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Rather than a game of chess, the whole construction equipment (CE) industry, curiously enough, seems to be forced playing snake and ladder - at least, almost for half a decade. Every effort and diligent planning suddenly swallowed by a deceitful python at a callous turn of the dice by political masters making a mockery of all the hard work put in; and suddenly one realises that he is back to square one. There are ladders - big and small, of course; but criss-crossing the board are more number of snakes.

Indeed, a big ladder is offered to the industry by the Finance Minister in the Union Budget! The plethora of projects proposed on almost every single vertical, confirms it. Overall, the industry perception is one of relief, and of great expectations.

According to Amit Gossain, EVP - Marketing, Business Development and Corporate Affairs, JCB India, the future prospects are strong for the industry as infrastructure is one of the key sectors for the government. The Modi government has emphasised on the infrastructural development of the country in the Union Budget, which will lead to an upsurge in the demand of CE.

Says Gossain, ?According to the recent allocation of Rs 37,800 crore to National Highways Authority of India (NHAI) for roads and Rs 14,000 crore for rural roads, I believe roads will be one the major sectors to drive the equipment demand in the coming years.? He further adds, ?The upcoming 100 smart urban hubs across the country-for which Rs 7,600 crore has been allocated-will again be a huge opportunity for the CE industry. Upcoming airports in tier I and tier II cities, development of industrial corridors, energy (thermal and hydroelectric power plants) telecommunications, water and sanitation will create a market for construction equipment companies.?

?The government?s focus on the infrastructure development is a welcome sign after years of policy paralysis,? says Sunil Tiku, Senior Director - Sales, Terex Equipment. According to him, the focus is on implementation methodology of projects by way of private participation or joint working and financing models between government and private players, emphasis on infrastructure development in the north-eastern states, and creation of smart cities augurs well for the CE sector. A confident Tikku says, ?We forecast a big demand pull for all types of CE. High productivity backhoe loaders and specialised site equipment, skid steers would see some good times. With focus on mining sector to support the power and steel companies, wheel loaders are expected to outperform their previous year?s sales volumes.?

?The Union Budget reflects massive investment in infrastructure sector to be mobilised through public-private partnership (PPP). The government?s plan to accelerate game-changing projects and reviving of many national and state highways with a massive investment of Rs 378.80 billion will help the road sector tremendously,? says Sanjay Wadnerkar, Vice President, LiuGong India. He further adds, ?The ambitious targets of constructing 8,500 km of road in FY15 and emphasis on setting up 16 new ports will foresee a bright future of CE industry. Increased allocation and long-term funding availability for power projects will induce more investment in infrastructure sectors and thereby benefit construction equipment manufacturers.?

The prevailing ground realities seem to dampen the spirit of the industry a bit. However, Samir Bansal, General Manager - India, Off-Highway Research, is quite emphatic on a paradigm shift. He avers, ?The government is creating a new paradigm with its infrastructure development plan. The Budget is focused on infrastructure development and the government is trying to remove the bottlenecks impeding project execution. The CE market will be driven largely by the sheer scale of work yet to be done in all infrastructure sectors, despite present unfavourable economic indicators.?

Rajinder Raina, General Manager - Marketing, Escorts Construction Equipment, has this to say. ?The recent Budget outlines the intent of the new government, which focuses on development and growth in a planned manner. Road constructions and power projects are the two sectors that will be taken up first. The model would be engineering, procurement and construction (EPC) as well as PPP.? According to him on the infrastructure front, clearing the projects currently on hold on account of land acquisition, environmental clearance and financial closure are the areas which need to be de-bottlenecked. Raina adds on a high note, ?The government-as its top agenda-will be working to curb inflation, and at the same time, will try to give a push to the stalled projects. The negative growth is expected to get arrested from October 2014 onwards and the last quarter of the current fiscal is expected to register a growth over the corresponding period of the previous year.?

Challenges
As in the board game of snake and ladder, the industry has been infested with challenges-big and small-be it paucity of finance, issues of environmental and forest clearances, absence of single window system. According to Bansal, the major challenges to the implementation of projects currently being faced by the industry include limited capacity for project execution in the government as well as in the private sector, incomplete and inadequate planning before bidding, aggressive bidding by concessionaires coupled with high rate of interest and inflation making the projects unviable, land acquisition delays, regulatory, administrative and procedural delays, especially relating to various approvals, non-availability of long term financing, politically instigated social unrest, cost escalation due to delays.

Says AM Muralidharan, President, Volvo CE, ?The global market trend is an important factor how the global markets fare has a bearing on the domestic market. The other markets also need to do better. We have seen improvements in the US and Europe, but the rest of the markets are down including China. This will affect us to an extent. All other economies should perform better.

According to a VDMA report, the world market is extremely heterogeneous. This year too, China does not qualify as a market of growth. Since 2011, turnover in construction machinery has gone down by more than 40 per cent (accumulated). ?This year, it will probably go down even further,? says Sebastian Popp, Economic Expert, VDMA. According to him, the main reasons are the enormous excess capacities and young machine fleets in the market, as well as difficulties with financing projects and machinery. The Indian market is remaining weak at the moment. With a new government now having been established, all hopes are focused on 2015 and 2016. Muralidharan adds, ?In India, the real challenge is the current market size. Anticipating the demand growth, most of the OEMs have built in capacities and then the market shrunk beyond measures.?

As Amarnath Ramachandran, Vice President - Product Engineering & Knowledge Management, LeeBoy India, puts it, the growth potential for earthmoving equipment in India has never been disputed. All sectors like power, roads, ports, etc. will drive demand. However, today, things are at a standstill due to paucity of finance.

According to Tiku, the market conditions, especially on a macro-economic level, the CE financing and overall sentiment in the market is not so healthy. Interest rates are still high and delinquencies are a cause of concern for all lenders. Since the Budget does not directly address monetary/fiscal policy, the industry has to wait for actions taken by the Reserve Bank of India (RBI), which could have an influence on financing for CE sector. He further adds, ?On a micro-economic level, especially in the CE business, financing largely depends on the client?s profile and more importantly on his future projected cash flow. Healthy cash flows, for contractors or hirers, largely depend on the ability of the project contractor to efficiently execute the project and get his bills cleared from the government. If this equation were to improve, especially due to government?s initiative to clear pending bills and release funds to the contractors, the financing situation for machine buyers in this sector could improve quickly.

Raina is on the same page. According to him, equipment finance is going through a difficult phase at present as customers find it difficult to get their equipment financed And adding salt to the wound, the cost of financing has gone very high. He says, ?One of the major reasons is the high rate of delinquency primarily due to hirers not getting payments on time and de-hiring of equipment because of projects being kept on hold.? On a positive note, Raina adds, ?As the projects are looking to get started financers are gearing themselves up to match the increase in demand. There are some non-banking financial companies (NBFCs) and banks which have bigger game plans for construction equipment finance. This will increase the options and ease the situation. ?

Wadnerkar points out, ?Special recapitalisation of public sector bank and general improvement in the overall economy will improve the collection of existing loans and advances in infrastructure sector, which shall help the major NBFCs and banks to sanction funding for new projects. Opening licenses to fresh corporate banking will support this initiative further.?

Implementation, the need of the hour
According to Tiku, the biggest challenge is to achieve clarity on the rules, regulations, acts and laws, concerning acquisition of land for various projects followed by proper and ethical rehabilitation of displaced people, if any. He says, ?The environmental clearances arising out of Centre-state conflict is a big ticket. FDI projects are also a cause of worry. Another challenge is the uncertainty related to rules of the game, PPP or any other model. The CE industry was never worried for the budgetary support for such projects but the above pitfalls were too much of a risk to manage for our customers. I hope the new government will focus on removing all such road blocks and ensure quick implementation of planned projects.?

Says Gossain, ?Land acquisition and environment clearance are the two major issues that are hampering execution of projects to complete within time. We need a strong mechanism to ensure that the top projects of national importance are implemented expeditiously. The need to remove the severe infrastructure deficit across the country is evident and imperative.? He adds, ?However, now with new government at the centre and new budget rolled out, we are positive that project execution process will be streamlined and accelerated thus creating demand for CE.?

Ramachandran suggests, ?What the PM could do is to start a single window clearance for projects. This practice is followed in many states for starting a new company. So, if there is empowered representation from various ministries within the NHAI, this would speed up things. The challenge which faces the government today is to translate positive sentiment into action at the grassroot level at the earliest.?

?One the major challenges at present is the equipment lying idle with the owners due to low demand. Also the equipment manufacturers have idle capacities, which result in low demand versus supply scenario as the idle equipment would be getting preference in deployment. However, by January 2015, the demand for new equipment will keep growing,? feels Raina.

Wadnerkar points out, ?The first and foremost reason in delay in implementation of proposed projects is due to the protracted process of clearances, particularly in the case of those related to environment, land acquisition, approvals from various ministries. Major PPP projects are delayed due to slow procedures at the pre-tendering and post-award stages, like delays in dredging and the lengthy process of fixing tariffs. The challenge ranges from project planning, regulatory, financial and execution to policy changes and in process litigations.? He adds, ?Sensing a change in the economic scenario of the country, the government is pushing towards a stronger regulatory regime by setting up of an independent regulator specifically for road sector projects in the country. Revision to the bidding process and documents in view of changing economic and market landscape is underway.?

Mining woes
The mining sector has not been performing well in the recent past due to various socio-economic reasons such as land acquisitions, environment and forest clearances, and legal issues. The growth in the mining sector is an enabler for infrastructure development, which has a major influence on the overall economy and prosperity of the country. Says Bansal, ?There have not been any project-specific announcements for the mining sector in the Budget, but the government is trying to revive its growth by removing the regulatory, administrative and procedural bottlenecks. It also plans to review the Minerals Mines Development and Regulation (MMDR) Act, 1957 that governs the mining licensing and lease agreements for major minerals in the country to encourage investment in mining sector and promote sustainable mining practices.?

Says Muralidharan, ?As far as mining is concerned, the market is expected to comeback slowly as the challenges faced by the mining sector is more complicated that the road sector. However, one good thing that is coming from the PM?s vision is the focus given on reducing import of coal and iron ore. The clear focus of using resources from within the country directly means to improve and enhance coal and iron ore production for thermal power plants and steel plants.?

Demand-supply
?After a drop of 8 per cent in 2012 and a further 15 per cent in 2013, the declining trend in the CE market in India has continued through in 2014. Despite a marginal recovery expected in the second half, and efforts by the new government to speed up the execution of infrastructure projects, overall sales would still decline by about 7 per cent in 2014,? says Bansal. He adds, ?However, Off-Highway Research remains bullish on the long-term prospects of the CE market and forecasts sales of CE to grow at a CAGR of over 16 per cent from 2015 to reach nearly 95,000 units by 2018.?

Says Muralidharan, ?In the last two years, excavators market has been down by at least by 20 per cent and our expectation is that it will take more time for the market to recover to the 2012 level. In the wheel loader segment, we are already witnessing some movement, especially the demand is more from ports as import of coal and iron has gone up.?

?The growth in earthmoving equipment, mainly hydraulic excavators may improve from the present 20 per cent to more than 12 per cent by 2016 as new infrastructure projects like roads, river cleaning and mining will take off, for which government is trying to ease the restrictions  be it on forest or environmental clearances,? says PK Shivpuri, Head of Sales Operations, Alpha Technical Services. According to him in hydraulic excavator segment, 20T/160 hp class contributes 75-80 per cent market share and in wheel loaders, 3T capacity contributes to 75 per cent market size.? Speaking about the rental scenario, Shivpuri adds, ?Rental market is not in a good shape now. One of the reasons is that the rental companies are not getting the payment from those who have rented machines. Second reason is lack of long-term contracts. Most of the contracts are 2-3 months. Unless they get contracts of at least for one year, it is very difficult for the rental companies to sustain in the market.?

Says T Dibakar Reddy, Managing Director, Mahaveer Engineerings, ?Beginning this year, we saw a lot of growth in market for backhoe loaders in our region. We are hoping the same trend will continue in future. Lack of availability of labour drives the demand for equipment in every construction work. Odisha is rapidly growing in all sectors, so definitely there is good demand for backhoe loaders. Specifically in south Odisha, there are some big projects like Vedanta and Uktal Alumina (bauxite mines), which are currently not operational in full capacity.

Once these projects become fully operational, there will be a new demand for backhoe loaders. Nowadays, people are aware of this equipment and they are creating the demand by hiring on hour basis.

Ramachandran says, ?Excavators and wheel loaders are required for clearance and excavation for new roads, power projects and general construction. Backhoe loaders are required for utility work. One of the key drivers of demand is a huge increase in labour cost and lack of availability of quality labour. This sector is rightly moving into the organised labour segment. Estimated demand in 2015 is 25,000 units of backhoe loaders, 16,000 units of excavators and 800 units of motor graders.?

?The demand growth for wheel loaders/skid steer loaders has been moderate. However, the upside potential is high, especially for skid steer loaders. On the supply side, most manufacturers have modular capacities and can adjust their production Numbers are up to a certain level in line with demand growth. In the backhoe loader market, there has been no growth since 2012. After a dramatic de-growth of over 25 per cent during H1 2014 compared to 2013 volumes, we expect a CAGR of 3.5-4 per cent for the period of 2013- 2018,? says Tiku.

Says Raina, ?Wheel loaders and skid steer loaders have a limited market size in India whereas backhoe loaders still remain the product that offers highest volumes in this industry. Backhoe loaders touched approximately 32,000 units in 2012 but came down to around 28,000 units in 2013. In 2015, the number is expected to cross approximately 30,000 yet again. Loaders touched 2,800 units mark a couple of years back then dipped. With the opening of mining, it could hit the same numbers again. Skid steer loaders is below 500 unit market, where not much likely to happen in next couple of years. Clearly, back hoe loader will drive the demand in this vertical.?

Tech trends
Elaborating on technology and product trends, Tiku had this to say. ?On the technology front, CE business in India has its own unique challenges. On one side customers drive hard on economising the product, while manufacturers are in a constant struggle to balance their products feature - benefit and cost equation. Fuel economy, responsive hydraulics, reliable power train components and robust fabrication, are broadly the areas in which product development initiatives are being undertaken. Manufacturers are asking their design teams to step up the gas and fill the pipeline with evolutionary, as well as revolutionary design improvements. Terex India Research Centre (TIRC) Bangalore is at the centre of our product development strategy.?

According to Raina, ?Technology improvement is a continuous process in all the equipment with emphasis on machine availability through minimum downtime of the machine. The engine and hydraulics are being incorporated with electronic based intelligence/logic systems for better monitoring. Also remote performance tracking system is being offered as a feature and contemporary looks is getting counted. Adds Ramachandran, ?The products by and large work on the same principles and tenements. There is more focus on reducing emission and noise. Contrary to popular belief, the latest tier III and tier IV engines are less fuel efficient than their predecessors. So, a lot of work is going into improving the efficiency of sub-systems. There is a large amount of electronics now converging with mechanical systems. Monitoring systems, which were the future a couple of years ago, are common place now.?

Muralidharan says, ?The trend in technology is more towards electronic controls. As we go deeper and deeper, there is a need to increase electronic controls in our products. We launched CareTrack way back in 2011. Our products are fit with CareTrack, which gives all the data; you can monitor the performance of our machines by seconds. We take advantage of these data to help our customers maintain the machine better, operate it better to get higher productivity at lower costs.? He further adds, ?When you plan to have higher productivity, the more is the need for electronic control and CareTrack. In excavators of 30T and above there is growing demand for these kinds of value additions whereas below, though there is much appreciation on the value added features, the demand is less. ?

The 20 tonner is the sweep spot. How receptive this segment to value-added features such as CareTrack? Muralidharan says, ?The smaller machines go into the rental segment, which has not started differentiating technology. In some areas the rental rates for a Volvo excavator is high, as there is much understanding on reliability and productivity. But in many areas rental happens per hour not by per tonne of material moved and that is unfortunate.?

Productivity and O&M cost
One of the major USPs of products in the CE sector is ?productivity?- the cost of output. For a product to be productive in the most beneficial manner it has to deliver the maximum output with the minimum fuel consumption and low cost of maintenance. This calls for high speeds, quick response and pick-up. The ease of operation, operator comfort and manoeuvrability also contribute to it in a big way as the machines these days are used for long hours at a stretch. This productivity has to be delivered by the machines with no compromise in stability and safety. Says Raina, ?Fuel constitutes approximately 60 per cent of the cost of operations, which calls for a highly fuel-efficient engine. However for the owner, the fuel consumption is linked to the productivity of the machine. The efficiency of a machine shall be measured by the cost per unit of the output delivered by the machine. For an excavator/backhoe loader, it is will be cost per cubic metre material excavated/loaded. The other cost includes consumable like filters, etc, which should be reasonably priced. On the oils, the focuses is on reduced frequency of change by using specific grades of oils.?

?Engine efficiency is the key for our products. Our engines deliver very high torque at a lower rpm of about 1,600-1,800, whereas the competitors? machines are above 2,000 rpm. The higher the rpm the higher the fuel consumption, and higher the noise levels, etc. When you compare out products with any of the competition in terms of owning and operating cost, we will be at the lower most level, which has been proven time and again to many of our contractors who are very happy about the owning and operating cost,? Muralidharan adds.? The next is the hydraulic efficiency. We have made some changes in hydraulics in our latest excavators where we have been able to increase the speed of operation. So while we are able to increase productivity we are also able to bring down the fuel consumption. All our new D series, which we launched during Excon, are more efficient than our previous series  better fuel consumption and higher productivity.?

According to Ramachandran, all solutions from LeeBoy focus on high productivity from two standpoints. The machines are hi-spec. The 523 excavator is the heaviest in its class at 24.2 tonne with centralised lubrication, diesel lift pump (fills 400 litre in 8 minute), and an infinitely variable power adjustment enabling the operator to choose efficiency level. The backhoes have power-shift transmission, high torque engines and joysticks.

He avers, ?The other standpoint of high productivity is by offering high ergonomic comfort levels. In all LeeBoy machines, the cabins are very comfortable with state-of-the-art electronics and HVAC to provide this comfort, which, in turn, boosts productivity.? He adds, ?LeeBoy engines with mechanical fuel pumps can handle poor quality fuel and do not give rise to huge bills for replacement of fuel injection system; piston pump hydraulics which ensures maximum fuel efficiency; extremely durable and proven aggregates from reputed partners like Cummins, ZF, Walvoil, Casappa, Rexroth, Safim, AKG, Murphy, Cobo, etc ensure long life and hence low repair costs.?

According Wadnerkar, all LiuGong machines are well accepted due to optimised powered prime movers and fuel economy system that result in increased efficiency and productivity.

Product solutions
According to Gossain, JCB offers a wide range of variants in every product category to ensure that its customers derive the most out of it. JCB?s flagship product-backhoe loader-is just getting better with each passing year. Currently, JCB offers five variants?2DX, 3DX, 3DX Super, 3DX Xtra and 4DX?and based on the customer feedback, the company has continually upgraded its machine to suit customers? needs. JCB has made some significant changes in its existing range of tracked excavators with industry leading cab, structure, reliability and fuel efficiency. Presently, JCB offers excavators starting from 3 T to 36 T - JS30, JS 81, JS 120, JS140, JS205LC, JS220LC and JS360.

JCB presently offers three wheel loader models (two variants of 430 ZX, 432 ZX). The two models of 430ZX are 3.3 T payload and the 432ZX is for 3.6 T payload. JCB wheel loaders come with bucket capacities ranging from 1.5 cu m (rock bucket), 1.8 cu m (rock bucket) to 3.1 cu m buckets. JCB wheel loaders are capable of continuous hours of uninterrupted and productive operation. ?We believe in upgrading our products from time-to-time to ensure our machines are most innovative and most fuel efficient. We provide best-in-class operator comfort through ergonomically placed operator controls,?

Gossain says.
Says Tiku, ?Terex is determined to offer the best solutions to its customers. In India, we are aggressively moving ahead with our plans to offer latest up-gradations and newer models for our backhoe loaders. Our plan to launch wheel loaders is being fast tracked. We are also working on newer models of skid steers loaders/tracked excavators for which we will announce our plans, later in the year.? However, besides the hardware on offer, companies also need to continuously improve on their service standards and client interface. With this goal in mind, Terex is making efforts in improving its dealer and distribution network. Tiku further adds, ?We are investing in skill development of our ground force and enable them to deliver services/technical support in an efficient manner, while remaining focussed on customer satisfaction and delight.?

LeeBoy offers a broad spectrum of equipment for roads and general construction: crawler excavators of 24T class; two models of motor grader - 785xl and 985, which are 13.5 T and 15.7 T respectively; two models of backhoe loaders - 80 hp and 99 hp. According to Raina, Escorts offers the best back hoe Loader, Digmax II. ?This model is gaining market acceptance at a rapid pace in a highly competitive market place. The customers who have been using the other brands have acknowledged the superior performance of Digmax II.? Escorts also offer 3 T and 5 T wheel loaders.

LiuGong offers wheel loader variants from 1.5 to 8T in Indian market with bucket capacity ranging from 0.78 cu m to 6 cu m. Besides high strength structural component, LiuGong offers loaders with Cummins and Weichai Deutz engine and with captive design of LiuGong Axle in 3 T segment. In 5 T segment, LiuGong offers Cummins, Mahindra engine and axles from ZF and LiuGong for the Indian market.

Except cranes, Volvo CE offers complete range of machines for infrastructure development.

Future prospects
Gossain says, ?We hope to see some movement by the second half of the current fiscal year. However, a lot depends on the implementation and monitoring of new initiatives. We can expect a turnaround in equipment demand only if project execution picks up. Moreover, to ensure long-term growth, the government should focus on increasing investments and building up investors? confidence in the Indian infrastructure market.? On a high note, Raina says ?The current fiscal year should see the end of negative growth and the year 2014-15 should mark the beginning of positive growth. Thereafter, for the next two years, the industry is expected to grow at 15-20 per cent.?

According to Wadnerkar, the Union Budget is neutral for CE sector in the short term. However, the government?s emphasis on infrastructure creation is positive in the medium to long term. India is at an inflection point and under the new reform-minded government, the medium and long term outlook seems positive. ?Foreseeing the current economic reforms and the government proposed projects, LiuGong is very optimistic about the growth of construction and earthmoving industry in the coming 2-3 years with various road, mining, port, power and infrastructure projects lined up.? ?We expect to end this fiscal year with good improvement to our topline and bottom line. We have targeted to achieve more than 10 per cent market share for backhoes and are moving full steam to hit that target,? says Tiku. He sums it up on a note of great expectation - ?With increasing investment in the infrastructure sector, we foresee huge demand for CE in the coming years. Also, as our government plans to work on faster execution of projects, it will act as an enabler in keeping the momentum of growth.?

It is high time we got out of the board game, snake and ladder.
Agith G Antony

Opportunities

• 100 smart cities and industrial clusters
• Dedicated freight and industrial corridors with linkages to mining belts
• High priority for modernisation of railways
• High speed bullet train connectivity between all major cities
• Diamond quadrilateral project linking Delhi, Mumbai, Chennai and Kolkata
• Development of railway network in the border areas and the Northeast region
• Develop 16 new ports along with Special Economic Zones (SEZs)
• Development of waterways and inter linking of rivers
• Integrated Ganga Conservation Mission named ?Namami Gange?
• Emphasis on power sector especially the renewable solar and wind energy, besides providing tax benefits for thermal power project developers
• Pradhan Mantri Krishi Sinchayee Yojna? for assured irrigation
• Swachh Bharat Abhiyan? to cover every household with sanitation facility by the year 2019

Major challenges to project implementation

• Limited capacity for project execution in the government as well as in the private sector
• Incomplete and inadequate planning before bidding
• Aggressive bidding by concessionaires coupled with high rate of interest and inflation making the projects unviable
• Land acquisition delays
• Regulatory, administrative and procedural delays, especially relating to various approvals
• Non-availability of long term financing
• Politically instigated social unrest
• Cost escalation due to delays

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