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Construction Equipment: Driving growth in a challenging market

Perspective DocumentDecember 15, 2014

bC India, 2014

Anil KumarManaging Director, RedSeer Consulting

India is the 5th largest and fastest growing construction equipment market in the world

473 785 625 679 718

Global Construction Equipment Market1

By country, in ‘000 units

RegionShare of global

CAGR (2013-17)

0%6%

17%8%

Japan

India

| 1Source: Industry reports; RedSeer Analysis

3%12%

5%17%

2%29%

1. Includes only China, North America, Europe, India and Japan which accounts for more than 80% of the global construction equipment market

Europe

North America

China

India will see the highest surge in infrastructure investment on absolute and % terms in next 10-15 years

Investment on InfrastructureBy countries

| 2Source: Industry reports, Company annual report, RedSeer analysis

Indian demand is largely driven by backhoe loaders and excavators

Market Segmentation# of units sold in FY12, in ‘000 units

Earth Moving /

Concrete~10.0 units /

Road Construction~7.8 units /

Material Handling~8.9 units / 350

XMarket size in million US$

XIn ‘000 units

~10.0 units 350~10 1,400~51 250~9 150~8

| 3Source: Industry reports; RedSeer analysis

Backhoe Loader

Excavator

Wheel loader

Skid steer loader

Compaction

Asphalt Pavers

Wheel loader

Skid steer loaderConcrete recycler plant

Transit mixer

Concrete Pump

Batching plant

Foundation equipment

Mobile crane

Tow truck

Tower crane

The stalled projects in mining and infrastructure have put brakes on the industry growth

Major challengesIllustrative list

DescriptionChallenges

� 200 major infrastructure projects are delayed

due to land acquisition issues

� Revised land acquisition bill on hold in

parliament and is expected to be approved in

first half of 2015

� US$ 46 Billion worth projects are stuck due to

Land Acquisition

A

Financial Performance (EBITDA%)

| 4

� US$ 46 Billion worth projects are stuck due to

lack of environmental clearance

� The Cabinet Committee on Investment (CCI)is instituted in 2013 to revive the stalled

projects

� Supreme Court of India banned mining

operations in states such as Karnataka, Goa,

Meghalaya and Odisha since 2010

� Mining ban was lifted in Goa in April 2014 but

restriction on total output was imposed

Environmental Clearances

B

Illegal Mining & Scams

C

Source: Industry reports, Company annual report, RedSeer analysis

Dealer view OEM view

Now the sentiment in industry is on upswing…

Market Views On TurnaroundIn # of months, N=90 (OEM-25, Dealer -65)

Q. In how much time do you think the construction equipment market in India is going to turnaround?

< 12 months

Dealer View

< 6 months

OEM View

% o

f re

spondents

| 5

Dealer speaksOEM Speaks

Source: Expert interview from OEMs, Dealers, RedSeer analysis

Dealer View

Current 6 12 18 24

Expected Months

% o

f re

spondents

Turnaround time

“We see positive sentiments in market with the approval on projects in Telangana and launch of hydro projects in North East”

- Director, Global OEM

“Market is at an all time low. There are noprojects. High interest rates is another area of concern. We don’t see any upswingin 6-9 months”

- Dealer

“Construction Equipment industry has gone throughthe bad times but now is the time to expect growth due to expected revival in mining and road construction projects”

-National Sales Manager, Global OEM

“There is a liquidity crunch in the market now. Most of the road projects are on halt asthere is no cash flow, a turnaround mighthappen in next 10 months”

-Dealer

… and the industry is expected to reach the peak sales in 24 months

Market Views On Reaching Peak In # of months, N=90 (OEM-25, Dealer -65)

24 months

Dealer View

18-24 months

OEM View

Q. In how much time do you think market is going to reach back to its peak position?

Dealer view OEM view

% o

f re

spondents

| 6Source: Expert interview from OEMs, Dealers, RedSeer analysis

Peak

Dealer speaksOEM Speaks

Current 6 12 18 24

Expected Months

% o

f re

spondents

“Announcement of Eastern and Western railwaycorridor for dedicated freight would increase demand of equipment”

- Business Head, Sales

“Small retail buyers doesn’t have money to buynew equipment because existing equipment are already underutilized. For the purchase of a newequipment they must have finance support and Projects”

-Dealer

Market growthConceptual

Phase llPhase lll

Turnaround Time

Peak

Eq

uip

me

nt

Sa

les

1

Our view is that industry would start picking up in next 6 month and is expected to see the growth in three phases

Present day

Phase l

| 7

12 6

Timeline in Months

Source: Industry report, RedSeer analysis

Accelerationll

Consolidation

� Release of new projects

� Increase walkins

� Release of new projects

� Increase walkins

� Reaching out to new opportunities

� New product launched

� Bulk Buying

� Reaching out to new opportunities

� New product launched

� Bulk Buying

� Consolidation on customer segments

� Consolidation on customer segments

lll

1. The range is not up to the scale

6

Phase l

Preparationl

Mining and road construction is expected to drive the near term growth of the construction equipment industry

Q. What are the key infrastructure sector that will lead the growth of construction equipment in India? Rate the sectors on scale of 1-5, where 5 is exceptional growth

Key Infrastructure SectorsRating on a scale of 1-5, N=90 (OEM-25, Dealer -65)

3.9 Mining

3.4 Road Construction

Exceptional growth

Mining sector

� The single window clearance

system of the Government for

coal mining

� The projected target of coal

mining to be double from 500

| 8Source: Primary research; RedSeer Analysis

Urban Infrastructure2.9

Thermal Power2.8

Railways1.7

Irrigation1.5

Modest growth

mining to be double from 500

million tonnes in 2014 to 1000

million tonnes in 2020

Road construction

� Govt. announcement of new

project and restarting of the

halted project

� NACI (National accreditation

council of India) is assessing

the projects to be rolled out in

Road construction

� Customers are large EPC

customers� Large fleet size with broad

portfolio of products� More focus on total operating

cost as opposed to acquisition

cost

OEMs need to position their strategy along the strong customer segments of Indian market

Customer Segments

A

InstitutionalInstitutional

Key Priorities

Customer SegmentationConceptual, In % Fuel efficiencyFuel efficiency Service qualityService quality PerformancePerformance PricePrice Must HaveGood to have

Description

30%

|

cost

� Customer with one or two

equipment more focused to

upfront price of equipment� New emerging customer in the

segment – operator cum owners

9

B

C

InstitutionalInstitutional

Large contractor/HirerLarge contractor/Hirer

Small contractor/HirerSmall contractor/Hirer

Source: Industry report, OEM and Dealer interview, RedSeer analysis

60%

10%

� Fleet size is ~10 units and

largely consists of smaller

equipment� They typically rent out the

equipment on daily / weekly

basis

Large contractors/Hirers will drive growth in the Indian construction market

Customer Segments

A

InstitutionalInstitutional

Customer DescriptionLarge contractor/Hirer

30%

Large contractor/Hirers:

� This segment of customers is going to drive the

Description

| 10

B

C

InstitutionalInstitutional

Large contractor/HirerLarge contractor/Hirer

Small contractor/HirerSmall contractor/Hirer

Source: Industry report, OEM and Dealer interview, RedSeer analysis

60%

10%

� This segment of customers is going to drive the market

� Due to uncertainty in the market Institutional customers are turning towards more of hired equipment

� Price sensitive customer, seek reliability at low cost

� Likely to subject equipment to severe load cycles with low maintenance and use of inferior quality fuel

Further, there are 4 key trends observed in the market

AAIncreased expectation of service qualityIncreased expectation of service quality

Shift in purchase criteria from Shift in purchase criteria from

� OEM sees that competition being

high, high service quality can be

the mantra to hold the customer

� Customer prefer brand based

on how is the service quality of

that brand is.

� Institutional buyers are always

concerned about ownership cost,

� Value segment customer give

more preference to the upfront

Dealer speaksOEM Speaks

Key TrendsConceptual

Customer trends

Strong trendNot Substantiated

| 11

BB

CC

DD

Shift in purchase criteria from upfront cost to ownership costShift in purchase criteria from upfront cost to ownership cost

Increase in equipment leasingIncrease in equipment leasing

Willingness to pay for technological up gradationWillingness to pay for technological up gradation

concerned about ownership cost,

small retail customer look at

upfront cost

more preference to the upfront

price

� Due to high uncertainty and under

utilization of the equipment,

buyers now prefer leasing

� In India, unless there is any specific

need of some feature, customers

are not willing to pay for additional

features

� Customers in mining sectors are

ready to pay for additional

technology up gradation where

as small retailers doesn’t want

to pay any extra amount

Source: Expert interview from OEMs, Dealers, RedSeer analysis

… and the industry is largely aligned on their initiatives with these market trends

Future Course of ActionConceptual, N=25

Q. How are you preparing for the expected growth in coming years?

New Product Launch

Export to other countries

Restructuring of

Increasing distribution

network New CRM initiative

New product launch

� India customer centric products� Focus on mid value segment variants� 95% OEMs plan to launch new products in

next one year

� High tax and interest rate on equipment� OEM exploring new financing options to

serve the market� Tie-ups with Banks and NBFCs

High

|

Distribution network

� OEM are not much interested in increasing distribution. They want to assess the order book and market base of the geography first

� Need to look at low cost frugal solutions

12

Imp

ort

an

ce

OEM Focus

Restructuring of Financial options

Capacity Expansion

Financing option

� Tie-ups with Banks and NBFCs

New CRM initiative

� Increased competition has made CRM inevitable

� Looking at the customers in a differentiated manner

� Capturing the customer feedback on a strong basis

Source: Expert interview from OEMs, RedSeer analysis

Low

HighLow

� Except for a few retail

customers, other customers are

not in favor of having Chinese

engines in their machinery

� Poor perception of durability of

Points of Discussion

Customer preference for Chinese engines is limited due to assumed low product reliability and poor service quality

Chinese engine preferences of customersN=21 corporate customers, N=27 retail customers interviews

Q. Will you consider buying a construction machinery with a Chinese engine, if the capex and the fuel consumption both are very low?

Points of Discussion

Corporate contractors Retail contractors

|

� Poor perception of durability of

such engines and spares

availability after sales is the

major reason

� Perception has been created

after unsatisfactory past

experience or market feedback

� Except for Liugong in the grader

space, no other Chinese

manufacturer has left a major

mark on the Indian road

equipment market

Source: Industry Interviews ; RedSeer Estimate 13

Q. What are your major concern areas with Chinese engines?

Customer verbatims on their view of Chinese engines

Chinese engine preferences of customersN=21 corporate customers, N=27 retail customers interviews

Q. Will you consider buying a construction machinery with a Chinese engine, if the capex and the fuel consumption both are very low?

Retail customer view

“ We have used some Chinese

products like Sany before and our

after sales experience was not

good, with spares unavailability a

regular issue. We will not go for a

product with a Chinese engine”

“ Although we have not used a

Chinese product ourselves, the

market perception is that such

machines are low in reliability. We

cannot take risks with such an

engine in our machinery”

|Source: Industry Interviews ; RedSeer Estimate 14

Corporate customer view

product with a Chinese engine”- Retail customer, Orissa

engine in our machinery”- Retail customer, Uttarakhand

“ For someone like us who is

involved in multiple road projects of

large value, we cannot afford to buy

machines whose reliability is

suspect as it would jeopardize the

project and our reputation”- Corporate customer, NCR

“ We don’t trust the durability of

Chinese engines. As a leading player

in the infrastructure space, we are not

concerned with price of machines and

out prime area of concern is machine

durability and minimum breakdowns. “- Corporate customer, Mumbai

50-60% of the future market will be driven by the value segment product

Expected Sales of EquipmentBy # of equipment, in ‘000, # of OEM-25

Descriptions

~45~45

~25~25

BackhoeBackhoe

Expected sale in 2016 Value vs Premium

� Suitability for small scale construction

works which is highly prevalent in India

will drive the sales growth

� At present, crawler excavator account

for ~25% of the CE market

40%

| 15Source: OEM interviews, RedSeer analysis

Acceleration Phase

~25~25

~16~16

~6~6

ExcavatorExcavator

Wheel loaderWheel loader

Fork liftFork lift

~12~12

Mobile craneMobile crane

for ~25% of the CE market� Expected infrastructure growth would

lead to increase excavator sales

� Increasing growth in warehousing and

need for fuel efficient vehicle is going to

boost the sale of Fork lift truck

� Power project, expansion of cement

plants and high business potential of

ship building/repairing are expected to

boost the mobile crane market

� New projects in coal mining, power

utilities, quarry owners will drive the

growth of wheel loaders

Flexible in Approach, Firm on Results

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