PORTER’S FIVE FORCES: ANALYSIS OF CEMENT, CONSTRUCTION AND AUTOMOBILE INDUSTRY

-NATIONAL LAW UNIVERSITY, JODHPUR-

MANAGERIAL ECONOMICS PORTER ’S FIVE FORCES: ANALYSIS OF CEMENT, CONSTRUCTION AND AUTOMOBILE INDUSTRY

SUBMITTED TO-

SUBMITTED BY-

DR. RITUPARNA DAS

AYUSHI CHAUDHARY (ROLL NO.1057)

ASSOCIATE PROFESSOR

DIVPRIYA CHAWLA (ROLL NO.1059)

FACULTY OF POLICY S CIENCE

ABHILASH AGRAWAL (ROLL NO.1054)

NATIONAL LAW UNIVERSITY,

3RD SEMESTER

JODHPUR

B.B.A., LL.B(HONS.) NATIONAL LAW UNIVERSITY, JODHPUR

-MANAGERIAL ECONOMICS ASSIGNMENT -

TABLE OF CONTENTS Introduction ................................................................................................................................ 3 Construction Industry............................................................................................................. 3 Cement Industry ..................................................................................................................... 5 Automobile Industry .............................................................................................................. 7 Status Quo .......................................................................................................................... 8 Porter’s Five Forces ................................................................................................................. 10 Porter’s Five Forces Analysis .............................................................................................. 10 Automobile Industry ........................................................................................................ 12 Cement Industry ............................................................................................................... 14 Construction Industry....................................................................................................... 19 Industry Analysis ..................................................................................................................... 23 Cement Industry ................................................................................................................... 23 India ................................................................................................................................. 24 Future forecasts ................................................................................................................ 25 Construction Industry........................................................................................................... 26 Construction industry in India ......................................................................................... 26 Characteristics of the Construction Industry.................................................................... 28 Construction Sector Present & Future Trends ................................................................. 30 Segmentation in the Industry ........................................................................................... 31 Challenges to the Construction Industry .......................................................................... 32 Efforts by the Government to revive the Industry ........................................................... 34 International Overview of the Construction Industry ...................................................... 35 In UAE ............................................................................................................................. 35 Automobile Industry ............................................................................................................ 37 Conclusion ............................................................................................................................... 45

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-Table of Contents-

-MANAGERIAL ECONOMICS ASSIGNMENT INTRODUCTION Through this assignment we are giving a comparative analysis of three vital industries, namely: automobile, cement and construction. We will first in the course of this Introduction give you a description of all these three industries and then proceed on to first describe the Porter’s fiver forces to determine the scope of survival after entering each of these industries by first analyzing it in isolation with respect to these five forces and then giving a brief elaboration making use of both the domestic and the international scenario. CONSTRUCTION INDUSTRY Construction activity creates physical assets in a number of sectors of the economy. Construction sector has two key segments: (i) Buildings, falling into one of the following categories: residential, commercial, institutional and industrial; and(ii) Infrastructure such as road, rail, dams, canals, airports, power systems, telecommunication systems, urban infrastructure including water supply, sewerage, and drainage and rural infrastructure. Assets once created also need to be maintained. Many upstream economic activities depend upon the construction sector. It is roughly estimated that 40–45 per cent of steel; 85 per cent of paint; 65–70 per cent of glass and significant portions of the output from automotive, mining and excavation equipment industries are used in the construction industry.1 The Construction sector has been contributing around 8 per cent to the nation’s GDP (at constant prices) in the last five years (2006–07 to 2010–11). As indicated by Table 19.1, GDP from Construction at factor cost (at constant prices) increased to `3.85 lakh crore (7.9 per cent of the total GDP) in 2010–11 from `284798 crore (8 per cent of the total GDP) in 2006–07. The growth in construction sector in GDP has primarily been on account of increased spending on physical infrastructure in the last few years through programs such as National Highway Development (NHDP) and PMGSY/Bharat Nirman. With around 31000 enterprises involved in the construction industry in 2011, the industry is thesecond largest employer in the country after agriculture. Over 95 per cent of the enterprises numbering around 29600 employ less than 200 persons; over3 per cent or around 1050 enterprises employ between 200 and 500 persons and only a little over 1 per cent or 350 enterprises have more than 500 employees. The employment figures have shown a steady rise from 14.5 million in 1995, 31.5 millionin 2005 to 41 million in 2011. Between 1995 and 1

http://www.cidc.in/new/support/overview/2012-2017/12th%20Plan%20-%20vol_2%20%20Construction%20-%20sector%20.pdf.

-INTRODUCTION-

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-MANAGERIAL ECONOMICS ASSIGNMENT 2005, there was a substantial drop in the proportion of skilled engineers in the workforce from 4.71 per cent to 2.65 per cent. This trend seems to have been arrested if not reversed with the number of engineers in 2011 at 2.56 per cent, that is, 1.05 million. The number of technicians and foremen is 1.12 million which represents 2.74 per cent of the workforce which shows an improvement over the 2005 when their proportion was 1.85 per cent. The number of skilled workers at 3.73 million constitutes 9.1 per cent of the total workforce which is marginally lower than their proportion of 10.57 per cent in 2005. Apart from clerical staff of 0.93 million, that is, 2.26 per cent, the rest of the workforce of 41 million in 2011 is comprised of unskilled workers whose number stood at 34.2 million representing 83.3 per cent which is almost at par with the proportion of 82.45 per cent in 2005. A large part of the industry remains unorganized which negatively impacts on the quality of delivery. Amongst the workforce, there is predominance of migrant labour which increases their vulnerabilities. There is a need to go in for state-centric surveys to capture the flow and pattern of migration rather than depending upon macro level data. There are mainly three segments in the construction industry like real estate construction which includes residential and commercial construction; infrastructure building which includes roads, railways, power etc; and industrial construction that consists of oil and gas refineries, pipelines, textiles etc. According to a study by ASSOCHAM, the burgeoning Indian construction industry, currently worth $70 billion, will rise to US$120 billion by 2010.2 The construction industry in India is highly fragmented. There are number of unorganised players in the industry which work on the subcontracting basis. To execute more critical projects, nowadays bids are increasing placed in consortium. But the profitability of the construction projects varies across different segments. Complex technology savvy projects can fetch higher profit margins for construction companies as compared to low technology projects like road construction. Various projects in Construction industry are working capital intensive. Working capital requirement for any company depends on the order mix of the companies. The construction industry operates on the basis of contractual agreements. Over the years different types of contracts have been developed. It mainly depends on the magnitude and nature of work, special design needs, annual requirements of funds and complexities of job. 2

http://www.indianconstructionindustry.com/overview.html.

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-Construction-

-MANAGERIAL ECONOMICS ASSIGNMENT Construction projects can be materialised through number of smaller contracts which mainly depends upon size of the project and diversified nature of activities to be carried out in the project. As a result, Subcontracting is a common phenomenon in the construction industry.

CEMENT INDUSTRY In 2008, global cement production stood at 2.8 billion tonnes, up 3.4% from the previous year. The growth mainly stems from emerging economies which are striving to meet their rapidly growing demand for housing and infrastructure. The cement industry plays a major role in meeting society's needs for housing and infrastructure. Cement, the glue that holds concrete together, is a key ingredient of economic development. Concrete becomes our offices, factories, homes, schools, hospitals and roads, as well as our underground water and drainage pipes, bricks and blocks, and the mortar that bonds them together. None of these things could be built without cement. There is currently no other material that can replace cement or concrete in terms of effectiveness, price and performance for most purposes. Moreover, from 2010 onwards more people will be living in an urban as opposed to a rural environment. It is vitally important that the infrastructure that is put in place to support this is as sustainable as possible - buildings which can last a hundred years and which are highly energy-efficient. Concrete is at the present time the only building material capable of delivering on this. However, cement production is also energy-intensive: it accounts for around 5% of global anthropogenic emissions of carbon dioxide, and affects a wide range of sustainability issues, including climate change, emissions to air and water, natural resource depletion and worker health and safety. The cement industry has continued its growth trajectory over the past ten years. Domestic cement demand growth has surpassed the economic growth rate for the past three years. Cement demand in the country grows at roughly 1.5 times the GDP growth rate. The industry had a turnover of around US$ 7.8 billion in 2003-04 and according to CRISIL is expected to grow at a CAGR of around 7 per cent in the next five years. The key drivers for cement demand are real estate sector, infrastructure and industry expansion projects. Among these real estate sector is the key driver of cement demand. The demand for cement is closely related to the growth in the construction sector. Consequently, cement demand has been -INTRODUCTION-

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-MANAGERIAL ECONOMICS ASSIGNMENT posting a healthy growth rate of around 8 per cent since 1997-98, propelled by the increased thrust on infrastructure development, and the higher demand from the housing sector and industrial projects. Cement is bulky commodity and cannot be easily transported over long distances making it a regional market place, with the nation being divided into five regions. Each region is characterized by its own demand-supply dynamics. Over the past few years the cost of cement production has grown at a CAGR of 8.4%.With increase in infrastructure development activity with projects such as state and national highways, and global demand has led Indian cement industry to increase their production capacity. This in turn has attracted the top cement companies in the world to enter the Indian market and take the advantage of growth in demand. The cement sector continues to emphasize on cost cutting through enhanced productivity, reduction in energy costs and logistic expenses. The government has considered spending more than US $500 billion on infrastructure in the 11th five year plan. Apart from this railways, urban infrastructure, ports, airports, IT sector, organized retailing, malls and multiplexes will be the main sectors driving the demand of cement in the country. So we can see that cement industry is moving towards both challenges and opportunities poised by the presence of domestic and global players in the Indian market. Cement is a mixture of limestone, clay, silica and gypsum. It is a fine powder which when mixed with water sets to a hard mass as a result of hydration of the constituent compounds. It is the most commonly used construction material. There are different varieties of cement based on different compositions according to specific end uses namely Ordinary Portland Cement, Portland Pozolona Cement,Portland Blast Furnace Slag Cement, White Cement and Specialized Cement. The basic difference lies in the percentage of clinker used. Ordinary Portland Cement (OPC) OPC, popularly known as grey cement, has 95% clinker and 5% of gypsum and other materials. It accounts for 70% of the total consumption. White cement is a variation of OPC and is used for decorative purposes like rendering of walls, flooring etc. It contains a very low proportion of iron oxide. Portland Pozolona Cement (PPC) PPC has 80% clinker, 15% Pozolona and 5% gypsum and accounts for 18% of the total cement consumption. Pozolona has siliceous and aluminous materials that do not possess cementing properties but develop these properties in the presence of water. It is cheaply manufactured because it uses fly ash/burnt clay/coal waste as the main ingredient. It has a lower heat of hydration, which helps in preventing cracks where large volumes are being cast. Portland Blast Furnace Slag Cement (PBFSC) PBFSC consists of 45% clinker, 50% blast furnace slag and 5% gypsum and accounts for 10% of the total cement consumed.

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-Cement-

-MANAGERIAL ECONOMICS ASSIGNMENT .Indian cement production capacity is expected to rise to 349.6Mt in the current fiscalyear (FY13) from 336.1Mt reached in the last fiscal. It had a total capacity of about300 million tonnes (MT) as of financial year ended 2010-11, The figure is expected todouble to reach almost 550 million tonnes by 2020, as per estimates by the CementManufacturers Association (CMA). As of 2011, there were 137 large and 365 minicement plants in India. Consolidation has taken place with the top three players alonecontrolling almost 35% of the capacity. However, the balance capacity still remains quitefragmented. In India, cement demand emanates from four key segments — housing,accounting for 67%; infrastructure for 13%; commercial construction for 11%; andindustrial sector for 9%. The cement industry has evolved in the form of clusters acrossthe country due to the location of limestone reserves in certain states. While China registered the highest per capita cement consumption in 2010 of about1,380 kg, India stood much lower at 230 kg. This underlines the tremendous scope forgrowth in the Indian cement industry in the long term. Cement, being a bulk commodity, is a freight intensive industry and transportingit over long distances can prove to be uneconomical. This has resulted in cement beinglargely a regional play with the industry divided into five main regions viz. north, south,west, east and the central region. With capacity addition taking place at a faster rate ascompared to demand, prices have remained southbound, especially in the last oneyear. Nevertheless, considering the government’s thrust on infrastructure, long termdemand remains intact. Given the high potential for growth, quite a few foreign transnational companieshave displayed their interest in the Indian markets. Already, while companies likeLafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim hasincreased its stake in domestic companies Ambuja Cements and ACC to gain fullcontrol. Considering the long term growth story, fair valuations, fragmented structure ofthe industry and low gearing, another wave of consolidation would not come as asurprise. AUTOMOBILE INDUSTRY Automobile industry is the key driver of any growing economy. It plays a pivotal role in country's rapid economic and industrial development. It caters to the requirement of equipment for basic industries like steel, non-ferrous metals, fertilisers, refineries, petrochemicals, shipping, textiles, plastics, glass, rubber, capital equipments, logistics, paper, cement, sugar, etc. It facilitates the improvement in various infrastructure facilities like power, rail and road transport. Due to its deep forward and backward linkages with almost every segment of the economy, the industry has a strong and positive multiplier effect and -INTRODUCTION-

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-MANAGERIAL ECONOMICS ASSIGNMENT thus propels progress of a nation. The automobile industry comprises of the automobile and the auto component sectors. It includes passenger cars; light, medium and heavy commercial vehicles; multi-utility vehicles such as jeeps, scooters, motor-cycles, three wheelers, tractors, etc; and auto components like engine parts, drive and transmission parts, suspension and braking parts , electricals, body and chassis parts; etc.In India, automobile is one of the largest industries showing impressive growth over the years and has been significantly making increasing contribution to overall industrial development in the country. Presently, India is the world's second largest manufacturer of two wheelers, fifth largest manufacturer of commercial vehicles as well as largest manufacturer of tractors. It is the fourth largest passenger car market in Asia as well as a home to the largest motor cycle manufacturer. The installed capacity of the automobile sector has been 9,540,000 vehicles, comprising 1,590,000 four wheelers (including passenger cars) and 7,950,000 two and three wheelers. The sector has shown great advances in terms of development, spread, absorption of newer technologies and flexibility in the wake of changing business scenario.The Indian automobile industry has made rapid strides since delicensing and opening up of the sector in 1991. It has witnessed the entry of several new manufacturers with the state-of-art technology, thus replacing the monopoly of few manufacturers. At present, there are 15 manufacturers of passenger cars and multi-utility vehicles, 9 manufacturers of commercial vehicles, 16 of two/ three wheelers and 14 of tractor, besides 5 manufacturers of engines. The norms for foreign investment and import of technology have also been liberalised over the years for manufacture of vehicles. At present, 100% foreign direct investment (FDI) is permissible under the automatic route in this sector, including passenger car segment. The import of technology for technology upgradation on royalty payment of 5% without any duration limit and lump sum payment of USD 2 million is also allowed under automatic route in this sector. The Indian automobile industry has already attained a turnover of Rs. 1,65,000 crore (34 billion USD) and has provided direct and indirect employment to 1.31 crore people in the country. Status Quo Today, the automobile industry is faced by increasing price competition while profit margins are shrinking. The used car sector is affected the most, amplified by excess supply in day registrations and the impact of the continuing rebate war in the new car sector. The growth of Indian middle class, with increasing purchasing power, along with strong macro-economic fundamentals have attracted the major auto manufacturers to Indian market. The market

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-Automobile-

-MANAGERIAL ECONOMICS ASSIGNMENT linked exchange rate, well established financial market, stable policy governance work and availability of trained manpower have also shifted new capacities and flow of capital to the auto industry of India. All these have not only enhanced competition in auto companies and resulted in multiple choices for Indian consumers at competitive costs, but have also ensured a remarkable improvement in the industry's productivity, which is one of the highest in Indian manufacturing sector. The Department of Heavy Industry, under the Ministry of Heavy Industries and Public Enterprises, is the main agency in India for promoting the growth and development of the automotive industry. The department assists the industry in achievement of its expansion plans through policy initiatives, suitable interventions for restructuring of tariffs and trade, promotion of technological collaboration and up-gradation as well as research and development. The department is also concerned with the development of the heavy engineering industry, machine tools industry, heavy electrical industry, industrial machinery, etc. The automobile sector recorded growth of 13.56% in 2006-07. During the year 2007-08 (April-December), the industry decelerated at 3.49%. The automobile exports crossed the US$ 1 billion mark in 2003-04 and increased to US$ 2.76 billion in 2006-07. The industry exported 15% of its passenger car production in 2006-07, 10% of commercial vehicles production, 26% three wheelers and 7% two wheelers. Similarly, during the year 2006-07, the auto component industry continued its high growth path and emerged as one of the fastest growing sector in Indian engineering industry by clocking 21% growth in output during the year. This industry crossed a total turnover of over US $ 15 billion (Rs. 64,500 crore), with exports of US $ 2.9 billion (Rs. 12,643 crore) during the year. Investment in the industry also grew by over Rs. 4500 crore during the year as the industry continued to invest in capacity enhancements and new greenfield sites to cope with the increasing demand. The auto component industry’s export growth was 15% in 2006-07. While, the total imports was US $ 3.3 billions (Rs. 14,644 crore). On the quality and productivity front, auto component industry maintained its leadership with more than 95% companies being certified as per the ISO 9000 system standards and more than 70% of the companies are certified as per the ISO/TS 16949 standards. It has also the distinction of having the maximum number of 11 Deming award winning companies.

-INTRODUCTION-

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-MANAGERIAL ECONOMICS ASSIGNMENT PORTER’S FIVE FORCES 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.

A brief description of what Porter’s five forces entail: Threat of New Entrants: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have

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-Porter’s Five Forces-

-MANAGERIAL ECONOMICS ASSIGNMENT strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. Power of Buyers: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.

Porter’s Five Forces Industries Automobile

Cement

1) Threat of new High level of entry High level of entry entrants

barriers.

barriers.

Construction

Strong threat of new entrants

in

commercial

sector

while high level of barriers to entry in

-MEANING & SCOPE-

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-MANAGERIAL ECONOMICS ASSIGNMENT the

infrastructure

sector. 2) Power

Holds

of Hold very little real Moderate.Have power.

suppliers

enough power to stall

very

high

power.

production. 3) Power of buyers

Hold

very

little Low. Hold very little Is low owing to the

buying power.

power.

huge demand-supply gap.

4) Threat

of Availability of both Low. No effective Little

Substitutes

alternate

offerings substitutes

and alternative mode cement exist

threat

for substitutes

in

of the

present.

of transportation. 5) Competitive

Less

Rivalry

price

reliance

competition

on High.

Highly Huge rivalry among

based competitive exists

market the established firms especially

in

segments

requiring

competitive tenders.

We shall now analyse all these, industry wise, in brief below: Automobile Industry 1. The threat of new entrants In the auto manufacturing industry, this is generally a very low threat. Factors to examine for this threat include all barriers to entry such as upfront capital requirements, brand equity, legislation and government policy, ability to distribute the product. It's true that the average person can't come along and start manufacturing automobiles. Automobile industry is very specific industry, thus it has higher level of entry barriers. 2. The amount of bargaining power suppliers have In the car industry this refers to all the suppliers of parts, tires, components, electronics, and even the assembly line workers. Some suppliers are small firms who rely on the carmakers, and may only have one carmaker as a client. So this force can be tricky to evaluate. The automobile supply business is quite fragmented (there are many firms). Many suppliers rely

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-MANAGERIAL ECONOMICS ASSIGNMENT on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. As a result, suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold very little power. Suppliers can exert a competitive force in an industry by raising prices or reducing the quality of the goods they sell. The bargaining power of suppliers is very low in the automobile industry. There are so many parts that are used to produce an automobile, that it takes many suppliers to accomplish this. When there are many suppliers in an industry, they do not have much power due to that industry manufactures can easily switch to another supplier if it is necessary. 3. The bargaining power of buyers/customers In order to attract customers, dealers vie with each other to give the best offer to the potential customers. Festive and social occasions such as Diwali, New Year, etc. are used to enhance sale. Quantity a buyer purchases is usually a good factor in determining this force, even in the automotive industry when buyers only usually purchase one car at a time, they still wield considerable power. Historically, the bargaining power of automakers went unchallenged. The consumer, however, became disenchanted with many of the products being offered by certain automakers and began looking for alternatives, namely foreign cars. On the other hand, while consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars. Generally, however, it's safe to say the customers have some buying power, but it depends on the market. 4. The threat of substitute products If buyers can look to the competition or other comparable products, and switch easily (they have low switching costs) there may be a high threat of this force. With new cars, the switching cost is high because you can't sell a brand new car for the same price you paid for it. But what about the threat of substitute products before the buyer makes the purchase? You need to know whether the market you are analyzing has many good alternatives to new cars. A vibrant used car market perhaps? Used cars threaten the new market. How about a very good mass-transportation system? We are not just talking about the threat of someone buying a different car. You need to also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options. The price of gasoline has a large effect on consumers' decisions to buy

-AUTOMOBILE INDUSTRY & PORTER ’S FIVE FORCES -

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-MANAGERIAL ECONOMICS ASSIGNMENT vehicles. Trucks and sport utility vehicles have higher profit margins, but they also guzzle gas compared to smaller sedans and light trucks. When determining the availability of substitutes you should also consider time, money, personal preference and convenience in the auto travel industry. Then decide if one car maker poses a big threat as a substitute. Product differentiation is important too. In the car industry, typically there are many cars that are similar - just look at any mid-range Toyota and you can easily find a very similar Nissan, Honda, or Mazda. 5. The intensity of the competitive rivalry (which is in part determined by 1-4) We know that in most countries all carmakers are engaged in fierce competition. Tit-for-tat price slashes, ad campaigns, and product developments keep them on the edge of innovation and profitability. Margins are low and pressure between rivals is high. Highly competitive industries generally earn low returns because the cost of competition is high. The auto industry is considered to be an oligopoly, which helps to minimize the effects of price-based competition. The automakers understand that price-based competition does not necessarily lead to increases in the size of the marketplace; historically they have tried to avoid price-based competition, but more recently the competition has intensified - rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales. Cement Industry To begin analyzing different frameworks that we can use to assess solutions for the growing environmental impact of the cement industry and the market regulations needed, a better understanding about the forces that critically affect the industry must be distilled. Porter’s five forces provides a ―competitive forces‖ framework that allows us to better understand the different dimensions that govern market competition. Porter’s five forces are: 1. Industry rivalry 2. Substitutes and complements 3. Power of buyers 4. Power of input suppliers 5. Entry and exit

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-CEMENT INDUSTRY & PORTER ’S FIVE FORCES-

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1. Barriers to Entry(high)  RAW MATERIAL -Cement being a high bulk and low value commodity, outward freight accounts for close to one fifth of the total manufacturing cost. In addition, for every tonne of cement produced, close to 1.7 tonnes of raw material (including coal) is transported.  LOCATION-In this scenario, the location of the cement plant becomes crucial. While deciding on the plant location, there is a trade-off between proximity to raw material sources and proximity to markets. . Access to limestone reserves (key input) also acts as a significant entry barrier. It is necessary to locate the plant close to the mineral deposits, so as to minimise raw material assembly costs. Given that 1.4-1.5 tonnes of limestone are required per tonne of clinker, locating the plant along the limestone deposits is the logical corollary.  COMPETITION- High level of competition in the cement industry. The Indian cement industry is weakly oligopolistic in nature on a national level with top 6 firms among more than 100 firms capturing 55% of the cement market. This nature has been consistent through the years.  COST- High capital costs and long gestation periods. a new cement works producing 1m tonnes a year, the smallest worth building, costs around $200m. It is much cheaper for an incumbent to expand

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2. Buyer Power(low) This refers to the effect customers can exert on a particular industry. In the cement industry, the bargaining power buyers is low because the majority of buyers are bulk buyers. For example, big construction firms, corporate who want to build their own offices, etc. These buyers can bargain with the cement companies. However, their bargaining power is not very high as their purchases form a small part of the total production of the companies. Hence, they cannot exert much influence on the manufacturers. Moreover, one potential bargaining power with the buyers is the threat of importing cement. However, this threat is limited to an extent as the cost of import will increase the overall cost of the project.. Pure buyer power exists when only one buyer exists in the market (monopsony). In this case power is entirely in the hands of the buyer. In the cement industry, facts suggest that this effect is minimal. The power of consumers is limited due to the lack of substitutes, the small number of cement firms (oligopoly), and the inelastic demand that consumers have for the product. Buyers are said to be powerful if they are highly concentrated, purchase a large amount of the product, or if there is product standardization. The last effect exists but its impact is weak because of persistent shortages in the cement market. Given the fact that the buyers in the cement market lack the characteristics that give them power over producing firms, the competitive level of the industry judged through this force is very low. Firms have an easier time setting price while buyers act generally as price takers.


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-MANAGERIAL ECONOMICS ASSIGNMENT 3. Supplier power(moderate) In this industry, the suppliers exert a very high power. This is so because the raw materials form a very large part of the process in the manufacturing of cement. Shortage in supply of raw materials can cripple the whole plant and can lead to huge losses. When the suppliers demand something, the negotiations have to be completed quickly and the result is more or less in favour of suppliers. For example, if the coal suppliers stop supplying coal to the plant, it cannot function and production will come to a standstill. The supply of coal has to resume as quickly as possible. Hence, the suppliers exert a great amount of influence in the decisions of the cement manufacturing companies. But since all the raw materials are natural resources, theyare under the Government’s control. Companies have to buy rights from the government to set-up the cement plant. Hence the suppliers power is moderate. 4. Inter firm rivalry(high) Cement industry is one of the highly competitive markets in India. Many players in this industry are large scale players with huge capital invested in setting up the production units. This factor raises the exit barrier for the companies. Hence, they stay in the industry and start aggressive competition. Also, the differentiation in types of cement is marginal, hence the switching cost to customers is not high, so firms compete intensely to gain market share. Also, sometimes problem of overcapacity comes into play. This leads to a price war and competition intensifies. The market share of the top four companies accounts to 39.80% currently. It is believed that if these four companies do not increase their market share in the coming years, thentheir combined share could drop to 34%. The share of mid-large players (like Shree Cement,Madras Cement, India Cement) will remain about 36%, small players (like My Home IndustriesLtd, Orient, Binani) will hold about 24%, and new players (like Reliance, Murli Agro, JSWCement) will account for 6% of the marketWith focus on capacity addition, many small/medium players have been able to capture moremarket share and consolidate their position in the industry in the last two years. Market share of top five individual companies taken together show a decline to a level of 44.3% in FY09 from46.3% in FY08

5. Threat of substitutes (low) Lack of substitutes ,other products that are not within the same industry but can be used instead,means that the industry does not face a credible threat of competition. This represents 18 | P a g e


-MANAGERIAL ECONOMICS ASSIGNMENT the reality of the cement industry. No product exists to date that can substitute effectively for cement. While construction firms can use less cement in exchange for using other materials that have some cementitious quality, that substitution effect is negligible on the market price of cement (United States Geological Survey, 2008). An industry is only threatened if another industry produces a similar product (e.g. aluminum cans vs. plastic bottles), or if consumers of that product can decrease the ratio of their use of that product and use another product i.e. minimal partial substitution. Both of these choices are virtually non-existent to cement consumers, hence the threat of substitutes is very low. In India, cement is the ultimate material used for almost all type of construction work. Bitumen is one of the substitutes of cement but these days cement is even replacing bitumen. Another substitute for cement is engineering plastic. This also cannot replace cement in many areas of work. Hence, there is practically no material to substitute cement. Construction Industry

The Porter’s analysis for the Construction Industry is as follows: 1. The threat of new entrants It is recognized that the construction industry is, in the main, confined to competition from established companies. This is particularly so in the sectors of Non-residential Building and Infrastructure because the construction industry operates differently to other industrial or economic sectors. Companies require manpower resources, plant and equipment, health and safety procedures and various insurances to be in place together with an established track record to be able to even bid for work in the important sector to develop roads, bridges, ports, airports which form the infrastructure of a nation and cannot be handled lightly. Consequently, these requirements impose significant barriers to entry to the construction market resulting in competition not from international companies or new entrants but being confined largely to existing and established companies. The threat of new entrants therefore, in the important sectors is low as the consideration is towards an established track record However, in the residential segment, where focus is on lower bids and cheapest tenders, threat of new entrants can possibly be very high as the contractors would prefer lower costs as compared to loyalty to an established company.


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-MANAGERIAL ECONOMICS ASSIGNMENT 2. Amount of bargaining power with Suppliers 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 the suppliers to affect the price. The same surveys point to the need to hinge on project management, mechanization and pre advanced technology to handle the situation.

This factor entails Completion risk, i.e. the risk of non-completion of projects on time due to reasons like shortage of skilled labour, Price Risk which basically is the prices of the inputs like cement, steel, aluminium adversely escalating and ultimately resource risk, i.e. the risk of

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-MANAGERIAL ECONOMICS ASSIGNMENT non-availability of these materials owing to their shortage due to their non-renewable character or the years taken to generate. 3. The bargaining power of buyers/customers As is evident by the data provided above, it appears that though construction industry experienced its peak till the 2000s, the sector lately had been dying and was on a declining trend due to stringent regulations, lack of financial resources, non-availability of materials, inputs. With all the available data and projections, labour shortage is also forecasted and particularly in India, the shortage of skilled labour is on the rise. There, therefore exists a huge demand and supply gap and there is an even increasing demand for construction due to rapid urbanisation. However, the capacity is not being added at the same pace due to high barriers to entry and the sluggish market for the construction companies. The bargaining power of the customers is therefore, on a low in the present scenario. However, if the customer is the government, or the one that brings the greatest demand in the infrastructure sector, its ability to assert pressure on the price is high as they buy undifferentiated products also price will largely be based on the quality provided and will not be agreed to blind folded by the government. 4. The threat of substitute products There is little threat of substitution of site-based infrastructure construction activities although the future may see an increase in the prefabrication of buildings or other factorybased building techniques. Also, it is obvious in the sense that infrastructure in terms of airports, ports, railways cannot be substituted by means of any substitute products or services. Neither can a demand for a house be substituted with its substitute good. Also in terms of the inputs being used in the industry, the same cannot be substituted very easily as compromising on the quality of the materials being used will ultimately affect the foundation of the very construction which may become very likely to collapse on account of substandard material that has been used. 5. Existing rivalry among the firms As already explained above, construction sector is very competitive amongst the existing firms. With the system of awarding tenders to the lowest bidder, the competition increases manifold. Also, in segments of non-residence, infrastructure etc., onus is on the established firm to meet the standards as laid won by the government.

-CONSTRUCTION INDUSTRY & PORTER ’S FIVE FORCES -

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-MANAGERIAL ECONOMICS ASSIGNMENT Companies require manpower resources, plant and equipment, health and safety procedures and various insurances to be in place together with an established track record to be able to even bid for work in the important sector to develop roads, bridges, ports, airports which form the infrastructure of a nation and cannot be handled lightly. Consequently, these requirements impose significant barriers to entry to the construction market resulting in competition not from international companies or new entrants but being confined largely to existing and established companies.

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-MANAGERIAL ECONOMICS ASSIGNMENT INDUSTRY ANALYSIS CEMENT INDUSTRY In the race to become the most economic superpower, China has generally outperformed India, and with exception of telecom & IT, India has had trouble slaying the Chinese dragon. But now we can add another sector to the Indian success story, i.e., Cement. In last ten years, this sector has recorded a CAGR of 8%, against the world cement industry average of 3.5% and China’s cement industry growth rate of 7.2%. Today this industry not only outshines that of developed countries such as US and Japan but also has become the second largest cement producer in the world after China. The cement industry has continued its growth trajectory over the past ten years. Domestic cement demand growth has surpassed the economic growth rate for the past three years. Cement demand in the country grows at roughly 1.5 times the GDP growth rate Through the 1950s, 1960s and 1970s small-scale county and commune cement plants multiplied in number. Accounting for just 7.6% of total production of Chinese cement in 1949, there were around 200 by 1965 (26.8% of capacity) and over 4500 (>65%) in 1980.In 1983 the cement sector produced 108Mt/yr, second only to the USSR in the world. In the 1980s the small-scale cement sector began to experience decline due to a greater emphasis on installing large-scale modern, integrated cement plants and the increased capital available from the private sector. China National Building Materials (CNBM) was incorporated in 1980 to help develop the cement industry and advance building materials in general.10 Many other similar firms were formed. It is difficult to get solid data regarding large-scale integrated capacity in China from the 1950s to 1970s but one can infer from the absolute number of small-scale local plants relative to the total capacity, that the integrated sector also expanded rapidly during this period. Figure 2 presents Chinese data that shows how cement production in China has seen a stark rise since the economy was liberalised in 1978. The decline in small-scale cement plants started in those regions closest to the industrial areas that underwent development at this time. While the small-scale sector is likely to still exist in very remote regions, obtaining a true picture of its scale in 2013 is difficult. So far in the late 2000s and early 2010s the Chinese government has made significant efforts to reduce the number of local enterprises, often on the grounds that they are environmentally-CEMENT INDUSTRY ANALYSIS-

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-MANAGERIAL ECONOMICS ASSIGNMENT damaging and/or inefficient. the most rapid increase in China's cement capacity has been since 2000. Chinese statistics report that the Chinese cement industry has risen from production of 595Mt/yr at the end of 2000 to nearly 2.2Bnt/yr in 2012. This is due to China identifying cement as a key 'regulated industry,' the development of which would help overall economic growth. The 11th Five Year Plan (2006 - 2010) called for a rapid overhaul of the cement industry. Through top-down investment strategies the country expanded the cement industry at an average of 11.7%/yr from 2006 to 2010 with a total investment of US$9.4bn. According to Chinese statistics a staggering 696 dry process cement lines were put into operation in five years. This growth rate is remarkable considering the 434Mt/yr of inefficient shaft kiln capacity, representing 55.5% of capacity in 2006, that was closed over the same period. At the end of 2010, China reported 1273 dry cement lines across the country, with a total capacity of 1255.7Mt/yr. The figures did not take into account remaining wet process and vertical shaft capacity, the inclusion of which expands China's cement industry to many thousands of producers. In 2010 the cement output of the top 10 cement producers in China reached 527.8Mt, with a combined 42.2% market share. By 2011 the cement output of the top 10 cement producers had reached 553Mt. India Today, the Indian cement industy is very large, second only to China in terms of installed capacity, and has grown at a very fast pace in recent years. The rate of growth over the past 20 years has been phenomenal, as shown by Figure 1.3 Since 1992 India's cement production has more than quadrupled from around 50Mt/yr to 220Mt/yr in 2011. Although the Indian cement industry has some multinational cement giants, like Holcim and Lafarge, which have interests such as ACC, Ambuja Cement and Lafarge Birla Cement, the Indian cement industry is broadly home-grown. Ultratech Cement, the country's largest firm in terms of cement capacity, holds around 22% of the domestic market, with ACC (50%owned by Holcim) and Ambuja (50%-owned by Holcim) having 15% and 13% shares respectively. Many of the remaining dozen top players are Indian and are (in order of diminishing market share); Jaiprakash Associates (10%), The India Cements Ltd (7%), Shree Cements (6%), 24 | P a g e

-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT Century Textiles and Industries (5%), Madras Cements (5%), Lafarge (5%), Birla Cement (4%) and Binani Cement (4%). Between them the top 12 cement firms have around 70% of the domestic market. Around 100 smaller players produce and grind cement on a wide range of scales but are often confined to small areas. Future forecasts Given the rampant growth of the Indian cement industry, few are betting against continued capacity additions in the short- to medium-term. The extent of capacity addition, however, and whether or not demand will rise to match it more closely than at present, is up for debate. Meanwhile, the Indian Government's 12th Five-Year Plan, which runs for 2013 to 2017, states that India will require a cement capacity in the region of 480Mt/yr by the end of 2017.12 It states that a further 150Mt/yr of capacity will be required to accomplish this. Separately, ACC expects India to have a capacity of 500Mt/yr by 2020. This represents more than twice the cement that India currently consumes in a year.The government promises significant investment in infrastructure, although bureaucracy has hampered such investments in the past. With prices remaining low due to overcapacity and low demand, the potential for future collusion between producers and the difficulty of setting up new capacity, it is possible that producers, under pressure to meet the expectations placed on them by the Five-Year Plan, will see increased pressure on margins in the next few years, especially if fuel prices continue to rise. In the midst of this, smaller companies are likely to suffer more than most, possibly making them acquisition targets for better-equipped multinationals. Indeed, in January 2013 Prism Cement, one of India's smaller cement producers, actually reported a net loss for the quarter to 31 December 2012. An academic report carried out for the Competition Commision of India in 2012 hints at this possibility of future consolidation in the industry¬.The study found that, despite capacity utilisation falling across all cement producers in India from 2006 to 2011, it was those with the smallest market share that experienced by far the worst reduction. Binani Cement, for example, recorded utilisation rates of only around 55-60%. Conversely mega-players like Ultratech have been more stable, with rates of 80-95%. In January 2013 India Ratings reported that smaller businesses were less likely to benefit from the expected improvement in the industry.

-CEMENT INDUSTRY ANALYSIS-

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-MANAGERIAL ECONOMICS ASSIGNMENT A major reason behind this phenomenon is rising fuel costs, which have hit producers from two directions in the past year. Firstly, demand for power in India is high and domestic fuels are dedicated predominantly to electrical generation. Industrial companies are forced, in many cases, to import costly foreign fuel, which must be shipped inland to be used. A second effect of increased fuel prices is that cement is more costly to tranport once it has left the factory. Due to their size allowing greater economies of scale, larger cement companies are better positioned to import fuel on a large scale and are more likely to have flexible vehicle fleets to respond as demand fluctuates in different areas. Another crucial difference between the larger and smaller companies is that larger players are more likely to have a pan-Indian presence. This enables them to ride-out periods of difficulty in one area while maximising margins elsewhere. Local producers do not have this luxury. Smaller local producers are less well equipped to deal with expansion and their relative size will gradually diminish compared to the top 12 producers. As this happens, it is likely that they will become the acquisition targets of the larger firms.

CONSTRUCTION INDUSTRY Construction industry in India The neo-liberalization efforts of the past two and a half decades have piqued the curiosity of international community towards opportunities in the country. During this period, India has grown at twice the global rate, showing that it can sustain the momentum. The Indian Government has identified Infrastructure as one of the key drivers of economic development in the country. Investment in Infrastructure has increased from about 5% of GDP in the 10th Five Year Plan period to 9% in the 11th Five year Plan Period.3 Today, India is the second fastest growing economy in the world. The Indian construction industry is an integral part of the economy and a conduit for a substantial part of its development investment, is poised for growth on account of industrialization, urbanization, economic development and people's rising expectations for improved quality of living.

3

http://www.deloitte.com/assets/DcomIndia/Local%20Assets/Documents/Thoughtware/2014/Infrastructure_and_Construction_Sectors_Building_the_ Nation.pdf.

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT In India, construction is the second largest economic activity after agriculture. Construction accounts for nearly 65 per cent of the total investment in infrastructure and is expected to be the biggest beneficiary of the surge in infrastructure investment over the next five years. Investment in construction accounts for nearly 11 per cent of India’s Gross Domestic Product (GDP). As opportunities in the sector continue to come to the fore, foreign direct investment has been moving upwards. The real estate and construction sectors received FDI of €216.53 million in the first half of the current fiscal year.4 The construction industry is a major contributor to the country’s GDP (8% in the Financial Year 2012) and one of the largest employment generators currently employing around 33 million people. While the Indian economy grew by 5% in Financial Year 2013 as compared to 6.2% in Financial Year 2012, the construction industry grew by 5.9% in Financial Year 2013 against 5.6% in Financial Year 2012. According to a PWC report prepared for the organizers of The Big 5 Construct India, India is expected to emerge as the world’s 3rd largest construction market by 2020.5 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. The Indian construction industry registered a compound annual growth rate (CAGR) of 13.52% in nominal terms during the review period (2009–2013), driven by private and public investments in infrastructure, as well as institutional and commercial construction projects. Industry growth is expected to remain strong over the forecast period (2014–2018), as a result of the government’s commitment to making infrastructural improvements and the implementation of the 12th Five-Year Plan (2012–2017), under which the government expressed plans to invest INR56.3 trillion (US$1.0 trillion) in various long-term development plans. Consequently, industry output is expected to record a forecast-period nominal CAGR of 10.09%. 6 The Construction sector has been contributing around 8 per cent to the nation’s GDP (at constant prices) in the last five years (2006–07 to 2010–11). As indicated by Table 19.1, GDP from Construction at factor cost (at constant prices) increased to `3.85 lakh crore (7.9 per cent of the total GDP) in 2010–11 from `284798 crore (8 per cent of the total GDP) in 2006–07. The growth in construction sector in GDP has primarily been on account of increased 4

http://www.construindia.com. http://www.ecoconstruction-india.com/read/indias-growing-construction-market-receiving-global-attention. 6 Id. 5

-CONSTRUCTION INDUSTRY ANALYSIS -

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-MANAGERIAL ECONOMICS ASSIGNMENT spending on physical infrastructure in the last few years through programs such as National Highway Development (NHDP) and PMGSY/Bharat Nirman.

Characteristics of the Construction Industry

 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 FY2012/13 had a growth of 6.0% for the Indian construction sector.

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT  India's construction sector is to reach 7.6% growth in FY2013/14.7  According to the Ministry of Statistics and Programme Implementation, the construction industry’s value add at constant prices rose by 3.0% in 2013 – up from 1.8% in 2012.  The annual pace of growth has slowed, however, from an average of 8.5% in 2010−2011. The outlook for growth is positive, having been supported by government investment to improve the country’s infrastructure, education and healthcare, as well as spending on affordable homes to meet the country’s rising demand for housing.  Large-scale investments in infrastructure development under the 12th Five-Year Plan will be an important driver of growth.8



From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. Given that the resource constraints of the public sector will continue to limit public investment in infrastructure in infrastructure investments, - especially backward and rural areas - the PPP based development will be needed wherever feasible. At the same time, reviewing the factors that constrain private investments would be necessary to encourage and speed up the process. The share of private investments is expected to increase to half in the Twelfth five-year plan as compared to the intended 30% for the Eleventh five-year plan.9

7

http://www.indianmirror.com/indian-industries/2013/construction-2013.html. http://www.rnrmarketresearch.com/construction-in-india-key-trends-and-opportunities-to-2018-marketreport.html. 9 http://www.equitymaster.com/research-it/sector-info/construction/Construction-Sector-AnalysisReport.asp#fy. 8


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Construction Sector Present & Future Trends 

In its 2014–2015 budget, the Indian government increased its expenditure on the infrastructure sector and allocated INR1.8 trillion (US$27.3 billion); an increase of 8.6% over the 2013–2014 budget expenditure. This will contribute to the continued expansion of infrastructure construction over the forecast period.



With an aim to increase foreign exchange earnings from the tourism industry to INR1.5 trillion (US$26.0 billion) and attract eight million tourists by 2015, the government is focusing on the construction of new tourist destinations such as Tannirbhavi aquamarine park, the Bhaleydunga Skywalk in Gangtok and the construction of a film city at Hesaraghatta in Bangalore. This will help to support growth in the leisure and hospitality buildings category over the forecast period.



As a robust and modern transportation infrastructure is vital for the growth and competitiveness of the economy, the government is focusing more on infrastructure development. Accordingly, a total of INR56.3 trillion (US$1.0 trillion) is planned to be spent in the next planning period of 2012–2017; an increase in investment of 136.0% from the 11th Five-Year Plan. From this proposed investment, INR15.0 trillion (US$279.4 billion) will be spent on electricity, INR9.7 trillion (US$180.4 billion) on roads and bridges, and INR5.2 trillion (US$97.1 billion) on railways. The

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT government plans to achieve these objectives through the PPP model, and attract half of the funding amount from the private sector. 

The country’s rising population and urbanization trends will continue to provide some support for residential construction. According to the World Population Statistics, the country’s population grew by 17.7% from 2000 to 2011 – from 1.1 billion to 1.2 billion – and is expected to reach 1.4 billion and 1.6 billion by 2020 and 2040 respectively. As a proportion of the total, the country’s urban population increased from 27.8% in 2001 to 31.2% in 2011, and is expected to reach 33.0% by 2026. The country’s growing population and rapid urban development will create fresh demand for residential construction market over the forecast period.10

Segmentation in the Industry

10

http://www.rnrmarketresearch.com/construction-in-india-key-trends-and-opportunities-to-2018-marketreport.html.


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-MANAGERIAL ECONOMICS ASSIGNMENT Challenges to the Construction Industry The construction industry continues to face multiple challenges. Investment capex of the private sector continues to be weak due to slowdown in economic growth. Also, uncertainties related to regulations & policy making has resulted in muted new order inflows for construction companies. Expressed as a proportion of trailing twelve month revenues, outstanding order book for companies in ICRA sample has been largely stagnant at around 2.5x – 3.5x over the trailing four quarters implying muted new order inflows. Companies also face challenges on the execution front due to delays in land acquisition and obtaining clearances which continue to plague key infrastructure sectors such as power, roads and ports. Sluggish pace of execution coupled with rising wages and other cost-pressures have resulted in lower fixed cost absorption and pressurized operating profit margins. Companies are also witnessing elongation in working capital cycle driven by delays in work certification and billings and in realizing receivables coupled with the need to extend greater support to sub-contractors. Combination of falling operating profitability, inability to grow order book, lower mobilization advances and longer cash conversion cycle has led to weak cash-flows from core construction business. This, coupled with the need to support the asset-ownership business has resulted in an increase in debt levels and dented net profit margins on account of increased interest costs. Construction companies’ order-books are largely comprised of projects from the industrial and infrastructure sectors; further given the relatively higher construction intensities, projects in the infrastructure sector typically constitute the major proportion of the order books. The 12th five-year plan envisages infrastructure investment equivalent to USD 1 trillion (equivalent to 2.3x expected spending on infrastructure achieved in the 11th five-year plan) with five sectors (electricity, roads, telecom, railways and MRTS) accounting for ~78% of the total spend. The underlying assumption behind these ambitious targets is that there would be a V-shaped recovery in fixed investment and GDP growth rates over the 12th plan period which would require urgent resolution of various policy and regulatory issues in order to revive investment capex. Additionally, the 12th plan envisages that ~48% of the planned investment spending in infrastructure to be contributed by the private sector (compared to 37% achieved in the 11th plan); while private sector contribution to infrastructure spending has continually increased since the 10th plan, the marked increase in expected contribution from the private sector in

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT the 12th plan would require the government to address various execution bottlenecks in order to revive private sector confidence and investments. New projects by the private sector have been on a declining trend since Q1FY11 with performance in Q3FY13 being the weakest since FY05. The continuing elevated quantum of stalled projects and declining y-o-y growth rate of projects under implementation reflects poor execution of projects and is indicative of various execution concerns which have resulted in moderation of y-o-y revenue growth rates of construction companies. While the government had spelt out certain targets for infrastructure sectors in FY13 the on-ground performance of the same has been lacklustre; there has been a marked deceleration in new project awards in the road sector (especially by NHAI) and policy-related issues faced by the power sector continue. Big-ticket infrastructure projects such as the proposed Mumbai elevated rail corridor and the Mumbai trans-harbour link continue to move at a slow pace. Bottlenecks for large projects are well known, such as issues in land acquisition and in obtaining regulatory clearances and approvals from multiple agencies/government bodies; and lack of funding-tie ups. While the government has recently setup a Cabinet Committee on Investments in order to fast-track approvals/clearances for bigticket infrastructure projects, the ability of such a setup to actually expedite project execution remains to be ascertained. In the current environment, execution challenges are expected to persist and the revenue growth rates of construction companies could continue to remain muted. Most construction companies had ventured into the asset-ownership space by undertaking PPP project under Build-Operate-Transfer (BOT) mechanism through Special Purpose Vehicles (SPVs). Need to fund equity in such projects coupled with execution delays during the construction-phase is expected to increase the level of support required from the parent construction company towards such SPVs. Further, project developers are also facing delays in achieving financial closure for PPP projects due to increased due-diligence by lenders which is a result of weaker-than-projected performance of many operational PPP projects and aggressive bidding done by the developers in the recent project awards. While many companies are actively seeking to raise cash through stake sale/dilution of projects only a handful of such deals have fructified; consequently several construction companies have supported their developer businesses by raising debt on their own balance sheets which has led to increased interest expenses and weakened their own financial risk profile.11

11

http://icra.in/Files/ticker/SH-2013-Q1-1-ICRA-Construction.pdf.


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-MANAGERIAL ECONOMICS ASSIGNMENT Efforts by the Government to revive the Industry Recognizing the need to kick-start investments the Union Budget 2013-14 proposed to renew the thrust on removing execution bottlenecks and guide decision making in respect of new proposals and stalled projects through Cabinet Committee on Investments; however onground benefits are yet to be ascertained. Setting up of a regulator for the road sector has been proposed to address issues such as construction risks and contract management. Companies engaged in road construction could benefit from the stated intent of awarding 3,000 km of projects in H1FY14, development of rural roads under Pradhan Mantri Gram Sadak Yojana, and assistance from World Bank and ADB for road construction in North Eastern states. Two greenfield ports; 17% increase in allocation to water supply and sanitation and stated focus on development of seven new cities under the Delhi Mumbai Industrial Corridor could also improve order inflows for construction companies. Some other big-ticket infrastructure projects have also gathered momentum in the recent past such as the dedicated freight corridor project, which involves development of high speed railway corridors aggregating 3,338 km at an expected cost of Rs. 950 billion. The project has witnessed progress in execution supported by stated focus on the project by the central government and the Indian Railways - land acquisition is at an advanced stage and the plan expenditure for the project is expected to witness a marked 4.6x increase from Rs. 1,542 crore (revised estimate for 201213) to Rs. 7,124 crore (2013-14). Further, PPP policy framework proposed in partnership with Coal India Limited (CIL) to tackle the rising domestic coal shortages and extension in eligibility date for power projects to avail of tax holidays till FY 2014 could provide a fillip to the power sector. Some revival in capital expenditure cycle could be seen with the proposed investment allowance of 15% for the companies investing more than Rs. 100 crore in plant and machinery over the next two financial years. Further, in addition to national highway projects some states like Maharashtra, Madhya Pradesh, Gujarat and Rajasthan are also focussing on developing of state highways which could provide additional opportunities to construction companies. Further, continued focus on increasing the availability of long-term funding sources for infrastructure projects is positive considering the significant planned investments on infrastructure in the 12th five-year plan.12

12

http://icra.in/Files/ticker/SH-2013-Q1-1-ICRA-Construction.pdf.

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT International Overview of the Construction Industry The assignment has already mentioned the status quo for the construction industry in India .The Construction sector has been contributing around 8 per cent to the nation’s GDP (at constant prices) in the last five years (2006–07 to 2010–11). GDP from Construction at factor cost (at constant prices) increased to `3.85 lakh crore (7.9 per cent of the total GDP) in 2010–11 from `284798 crore (8 per cent of the total GDP) in 2006–07. The growth in construction sector in GDP has primarily been on account of increased spending on physical infrastructure in the last few years through programmes such as National Highway Development (NHDP) and PMGSY/Bharat Nirman.

In UAE The industry structure in the UAE is mainly shaped by the Joint Ventures (JVs) between foreign and local organisations. Local shareholders usually account for 51% of share capital, due to the 49% foreign ownership restriction in companies registered in the UAE. However, the distribution of profits is flexible and is not necessarily aligned with the percentage of ownership. JVs combine the advantages of both partners: a) The authority for business management and strategic decisions is usually assigned to the experienced foreign company, which has the best knowledge and expertise, the capital to acquire the required market share, and a clientele base from the international and local arenas; and b) Local shareholders bring links, contacts and a deep understanding of the specific conditions of the UAE's market. These dominant firms set the rules of the game for product and site policies, pricing strategies, marketing approach, and construction standards and contracts. Construction companies may be classified in the following strategic groups: Real estate developer (owner, client, bank, fund), Project manager, Design and supervision consultants, Design and built contractor, Sub-contractor (specified, MEP), Building materials and services suppliers. Therefore, this shows that as the Indian Construction Industry is divided into three major segments, even the UAE construction sector is divided into segments.


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-MANAGERIAL ECONOMICS ASSIGNMENT The world's third largest re-export centre after Hong Kong and Singapore, the United Arab Emirates is the most important trade centre in the region. With a policy of stringent public spending, increased oil revenues, and economic diversification partnered with a fourth consecutive zero-deficit budget, the UAE appears set to strengthen its position as a primary regional trade, business and investment powerhouse. With a real GDP annual growth of 4.4% on average during the period 1991- 2000 and 7.2% during 2001-2008, the UAE's economic growth was amongst the strongest in the world. Despite an expected drop of -0.2% in 2009, due to the financial crisis and low price of crude oil, a 2.4% recovery is expected for 2010, and a strong recovery, above 4%, for 2014. While oil exports continue to play a major role in the UAE economy (about 30% of the GDP), the economic boom of the last years is also due to the UAE's economic diversification strategy in the non-oil sectors. The construction industry, considered one of the key sources of employment, income and growth, contributed about 8 and 12% respectively of the GDP and non-oil GDP in the last years. This share is high compared to Western countries.

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-Industry Analysis-


The industry started to expand during the economic development at the end of 1990s, contributing in average 9 per cent of the GDP. The year 2005 showed a rocketing increase in construction industry output, which peaked the next year at AED' 62.4bn. Since then, the output has maintained a high level - above AED 40bn per year. Thus, there exists a similarity between the construction industry in India and UAE to the extent that though both the countries were hit by the recession in the 2000s, both the countries are trying to bounce back on account of the incessant strategies and steps initiated by the governments. Both the countries are striving to invest huge amounts in the industry and also provide luring investment opportunities to foreign investors to increase the level of FDI and increase the flow of funds in the industry in order to make sure that the capacity is increased and the demand supply gap adequately met.

AUTOMOBILE INDUSTRY

Having analysed the scope of survival of the two above industries, let us take an example to better understand the chances of survival after entering the automobile industry. First we consider the situation in isolation then move on to analyse vis-à-vis the two other industries. To make this more interesting, we shall be taking the example of a well-established automobile company that has not been able to succeed in India despite having enviable sale figures in other countries. We are talking about the German carmaker Volkswagen.


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Volkswagen has maintained its position as one of the world’s highest-selling vehicle manufacturers, and is in fact bidding to replace Toyota as the single largest automaker this year itself13, is due to its stronghold in China, the largest and fastest-growing automotive market. China’s fellow BRIC nation, India, also has a vast potential to grow in terms of vehicle sales, fueled by increasing disposable incomes and investments by automakers around the world. But as has the case been, since its very introduction in 2010, the automaker has struggled, with its non-luxury vehicle volumes undergoing declines. Its ambition and aim of grabbing around 20% market share in the country by 2018 seems like a distant dream if we go by today’s sales figures. But it is important to notice that this is not a trend and India is the world’s seventh largest passenger vehicle market, and was previously estimated to topple Germany, Brazil and Russia to gain three places in the global rankings by 2015. While Germany struggled from the impacts of the double-dip recession and is slowly rebounding, the Russian economy is weaker this year due to ongoing geopolitical tensions with Ukraine, and Brazil is witnessing lower vehicle volumes due to higher interest rates, inflation and negative consumer sentiment. However, despite anticipated tepid volume-growths in these three countries, India’s bid to enter the top-four-passenger-vehicle-markets bracket in the next couple of years looked weak, due to lower than expected economic growth, causing only modest gains in the country’s automotive industry. In fact, after years of positive growth, passenger vehicle volumes in India fell 6% in fiscal 2014 ended March. But the industry has since returned to

13

http://www.forbes.com/sites/greatspeculations/2014/09/29/can-volkswagen-succeed-in-india/

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT growth through the last five months, growing by 4.5% year-over-year, with car sales rising by over 5%. A stable government at the centre and positive consumer sentiment has boosted this reverse in declining trends in passenger vehicle sales in India. In the interim budget 2014-2015, excise duty on small cars was decreased to 8% from 12%, incentivising the purchase of vehicles. In addition, excise duty was reduced to 24% from 30% on sports utility vehicles, 24% from 27% on large cars and 20% from 24% on mid-sized cars. The new government has extended the contracted rates till December. Penetration of vehicles in India is still very low at around 18 per 1,000 individuals. The country’s economy grew by 5.7% in the last quarter, the fastest in over two years, and with increasing disposable incomes, vehicle sales could continue to rise. In contrast, let’s look at the neighbouring country China and how Volkswagen has been doing there. Below we can see how the sales of Volkswagen drastically differ quo the other BRIC countries-

In 1984, Volkswagen signed a 25-year contract to make passenger cars in Shanghai. Since, at that time, vehicle manufacturers could not own a majority stake in a manufacturing plant, Volkswagen’s venture took the limit of 50 per cent foreign ownership.

-AUTOMOBILE INDUSTRY ANALYSIS -

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-MANAGERIAL ECONOMICS ASSIGNMENT Today, the Group has 16 representative companies in the country, undertaking parts delivery and service provision for both customers and industry in addition to vehicle production and import. By May 2004, Volkswagen Group had concentrated its strengths in the founding of Volkswagen Group China (VGC), which is governed by a six-member management team responsible for the areas of sales and marketing, technology, purchasing, personnel and governmental relations as well as finance. VGC's tasks include supervision of the Chinese associated companies of the Volkswagen Group, and the set-up of new business segment.

The Chinese government insisted on foreign businesses forming joint ventures with domestic companies. But most Chinese automobile makers concentrated on vehicles for industrial use rather than cars. Also, design and technology were both basic. High quality global journalism requires investment. As for consumers, a tiny fraction of the population earned enough to buy a car. Keeping a vehicle running was also problematic: Shanghai, for example, had a population of 12m in 1985 but 70 petrol stations at most.

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT The market would have to develop substantially before western carmakers could operate there profitably. The initial response. Most of Volkswagen’s competitors were content to export small volumes to China and wait to see what would happen. The German company opted instead to establish operations on the ground, with a view to building its brand slowly and also establishing key relationships, including at various levels of government. Volkswagen accepted that it would be years before it saw financial returns – if ever. It established a joint venture, called Shanghai Volkswagen, with Shanghai Automotive Industry Corporation in 1985; and a second, with First Automotive Works, in Changchun that began production in 1991. The Chinese companies and Volkswagen held equal shares in both cases. Volkswagen shared its technology, and factories were built or retooled to make Volkswagen brands. Good relationships with government were cultivated, partly because of the levels of state control over business but also because government bodies were important potential customers. These relationships bore fruit early on when Volkswagen won contracts to supply taxis to the municipalities of Shanghai, Beijing and other cities. Red Volkswagen Santana taxis became a common sight on Chinese streets. The taxis put the Volkswagen brand in the public eye. As more people bought their first car, Volkswagens made in China were a natural choice for many. By 1995, Volkswagen had at least 70 per cent of the Chinese domestic car market. It had achieved a powerful first-mover advantage, and for several years other carmakers, domestic or foreign, were in its shadow. The second challenge and response. By the early 2000s, that first-mover advantage was diminishing. Aggressive marketing of low-cost brands by other foreign companies, such as General Motors, and improved quality on the part of local carmakers meant that by 2004 Volkswagen’s market share had fallen to 15 per cent. Its response was to introduce new technologies at the two joint ventures to bring down unit costs of production, and to launch new low-cost models such as Skodas. Chinese customers still had a favourable view of the brand, and once Volkswagen was again matching rivals on price – and outdoing many on quality – they flocked back.

-AUTOMOBILE INDUSTRY ANALYSIS -

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-MANAGERIAL ECONOMICS ASSIGNMENT By 2010, Volkswagen was once again the leading car company in China, with Skodas accounting for about 20 per cent of sales. Volkswagen has achieved an almost ―heritage‖ appeal, and the company is admired for its long commitment to China. The lessons. First, strong brand image was important. And the early contracts that established the brand in the public’s imagination were won at least partly through having good relationships with government. Second, first-mover advantage takes a long time to establish and can be eroded very quickly. Volkswagen might have not acted quickly enough to protect that advantage but in the long run, the brand and good customer relationships enabled it to recover its position. Volkswagen in India Volkswagen has managed to grab only under 4% market share in the Indian passenger vehicle market, since its entry in 2010, mainly due to tepid sales for Volkswagen and Skoda branded vehicles. While Volkswagen’s sales fell by nearly 20% in India in the last fiscal ended March, the company’s own branded vehicles, which form over half the company’s India volumes, witnessed a 24% decline during this period. On the other hand, Skoda’s unit sales were lower in fiscal 2014 than those achieved in fiscal 2011. In India, local manufacturer Maruti Suzuki and foreign automakers Hyundai and Honda control over 70% of the passenger vehicle volumes. Automakers such as Volkswagen, Renault, Fiat and Ford have somewhat failed to grab additional shares in India, which is dominated by Maruti Suzuki with nearly half the passenger car volumes. The domination of a handful of automakers in India is mainly due to the large popularity of entry-level compacts, which cater to first-time buyers. Almost one in two new cars sold is an entry-level compact, boosted by government incentives such as lower excise taxes for smaller cars and price-sensitivity of the lesser affluent customers. Volkswagen has positioned itself as a relatively premium brand, and thus doesn’t compete in this high growth segment. Moreover, Volkswagen’s sedan offerings such as Skoda Octavia and Superb and Volkswagen Vento haven’t been able to compete strongly with models such as Maruti Swift Dzire and Honda Amaze. With high growth for entry-level compact cars, and strong brand recognition of Maruti, Hyundai and Honda, which have vast dealership networks across India, Volkswagen’s sales could remain weak in the country, going forward.

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT Future prospects Volkswagen has lowered its market share target in India to 7-8% by 2018, from the previously estimated 20%. If we expect overall passenger vehicle sales to grow at a CAGR of 5% through 2018, a market share of 8% would mean annual unit sales of nearly 250,000 for Volkswagen in the country by then. Although this estimated figure would still represent roughly 2% of global Volkswagen volumes by 2018, improving sales in India could lay a strong foundation for the automaker in the country, going forward. However, even to achieve the 7-8% market share in India, up from under 4% presently, Volkswagen will look to accelerate its penetration in the country. As part of its mid-term strategy, the group announced that it will launch a new product every year in India starting 2015, and launched the new facelifted model of its Vento sedan this month. While protecting its relatively premium brand image, Volkswagen aims to enter high growth segments such as SUVs and compact sedans, rather than smaller hatchbacks. In fact, between fiscal 2011-2014, compact sedan sales rose by 55%, while hatchback volumes fell by 45% in India. Although smaller cars still form bulk of the passenger car volumes in the country, rising sedan sales highlight how customers are looking to trade-in their smaller cars for larger sedans. With rising proportion and wealth of the middle-class population, coupled with lower current customer penetration for sedans compared to smaller cars, sedan volumes could grow at a steady pace in India, providing growth opportunity for Volkswagen. In order to improve competitiveness, Volkswagen will also invest around $250 million in India through the decade, to increase local content sourcing and production and introduce new models. In fact, the group aims to raise the level of locally sourced content in its models in India to 90%, up from around 65-70% presently. Volkswagen aims to expand its production base in India, starting with building engines and gearboxes in the country itself. By further raising local production and content sourcing in India, the company will benefit from the lower manufacturing and operational costs in the country, expanding margins. Profitability could further increase if and when Volkswagen’s volumes in India pick up, and the automaker gains from economies of scale and higher profits on each incremental sale, due to its high fixed-cost base. Although the impact of increasing local production in India on the company’s profit margins can’t be accurately estimated, cost-effective production could improve the operating margins for Volkswagen’s passenger cars, the least profitable division for the company. We currently -AUTOMOBILE INDUSTRY ANALYSIS -

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-MANAGERIAL ECONOMICS ASSIGNMENT expect margins for this division to rise to nearly 7% by the end of our forecast period, from under 6% presently. If the long-term margins rise to 8%, there could be as much as a 12% upside to our current price estimate for Volkswagen.

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-Industry Analysis-

-MANAGERIAL ECONOMICS ASSIGNMENT CONCLUSION

By this assignment, the researchers have studied the three given industries in detail, the status quo, the future challenges and continuous efforts being made by the governments to revive the reeking infrastructure space. The project began with the cement industry and analysed it with the porter’s five forces model. We saw that the demand for cement increased considerably in the 20th century, reflecting the development of industry and growing urbanisation. India’s cement production has increased at a compounded annual growth rate of 9.7% to reach 272 million tonnes during the financial year of 2006-2013. The cement industry also has a high correlation with the construction sector, the housing sector being the biggest demand driver of cement. We also attempted to compare India’s cement industrywhich is the second largest cement industry, to china’s cement industry, which is the largest cement producing industry in the world. The cement industry has continued its growth trajectory over the past ten years. Domestic demand growth has surpassed the economic growth rate for the past ten years. With the government of India providing enough scope in infrastructure development, there is a lot of hope for the cement sector. Following the release of the union budget in July 2014, cement companies are hoping for some reforms like reduction in excise duties, which will go a long way in the betterment of this sector. In addition, with the ever increasing industrial activities, real estate, and construction and with the special economic zones being developed across the country, the demand for cement is slated to increase in the upcoming years. The assignment then moves on to the Construction Industry. The assignment mentions the importance of the construction industry and how it is the second largest contributor to the GDP, next only to agriculture. The industry provides huge employment opportunities with over 3100 companies operating throughout the country. However, the recent trends evidence the fact that there had been a downward trend in the industry due to the existing policy paralysis, stringent regulatory mechanism, shortages of materials, skilled labour and the continuously rising prices of the inputs needed in construction. Analysis is then done with the porter’s five forces model which then ultimately provides that in light of the recent measures brought in by the latest budget the construction industry is likely to experience a huge boom and the capacity is likely to go up. All the efforts are to meet the demand-supply gap. An overview of the Construction industry in UAE is then provided and shown that the

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-MANAGERIAL ECONOMICS ASSIGNMENT construction industry in both the countries have experienced a low post recession and the government has been taking steps to revive the same and projections show a rising trend in both the countries and how the industry is likely to achieve its peak in the coming financial years. The prospect of growth in the Indian markets as far as automobiles are concerned are tremendous. with the liberalisation of the economy, many new producers have entered the market and were competing with home producers such as Maruti. The situation now is completely different from what it was in the beginning of the 90’s. Now, the players who had entered the Indian automobile industry then have deep entrenched roots in terms of market share. Newer players are finding it hard to enter these markets regardless of the huge quantum of funds that they invest in order to establish themselves. the case of Volkwagen that we have taken here is the perfect example of this phenomena. We have analysed how despite the rigorous impositions of sanctions, Volkswagen was able to succeed in China and has not been able to do the same in India. This has been due to the various other factors that exist now that did not exist then, such as available of substitutes and market competition among others. In conclusion, we see through the application of the five forces given by Porter how difficult it is to enter the market and establish yourself than it was earlier. However, we also concede that it is too early and many predictions may prove later.

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-Conclusion-

PORTER’S FIVE FORCES: ANALYSIS OF CEMENT, CONSTRUCTION AND AUTOMOBILE INDUSTRY

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