Cyclical nature of business prompts them to fast-track plans for manufacturing construction equipment.
Commercial vehicle (CV) manufacturers are putting their plans to diversify into construction equipment, such as backhoe loaders and excavators, on the fast track.
“It’s a good hedge against risk,” explains the head of a leading CV maker.
German CV manufacturer Man AG, for instance, will roll out its first construction equipment for the domestic market in the next four months.
“We will be rolling out our 6x4 and 8x4 tippers this year. We are scouting for dealerships in the country. We find the infrastructure thrust initiated by the government very interesting, since it creates demand for construction equipment,” says Hakan Samuelsson, chairman of Man. The company has a 50:50 joint venture with Firodia’s Force Motors and the tippers will be made at Pithampur in Madhya Pradesh.
Chennai-based commercial vehicle manufacturer Ashok Leyland, which entered into a 50:50 venture with US company John Deere in 2008, is also gearing up to roll out its first range of commercial vehicles by the last quarter of this year.
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“The joint venture is very much on track. Our first offering for the domestic market will be backhoe and wheeled loaders and excavators,” says R Seshasayee, managing director of Ashok Leyland.
Apart from reducing exposure to the cyclical truck manufacturing business (sale of heavy and medium CVs dipped by 18 per cent in 2008), the promise of rapid growth in the construction equipment business on the back of an increased infrastructure spending by the government in the coming years is acting as the main draw.
A N Amrolia, executive director (construction & allied equipment business) of Ashok Leyland, says the size of the construction equipment segment in India is estimated at around $2.5 billion (Rs 12,250 crore) and is expected to post a compounded annual growth rate of 18-20 per cent in the next two years.
The growth would primarily come from construction activities in the road sector, residential and office complexes, and large infrastructure projects like ports and dams across the country.
Industry players say construction equipment financing is also expected to grow at a CAGR (compounded annual growth rate) of 20 per cent from around Rs 10,000 crore now. While some of the big players, such as GE capital and ICICI Bank, have moved out of this segment, their places have been taken by non-banking finance institutions such as L&T Finance and Tata Capital, among others.
The Budget for 2009-10 contains budgetary provisions to the tune of Rs 1,00,000 crore for infrastructure development over the next five years. This spending encompasses the government’s infrastructure programmes like JNNURM, Bharat Nirman, highway projects and the development of ports and railways.
Broadly, construction equipment can be divided into three categories. “First, you have the backhoe loaders, which contribute around 60 per cent of the 22,000 units of construction equipment sold every year in the domestic market,” says Vipin Sondhi, managing director & CEO of JCB India Ltd, which is a 100 per cent subsidiary of its UK-based parent.
JCB has a market share of 75 per cent in the domestic backhoe market. Backhoe loaders are machines commonly seen near garbage dumps and landfill sites that scoop debris found on the ground with their large buckets and place these onto open trucks. Due to their functional versatility, industry executives say loaders sell in large numbers in the domestic market.
The other two categories of construction equipment are wheeled loaders and excavators, which contribute about 20 per cent each to the total segment.
The other segment of construction equipment is the off-road segment, comprising large tipper trucks that are used in mining, quarrying and infrastructure projects. Caterpillar, Komatsu, BEML and Mercedes Benz trucks of the 100-tonne capacity are widely used in these sectors.