Indian economy has been growing at a rate of 8 to 9 per cent per annum for the past few years and is the second fastest-growing economy in the world. The Indian construction industry has been contributing significantly to the overall economic development of the country. The construction industry has been growing at a compound average growth rate of around 20 per cent for the past five years. In 2005, the industry created around 31 million jobs. However, just around 3 per cent of the jobs were created in the organized sector and the rest were in the unorganized sector.
This industry in India is highly fragmented and has about 300,000 construction companies operating nationwide. The government has allowed 100 per cent foreign equity in the construction industry. Among the major infrastructure projects are the $7–$8 billion India–Iran gas pipeline, the $2.8 billion construction of two power plants and the $2.3 billion power project in Tamil Nadu.
The momentum in the overall growth of Indian economy is likely to continue with the growing quantum of domestic and international capital inflow in this industry. This would give a further boost to the demand for infrastructure.
Equipment rental business in the country is at a nascent stage and is just 2 per cent of the total equipment market. This has grown by around 25 per cent in 2010, mainly on account of increasing demand for machinery from the infrastructure sector
Infrastructure is the backbone of any economy and India is no exception. The construction industry employs more than 30 million people. This sector, which covers rural and urban infrastructure, roads, airports, sea-ports and commercial and residential establishments, got a major boost during the last five years mainly because of a large number of government schemes and projects such as Bharat Nirman, Pradhan Mantri Grameen Sadak Yojana and airport modernization, and also because of boost to the housing sector.
It is expected that the total investment in the infrastructure sector is going to touch 9 per cent of GDP by the end of 2012, as against 5 per cent of GDP in 2006–07. On the basis of this projection, it is estimated that investment in physical infrastructure alone is likely to touch $500 billion between 2007and 2012. Massive construction projects would translate into multiple downstream opportunities for several other sectors, such as cement, steel and construction equipment. As a result, the construction equipment industry is likely to grow from $2.3billion to $12–$13 billion by 2015, that is, a compound average annual growth rate of around 24 per cent. The major operators in the construction equipment rental business are Quippo and Sanghvi Movers.
Business Rental The
Large construction projects require deployment of heavy equipment such as cranes, bulldozers, loaders and dumpers. Purchasing such equipment only adds to the costs of construction companies, who are already battling soaring commodity prices, particularly those of cement and steel. Some of the vital categories in which the construction industry related equipment can be classified are as follows:
earthmoving equipment
concrete equipment
material-handling equipment
material preparation
road construction equipment
construction vehicles dumpers
tunnelling and drilling equipment
Because of heavy investment required to acquire these pieces of equipment, particularly small and medium operators in the construction industry look at acquiring these equipment items on lease. This has helped in the growth of construction equipment banks, which provide machinery on rent and make it easier for developers to contain project costs.
Two companies dominate India’s equipment rental business—Quippo, promoted by SREI, an infrastructure finance company, and Saghvi Movers. However, there are several smaller players in the unorganized sector. The launch of Quippo, the country’s largest infrastructure equipment bank, in 2002, coincided with the start of the Tenth Five Year Plan period. The company made the most of the big opportunities in renting equipment not only with the construction sector but also with power, mining, ports, telecom, and oil and gas. Besides, Quippo also provides value-added services such as trained manpower and maintenance facilities. Sanghvi Movers is another major player in the business with special focus on cranes. Operating with a fleet of 300 medium to large cranes, the company boasts an impressive line-up of clients such as Suzlon, Reliance, Enercon, BHEL and L&T.
Global players in the earthmoving equipment industry are Caterpillar, Deers and Terex from the United States, Komatsu and Hitachi from Japan, Volvo from Sweden and Liebherr Inti from Switzerland. The major construction equipment manufacturers in India are Bharat Earth Movers, L&T Case, L&T Komatsu, Ingersoll-Rand India, Tractors India, Telco Construction Equipment, Godrej & Boyce Mfg., Escorts Construction Equipment and Action Construction Equipment.
According to ‘ECE Vision 2015: Scaling new heights in the Indian Earthmoving and Construction Equipment Industry’, a study conducted by McKinsey for CII and the Indian Earthmoving and Construction Industry Association (IECIAL), construction equipment rental is one of the emerging growth areas of the Indian construction equipment industry, besides exports, and refurbishing of used equipment and services. ‘The services segment in the construction equipment business is still nascent and presents good opportunities for growth,’ says a study carried out by the India Brand Equity foundation (IBEF) and KPMG. Currently, equipment rentals contribute just about 2 per cent of the market. This was expected to grow to about 25 per cent by 2010, the study said. In the United States, the rental market is 65 per cent of the total construction equipment market.
The global demand for construction machinery has increased from $97.7 billion in 2006 to around $130 billion in 2011. The study says that China, India, Mexico and Russia will register some of the largest sales increases, with China alone accounting for 31 per cent of all additional construction machinery demand through 2011. The demand will be fuelled by healthy economic growth, ongoing industrialization efforts, rising population and higher standards of living in a developing world leading to increase in spending on construction.
While India and China are on an upswing, the United States, however, could see a slump in its construction equipment rental business. This is because of the fears of recession looming large over the world’s largest economy and the ongoing trouble in its housing market. Lesser construction of houses translates into lesser demand for cranes and dumper trucks among other earthmoving machinery.1
1. What is the nature of the construction industry in India and what contribution does it have to the growth of the economy?
2. What logical reasoning provides a clue for the earthmoving equipment industry in India to be a great opportunity?
3. What specific business models could be effectively deployed to tap this opportunity in the Indian market?
4. If you choose to enter into rental business in this industry, which market segment would you prefer to enter and why?