The cumulative sales of backhoe loaders, crawler excavators and wheeled loaders have been growing at a CAGR of over 20 per cent for the last ten years and will continue to grow at an impressive rate. They currently constitute nearly 73 per cent of the total construction equipment sales, and this structure of sales is expected to continue, says Samir Bansal, General Manager, India, Off-Highway Research.. Excerpts from a exclusive interview.
Would you brief us on the global scenario sales and market trends for earthmoving equipment?
Amidst economic downturn in the major markets, especially Western Europe, North America and Japan, the total sales declined by five per cent in 2008; however, a much bigger impact was noticed in 2009, which resulted in the contraction of the total industry by 23 per cent. The Indian market also declined during the period but the Chinese market continued to grow. Global sales of construction equipment improved by 12 per cent in 2010, led by growth in the emerging markets and achieved a new peak of over one million units in 2011. However, on account of weak global sentiment, it is estimated that the industry will again decline by 11 per cent in 2012.
Construction equipment sales in China, the single largest market in the world by a considerable margin, declined for the first time in 2012. It is now challenged by the huge population of new and nearly new machines that exists, and one cannot reasonably expect the same sort of sales growth that took place just a few years ago.
The year 2011 was the second year of recovery in Western Europe but the market is estimated to decline in 2012 and is expected to shrink further in 2013. However, recovery is expected during 2014-2016.
After a disastrous market collapse during 2006-2009 in North America, when demand slumped from 223,000 to 77,000 units, sales recovered in 2010 by 17 per cent. The continued growth seen in 2011 was even better, at 39 per cent to 125,000 units, while it is estimated to grow by seven per in 2012. The future now looks positive but the industry believes that the future growth will be gradual.
After a sharp fall in 2009 of almost 50 per cent in Japan, caused by stagnation in public works, a dramatic decline in private investment, and problems for rental companies disposing their old fleets, demand bounced back in 2010. It continued to climb back in 2011, but is expected to decline in 2012. Not much optimism is left in this market at the moment, which is expected to remain below 50,000 units till 2016.
An analysis of the regional sales indicate that the share of developed markets of North America, Western Europe and Japan is declining, while the developing economies are gaining share, leading to a new world order in sales and production. As a result, production of equipment and components is also moving to the developing markets.
How do you assess the current CE market scenario, especially for earthmoving equipment?
Despite an optimistic outlook at the start of 2012, the sales of construction equipment declined, as not many infrastructure projects planned by the government could reach implementation stage. The impact of much talked about policy paralysis of the government was a principal factor responsible for the slowdown in the industry during the year.
Further, high inflation rate fuelled by the increase in commodity prices, rupee depreciation and growing budget deficit forced the Reserve Bank of India (RBI) to follow a tight monetary policy, which revised the repo rate from 4.75 per cent in March 2010, to a high of 8.5 per cent in October 2011. This resulted in an increase in the cost of borrowings, leading to reduced investment activity and slowdown in the economy to a growth rate of 5 per cent, its lowest level in the last 10 years.
However, RBI cut the repo rate in April 2012 and January 2013 to bring it down to 7.75 per cent. It has also injected a liquidity of approximately Rs 525 billion into the banking system during September 2012-January 2013 by slashing the CRR by cumulative 0.75 per cent.
The prime factor favouring the growth of the construction equipment industry is the sheer scale of work yet to be done in the infrastructure sector and an investment of $1 trillion planned in the 12th Five Year Plan. The increased size of projects and steadily declining availability of manual labour also favours the demand for the mechanisation of work at construction sites. Despite the challenges, Off-Highway Research remains bullish about the long term prospects of the construction equipment market and forecasts growth, from estimated 66,000 units in 2012 to over 100,000 units by 2016.
What have been the sales trends for earthmoving equipment?
The cumulative sales of backhoe loaders, crawler excavators and wheeled loaders have been growing at a CAGR of over 20 per cent for the last ten years and will continue to grow at an impressive rate. It currently constitutes nearly 73 per cent of the total construction equipment sales, and this structure of sales is expected to continue. However, the share of individual equipment may vary as Off-Highway Research believes that the demand for more efficient and specialist equipment such as crawler excavators and wheeled loaders will grow at a faster rate.
Which are the major vertical that will drive the demand for earthmoving equipment?
Earthmoving equipment such as backhoe loaders, crawler excavators and wheeled loaders are required for types of construction and mining projects, and their demand will be driven by infrastructure development in the country. Projects and investments have been planned in every sector, however, the growth in equipment sales will be led by power, roads, railways, irrigation and water supply segments, and the associated growth in mining and quarrying activities.
Do you expect a negative impact on the market due to the slump in the Chinese CE market?
The Chinese market for construction equipment is estimated to have declined at over 30 per cent in 2012but is expected to recover gradually. The current manufacturing capacity in China far exceeds the domestic demand, and therefore the manufacturers would be keen to export to any potential market. This can impact the Indian market as well in the short term, if the machines are offered at low prices. However, the Chinese manufacturers will need to establish a reliable distribution and support network, without which they will not be able to sustain the sales.
What do you think the major challenges are?
The behaviour of construction equipment market depends largely on the speed at which the government plans and executes the infrastructure projects. Often, these projects are bogged down by various social, political and environmental problems that require a strong government will to overcome.
Policy decisions along with administrative and procedural bottlenecks for land acquisition and rehabilitation, statutory approvals and clearances, litigation and long term funding are the major challenges currently being faced by construction and mining projects in India.
What are technology/product trends seen in the earthmoving equipment segment?
Currently, a large variety of machines are working in the country representing different levels of technical sophistication. The general trend amongst customers is to move towards better technology; albeit at a slow pace. As the size of projects being executed is increasingly getting bigger and execution time is becoming shorter, the demand for larger, more productive and specialist machines is expected to rise.