INDUSTRY ANALYSIS

INTRODUCTION OF INDIA AS A MARKET Worlds seventh largest country by area and second biggest by population makes India one of the most dynamically growing and still, largely untapped construction equipment industry. The country has witnessed massive investment in the construction industry from both public and private enterprises in recent years. Multibillion dollar investments made in constructing roads, ports, power plants, telecommunication sector, urban infrastructural developments, etc have paved the way for construction equipments demand to grow substantially in recent years. The construction equipment industry in India has witnessed consistent double digit CAGR growth over the past few years. The global economic slowdown had its moderate effects on the industry, but it regained growth momentum in FY 2010 and showed positive year-on-year growth. Particularly, the earth moving segment is driving the overall industry with strong demand emanating from government backed infrastructure projects. The segment is poised for an unprecedented CAGR of around 18% during FY 2011 FY 2014. Over the last 3-4 years, various new entrants made inroad to the Indian construction equipment industry. Some of the biggest names belong to Japan, the US and Korea. Besides, a number of domestic companies are either expanding their domestic capacities or diversifying their product portfolio. With the emergence of new market players and expansion plans underway, the industry is expected to become more competitive and fragmented. However, these new capacities will find their home quite comfortably in the domestic market amid growing mechanization and proposed large infrastructural projects. My report provides profound research and rational analysis of the Indian construction equipment industry. It provides information/statistics of all prominent market segments including earth moving, material handling, concrete equipments and road building equipments. Analysis of past, present and upcoming industry trends provide balanced market intelligence on the concerned industry. In addition, we have covered key industry players and their business description to examine industrys competitiveness and growth potentials. In addition, the report has given the industry forecast based on correlation of past drivers, challenges and opportunities for expansion. In this way, the report gives an unbiased market picture that will prove decisive for clients.

HISTORICAL TRENDS Construction equipment cover a variety of machinery such as hydraulic excavators, wheel loaders, backhoe loaders, bull dozers, dump trucks, tippers, graders, pavers, asphalt drum / wet mix plants, breakers, vibratory compactors, cranes, forklifts,

dozers, off-highway dumpers (20T to 170T), drills, scrapers, motor graders, rope shovels etc. They perform a variety of functions like preparation of ground, excavation, haulage of material, dumping/laying in specified manner, material handling, road construction etc. These equipment are required for construction activity. With a wide production capacity base, India is perhaps the only developing country, which is totally self-reliant in such highly sophisticated equipment. India has only a few, mainly medium and large companies in the organized sector who manufacture these. The technology barriers are high and therefore the role of SMEs is restricted to manufacture of components and some sub-assemblies. Prior to the 1960s, domestic requirements of construction equipment were entirely met by imports. Domestic production began in 1964 with the setting up of Bharat Earthmovers Ltd.(BEML), a public sector unit of the Ministry of Defense, at Kolar in South India to manufacture dozers, dumpers, graders, scrapers, etc. for defense requirements under license from Letourneau Westinghouse, USA and Komatsu, Japan. In the private sector, the Hindustan Motors Earthmoving Equipment Division was established in 1969 at Tiruvallur, near Chennai with technical collaboration from Terex, UK for manufacture of wheel loaders, dozers & dumpers. This factory has since been taken over by Caterpillar for their Indian operations. The machines manufactured by Caterpillar in the Tiruvallur factory are marketed by TIL and GMMCO. In 1974, L&T started manufacturing hydraulic excavators under license from France. In 1980 and 1981, two more units, Telcon and Escorts JCB commenced manufacture of hydraulic excavators (under license from Hitachi, Japan) and backhoe loaders (under license from JCB, UK) respectively. Escorts JCB has been taken over by JC Bam ford Excavators Ltd. U.K. in 2003 and is now called JCB India Ltd. Volvo and Terex Vectra are the most recent entrants in the Indian market. Volvo has set up their manufacturing unit in Bangalore. At present they are only manufacturing tippers and the other equipment are imported from their parent company and marketed in India. Terex Corporation USA and Vectra Ltd. U.K. have formed a joint venture, which has started manufacturing construction equipment like backhoe loaders and skid steer loaders from May 04 at Greater Noida with an investment of USD 12 million. Other equipment in the Terex range are being sold through their agents in India. Most of the technology leaders like Case, Caterpillar, Hitachi, Ingersoll-Rand, JCB, John Deere, Komatsu, Lieberr, Terex, Volvo are present in India as joint venture companies, or have set up their own manufacturing facilities, or marketing companies. The industry has made substantial investments in the recent past for setting up manufacturing bases, despite small volumes and uneconomic scales of production compared to global standards. BACKGROUND The Indian construction equipment industry was severely hit by the economic slowdown, weak sentiments across user industries and tight liquidity conditions in 2008-09, resulting in a sharp 15-30% drop in demand across product segments. The cumulative negative impact across industrial/ infrastructure investments resulted in a sharp decline in Indian CE volumes in Q3, 2008-09. While Government funded infrastructure projects largely remained on track even during this downturn, a number of privately funded projects suffered due to insufficient credit and a sharp deterioration in the investment environment. Growth in governmental segments of

roads, which are relatively more mechanised and thereby use more of CE, supported growth during the past few quarters. Indian CE volumes started picking up in November 2009 and maintained a healthy growth over the past four months. The IIP index April-February 2010 posted a growth of 10.1% as against 3.0% in the corresponding period of the previous year. Infrastructure spending by the government, towards schemes like Pradha Mantri Gram Yojna and preparation for the 2010 Common Wealth Games, has been a strong demand driver, especially for the northern part of the country. The southern part of the country, which was hit by fall in iron ore and granite mining activity, also showed some signs of revival. However, the demand from the real estate segment (which impacts concreting equipment) continues to be relatively weak, particularly in the commercial real estate segment. Nevertheless, the longer term prospects for the segment remain healthy, with strong demand expected from the housing segment. The CE industry is cyclical, with the long term demand strongly correlated to the health of the underlying economy and infrastructure investments. The CE industry is particularly affected by macro-economic factors like investments in infrastructure, housing demand, real estate prices, employment rates and commodity prices. As the purchase of real estate and construction equipment industry is largely debt-funded (about 85% of the CE industry purchase is financed), timely availability of credit at favorable terms and interest rates also remains a strong industry driver. In the following, we have highlighted some of the key trends observed in the CE industry. Industry enjoyed high profitability during up-cycles; however, profitability and capital structure deteriorated in H2, 2008-09: Most of the large established players in the Indian CE industry enjoy healthy operating margins. A number of players operate as assembly facilities with high proportion of imported components procured as bought outs/ CKD (Completely Knocked Down). Managing raw material costs through effective sourcing, especially for imported content coupled with benefits from economies of scale had resulted in growing profitability for the industry during the five-year period from 2003-04 to 200708. However, the profitability declined in recent periods especially during H2, 200809 and H1, 2009-10 contributed by a sharp contraction in demand, thus resulting in under-absorption of fixed costs. Inventory pile-up was another cause of concern for the players during H2, 2008-09, especially for those with significant import content. A number of companies anticipated robust off-take in H2, 2008-09 and placed orders for components and CKDs from their global parents/suppliers. With a longer lead time on imports, the sudden contraction in Q3, 2008-09 resulted in stock pile-up. Additionally, a number of OEMs were forced to extend support to their weaker channel partners (through interest subventions and longer credit periods), resulting in a significant increase in working capital and deterioration in capital structure. However, with a relatively moderate level of leveraging, many industry participants had sufficient cushion to support these borrowings. With a sharp decline in volumes, most of the CE players now have surplus capacities, and hence have cut-back on fresh capacity additions. However, some players with new product introduction plans may continue to invest, albeit at a slower pace. The CE industry has bounced back strongly during H2, 2009-10, supported by easing of liquidity conditions; correction of pipeline inventory and revival in

infrastructure investments led by Government spending. However, the overall performance of the industry in 2009-10 is expected to be relatively modest owing to the weak first half. Demand for service and spares to increase in importance: Globally, income from spares and services income accounts for over 15% of revenues for major CE companies, supporting profitability and smoothening revenue volatility. This also enables the manufacturers to sell their goods initially at a competitive price while making up in the service contracts - a life cycle approach to profitability. However, at current levels, the contribution to revenues in the domestic market from spares and services contracts remains low, largely due to a relatively small equipment population and availability of non-OEM spares. The life of equipment is around seven years although the actual on-road fleet in India is sometimes over 20 years old. Hence, there is a strong potential for annual maintenance contracts (AMCs) and spares business. However, it needs to be noted that a large geographically concentrated vehicle population helps generate economies from the service network. As the population of on-road increases, service and spares income is likely to become a stable, high margin and counter cyclical source of revenue. Used and rental equipment markets are still in their nascent stages: While there is good potential for used equipment in India, the market size of which is estimated at about three times the primary market, India does not have an established common platform for trading in used equipment.

Again, the current rental penetration in India at around 7-8% remains low as compared to the global standards of 50-80%. An average of 30% of the equipments sold in Europe and over 60% in the United Kingdom are to rental operators. A robust rental market enables reduction in investments in projects by outsourcing the equipment requirement (including spares and services) and improving capacity utilisation of equipment. The key equipment in the rental fleet in India currently are backhoe loaders, pick-and-carry (PNC) cranes, excavators, motor graders and vibratory compactors. While a number of organised equipment banks like Quippo Infrastructure Equipment Limited, Sanghvi Movers Limited (for cranes), ABG Infralogistics Limited, GMMCO Limited & TIL Limited (TIL-for Caterpillar equipment) have entered the fray with large fleets (of over 100 equipments), the market continues to be serviced mainly by small fleet owners with less than 10 equipment each. However, there are various structural/ operational concerns that need to be resolved for the Indian equipment rental markets to evolve. Concerns include lack of synchronisation of interstate tax policies (on movement of equipment between states) and logistics of the equipment. Further, the dominance of unorganised market participants that operate on cash transactions (on rentals, thereby avoiding taxes and enjoying an unfair advantage to the larger rental operators) prevents the evolution of a more organised system. With the large infrastructure investment proposed over the next few years, demand for rental equipment is expected to see a large growth over the medium term. Globally, a number of OEMs like Caterpillar Inc, JC Bam ford, UK and Volvo are

actively involved in the equipment rental business, an area that has not caught on in India as yet. Outlook - A strong positive Over the past four months, the industry has been on an upturn supported by increased financing availability; step-up in infrastructural investments and pick-up in demand for commodities globally. Large proposed investment over the next several years in infrastructure (ports, airports, roads) has the potential to sustain the growing demand for CE. The Eleventh Plan commission (2007-12) envisages the need for an infrastructure investment of over US$ 155 billion for development of roads, bridges, railways, ports and airports. According to the Economic Survey of 2009-10, the Ministry of Road Transport & Highways has set a target of completion of 20 km of National highways per day, translating to over 35,000 km during the period from 2008-09 to 2013-14. The NHAI has formulated closely monitored work plans for awarding 12,000 km of projects each during the years 2009-10 and 2010-11. The Special Accelerated Road Development Programme in the North-eastern Region (SARDP-NE) envisages two / four-laning of about 5,184 km of National Highways and two-laning / improvement of about 4,756 km of State roads. Since inception in December 2005 and until December 2009, 515 projects across 31 States at a cost of Rs. 580 billion have been sanctioned for urban infrastructure development under the Jawaharlal Nehru Urban Renewal Mission (JNNURM). These are, but a few of the large infrastructure initiatives that are currently under way in the country. The long-term demand drivers for the construction equipment industry are relatively low levels of mechanisation and penetration of equipment in the construction industry; proposed heavy investment in infrastructure and increasing population and urbanisation. Low-cost countries like India and China also stand to gain from the potential for export of components, equipment and engineering/designing services - an area where China has already made significant inroads. Some of the areas that need to be addressed during this growth phase include introduction of customised products for the Indian markets; setting up of a viable and efficient aftermarket network; an equipment rental & used-equipment market and training of manpower to operate the equipment. Industry Structure India produces the entire range of construction equipment for different applications. The industry can be broadly classified under the following categories:

Earthmoving equipment Road construction equipment Material handling equipment Tunnelling and Drilling equipment Construction vehicles

The following is the industry structure and the categories involved in the construction equipment industry: In terms of size, earthmoving equipment constitutes the biggest segment, accounting for nearly 57 per cent of the overall equipment market. Material Handling equipment and tunnelling and drilling equipment follow with 13 per cent and 12 per cent respectively. 71% of the sector comprises of public limited companies including PSUs and 29%private limited, or joint ventures including closely held private limited companies.

75% of the companys manufacturing in India were involved in the entire range of Activities like design and engineering, manufacturing, erection, servicing and Commissioning. There are only a few companies who act as selling agents for International players. There are others who manufacture and also import complete equipment or in SKD condition from their principals abroad and market them. Since each piece of the equipment in this product category has substantial value, a number of companies have a turnover of over 100 crores and the larger ones have a turnover above Rs.1000 crores. The technology barriers have made the industry less fragmented in the construction equipment and the material-handling segments. The international trend in the earthmoving segment is one of consolidation. This trend is also beginning to be seen in India. Some international companies are looking at the prospects of enhancing their market presence based on higher investment in infrastructure and also using their Indian operations to meet demand in South and South East Asia. The industrys expectations of the likely future evolution in this sector are represented here in graphical form. Most of the current players expect that new players will enter the Indian market.

GROWTH The growth of this sector is interlinked with the growth of the Indian economy and indirectly with the growth of infrastructure. This is evident from the graph shown below:-

The last few years have witnessed a phase of restructuring in the industry through acquisitions and joint ventures. This also reflects the active interest of international majors in the domestic market. Many international players have also appointed selling agents for importing and selling complete equipment in India. The construction equipment industry is dominated by a few large manufacturers in each product segment. BEML supplies to nearly half the total market. BEML & Caterpillar lead in dumpers and dozers while L&T-Komatsu and Telcon lead in excavators and JCB India in backhoe loaders. TECHNOLOGY The construction equipment sector has a wide range of products. For the purpose of this study, this is taken to mean the following :

The technology leaders in the construction equipment sector are: Komatsu, Caterpillar, Hitachi, Terex, Volvo, Case, Ingersoll-Rand, HAMM, Bomag, John Deere, JCB, Poclain, Bitelli, Kobelco, Hyundai and Daewoo. Except for the last 3, all the other companies are present in India either as joint ventures, or have set up their own manufacturing facilities, or marketing companies. In the construction equipment sector, the level of technology prevalent internationally can be made available in India through joint ventures. However, the equipment currently being manufactured in India is not of the same size. For example for a 15 Cu. M. hydraulic shovel, the manufacturers do not feel the need to bring in the technology due to low volumes and uncertain demand though the companies have the manufacturing facilities and design capabilities to manufacture the same in India. Some of the other reasons for not manufacturing the latest equipment are:The Indian market cannot absorb the cost of the latest technology. If manufactured in India for export markets, most of the components will have to be imported. Equipment adhering to the latest emission norms cannot be used since the Quality of fuel required for them is yet to be made available here. At the same Time, off highway construction equipment does not need stringent emission norms in India. The construction equipment sector in India has evolved over the years and is at Present in an intermediate stage of development. The industry is trying to bring in International levels of technology as demand and the scale of operation increases. The users are now not looking at only the initial cost of the equipment, but focusing on total costing, or cost per ton of usage. It is anticipated that 5 years hence, the need for more and more mechanization and enhancement of scale may lead to

change in the level of technology in use. Advances in technology have allowed an increase in haul truck and rope shovel size. For example haul trucks are now being manufactured up to 400 tons capacity. Here the increased machine size has provided an opportunity for increased production. Management Efficiencies The industry is quite mature in terms of marketing abilities as compared to the other sectors of the capital goods industry. Majority of the companies have strategic planning programmes in place and have well chalked out business strategies at all levels. In order to enhance their market share, companies need to improve quality and service followed by reduction in costs, increase in product range and finally adopt more aggressive marketing strategies. The competitive edge lies in satisfying customers by delivering higher quality products at lower prices. Strategic alliances are already in place among 60% of the companies surveyed. These are primarily focused on developing and combining competencies with the help of other organizations in terms of marketing, after sales service etc. Only 45% of the companies are interested in growth through mergers and acquisitions. The level of quality consciousness is on an average higher than the other sectors probably because the companies are larger and many of them are associated with international companies either for manufacturing or marketing their products. Another reason for higher quality consciousness is that more companies in this sector are well versed with the soft technologies being used worldwide for enhancing competitiveness and quality. Approximately 90% of the companies covered under the study have either implemented, or are implementing soft technologies like six sigma, lean manufacturing etc. 100% of the companys manufacturing in India are ISO certified. It was noticed that the percentage of scrap due to errors in manufacturing is between 2% & 5% and the percentage of labour hours spent on reworking was 4%. All the manufacturing companies train their workers on quality concepts. However the percentage of workers who received company sponsored training on quality concepts in the past two years varied from 20% to 100% in some companies. The average number of hours per person of training provided was approximately 16 hours per person varying from 6 hours to 35 hours per person per annum.Most of the companies were quite responsive to customer complaints and the average number of days taken to respond varied from a day to 5 days in some companies. More than 70% of the companies have undergone business process reengineering for higher customer satisfaction. It has been observed that the majority of the companies in this sector are between medium and high users of computerization. The various activities computerized by the percentage of companies are shown below.

This level of computerization is also comparatively high compared to the other sectors of the capital goods industry. Yet the percentage of IT expenditure to sales in the last one year i.e. 2004-05 was a meagre 0.5% of the total sales i.e. Rs.32 crores was invested by the industry towards computerization either for ERP / SCM / CRM.

ERP or enterprise resource planning is an industry term for the broad set of activities supported by multi product application software that helps a manufacturer to manage the important functions of its business including product planning, parts purchasing, maintaining inventories, interaction with suppliers, providing customer service and tracking orders. Supply Chain Management (SCM) is the management of the entire value added chain from the supplier to manufacturer right through to the retailer and the final customer.SCM has the primary goal of reducing inventory, increasing the transaction speed by exchanging data in real time and increasing sales by implementing customer requirements more efficiently. CRM (Customer Relationship Management) entails all aspects of interaction a Company has with its customers, whether it be sales or service related. CRM is an information industry term for methodologies, software and usually internet capabilities that help an enterprise manage customer relationships in an organized way. Companies need to be in constant touch with their customers over the electronic media. The percentage of companies using ERP solutions is high with quite a significant number also using CRM for better customer relationship management. However, all the players need to be better integrated with both their suppliers and customers to strive to be the market leader. After-sales service is an important aspect of a companys successful business strategy because all customers would like higher productivity and utilization from their machines in order to be cost competitive. Hence this is an area no company can

Afford to ignore or accord a lower priority to. All the companies surveyed whether manufacturing, or trading, offered after-sales service to their customer and it was also noted that 70% of them have entered into this field in the last ten years. Equipment manufactured by the industry is mostly mobile and hence subjected to Higher wear and tear and consequently maintenance requirements are higher. Users rate machines with lower downtime higher. Hence, training of maintenance Personnel both of manufacturers as well as users is a very important aspect of Managing customer relationships. This is also evident from the fact that all the Companies spent on training and the majority of them (60%) spent more than Rs.1 lakh per month. Only 40% of the companies spent less than Rs.10 lakh per annum on employee training.

The average response time for responding to customer calls is 24 to 48 hours and in premium service contracts it varied between 12 to 36 hours. 91% of the maintenance calls were completed within the specified time frame. From the user feedback, it emerged that the deliveries of most of the companies were delayed. Hence many customers preferred to import second hand machines. Scheduling is therefore required to be strictly followed by all the companies for manufacturing, and approximately 90% of them use one, or the other software to Enhance efficiency in manufacturing. Yet the percentage of companies where the Shipments are before/within the due date is very low at only 50%.

A clear distinction was noticed in terms of reasons for late delivery. Companies predominantly manufacturing construction equipment have attributed more than 70% of their late deliveries to delay in customer clearance. The reason for late deliveries is attributed mainly to the growth in domestic demand, which was not

foreseen earlier by the companies. Delays were therefore mainly attributed to capacity constraints. A fall out of delayed delivery has been higher imports both for new machines, as well as second hand machines. This issue can be tackled by enhancing capacity of both the manufacturers and their sub-suppliers, tighter monitoring and scheduling and by greater usage of ERP / SCM. Benchmarking with International Companies The companies against which Indian companies have been benchmarked are Caterpillar, Komatsu and Volvo. They are the leaders in their respective fields Productivity Parameters Machine and labour utilization

In 2003-04 the capacity utilization in this sector ranged between 50 percent to 85 Percent depending on the market conditions. By and large the more efficient Companies were operating at a level of 85 percent or more capacity utilization. It is interesting to note that the industry is experiencing delays in delivery due to Capacity constraints. Yet at the same time the capacity utilization and levels of Utilization of labour are not significantly high. This can be attributed to breakdowns as a result of inadequate maintenance, absenteeism, sub-contracting due to the attraction of lower prices and delays in receiving materials and components due to delays in imports. Machine breakdown ranged from 0.5 to 10 percent and most of the companies Followed systems of periodic and preventive maintenance. Supply Chain. Procurement lead-time was very high in this sector ranging from 2 weeks to 6 months. The reason being that this industry has a large number of proprietary items, which need to be imported, and 35 percent of the raw materials generally comprise of imported components. These components have to be imported because of their non-availability in India and hence most of the companies require an average of 1 month to 6 months as procurement lead-time. Most of the companies are procuring 50 to 80 percent of their raw materials and bought out components within a radius of 200 kms. From their manufacturing base .The lead time is high compared to global leaders. Though 100 percent of the companies have their vendors rated and have fairly good supply chain management systems, yet the procurement lead-time is very high due to the following reasons: Lack of proper port/airport infrastructure Cumbersome procedural delays while importing Lack of high level of computerization and integration with the supplier Network.

CHALLENGES Globally, the growth in the industry has been led by emerging economies; the economic crisis in 2009, however, put a brake: USA is the largest construction equipment market in the world followed by China (around 0.3 million units) and Europe (around 0.2 million units). The global CE industry has been on an upswing since 2003-04 and has grown by over 15% annually until Q3, 2008-09. The growth was more pronounced in and was mainly driven by the fast growing BRIC nations of China and India. The size of the CE market in emerging economies has also expanded significantly and now accounts for 50% of the global market as against just 35% in 2004. The Indian market grew by over 30% annually during this period but on a significantly lower base than in other major countries. The key growth drivers were strong economic development, government and private investments in infrastructure, large government projects like road building, high commodity prices, the booming real estate industry and growing levels of mechanisation. The global CE industry experienced a contraction in Q3 2008-09 as a result of reduced construction activity, especially in the real estate segment; virtual standstill in equipment financing in the aftermath of the economic meltdown towards the end of Q2, 2008-09. In 2008-09, the global CE industry is estimated to have fallen by over 20%, mainly on account of a 38% fall in global demand for construction equipment. The fall in demand was led by sharp declines in the key markets of Europe, Japan and North America. Barring certain markets like China, the global CE industry continued to fall in the first nine months of 2009-10 as well, although the magnitude of global decline slowed down to around 4% in Q3, ICRA Rating Feature Indian Construction equipment Industry ICRA Rating Services Page 3 2009-10. New MNC entrants setting up base in India: With CE industry volumes of around 40,000-45,000 units per annum and an estimated turnover of US$2.6-3.1 billion, the Indian market is relatively small as compared to the global market that is estimated at over $75 billion. Nevertheless, many international OEMs have indicated plans of setting up manufacturing facilities in India owing to its good growth prospects and slack demand in the traditional developed markets. Some of the new entrants in the past 3-4 years were Japans excavator major Kobelco and ME company Komatsu; CE and farming equipment major, John Deere (USA) in JV with Ashok Leyland Limited; excavator & CE company Sany & Liugong (China) and CE majors Hyundai and Doosan (Korea). Further, existing participants like Caterpillar and excavator manufacturer Telco construction Equipment Company Limited (Telcon) are either adding to their domestic capacities or increasing their product portfolio. With the incremental capacities and new entrants, the industry is expected to become more competitive and fragmented. However, growing mechanization and large infrastructural projects proposed in the country indicate the potential to absorb these new capacities. The entry of global CE manufacturers has also facilitated product upgrades in the growing Indian market. Threat of imports from low-cost countries like China:

China has a huge domestic market for CE. The Chinese loader market alone stands at over 125,000 as against 1,800-2,000 wheeled loaders sold in India per annum. With such economies of scale, the Chinese equipment have the competitive advantage of being significantly cheaper than the Indian equipment. A number of Chinese companies - crane manufacturers Zoomlin & Weihai Huata and wheel loader & motor grader manufacturer Xiamen, Sany and Liugong, to name a few, have established their presence in India through a combination of manufacturing facilities, sales offices or marketing tie-ups with Indian companies for selling their products in India. It is estimated that the Chinese MCE companies currently hold over 12% in the wheeled loader segment, around 13% of the dozer segment and enjoy a strong presence in concrete mixers, with the potential to expand their presence in the Indian markets. The challenges for the Chinese products in India stem largely from warranty support and availability of spares/ after-sales support. Some Chinese manufacturers have started addressing these concerns through tie-ups with local established OEMs like Escorts Construction Equipment Limited (ECEL). While the current approach of domestic buyers towards Chinese equipment remains cautious on concerns related to quality and availability of long-term after-sales service, the future trends could be largely determined by the success of local tie-ups in addressing these concerns. Further, the resale value of the Chinese equipment currently remains low, restricting availability of finance. However, the Indian OEMs will continue to face competitive pressures to lower costs, thus requiring higher localization; improving value through greater customization to meet local needs besides strong service and spares support to beat competition. Imports into India also originate from other countries too, either because of nonavailability of such products in India owing to a cost advantage (on used equipment). This trend is more pronounced in material handling equipment; where over 10-15% of the equipment in the country is currently imported. Developing nations like India are key destinations for used cranes from countries like Australia. Limited investments in Research & Development by CE manufacturers in India: 65% of the companies surveyed have their own R&D set up and 90% of them have started allocating for R&D since the 1990s.However, the percentage of sales budgeted for R&D was meagre ranging from 0.5 to 3% of sales. 35% of the companies surveyed worked in collaboration with some educational/domestic research institutes. The prominent amongst them being the IITs and IISc Bangalore. When benchmarked against global companies, it was noted that companies like Caterpillar, Komatsu and Volvo spent approximately 3% of sales on R&D which is USD 880 Mn., 34000 Mn. Yen, 975 Mn. SEK respectively compared to the highest spender in India investing approx. Rs.16 crore. Although many of the manufacturers have established full-fledged R&D units to update their products/technologies, the industry in India does not invest adequately in R&D activities compared to world leaders like Caterpillar or Komatsu, as the existing market cannot absorb the development costs. However, we may see more R&D work by world majors in India, taking advantage of low R&D manpower costs. CE companies with MNC parentage typically have depended on parental support for product development and have made minimal investments on Research and

Development (R&D) - largely limited to homologation of the global products for Indian conditions. Further, the need for technology investments specific to the Indian market is relatively low, as the requirements for emission/noise control in Indian offhighway vehicles continues to be basic as compared to the developed markets. The Indian CE industry is currently BSII compliant, with the next transition expected in April 2011. Developed nations like Japan and even emerging markets like China have already moved to cutting edge technology of hybrids and EV (electric vehicles) to increase productivity and comply with stringent emission/ noise control norms. With the increasing presence of international companies/products in India, Indian market participants have started to invest into R&D to match the international quality standards. Deeper understanding of the market and the requirement for application/topography specific products has further raised the need for increased R&D by participants in the Indian market Low levels of indigenisation expose MNC companies to high forex volatility: The Indian CE industry has only a few large local players, namely, BEML Limited (BEML), ECEL, TIL, Action Construction Equipment Limited (ACE) and Greaves Cotton Limited (Greaves) among others. Most of the international majors in the industry like Caterpillar Inc. USA, Komatsu Limited, Japan, JC Bam ford Excavators Limited, UK and Hitachi Construction Machinery Co. Limited, Japan are already present in India, either through subsidiaries or joint ventures. The level of indigenisation in the domestic CE industry, however, continues to be low (at around 40-50% depending on the company and the product) with the import of technology and component CKDs (especially for power train and hydraulics) by the Indian entity from its technology parent. The key import driver is a lack of domestic suppliers that assure good product quality. A lack of economies of scale has also been a contributing factor in the past, although this is likely to undergo a change in the future. High import content adds to the cost due to the longer lead time and higher inventory levels for components, and exposes the industry to high forex volatility. In 2008-09 and the first half of the current fiscal (2009-10), rising cost pressures, especially on account of the hardening Yen, affected a number of players with Japanese parentage.

OPPURTUNITIES
Critical Success Factors for Manufacturers in India after Sales Services The share of revenue from service for Indian construction equipment manufacturers is estimated at around 2-8 per cent as against 12-20 per cent that global players enjoy. This indicates the potential for improving service revenue in the Indian market. As product technology improves across competitors, service would be the key differentiating factor to retain customers. Equipment in India are typically used for 15 to 20 years, indicating the significant potential for maintenance and service activities, apart from spare parts sales, across the usage cycle. Hence a clear focus on service is necessary for companies to grow and remain competitive. This needs to translate into developing capabilities in training, supply chain management and distribution reach.

Focus on R&D and Innovation Indian construction equipment manufacturers invest very little in Research and Development (R&D) compared to global majors. This is a key lacuna that can hamper growth product innovation and new product development are key capabilities to maintain a pipeline of new products, which is critical for success in the increasingly competitive market. Customer training and education on the benefits of technology have to evolve in parallel with product technology development so that customers perceive value for the enhanced technology and also use the equipment correctly. Providing End-to-End Solutions The capability for providing end-to-end services to customers is expected to be a key differentiator for players in the construction equipment industry in future. From the evaluation of equipment prior to purchase till disposal of used equipment, customers need a variety of services and players who can provide these in an integrated manner, stand to gain multiple benefits. For this construction equipment manufacturers may need to enter into collaborative ventures with financiers, insurance companies and rental companies. Supporting Government Regulations & Policy The Government of Indias focus on infrastructure development is the single biggest driver for the construction equipment industry. Policies that encourage manufacturing and retail activity also have a positive impact on the equipment market. Apart from these, some of the policies that are aimed at attracting investment in the sector include the following: All agencies and ministries of union and state government will work united with a shared vision for success. 100 per cent FDI is allowed for manufacturing purposes. Exemption from obtaining an industrial license to manufacture. Manufacturers are free to select the location of the project. Import duties reduced to encourage imports. Encourage exports from Export Oriented Units (EOUs), Special Economic Zones and Export Processing Units (EPUs). Locations with high growth potential to be supported by Government to bridge technology and productivity gaps. Skill up-gradation, physical infrastructure, environmental mitigations facilities to be provided by Government in selected areas of intervention. Schemes similar to SEZs can be developed for export oriented units with capital investment in plant and machinery over US$ 6 million. User Sector Feedback From the responses received from some of the major users of construction equipment, it was noticed that large purchases were made in 2002-03 when the Government investment in infrastructure projects like the Golden Quadrilateral was in full swing. For the same companies demand has tapered since then. One of the

main reasons cited by some of the importers of second hand equipment was the delayed delivery by domestic companies. Cost-wise there was no benefit since the machines required total overhauling and retrofitting. When the indigenously available machines were benchmarked with the imported machines the users felt that cost-wise, indigenously manufactured machines were very competitive. The spare parts availability and servicing of the machines were much better than the imported machines, though it still fell short of customers Expectations. Delivery of indigenously manufactured equipment was fairly poor though in a few Segments like compactors; it was at par with International players. However when it came to technology, performance/productivity, reliability and downtime, the indigenously manufactured machines were rated lower than the imported machines. In the case of downtime, the domestic equipment had 10-15 percent higher downtime than the imported machines. Many of the international players in India do not manufacture the total range and therefore imports were a necessity. In cases where a particular technology was specified by the user industry, and the same was not available in India, the machines were required to be imported. According to the operations and maintenance personnel of the user industry the Priority that they gave while rating a machine was in the following order: Less downtime Ease of maintenance Power/Fuel consumption Efficiency Availability of spares parts and servicing Eco-friendliness of the machine. Indian manufacturers gave good service and spares backup at a reasonable cost as compared to International players. However, the user sector felt that there was scope for tremendous improvement, especially as international players were appointing agents in India who are gearing up to give service and training backup. COMPETITION JCB India JCB setup a presence in India in 1979 and has invested US$ 125 million in the country. They are one of the largest construction equipment manufacturers in India. The company has a turnover of US$ 335 million. The company is growing by between 25-30 per cent annually. JCB India is a subsidiary of prominent global player J C Bam ford Excavators Ltd. (JCB). The product ranges from Backhoe loaders, wheeled loaders to excavators and skid steer loaders. They have 70 per cent market share in the backhoe loader segment and around 13 per cent market share in overall Indian construction equipment industry. JCBs customers are mostly hirers and large and small contractors. They have facilities at Ballabgarh in Haryana & Pune in Maharashtra. They have a very good distribution network. They have 38 dealers and 206 outlets. They have dedicated parts centre in Ballabgarh and parts distribution depots in Chennai, Pune and Kolkata. They are setting up a new facility in Pune with a capacity of 8000 units. The company has plans of going aggressive on excavators and compactors. They shall achieve the same with their new excavator production unit with an installed capacity of 6000 units. The company

wants to make India an export hub to cater to the Middle East & South East Asian regions. Bharat Earth Movers Limited (BEML) BEML is the largest player in earthmoving equipment sector. The company turnover is around US$ 484 million. The construction equipment segment Is around US$ 306.6 million defence segment is about US$ 154.2 million and railways around US$ 23 million. The company is the largest public sector undertaking in this industry. The following are the products which are manufactured by BEML: bulldozers, dump trucks, hydraulic excavators, wheel loaders, wheel dozers, tyre handlers, pipe layers, rope shovels, walking draglines, motor graders, scrapers, water sprinklers, aircraft towing tractors, backhoe loaders, and road headers & side discharge loaders for underground mining applications. Some of their customers are Delhi Metro Rail Corporation, Coal India, Jessop Co. Ltd. (Railways). They have facilities established in Bangalore, Kolar Gold Fields, and Mysore Karnataka. They have 70 per cent market share in domestic earthmover industry and 12 per cent in the overall construction equipment industry. They have 33 marketing offices and have a strong foothold in the Government sector. Telco Construction Equipment Company Limited (Telcon) The company is a market leader in excavators and collaborates with Hitachi Construction Machinery Company, Japan, for hydraulic excavator and cranes; John Deere, USA, for backhoe loader technology; CESAN, Turkey, for asphalt plants. It is a subsidiary of Tata Motors and has a turnover of US$ 283 million. Their major products are excavators, loaders, mechanical shovels, high tonnage crawler cranes etc. They have 50 per cent market share in the excavator segment and an overall market share in the construction equipment segment of 11 per cent. Tata group of companies, Government enterprises, and contractors are their major customers. They have facilities installed at Jamshedpur in Jharkhand and Dharwad in Karnataka. Their marketing network is situated in 30 Indian states and 3 international locations. Escorts Construction Equipment Limited (ECEL) It is a pioneer manufacturer of Pick and Carry cranes. The company is a subsidiary of Escorts Limited. It has a turnover of US$ 61 million. They hold 56 per cent market share in the domestic pick and carry market. They have facilities installed in Faridabad, Haryana. Their products include pick and carry cranes, slew cranes, articulated boom cranes, tower cranes, forklift trucks, front end loaders, vibratory soil compactor tandem vibratory roller etc. Large, medium and small sized private enterprises as well as Government enterprises are their customers. They have 16 ECEL business centres and 54 dealer locations. The company has plans of setting up new facilities. Action Construction Equipment Limited (ACE) The public limited company has a turnover of US$ 36.3 million. Their product range is hydraulic mobile pick-n move cranes, forklift truck, loaders, tower cranes, aerial

work platforms, lifts, lorry loaders/truck mounted cranes etc. They have 41 per cent share in Pick and Carry cranes segment. Their customers are usually large, medium and small sized private companies as well as Government enterprises. They have facilities installed in Faridabad in Haryana. There are 8 ACE offices and 33 dealer locations. The turnover of the company has grown at a CAGR of approximately 96 per cent in the last four years. The company has plans of diversifying their product portfolio to include truck mounted cranes, Forklifts, backhoes.