Atlas Copco is a global industrial group with world-leading positions in compressors, expanders and air treatment systems, construction and mining equipment, power tools and assembly systems. Nitin Lall discusses the future of the construction equipment market in an interview with Sandeep Menezes.
The construction equipment market has not seen growth this year as a result of projects not taking off as planned. What will be the scenario in coming months?
From the construction perspective, we have not seen any activity from the government this year. I wish this was different because my firm belief is that if you are doing your job right there should be no problem in India for the next 30 to 40 years. I feel India handled the crisis of 2008 much better. This has been a kind of manmade problem. It’s a policy paralysis that has happened in this country because we are dogged by internal issues rather than external ones. I don’t think much will happen till the general elections are over.
How much slump has the construction equipment witnessed this year?
We are into four business lines like portable energy, construction tools, road construction equipment and lastly service and after-sales support. Now every business line is showing different dynamics. Portable energy has grown 40 per cent while construction tools have remained flat. Incidentally, road construction equipment is also growing for us which most of the other companies are down. Therefore, by end of the year, we have grown 10 per cent.
The reason for growth in our road equipment business is different. Last year, we were down in road equipment business while this year has been better. Everyone measures their performance vis-à-vis last year; therefore, even we do the same.
In service segment, our business will end up with around 14 per cent growth. Therefore, on an overall perspective construction at Atlas Copco will show a growth of around 20 per cent.
Raw material costs are rising while the market slowdown is not allowing manufacturers to increase prices.
There are extreme pricing pressures. In fact, I must say that to hold on to this growth we have to sacrifice both top line as well as bottom line. But we could have grown more had we accepted the counter offers offered to us at that time.
There is more pressure on products that come in from overseas since we are also witnessing decline of rupee. We import in euro therefore the impact has been to the tune of nearly 25 per cent which the market has not accepted. Hence, it had to be fully or partially absorbed by us. If the currency depreciation was to the tune of 25 per cent, we could pass off maximum around 7 to 8 per cent to customers.
Around 90 per cent of equipment sales are routed through funding from financial institutions. How has the recent hardening of interest rates affected the equipment market?
Since people involved in capital equipment finance have had a bad time, they are not disbursing it even though they have the money. Therefore, the money is not available for the customer who needs it most. But for cash rich customers, the financial institutions are offering finance, so it’s a very peculiar situation.
If you speak to any of our financers, the rate at which they take back Atlas Copco equipment is less than 1 per cent. Therefore, financers can go forward aggressively in case of Atlas Copco equipment because customers have made a calculated purchase which they would not like to give back.
Post-elections, how do you see the construction equipment market growing?
If everything goes like earlier and I also feel that we have the potential, then there can be expected growth of around 20 to 25 per cent every year.
Even today many equipment products manufactured in India have imported components. In spite of manufacturing cost advantage in India, we have not become a manufacturing hub for equipment.
A lot of innovation happens in the product. We might see new equipment launch once in two years. Also, in this industry which is a capital goods industry, you cannot create multiple hubs and then create that technology being replicated everywhere because to manufacture that type of technology, you need that type of equipment also.
For example, the heart of Atlas Copco technology is the screw element of a compressor. To manufacture that type of screw, you need very high precision equipment. Therefore, we place our equipment in one major hub from where we would like to produce. From there it is easier for us to innovate faster and implement R&D changes.
Many OEMs face difficulty exporting India-made products to the EU and USA due to stringent quality criteria.
In our construction tools division most of the smaller tools are manufactured in India. We have closed down our factories globally to produce in India. These tools are produced to Swedish, European and American standards.
What is Atlas Copco’s future business strategy?
We would like to double our sales in India within the next three years. At Excon, we launched two compressors, and also the on-road or on-site generator. Most of the available generators are stationary generators, since we provide generators for infrastructure projects; it has to be generators which are on wheels. Then within the Dynapac road equipment, there are two new models.