Potential Survival After Entering the

Construction Industry

Presentation in the subject of Managerial EconomicsBy – Divpriya Chawla

Objective

By means of this presentation, the researcher aims to analyze the potential survival after entering the construction industry in India with the help of the Porter’s Five Forces Analysis. The researcher will also look into the status of the construction industry in India, its recent risks, challenges and developments.

Porter’s Five Forces Analysis

►The Five Forces were Porter’s conclusions on the reasons for differing levels of competition, and hence profitability, in differing industries.

►They are empirically derived, i.e. by observation of real companies in real markets, rather than the result of economic analysis.

► Porter’s Five Forces is a useful generic structure for thinking about the nature of industries.

Construction Industry in India

►The construction industry is the second largest industry of the country after agriculture accounting for 11 percent of India’s GDP.

►Indian construction industry employs 35 million people and its total market size is estimated at US$ 126 billion.

►Construction activities in India are largely fragmented with only about 250 firms employing more than 500 people.

Construction Industry Characteristics

►The Financial Year 2012-13 had a growth of 6.0% for the Indian construction sector.

►The industry is characterised by a mix of organised and unorganised players in all sub-sectors encompassing everyone from construction workers to supervisors, contractors and material manufactures/suppliers etc and has grown slower than the overall Gross Domestic Product (GDP) during the year.

►The industry is currently on the cyclical uptrend. Deciphering past data, indicate periods of 3 to 4 years of cyclical peaks and troughs.

►The year 1990-1991, recorded a growth rate of 11.8% and has been low for the past decade owing to the slow market for construction.

►The next peak of the cycle is likely to be experienced in the year 2014-2015 by reaching 11%.

Segmentation of the Industry

►Residential, industrial, commercial, and other buildings.

►Sewers, roads, highways, bridges, tunnels, and other projects.

►Specialized activities such as carpentry, painting, plumbing, and electrical work.

ANALYSIS WITH PORTER’S FIVE FORCES

Threat of New Entrants

►New entrants to an industry add capacity and if the capacity added is greater than growth in demand, this reduces profitability.

►Threat of new entrants is very high across segments like road construction, housing and urban infrastructure development.

►Threat of new entrants is relatively low in airport and port development.

Bargaining Power of Buyers

►The prices a business can obtain has the single biggest impact on the profitability of your business. In most cases buyers shop around for best prices and thus exert downward pressure on prices.

►Bargaining powers of the buyers is low in the Construction Industry, owing to the huge demand-supply gap in the present economic scenario.

Threat of Substitutes►The threat from substitute products is particularly

severe if the substitute product is cheaper or more cost effective.

► Whole industries have been wiped out by substitutes, for example in Europe the replacement of silk by viscose rayon.

►As such, there is a very little threat of substitutes in the Construction industry as the inputs cannot be substituted easily.

Bargaining Power of Suppliers

►The balance of power between suppliers and the supplied industry is a function of the relative fragmentation.

►In industries where inputs are commoditised and where there is ample availability of substitutes, the ability of suppliers to raise prices is limited and vice-versa.

►The bargaining power of the suppliers is high keeping in view the shortages of labour and the constantly rising prices of the inputs.

►Construction costs have shown a clear 15% increase with input costs of materials and workforce. There is a critical shortage of over 30% of skilled workforce and supervisors.

The constantly rising input prices and the acute labor shortages in the construction industry lead to a very high power in the hands of thesuppliers to affect the price.

The same surveys point to the needto hinge on project management, mechanization and pre advanced technology to handle the situation.

Rivalry among Existing Firms

►The intensity of competition, or rivalry, will have a significant impact on the ability to generate adequate margins.

► High competition in cases of road construction, housing and urban infrastructure development.

►Relatively less competition in airport and port development.

Risks to the Construction Sector

►Construction majors are currently experiencing liquidity constraints due to tightening funding norms being employed by institutional financers.

►The industry is also facing squeezing margins due to increasing commodity prices.

The Way Forward

►Due to monetary issues and other elated policies the Indian construction industry showed a lacklustre performance in 2012-13.

►The government is also making pertinent efforts to remove bottlenecks that are delaying infrastructure projects in India. India's construction sector is to reach 7.6% growth in Financial Year 2013/14.

Efforts by the Government

►In 2012 the Asian Development Bank (ADB) and India Infrastructure Finance Company Limited (IIFCL) have launched the first version of the credit enhancement scheme or infrastructure bond guarantee scheme.

►This risk-sharing facility will partially guarantee INR7.2bn (US$128mn) of rupee-dominated bonds issued by Indian companies to finance infrastructure projects.

►The government announced the proposal to set up a National Investment Board to ensure speedy clearing of projects.

► The Indian Government has decided to allow 100% Foreign Direct Investment (FDI) in the real estate industry, thereby stimulating construction activities throughout the country.

►The Indian real estate industry is likely to grow from €7 billion or Rs. 490.03 billion in 2005 to €58 billion or Rs. 4,060.24 billion in by 2015.

►Foreign direct investment alone might see a close to six-fold jump to €19 billion or Rs. 1,329.96 billion over the next 10 years.

Conclusion

Therefore, after experiencing a decade of slow growth, the construction industry is expected to experience a major upsurge leading to huge profitability and reaching the peak of its cycle again owing to the various revival measures taken by the government.