McKinsey: Indian Earthmoving, Construction Equipment Industry to Grow Fivefold by 2015
December 4, 2007 // Published as a news service by IHS
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India's earthmoving and construction equipment industry (ECE) is at a watershed in its evolution and will experience strong growth spurred by the nation's economic development, according to a study by McKinsey & Co.
The study, ECE Vision 2015: Scaling new heights in the Indian Earth Moving and Construction Equipment Industry, was conducted for the Confederation of Indian Industry (CII) and the Indian Earthmoving, Construction Industry Association Ltd. (IECIAL).
The Indian ECE industry has the potential to grow fivefold from its current size of U.S. $2.3 billion to approximately U.S. $12 - 13 billion by 2015, growing at 24% compound annual growth rate (CAGR), according to the study.
"The McKinsey report states that the industry's revenue and volume have recorded 40% growth year-on-year between 2004 and 2006 reaching U.S. $2.3 billion today and uncovers a $40 billion opportunity for the industry between now and 2015," said Vipin Sondhi, managing director and CEO, JCB India Ltd.
The study discusses five trends that could shape the evolution of the industry and highlights the imperatives to realize this opportunity.
Four of the five trends are growth opportunities including:
- Investments of $750 billion in infrastructure development.
- Increasing dominance of price- and value-focused customers.
- Deeper engagement of global equipment manufacturers in India.
- Increasing opportunities for exports. However, the trend of increasing competition from product imports from other countries such as China could potentially challenge industry growth and needs to be addressed proactively, according to the study.
Conservative estimates suggest that "as usual" growth will create a market of $8 billion by 2015, according to the study. But a push by the industry and government could result in an additional $4 billion opportunity equally split between exports and the provisioning of India specific products.
"For the industry to achieve its full potential, players need to embark on three strategic initiatives: (i) introduce India specific products that include low-priced multipurpose equipment to attract new customers and to increase mechanization in important areas adding features to products that make suitable for use in India and launching new applications and products for missing applications; (ii) improve cost positions to better deal with the onslaught of competition from low-cost carriers (LCCs); and (iii) pioneer efforts to boost exports in areas like engineering and design services that leverage the India's technical prowess," said Adil Zainulbhai, managing director, India McKinsey & Co.
"In addition, companies need to pursue four growth-enabling initiatives to expand the market," said Rajat Dhawan, partner and coleader of McKinsey's automotive and assembly practice in India.
"These include enhancing the quality, delivery and price of after sales-services to increase share of service revenues from 2% of total revenues to the global average of about 8%; addressing key gaps in financing to catalyze latent demand particularly in rural areas and small towns; expanding dealer and channel network coverage to address buyer fragmentation and quality and proactively strengthening supplier capacities and capabilities."
The study concludes by outlining imperatives for the government including:
- Increasing the availability of trained manpower because at the current pace the industry is likely to face a shortfall of 0.3 million trained operators by 2015.
- Removing tax anomalies to encourage exports and lower tax burdens that impede demand.
- Instituting policy measures that strengthen the industry capabilities. Key policy measures include providing tax benefits to players to encourage investments in research and development; establishing an industry focused R&D center; incentivizing exports by exempting them from excise and local levies; and containing imports of used equipment as is done in other emerging market economies.
The study also said that CII and IECIAL should work with the industry and government to create an enabling environment that results in the desired regulatory changes and export the "Made in India" brand to international shores.
The ECE industry has a critical role in making India one of the world's top five economies by 2025, according to the study. Construction equipment players have an opportunity to help realize the potential of this sector and, in doing so, garner their share of the U.S. $12 -13 billion revenue potential.
Source: Confederation of Indian Industry (CII).