It is crystal clear, to reach world-class levels, infrastructure needs a tremendous boost for the next several years; this will augur well for the CE sector where most of the major players continue to upgrade capacity and widen product lines. On the other side, devaluation of Indian currency, rising cost of funds, fluctuating cost not just of input materials but also power and fuel, the slowing down of reform process; Agith G Antony finds out how the CE industry perceive the present, and whether the growth story is really sustainable.There is a Zen story that goes like this: When a man whose marriage was in trouble, he sought the advice of a Master. He detailed with much of pain what was going on in his life.The Master said, "You must learn to listen to your wife."Though a bit perplexed the man took this advice to heart and left. Days fell like leaves in an autumn wind, and there he was, back again with the Master telling him that he had learned to listen to every word his wife was saying.Said the Master with a smile, "Now go home and listen to every word she isn't saying."On a peripheral level, the story is about a relationship. Take a closer look: on a broader sense, it is about managing a crisis. That is true in the current scenario; devaluation of Indian currency, rising cost of funds, fluctuating cost not just of input materials but also power and fuel, the slowing down of reform process…Vipin Sondhi, Managing Director and Chief Executive Officer, JCB India, puts it succinctly when he says, “As a nation, we face challenges, with the volatility in oil and commodity prices and inflationary pressures.” Is the growth story projected so far really sustainable? How do the major players in the construction equipment sector perceive the present uncertainties in the long run? How do they counter these issues? EQUIPMENT INDIA digs deep into the crux of the matter.Sondhi says, “The construction equipment industry’s performance is directly linked to the investment in infrastructure, which is top priority for the government. There is proposed investment of over a trillion dollars that will go into urban as well as rural infrastructure building. The construction equipment industry will grow in tandem with the growth in the infrastructure sector. Today one finds that most of the major international construction equipment manufacturers have set up facilities in India. The overall scenario is positive. The infrastructure sector is bound to see a growth every year, propelled by government policies and support from the private sector.”Sunil Sapru, President, LiuGong India, says, “We are always optimistic. In the short term, there are many issues such as hardening of interest rates, rupee devaluation, inflation, projects delay, manufacturing sector slowdown, etc. The devaluation has an impact, there is huge imbalance of import and export, the projected fiscal deficit and the actual figures, I think is really hampering the growth. We were talking about GDP going to 9 per cent as budgeted and we see it has closed at 7.5 per cent. Then internal conflicts in the government on various issues, elections in different states, general election are round the corner. In today’s scenario, it is rather a wait and watch policy, however, I feel in case the economy has to improve, all segments have to share the responsibility and so also with the infrastructure.”Speaking about the measures taken to counter these issues, he says, “In our short-term plan we are reinforcing ourselves with complete transparency to our end-users about how long can we sustain with the same price structure. If it is going to be persistent, then there is no other choice but to pass a part of the cost on to the market. On the long-term strategy, we have already started localising the product here in a phased manner. We have developed a supply chain management and are trying to give benefit to the customer in terms of localisation so as to have a control on the cost.”Kamal Bali, Chief Executive & Managing Director, LeeBoy India, has this to say, “I think these are short- term issues. The exchange rate is an issue which has happened not only in India but also because what is happening in the Euro zone. So people feel that the US dollar is the safest currency to have and therefore park money in US bonds and US funds. The US dollar has appreciated against all currencies in the last one month; and as far as India is concerned, the US dollar has appreciated even more. Month-on-month we have our current account deficit which is the trade deficit, imports minus exports. The exchange rate issue means greater input cost to the industry if the exchange rate does not go down. So there could be a rollercoaster ride for the next one year,”Kamal further emphasises,“I think the regulatory environment has to keep pace. Therefore, the government’s role has to be quite proactive, especially in removing regulatory hassles such as land clearance, environment clearance, etc, so that at any point in time you have enough bankable projects. Our industry is derivative of infrastructure development. So, provided certain caveats like regulatory environment and the like are taken care of, the industry will grow and there is no doubt about that. We can easily assume between 15-25 per cent growth in the next few years.”Says Anand Sundaresan, Managing Director, Schwing Stetter India, “In the last two decades, the construction equipment industry has made enormous progress and has grown both in size as well as diversity. There has been a sudden slowdown in the second half of 2011, due to various reasons including high inflation and interest costs. Many of the factors have definitely affected the performance of construction equipment industry. High cost of funding has resulted in lower off-take of equipment, besides increasing input costs. The devaluation of the currency by over 20 per cent has a direct effect of over 7-8 per cent on the material cost since on an average; we always have 35-40 per cent import contents in our products.” On a positive note, Sundaresan adds, “We expect that this is a temporary setback and anticipate a year-on-year growth of between 20 and 25 per cent in the next five years.”“The rise in interest rates, high raw material cost and devaluation of the rupee directly affect the infrastructure project viability. Therefore, the construction equipment market may pass through a challenging phase in the short term but we are confident about the overall outlook in the medium/long term. The country’s economic fundamentals and the relevant demand for the development of infrastructure will strongly sustain the construction market’s growth; therefore, we view the future very positively,” according to DK Narang, Managing Director, CASE India. He then adds “CASE India is geared to meet the future requirement of the Indian market. We will be enhancing our value proposition to the customers significantly in the future. In the short term, the construction equipment market could be facing a few challenges due to economic slowdown, higher interest rates, etc. However, the medium to long-term outlook continues to be positive and strong.”Sunil Kumar, Managing Director & Chief Executive Officer, Revathi Equipment has this to say, “Cost of funds is one major issue affecting our customers and the industry. Once the interest rates come down, coupled with faster implementation of projects, we should see a revival in demand. We import the hydraulic components for our products and to that extent; we are affected by the devaluation of the rupee. There is now a lot of emphasis on the quality and reliability of products and customers will not compromise on this vital aspect of their buying decision. Also, the concept of total cost of ownership is gaining credence and customers have started evaluating options based on TCO.” Sunil further adds, “Even though in the last couple of months the industry has seen a downturn, I am quite optimistic about the future. We should see a revival of demand once the interest level comes down. The industry growth would definitely depend on the investments made in the infrastructure in the country. With the planned investments of one trillion during the next Five Year Plan, I would feel that the industry is poised for a growth period in the next couple of years. The most important factor could be the faster awarding of contracts as well as the interest rates coming down.”Says Michael Schmid Lindenmayer, Managing Director, Putzmeister Concrete Machines, “Worldwide, it is a picture of light and shadow. The growth rate worldwide is not of the level we have in India. Europe is still flat and specialists think that there might be a light recession in the construction industry which is not a good sign for machine builders. Then, the US market is also not promising at this point of time. We have seen a regular rise in the costs of the inputs materials, be it steel, fuel, power or other commodities that directly or indirectly contribute to the final product. These rising input costs definitely make an impact on the margins with which the industry operates. On the other hand, we see that the customer`s expectations are increasing as he is more exposed to international quality products, at the same level of quality and service. We strive to give an international level quality to our customers at the best possible price by absorbing additional costs to the extent possible.”He further adds, “Our major focus now is to localise production, especially with aggregates which are currently imported from our parent company in Germany. We have identified some vendors who can provide the same level of international level quality at a competitive price. We are closely working with these vendors and suppliers and guiding them to produce components as per our standards and requirements. We are also identifying the areas in which we can reduce the costs, so that we can make the products available to the customer at a competitive price.”For Ramesh Palagiri, Managing Director and Chief Executive Officer, Wirtgen India, the situation is a splendid opportunity. “Actually, we look at it as a splendid opportunity for us because when most countries in Europe are growing at one to one-and-a-half per cent of growth, countries like India have grown much faster. So it’s really an opportunity to grow in such a situation and for us, it’s not pressure. We look forward to such opportunities and we are building infrastructure, effective sales and service force, and employing more people in the engineering side.”Dr V Sumantran, Executive Vice Chairman, Hinduja Automotive, had this to say, “Today that is the core competency in our industry, whether we are talking about commercial vehicles or off-road equipment. The cost goes up because of two reasons, one is the raw material cost and the other is technology cost, and our core competency finally boils down to our ability to innovate and our ability to provide value at a lower cost. For example, we have been able to not only improve productivity of the bucket but actually reduced its weight special grade of steel with innovative design. We have made sure that not only at the launch but even as we go beyond the launch, the cost of acquisition of the machine is going to be addressed and that we will be remaining below the trend line as costs starts to grow, with both raw materials and technology.”“The input cost is certainly going up and this is putting a lot of pressure. As I said earlier, we are increasing our efficiency to balance the input costs but then if it goes out of hand, it affects the performance of the entire industry. So we try to be competitive by increasing our efficiency, which means the entire operational efficiency of the organisation. As far as quality is concerned, we never compromise on it, says Prabhat Kumar Tiwari, Head – Sales and Marketing, Hyundai Construction Equipment India.“Our costs depend upon the relationship between the pound and the euro and the pound and dollar. So we really look at those two exchange rates in terms of our manufactured products. The devaluation has had an impact depending on the extent we are dependent on import of aggregates. So our strategy is to localise the production faster and source components locally, which will reduce the impact. It has a big effect on the products manufactured in Europe and imported into India. Currently we are increasing our production in Hosur and we have plans to launch more new models in this year, so our dependence on European produced goods is reduced to a great extent,” says Nigel Irvine, Sales & Marketing Director, Terex Finlay.Tim Lämmle, Sales Director, Azerbaijan, Turkey, India, Bauer Equipment, looks at it in a different way. He says, “Of course, cost is an issue. But in a different perspective, increased costs will lead to a point that people begin to look for more efficient equipment and there Bauer scores, as we are the most efficient manufacturer of drilling rigs in the market world over. Customers in India today are looking for premium products to double the productivity and increase the bottom lines.”According to Ravi Chawla, President, Lubes Business, Gulf Oil Corporation, “We still import our base oil and devaluation of the rupee has had an impact on the pricing. The fluctuation has been very high and if it is going to be longer, we will have to pass on these increases.”Speaking about the strategies to counter such kind of issues, Kamal says “I think in the long term, the aggregate and component industry in India has to grow, so that the dependency on imports will come down. So it’s imperative that the component and aggregate industry grow manifold to meet the demands. We have to encourage that sector, especially the small and medium industries of the economy. The manufacturing policy ultimately is also going to help because the government has clearly stated in the manufacturing policy that the share of manufacturing in GDP has to move from 14 per cent to 25 per cent. Service industry contributing to 50 per cent of GDP will not take us to a sustainable position. So, manufacturing has to grow. Our import has to come down drastically, manufacturing has to improve and our exports also have to increase, to counter these issues.”Sunil Gupta, Vice President & National Head – CE & SCE, Magma Fincorp, sums it up, “The impact is yet to be seen. Of course, the profitability of the corporates has come down. The infrastructure segment which we finance, most of the customers have still placed a substantial amount of orders; this can be substantiated by the fact that the sales for most of the manufacturers are going up; the volumes are being maintained and the numbers are increasing by some percentage. I think this may be a short-term impact, may be three to six months. But the Indian economy is really strong, the GDP growth projections are strong, and where world economies grow between two to three per cent, we are growing at almost seven per cent. So I think there is a great story ahead for India. There might be a short-term dip, but the long-term story is definitely good."It is crystal clear, to reach world-class levels, infrastructure needs a tremendous boost for the next several years, as this will augur well for the CE sector where most of the major players continue to upgrade capacity and widen product lines. The industry feels it imperative that the component and aggregate industry, especially the small and medium industries of the economy, grow manifold to offset the import dependency. As exchange rate issues means greater input cost to the industry, most of the OEMs have furthered the localisation programme.However, on a positive note, the fluctuating costs, whether of input materials or of power, fuel, or the technology cost on the other hand, finally boils down to one’s competency to innovate and one’s ability to provide value at lower cost. Here, the increasing competition has fuelled innovation to a great extent. Things are not so bleak, after all. This relationship will thrive.