Thursday, November 1, 2007

construction boom in India and Middle east

Extract from - Knowledge@wharton

"The turnover of all construction companies in India last year was around $15 billion. This year it may rise to $20 billion. But a total of $50 billion is [slated] to be spent on construction every year in India, which requires a capability of 2.5 times the sector's size."

India's planned infrastructure outlay over the next five years has been revised upward by various government authorities, from $150 billion to almost $475 billion. The country currently spends around $21 billion a year on infrastructure, compared to China's $150 billion.

Consider the various construction firms:

1. Punj Lloyd, one of the country's largest engineering, procurement and Construction (EPC) companies, earned 72% more income for the quarter ended June 2007, at Rs1, 4179.5 million ($359.43 million). Yet, its order backlog rose to Rs 152,250 million ($3,859.32 million).
2. Larsen & Toubro, one of Asia's largest vertically integrated engineering and construction companies, announced that gross sales rose 47% in the quarter ended September 2007 to Rs 55.74 billion ($1.41 billion), and yet its order backlog rose to a record Rs 400 billion ($10.14 billion).
3. At Wartsila India, which had an order book of one times sales in 2003, the backlogs have risen to almost three times that amount.
4. Patel Engineering, which expects to close the current year with sales of Rs 16,000 million ($405.58 million) has an order book of Rs 54,000 million ($1.37 billion).

Rupen Patel, managing director of Patel Engineering, says that alone, the planned roll-out of highways by the National Highways Authority of India (NHAI) over the course of the next 10 years exceeds the total turnover of all construction companies in India today.

"Construction companies have never seen such a boom in India. Even if [they all] did only road projects and left all work on building airports and power plants aside, NHAI still has more work to offer than firms can take.”

Almost every Indian company -- big or small -- that has some expertise in
Construction finds itself flooded with orders that are nearly three to four times its annual sales. The size and pace of orders could threaten the development of the country's already creaking and short-supplied infrastructure. "Execution is the biggest issue in India today, especially on time and within budget," says Pratyush Kumar, president and chief executive officer of GE Infrastructure, India.

Foreign firms might view the huge gap between the sector's existing capabilities and those required as an opportunity to make their mark in India. Indeed, the infrastructure spending boom in India has benefited a bevy of overseas companies, such as Dongfang Electric Corporation in China and Doosan Heavy Industries and Construction Company in Korea, who are filling orders for turbines used to generate power. A number of leading global construction companies, such as Australia's Leighton Holdings and Italian-Thai Development Public Company, have also entered India.


1. Skilled-labor Shortage

It's difficult to fathom the words "talent shortage" in a country of a billion people that's getting younger over time. But speak to any infrastructure builder, and you hear anecdotes about shortages of trained fitters, welders, masons and plumbers. "Whether we will get the people necessary to support the growth
is the real challenge. Both engineering and blue-collared skilled workers are in short supply. Fitters and welders are not available in the numbers you want. The industry also needs mechanical engineers who have worked in capital goods industries and would like to pursue a career [in that sector] rather than Switch into software," says Allen Antao, vice president, process equipment, at Godrej & Boyce Manufacturing Company.

2. Equipment shortage

At the lower end of the skills chain, companies are responding to labor shortages by automating parts of the production process, which makes them less susceptible to shortages of vocational staff. As a result of this, and partly in response to customer demand for faster build-outs, construction companies that once relied on an army of cheap labor now employ a variety of equipment, from low-end concrete mixers to goods elevators and tipper trucks for transporting materials, tower cranes, tunnel-boring machines, robotic drills and hydraulic excavators.

Patel, for instance, has spent Rs 600 million to Rs 800 million ($ 20.28 million) so far to build an equipment bank, while IVRCL estimates it has invested between Rs 2,500 million to Rs 2,750 million ($69.71 million) in equipment so far.

The boom in building activity in Asia and the Middle East has not only increased demand for such building equipment but also resulted in a rise in lease rentals and forced many companies to own equipment. This has made the operations of such companies far more capital intensive.

While funds can be raised, companies have also been rethinking their work methods and the building materials they use. Many companies now employ ready-mix concrete rather than prepare a cement and sand mixture on site. This helps speed up production since ready-made cement can be poured faster and in a uniform consistency to lay out foundations and pillars. Companies have also started employing prefabricated materials -- like brick wall sections or Siporex blocks for ceilings -- to help speed things up while using less manual labor. "India may soon move to [another] stage of mechanization, where developers use completely knock-down assembly components to build projects."

No comments: