Developing an ecosystem for the rental business. Creating equipment safety and environ- mental regulations on par with the global construction equipment industry, along with training skilled manpower for construction equipment, will enable large organized rental players to improve their value proposition against the cost-competitiveness of smaller unorganized players. This will help attract more customers to larger rental players and improve rental penetration. In the developed economies of the United States, Japan, and Europe, large rental players offer the latest equipment with an average fleet age of only two to four years, and they ensure that the equipment complies with regulations. They also provide lower maintenance costs and offer operators from a pool of qualified manpower. Consequently, customers prefer to rent from organized, established players. OEMs could also enter the rental space, as has already started in India, either with dealer-run rental operations that offer new and used equipment or independent franchise-run rental operations.
Tapping into the Potential
The low penetration of equipment rental or other financing options in India, apart from loan-based purchases, indicates a latent demand for construction equipment that has yet to materialize because of a lack of easy financing. Current and potential customers will be encouraged to buy equipment if there is direct access to numerous viable financing options that are based on their needs. However, the current lack of uniform financial regulations, collection inefficiencies, and the absence of several large organized rental players are major challenges for equipment financing. If OEMs, organized financing players, and the government all contribute to an ecosystem that encourages easy purchasing or renting, flexible payments, and convenient disposal of construction equipment after use, the demand for construction equipment will rise at a much higher rate than expected.
Greater availability of financing can support the penetration of ECE in India, and help the market tap into a larger latent demand from fringe players that, because of a lack of access, are not already participating. Improvement of regulatory norms for financing can also help boost NBFCs’ role in overall financing and help reach customers in different parts of India. Growth of organized rental players can boost the rental industry and help boost the underdeveloped secondary sales market. Better rental availability also frees up the need for capital equipment purchases for small players and increases participation in the industry. Organized rental players can offer the latest- technology equipment, with trained operators and mechanics, which can also support project execution. Overall, many benefits can be attained through improved penetration of ECE financing.
Skill Development
Skilled manpower is an essential factor to ensure safe and efficient operations of construction equipment. In India, the demand for skilled workers was approximately 800,000 people in 2011, and an additional 2 to 2.5 million will be required to manage the fleet by 2020 if the industry’s projected growth materializes (see figure 19).
Availability of skilled manpower for construction equipment is already becoming an issue in India, with a potential shortage of around 20 percent anticipated by 2015. In the short run, unskilled labor is expected to bridge the gap. However, this can create issues for safety, operational efficiency, and the life of the equipment. If the industry grows as predicted, the gap could widen to 30 percent by 2020, given the growing fleet size and safety requirements that will require using trained manpower. There will also be a demand for workers with specific skills to operate specialized equipment. Steps must be taken now to address the lack of skilled manpower.
Challenges to Skill Development
To bridge this manpower gap, the construction equipment industry will need to address four challenges:
Limited pull from the user industry. In the construction and mining industries, 75 percent of firms are owned by small employers and contractors that own fewer than 15 pieces of equipment. Most of these small-scale players prefer hiring unskilled labor, opting to minimize labor-related expenses by providing on-the-job training rather than employing qualified operators. In such an environment, qualified workers find it difficult to get compensation that matches their skills, often moving abroad to places such as the Middle East, where they have more options with better pay. This trend will further widen India’s gap for skilled workers.
Lack of coordination among stakeholders. There is a lack of coordination among government agencies, OEMs, and construction companies for creating skill development programs. This has resulted in significant duplication in allocating resources and a lack of standardization for
Note: Manpower includes operators and maintenance personnel. Source: A.T. Kearney analysis
Fleet size
Figure 19
India needs skilled workers for construction equipment
Fleet size and manpower required
(million) Manpower 2020e 1.3–1.5 3.0-3.5 2011 0.3 0.8 +16%
training programs across the industry. For example, the government has 17 departments that provide different formal and informal vocational education training programs. In addition, some construction companies have independently established training schools for their own operators and customer staff.
Lack of access to affordable training. Several issues are deterring easy access to affordable training programs for construction equipment operations. For instance, India’s industrial training institutes offer one of the most standardized and affordable modes of technical and vocational training. However, there are no specialized courses to train operators for construction equipment such as cranes, backhoes, and excavators. Additionally, no private schools or agencies offer practical training similar to automotive driving schools because of the high cost of the equipment and a lack of available qualified trainers. Finally, there are few construction equipment training institutes run by OEMs or construction companies, and the ones that do exist are often unaffordable for low-income groups. For example, a three-month crane-operator course offered by one of the leading construction companies costs Rs 35,000 per person, which is expensive for those with a low income.
Lack of quality guidelines. The industry lacks quality guidelines and mandatory certification requirements for employees. The government does not have mandatory requirements about quality and safety standards for industry personnel. For instance, the only qualification needed to operate mobile cranes and excavators in India is a heavy-vehicle license. As a result,
companies can hire less-skilled personnel, which can lead to productivity and safety issues.
Overcoming the Challenges of Skill Development
The industry would be wise to address the skill gap by tackling these challenges on a medium- to long-term basis. The construction industry is taking some steps already, but several more imperatives could have a positive impact:
Demand driven by the user industry. Developed nations such as the United States have stringent requirements and mandatory qualifications for construction equipment operators to ensure that the industry employs skilled workers. For example, loader, bulldozer, and crane operators are legally required to have special licenses in most U.S. states. As India’s industry matures, using trained manpower can improve both productivity and safety records, which in turn will lead to recruiting more trained manpower for operations and maintenance. An awareness of the benefits of using trained manpower will need to permeate India’s user industry.
Grants and scholarships. Establishing dedicated grants and scholarships can improve the affordability of quality training and boost enrollment for training programs. This has been highly successful worldwide. In Australia, the construction equipment industry established the Construction Training Fund, which uses levies on construction projects (0.2 percent of value) to support students who want vocational training. The Canadian government’s Canada Job Grant matches federal, provincial, and employer contributions to fund vocational training. Establishing such grants and scholarships in India is possible, but the mode of financing them needs to be finalized with long-term sustainability in mind.
Training program guidelines coordinated by an industry body. A sector skill council for the construction equipment industry, promoted by CE industry bodies, is crucial. This body would serve two primary objectives: to identify the skill-development needs of the sector and develop a plan to address those needs. The skill council would also plan to use global benchmarking to identify best practices around the world to help build a robust skill development plan for India.
The skill council would aim to work with private and government agencies to devise an industry- based curriculum, set training standards, offer quality vocational training, and provide industry- endorsed certification for training agencies.
A construction sector skill council would also aim to formulate accreditation guidelines for heavy-equipment operators in line with the U.S. National Center for Construction Education and Research, a joint industry-academia body that provides standard curriculum and accreditation guidelines for vocational training in construction.
Establishing the construction sector skill council would be a good first step for developing a pool of skilled labor, but its effectiveness should be periodically assessed and course correc- tions done to achieve the long-term goals.
Training partnerships between OEMs and other players. OEM-level collaborations and tie-ups with industry bodies could help provide affordable vocational training for aspiring employees. There is already some movement on this front with some Indian OEMs working with industrial training institutes to offer training for in-house operators. Similar partnerships are in place between some OEMs and professional training companies in collaboration with state govern- ments. Another option OEMs are exploring is using the support and network of non-government organizations to offer free or subsidized operator training for India’s underprivileged youth. Although there is some movement from OEMs to improve the training infrastructure, many more such initiatives will be needed to close the skills gap.
Filling the Talent Pool
The construction equipment industry would be wise to take proactive steps to ensure that the lack of skilled manpower does not become a bottleneck to industry growth a few years down the line. A lack of demand from the user industry often causes trained manpower to migrate to other industries or other countries. Also, better coordination is needed among various stakeholders: government departments, OEMs, and the user industry. Forming the construction sector skill council will be the right step forward in skill development for Indian operators, but setting up grants and scholarships can also help make programs more affordable. Uniform guidelines and policies for training and hiring programs are also needed. Taking these steps will give the industry access to a larger pool of operators who have consistent, high-quality skills.
Operating and maintaining construction equipment requires an advanced skill set, especially for specialized equipment. Deploying more skilled manpower (operators and mechanics) would not only ensure safer use of equipment, but also improve the life of the equipment through regular maintenance and proper usage. The total cost of ownership will drop, and the resale value will rise, which will increase secondary sales in India. Overall, many benefits can be attained by improving the availability and deployment of skilled manpower for using construction equipment.
Construction Equipment Components and Aggregates
Components and aggregates enable rapid growth for the ECE industry. In India, the industry is expected to expand by 20 to 25 percent in the next decade, thanks to rising demand from the construction and mining industries and a growing number of traditional applications using ECE. Flourishing markets for domestic construction equipment, after-market sales, and exports will cause a spike in demand for construction equipment components and aggregates.
Trends Causing the Market to Expand
Several trends are behind the rising demand for construction equipment components:
Growth in the domestic construction equipment industry. India’s ECE industry is expected to grow at an annual rate of 20 to 25 percent over the next five to seven years. To take full advantage of this boom, many OEMs are planning to add capacity, and global OEMs are ramping up their presence and investments in the country. Robust growth is expected in components used in backhoe loaders, crawler excavators, and wheel loaders, which are often used in large-scale infrastructure projects.
Increasing demand for after-sales service. Spare-parts sales are expected to grow in tandem with the overall ECE industry and will be boosted by a growing, under-penetrated after-sales market. Currently, after-sales revenue contributes a low percentage of total sales for ECE OEMs in India: just 2 percent compared to the global average of 7 to 8 percent. Going forward, ECE OEMs are expected to further enhance their after-sales service offerings to tap into a market opportunity that could reach $0.5 billion by 2015.
Greater potential for exports. Robust growth is expected in export demand for engineering services and components and aggregates manufactured in India and sold to emerging markets. Three factors are causing this shift:
• The availability of cheap, highly skilled engineering and design services in India
• High cost competitiveness because of the scale of production in manufacturing basic powertrain systems, including transmission components and downsized engines
• The development of product solutions, rather than just designs, to meet the market demand for better connectivity and remote performance monitoring
Challenges to the Industry’s Growth
The Indian ECE components and aggregates industry is on the verge of fast growth, but signif- icant challenges could prevent players from effectively tapping into the market’s opportunities. These will need to be addressed to realize the full potential of the components business.
Fluctuations in OEM demand for components and aggregates. Varying demand from OEMs can have a significant impact on components suppliers, which sell most of their products to OEMs. Because they rely little on after-market sales, their business is intrinsically linked to the orders placed by OEMs. Because of heightened OEM demand between 2005 and 2011, suppliers invested in more capacity. But now, demand remains low as a result of adverse market conditions, and suppliers are suffering from a demand shock. The problem is further compounded by the fragmented supplier landscape. Numerous low-sophistication product manufacturers and vendors supply customized components to some OEMs rather than standardized offerings. As the industry picks up pace to grow by four to five times in the coming decade, OEMs and suppliers that coordinate to ramp up capacity will be better able to fulfill demand.
Planning for spares distribution. The supply chain for spares distribution is often not geared toward providing a very wide reach or catering to the full potential of spare-parts sales. Moreover, a fresh look at the spare-parts pricing model could help, especially if it is more in line with market expectations for specific components. New pricing can help increase the consumption of spares, which are not being consumed in very high numbers.
Gaps in adopting technology. End users of construction equipment in India are demanding more-sophisticated products to meet their needs. However, domestic ECE vendors and suppliers are facing a technology gap between what the market wants and what vendors can offer. For instance, the market has already started demanding products with enhanced connec- tivity and electronic systems. But production of ECE with technologies such as telematics, GPS, electronic control systems, and real-time remote performance monitoring equipment is at a nascent stage. Suppliers will have to quickly adapt to meet the growing demand from end users. From a regulatory standpoint, greater emphasis is being placed on greener vehicles with lower carbon dioxide emissions and better fuel economy. In addition to the latest technologies, suppliers will have to incorporate more technologies compliant with Bharat Stage IV emission standards and other advanced fuel-efficient technologies.
Stiff margin pressure. Vendors in the domestic ECE industry are often under stiff margin pressures for an array of reasons:
• Emphasis on price. Indian consumers are more price conscious than global players. Price versus value is the primary concern for 70 to 80 percent of Indian customers, compared to 40 to 50 percent of customers in the United States and 60 to 70 percent in China.
• Dependence on imports. Currently, 50 to 55 percent of components are imported. This is expected to go down to 25 percent by 2017, but high-tech components will largely continue to be imported.
• Price inflation of raw materials. Prices of materials such as steel and crude oil drain margins because vendors have a limited ability to pass price increases on to customers.
Overcoming the Challenges
Best practices from OEMs across the world and examples from adjacent industries such as automotive can help guide solutions for India’s components and aggregates industry.
OEM support for suppliers’ capacity planning. OEMs could follow the example of the auto- motive industry, where players such as Maruti and Hyundai have worked with parts suppliers to develop and coordinate order schedules, capacities, and demand forecasting. Closer collaboration of OEMs with suppliers can mitigate risks such as volume fluctuations, improve component customization, and help leverage one another’s expertise. Communicating about OEM plans to add capacity will benefit suppliers by allowing them to plan their production schedules in a volatile demand environment and better manage their inventory. Furthermore, establishing supplier parks with shared facilities can substantially minimize incremental capital expenditure requirements. OEM support is especially beneficial to small suppliers, which form the bulk of the market but often struggle to withstand sharp swings in demand.
OEM investment in developing suppliers’ capabilities. OEMs and suppliers can take up joint development exercises, including state-of-the art manufacturing capabilities, training and skills development, and quality monitoring and compliance.
R&D enhancement and technology indigenization. Establishing R&D centers focused on product innovation and indigenization could help improve product availability and quality and make India’s players more competitive compared to foreign suppliers. Technological collabo- ration across the value chain spearheaded by industry, research institutions, and industry bodies can drive market-centric innovation.
The authors wish to thank Shiva Datwani, Sreejith Edamana, and Tamanna Padhi for their valuable contributions to this paper.
Authors
Manish Mathur, partner, New Delhi [email protected]
Mayank Bansal, principal, New Delhi
Shiv Shivaraman, partner, Mumbai
Anshuman Sinha, consultant, Mumbai [email protected]
Increased cost competitiveness. Taking into account the highly price-conscious Indian customer, component suppliers would be wise to lower costs while maintaining their product quality. Developing India-centric product offerings with tailored, frugal designs with an eye on cost optimization could be highly beneficial in the long run. OEMs could also give suppliers more flexibility for value-engineered product designs. More local control over product designs at the OEM end and more supplier involvement at an earlier phase of the design