there are also a lot of machines built under licence from major manufacturers. However, there are also a handful of &home grown' companies.

Most notable among these is Bharat Earth Movers Limited (BEML), a Bangalore-based state-owned company that had sales of INR 18.6 billion (US$ 420 million) last year. On the basis of the market being worth US$ 2 billion per year BEML has a nominal share of 21% on these figures.

Deputy general manager Satish Kumar Tiku told IC, “We have a population of 50000 machines and we make 1200 per year. We have an 80% share in some products, and even 100% in some areas. Nobody else apart from us makes dozers in India.”

The other notable Indian manufacturer is Faridabad-based Escorts, which manufactures compaction equipment under licence from Hamm, along with &pick & carry' cranes of its own design. These unique machines feature a hydraulic telescopic boom mounted on a chassis that looks like a cross between a small wheeled loader and a grader.

Escorts' latest model, the HP 216 features a 50 km/h travel speed 60 foot (18.3 m) boom and a lift capacity of 16 tonnes. The company says it sells some 3000 pick & carry cranes each year, which accounts for 90% of the Indian market.

Roads

So much infrastructure development in India to date has been focused on road building that it is unsurprising that companies supplying equipment to the sector are also enjoying the good times. Sunil Sapru, general manager for national sales of Wirtgen India told IC, “Market growth is around +20% to +25% due to the national highways infrastructure projects. Now there are other projects which are coming up connecting the state highways to the GQ and north-south, east-west national highways, which will total about 10000 km.”

The company has imported over 100 Vögele pavers in India to date, which have clocked up some 275000 hours in total. However, with new build activities likely to peak in the next few years, the company thinks the maintenance market will pick up, stimulating demand for Wirgen's milling machines.

“The maintenance jobs will start in a few years. We feel that after three to four years the market will really pick up. The other point is that the increasingly popular build operate transfer (BOT) project model of course includes maintenance, because the franchises run for 15 to 25 years,” said Mr Sapru.

The boom in road building has also had a big impact on crushing and screening equipment suppliers as G. V. R. Murthy, general manager for Sandvik Rock Processing in India told IC. “It's mostly road contractors that operate the quarries. There is quarrying per se, but most is contractor owned. Like everywhere else, it's moving towards mobile crushers,” he said

This view is shared by Metso Minerals. “Customers are recognising now that while a fixed plant can offer you profit, a mobile unit gives you more flexibility. Road schemes are getting shorter in India, so what do you do with a fixed plant when you've finished the contract?” said marketing communications manager Dinesh Sharda.

“When mobile units arrive on site and they're ready in a few hours. That's important because today the time limits on projects are very stringent,” he added.

Potential

The buoyancy expressed by exhibitors at Excon underlines the strength and future potential of the Indian market. The exhibition itself is being positioned as a complement to Shanghai's Bauma China show, which takes place in November this year, so Excon is likely to be next held at the end of 2007. The 2005 edition was twice the size of the original 2002 show in terms of exhibitors and space, so it will be interesting to see if the up-beat predictions made at the end of 2005 come to fruition over the next two years.

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