GST will lead to savings of 10-12% of overall supply chain cost

Shripad Ranade, Practice Head – Automotive & Engineering, Tata Strategic Management Group, explores the impact of government policies and the latest technical developments, on the construction and mining equipment sector.

What are the implications of the new GST regime for the construction and mining equipment sector once it is launched by the next fiscal year? How do you react to the sector-wise GST rates anticipated by the GST council?
The taxes currently levied are in a broad range of 20-40 per cent, differing on the basis of type of construction (roads, rail/road bridges, commercial/residential buildings, power plants, etc.), and type of contract signed between the parties (e.g., leasing, works contract, etc.) The construction and mining equipment sector will face a neutral or positive impact due to the implementation of GST. It is highly probable that this sector will fall under the 12 per cent or 18 per cent bracket.

Introduction of input tax credits in the construction and mining industry would also result in lesser overall tax burden.

How do you intend to rationalise warehousing management in sync with the post-GST way of doing business in India, leverage volumes of scale after the differential tax regimes of individual states shift to a uniformly levied tax rate?
Companies can do away with the current practice of having a warehouse in each state and adopt an optimised network with a hub & spoke model consisting of larger warehouses, better routes and ideal modal mix to serve their customers better in the GST scenario.

Savings along the logistics and distribution chain can amount to ~5-8 per cent in transportation, ~10-12 per cent in warehousing and up to 25 per cent in inventory holding costs, leading to overall savings in the range of 10-12 per cent of the total overall supply chain cost.

For example, a company having multiple CFAs (clearing and forwarding agents) in northern states can look at consolidating its network and having a regional hub to serve different markets. This is possible mainly because of the easier accessibility to key consumer clusters from a central warehouse (in most cases the transit times are less than 12 hours).

What is the growth level (market share) envisaged during the expansion of capacities in the mining and construction space within India in the wake of changes/amendments to the Mining Act and a general ease of doing business being ushered into the construction business sector?
Improvement in the mining sector would be mainly driven by coal-based capacity additions.

Policy amendments would increase mining activity by private players, thereby increasing the demand for premium equipment.

India currently imports 25 per cent of its coal, and the government plans to reduce its dependence on imports in the next couple of years.

Amendments in regulations such as MMDRA would ensure speedy licensing, granting of mineral concessions through auctions, and increase in renewal tenure from 30 to 50 years. Indian arms of foreign companies are now entitled to bid for blocks including commercial mining of coal.

These factors would lead to increased investments in the mining sector (predominantly coal based) which is expected to grow at CAGR of 12 per cent to reach Rs 150 billion by FY19. CIL has also assessed a tentative capital investment of Rs 57,000 crore for the next five years.

The construction industry in India would be majorly driven by roads and urban infrastructure projects. The rate of construction of roads has been increased from 12 km/day in FY15 to 17 km/day in FY16.

A target of 40 km/day of road construction has been planned by the government through initiatives such as Hybrid Annual Model, amendments to the Model Concession Agreement (MCA) for BOT projects, increased threshold for project approval, back-ending of premium payments, and better exit policies.

NHAI has also announced that it will bid out 30,000 km of highway projects in the next three years. This would increase the demand for road construction equipment such as pavers, compactors, excavators and backhoe loaders.

Urban infrastructure, another key driver for growth in the construction sector, is expected to grow with development of Smart Cities, Swachh Bharat initiatives and major water supply & sanitation projects, which would further increase the demand especially for excavators and backhoe loaders.

What is the role of newer technologies (advanced low-cost sensors, RFID, wireless technology, radar tech, robotics, autonomous vehicles and telematics) in working towards creating better efficiencies of cost for the construction and mining business?
Advanced manufacturing technologies would help end-use customers enjoy better responsiveness and operational efficiencies. Let us look at the impact of a few of these technologies:

• Through additive manufacturing, spares can be printed at the dealer location and immediately shipped to customers, thus reducing mean time to repair (MTTR) for OEMs. This improves responsiveness and increases availability of genuine spares to customers. With many mining equipment working in remote locations, lesser MTTR reduces downtime of machines for the customers.
• It simplifies the entire spares management process, thus adding to cost competitiveness of the OEM.
• OEMs, especially with a large retail customer profile (customers with orders of less than 5 equipment of a certain type) would benefit from increased spares revenue which was earlier lost to non-genuine spares.
• Advanced low-cost sensors would enable even value-segment OEMs to offer complete remote monitoring for their products and provide interconnected machines/fleets. This simplifies fleet management for the customers.
• With increasing demand and variety of construction equipment, advanced collaborative robots would provide greater flexibility in plant operations.
• These robots can work alongside humans and hence augment the quality of the product offered to customers.