Construction sector of India is an integral part of the economy

Introduction

Construction sector of India is an integral part of the economy and is progressing on account of urbanization, industrialization, economic development and people’s soaring expectations for improved quality of living. Between 2004-05 and 2008-09 average real growth has been an impressive 12.28% year-on-year (y-o-y), which reflects the country’s immense need for continued investment in transport infrastructure, electricity generating capacity and housing, as well as the build-up of industrial capacity (BMI, 2010).

Segmentation of Construction Industry

The Indian Construction Industry can be divided into residential segment generating 85.8% of the total revenues and the non-residential building segment that generates 14.2% of the industry’s value (Data Monitor, May 2009).

(APPENDIX 1)

Real Estate

• Corporate

• Industrial

• Residential

• Commercial

(APPENDIX 2)

Infrastructure

• Roads

• Urban infrastructure

• Railways

• Airport

Porter’s Five Forces

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Customers

Competitive Rivalry within the Industry

Threat of Substitutes

Bargaining Power of Suppliers

Indian construction industry consists of two categories of suppliers, those providing construction materials and those who provide constructional services like electrical installation In India there are many small players in the construction material manufacturing industry, which weakens the supplier power (Data Monitor, May 2009).

The subcontractors who provide constructional services are in a weak position due to the existence of many small operators. Overall, supplier power in this industry is moderate.

Bargaining Power of Buyers

Buyers in this industry are few and large such as government agencies or other major organizations, rather than individuals. The presence of low costs along with the strong price sensitivity of demand strengthens buyer power in the industry.

Also the buyers are rarely capable of integrating backwards and take over the practicalities of the project themselves thereby proving that the buyer power in this industry is moderate (IICCI, 2008).

Threat to New Entrants

The government’s recent liberalization of the rules governing foreign companies entering the Indian industry has boosted the entry of new players. Since a very small amount of capital is adequate to enter this industry and the contractors can reduce their costs by renting rather than buying equipment, the labor market is extremely elastic. Overall, the threat of new entrants to the industry is strong.

Threat of Substitutes

The threat of substitutes in this industry is very weak as it is unlikely that any alternative expenditure would be satisfactory for a buyer even if he has the requisite funds for a new construction project. Even if buyers have the option of renovating an existing structure rather than investing in a new construction, players in the construction and engineering industry remain likely to be involved.

Competitive Rivalry within the Industry

The atmosphere of a secure growth within the Indian construction industry eases rivalry by creating space for expansion. The low capital cost of market entry translates into low sunk costs reducing the exit barriers. Thus the rivalry is considered to be moderate (Data Monitor, May 2009).

Key Players in Construction Industry

Larsen & Toubro Limited (L&T) is one of the largest and most respected technology, engineering, construction and manufacturing companies of India.

Jaiprakash Associates – Jaiprakash Associates Limited principally provides civil engineering and construction services primarily in India. They earned a revenue of about 65000 US $ in the year 2010. (Business Wire, November 2006)

Hindustan Construction Company – HCC is one of the leading construction companies of India having built several landmark projects in India’s Hydro Power and water resources sector (Sandeep Sawant, Sept. 2007).

Gammon India – It is the only Indian Construction Company to have been accredited with ISO 9001 certification for all fields of Civil Engineering Works. Gammon employs expertise who has proved their innovative skills in India and abroad

PESTLE Analysis of Construction Industry

Source: http://www.whatmakesagoodleader.com/macro-environment-analysis.html

Political Factors

SEZ Act

“Special Economic Zone” is the new target for real estate investors. As of date there are 105 approved SEZs in India (General Knowledge Today, Feb 2010). Laws governing these zones are more liberal in nature than the centralized laws and enhance a country’s technology growth, infrastructure and economic development.

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FDI Liberalisation

The government of India has permitted a Foreign Direct Investment of 100 % for development of townships in India. India is now 2nd most preferred country for FDI after China. Opening of FDI in construction and allowing developers to raise capital in international markets has led to development of larger projects (Mohit Saraf, July 2009).

Impact of REITs

The introduction of Real Estate Mutual fund (REMF) and Real Estate Investment Trust (REIT) has boosted real estate investments from the small investor’s aspect.

Economic Factors

Gross Domestic Product (GDP) Growth

India is witnessing tremendous growth and expansion of construction activities and construction is the largest component of GDP. It has been growing at a rate over 10 % in the past few years when GDP was around 8% (Farook Azam, 2010).

(APPENDIX 3)

Source: IHS Global Insight

Change in Demand

Changes in the demand due to factors like changes in disposable income of perspective buyers and inflation may affect the construction industry. With the easy availability of housing loans and tax redemption on loans the demand for houses is increasing and thus construction is gaining weight.

Fluctuations in Prices of Inputs

Many builders tend to stop work when the prices of inputs like cement, iron etc go up and wait till the prices come down. This leads to unnecessary delay in the work and the cost of wasting time would actually be more than the increase in price (Arghadeep Laskar and C. V. R. Murty, 2003).

Social Factors

Goodwill of the Company

Brand name of a builder or the company plays an important role in convincing the buyer to buy the house and be sure of the quality of construction work done. A low credibility or image can lead to poor financial performance.

Green Buildings

A green building is one which uses less water, optimises energy efficiency, conserves natural resources, generates less waste and provides healthier spaces for occupants, as compared to conventional building” (India Today, Vol. 34, Issues 1-8). The estimated market potential for green building was about $ 400 million in 2010 and is increasing continuously.

Technological Factors

Upgrading of Technology

Use of low grade technology in the construction sector leads to low value addition and low productivity apart from sub standard quality of construction and time over runs in projects. Due to lack of technology, construction can suffer in terms of quality and design.

Source: managingthedragon.com

Ready Mix Concrete

The business of ready mix concrete in India is in its infancy. Indian ready mix concrete business uses only 2% of the total cement production. The increasing use of ready mix saves time and allows better quality too.

Legal Factors

The National Housing Policy

NHP (1998) was formulated to address the issue of sustainable development of infrastructure. The Government helps to provide fiscal concession to carry out legal and regulatory reforms and create and enabling environment for the construction industry (P.R. Swarup, Director General, Construction Industry Development Council, India).

Environmental Factors

Uncertain Calamities

Uncertain environmental hazards like earthquakes, floods etc. have a disastrous impact on the construction industry and can delay construction as well.

This has been witnessed during the construction of the Metro line in the capital of India, New Delhi where one of the railway lines being constructed collapsed due to heavy rainfall and delayed the total completion time of metro.

Structural Drivers of Change

Globalization

After the policy of globalization being introduced in 1990s, the private companies started being more aware about construction products and there was inflow of construction based knowledge and technology from other countries to ours changing thinking towards the whole construction scenario.

Import and export procedures, customs and excise laws and ease in operations of foreign accounts minimized controls on industry and rapid growth took place. Due to simplified single window clearance import export procedures became easier thereby allowing Indian construction Industry to compete in overseas market (Accommodation Times, 2009).

Technological Developments

A key driver of transformation for the Indian construction industry is technological change. Global telephony, satellite communications and video links are now widely available (Shakantu, 2000). Information and communication technology (ICT) is significantly influencing technological change (CIRIA, DTER, 1999).

Simulations of entire construction processes and systems can be developed to determine the optimal approach to achieving desired performance (Shakantu, 2000; Fisher, 1993; Coyle, 1996).

Changes in Government Policy

The government policies helped in boosting the real estate sector by substantial cutting interest rates and facilitating greater ease in credit. Recent excise duty cuts on cement and steel also reduced the construction costs. These recent government initiatives increased liquidity in the market and brought down the interest rates to a more realistic level.

Life Cycle of Construction Industry

The Indian construction industry is in its growth stage growing at over 20% over the past 5 years. It has witnessed a revolution, driven by the booming economy, favorable demographics and liberalized foreign direct investment (FDI) regime (World Market Intelligence, March 2010).

We can say that the sector has been performing quite well over the past decade. Despite the depressing global scenario, the Indian market was protected from the effects, as the economy as was more robust than its counterparts. The pace of private construction slowed down but remained positive.

With the growing capital inflow within India and from abroad the demand for infrastructure is likely to increase. The Indian government has been a major investor in this sector in order to stimulate the development of construction industry to the requisite level required to achieve the next growth target. (K.V.S.S., Narayana Rao, 2009).

Although steady progress through the construction industry is not inevitable, the life cycle concept does none the less remind construction companies that conditions will change over time. ( Johnson, Scholes & Whittington, 2008)

(APPENDIX 4)

In 2013, the Indian construction and engineering industry is forecast to have a value of $55.3 billion, an increase of 44% since 2008.

Future Scenarios for Construction Industry

Scenario 1 – New Equipment, Technology and Materials

Involvement of Indian consultants in international projects has led to blend of new materials, equipment and technologies in the construction practices of India. Very soon the growing demand for such advanced equipment will force the builders to manufacture these as well.

The government has also taken some remarkable initiatives to ensure that its basic infrastructural structure is more efficient and world-class. Therefore billions were spent on constructing bridges, roads, railway transportation, power infrastructure etc. Construction equipments especially earth moving equipment sector has benefited the most from these developments and is poised to grow at double digit CAGR by FY 2014 (Free Press Release, 2010). It is expected that during 2007-2015, the potential investment for new equipments and materials will be around US$ 750 Billion.

Scenario 2 – Employment Opportunities

India with its high potential untapped market attributes has become a favourite destination for global construction equipments companies. There will be demand for over 24.3 million new dwellings for self-living in urban India alone by 2015 (Housing Skyline of India 2007-08)

Considering government’s projects lined up for the Eleventh Plan period, the demand for construction is expected to grow by at least 8-9%, and 2.5 million employment opportunities per annum are expected to be generated ( BMI, 2011).Thus those who are looking for opportunities in this sector would be rewarded with accelerated learning and fast progress.

Construction Industry has created a need for the full spectrum of employees varying from professionals like civil and mechanical engineers and architects to daily basis wage construction workers and industrial workers such as steel and cement manufacturers to highway toll booth operators. Thus it is advisable to join a leading Indian Construction Company, or a multi-national present in India even from a beginner’s level as there is large scope for training and rapid upward movement through the ranks for talented individuals.

Scenario 3 – Changing Indian Economy

The changing economy is placing increasing pressure on India’s physical infrastructure, not only from population growth and developing economic activities, but also structural changes in the economy. India’s economy now clearly reflects a steady decline of primary sectors, such as agriculture, forestry, and fishing, giving more importance to the non primary sectors such as service and manufacturing industry. But it is predicted that growth in construction spending in the longer term is likely to be enormous, driven by a rising population and a growing middle class.

Since 100% foreign direct investment (FDI) is now allowed in construction, it now allows significant inflows of capital to meet growing demand from the increasing middle class.

India’s population growth rates remain well above replacement level and the number of people living in urban areas is likely to grow significantly (BMI, 2011).

( APPENDIX 5)

Conclusion

Though all these scenarios are linked together and their inter relationships can produce long and complex results, growing population is the key driver of success of the construction industry. (Johnson , Scholes & Whittington, 2008)

According to me the second scenario is the most influencing scenario as it is directly linked to India’s growing population which is an unstable factor growing at a fast rate and directly linked with the success of the construction industry.

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APPENDIX

Appendix 1

Source: IHS Global Insight

Appendix 2

Source: IHS Global Insight

Appendix 3

Source: IHS Global Insight

Appendix 4

Indian Construction Industry Value Forecast

Source: Data Monitor