Growth strategies in the global construction equipment market Capturing growth markets in BRIC and beyond

Market survey
Munich, October 2011

Construction_Study_final_mit_Ansprechpartnern.pptx

Contents

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A. Global market survey on construction equipment 50 senior management and industry expert interviews conducted among manufacturers, dealers and suppliers B. Key growth priorities in the global construction equipment industry Regional growth focus on BRIC and other emerging market regions (e.g. Africa and Middle East), evaluation of products/product properties, leasing/aftermarket services and key market challenges C. In-depth review of survey findings Detailed results from interviews regarding prospective growth regions, attractive products, differentiating product properties/services and market challenges D. Conclusive implications for construction equipment players Actionable recommendations and areas of focus regarding markets, products, competitiveness and growth strategies

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2011 Roland Berger Strategy Consultants

A. Global market survey on construction equipment

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This study identified key growth opportunities, important levers and market challenges in the global construction equipment industry
Study scope
PRODUCTS
Core construction vehicles and equipment, as well as associated financial, rental and after-sales services

1 OPPORTUNITIES 2 KEY GROWTH LEVERS 3 MARKET TRENDS 4 MARKET CHALLENGES

MARKETS

Global markets, including TRIAD1) and top growth markets such as BRIC

COMPANIES

Leading global construction and off-highway machinery OEMs and their component and service providers
1) North America, Europe and Japan
Source: Roland Berger

Our study comprises the results from 50 interviews with industry experts located in the six construction equipment lead markets
Study participants by geographical distribution
RUSSIA

#5
GERMANY USA

# 15
BRAZIL

# 15 #5
INDIA

# 5 CHINA

> 50 senior managers and industry experts from global and regional players in key markets were interviewed > Markets covered include the US and Germany with a focus of 30 interviews > Additionally all BRIC markets were covered with 20 interviews in total
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#5

SUM: 50 INTERVIEWS
n = Number of interviews conducted
Source: Roland Berger

Roland Berger study findings are based on senior management interviews and insights from industry experts along the entire value chain
Study participants by company type and position held [no. of interviews conducted]
PARTICIPATING SEGMENTS1)
Equipment manufacturers

REPRESENTED BY 34
Vehicle manufacturers > > > > > > > > > > > > > > > > > > Vice President Deputy General Manager Sales Manager Marketing and Sales Executive Director of Strategic Marketing Product Manager Business Development & Account Mgmt. Executive Global Manager Head of Marketing Senior Sales and Marketing Executive Marketing and Business Development Director Director of Operations & Industrialization Director of Supply Chain Regional Director General Manager Chief Commercial Manager Sales and Marketing Director Product Development Director

Components suppliers

Suppliers

Dealers

Dealers

Independent industry experts

Source: Roland Berger

Experts

> Global industry analyst

We conducted a global and comprehensive survey covering most important company size segments along the entire value chain
Study participants by company size and type [no. of interviews conduced]1)
REVENUE SEGMENTS Equipment manufacturers Components Suppliers Dealers

Large > EUR 5 bn Medium EUR 1-5 bn Small < EUR 1 bn

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14

SUM

34

1) Additionally two industry expert interviews conducted

Source: Roland Berger

STUDY APPROACH: > Telephone interviews with than 50 global top executives and industry experts Vehicle manufacturers Suppliers Retailers and dealers SCOPE/COVERAGE: > Study comprises leading global companies, as well as large regional enterprises and regional players > All relevant products from new/used equipment sales to after sales and leasing/financing > Global key markets
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B.

Key growth priorities in the global CE industry

Growth opportunities for construction equipment industry are in BRIC and newly emerging markets Consolidation is expected
Key findings (1/3)

1. 2. 3.

BRIC MARKETS continue to be the major growth focus due to large investments in

roads, ports and other infrastructure > Brazil is very attractive due to its continuing economic growth and political stability > China and India are growing markets, dominated by local Joint Ventures, however room for new market entrants still available
Also OTHER EMERGING REGIONS, such as Africa and Middle East are increasingly attractive for CE companies with large investments planned and various construction OEMs about to enter these markets > In particular South Africa and North African countries are very promising > Also Middle East, ASEAN and Latin America are considered very attractive markets

COMPETITION IS INCREASING in the whole industry, along the entire value chain,
especially in TRIAD markets Market consolidation is key result > Recent mergers, e.g. Caterpillar (Bucyrus), Terex (Demag) show the extent of ongoing industry consolidation

Source: Roland Berger

Beyond core construction machinery offer based on distinctive product differentiation, financial and AM service key for growth
Key findings (2/3)

4.

Among core construction machinery, EXCAVATORS AND WHEEL LOADERS are the most important product segments with BACKHOE LOADERS catching up > Most important technological trends are connectivity, monitoring of vehicle functions and emissions reduction > Most relevant and differentiating key components are engines and transmissions > Most important distinguishing factors on the market are QUALITY, PRICE AND

AVAILABILITY OF REPLACEMENT PARTS

> Product range, customization and quality have the strongest rise in importance

5.

LEASING IS GAINING IMPORTANCE compared to other financing options,

especially loans However, strong regional differences can be observed > Leasing is considered most important in the future in e.g. Brazil, Russia, China, Germany > Importance of joint equipment ownerships is rising, however, it is still not as competitive compared to leasing/loan financing options

Source: Roland Berger

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Regional specifics play a fundamental role and have to be implemented in comprehensive growth strategies
Key findings (3/3)

6. 7.

Continuously high importance of COMPREHENSIVE AFTERMARKET SERVICES Large investments are currently made to expand service locations1) > Availability of replacement parts however is still the most important criterion, closely followed by the demand for a professional key account management and round-the-clock services > Full service offerings including financing, insurance and service is the fourth most important aftermarket service

GROWTH REQUIREMENTS and MARKET CHALLENGES are strongly diverse

across different geographical markets > Growth enablers in BRIC countries tightly linked to governm. support and market regulation > TRIAD markets for CE are mostly saturated with entrenched competitive landscape Most important KEY MARKET CHALLENGES are emissions regulations, import duties/restrictions and pressure from emerging market competitors > Strong regional differences in market challenges > Regulations are most important in Europe and USA > Pressure from emerging market competitors in BRIC > Import restrictions in Brazil, China and Russia

8.

1) E.g. by Caterpillar, Komatsu, Terex

Source: Roland Berger 11

C.

In-depth review of survey findings

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MOST ATTRACTIVE REGIONS

BRIC countries are considered the most attractive growth regions, rating significantly better than TRIAD countries
Rating of attractiveness regarding growth potential by key regions
CITATIONS FROM STUDY PARTICIPANTS
Brazil China India Russia Europe NAFTA Japan
Low (1)

4.4 4.1 4.1 3.9 3.1 3.0 2.6

High (5)

BRAZIL

BRIC

RUSSIA

TRIAD

INDIA

CHINA

"Attractiveness of Brazilian market is due to the positive economic growth and political stability" "Attractive due to growth, however, antiquated manufacturing base, dependency on strong oil pricing, and political problems can inhibit growth." "Russia weakens itself due to the frequent introduction of new policies, e.g. unfavorable customs regulations" "Limiting factors of lack of growth in middle economic class, cultural issues, and weaknesses also in education system" "We as component supplier are heavily pushed by our OEM clients to follow them to China"
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Source: Roland Berger

MOST ATTRACTIVE REGIONS

Beyond BRIC, Africa and Middle East have also become the upcoming growth priorities of the construction equipment industry
Most attractive growth regions beyond BRIC and TRIAD markets [% of all mentions]
AFRICA MIDDLE EAST ASEAN LATIN AMERICA1) OTHERS

29%
> South Africa is the single most attractive African country > North Africa is also a promising growth region, e.g. Algeria Egypt Morocco Libya
Source: Roland Berger

25%
> Named countries include: U.A.E Saudi Arabia Qatar Afghanistan Iran

15%
> Indonesia is by far the most attractive country in ASEAN regarding growth options > Other countries include: Thailand Vietnam

15%
> Following Brazil, Argentina is regarded the second most attractive market in Latin America > Other countries include: Uruguay Chile

16%
INCLUDING: > Australia & New Zealand > Far East > Central Asia

1) Excluding Brazil: Brazil is included in the BRIC specific analysis

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ORGANIC VS INORGANIC GROWTH BACKUP

All companies interviewed consider organic growth in current and entry to new markets Two out of three consider inorganic growth
Growth options pursued by CE companies [%]
TYPE OF EXPANSION

ORGANIC
18% 0% 82%
All companies interviewed consider organic growth in current markets with most of them having implemented all necessary measures

INORGANIC (through M&A)

21%
Around 2/3 of companies consider inorganic growth in current markets. However only 21% have taken actual measures

CURRENT MARKETS
Through gain of market shares

36%

43%

NEW MARKETS
Through market entry
44%

0% 56%

All companies interviewed consider organic growth to new markets Only slightly more than half of them have taken measures for implementation
Not intended

38%

21%

42%

Around 2/3 of companies consider inorganic growth to new markets. However only 21% have taken actual measures

Currently in implementation
Source: Roland Berger

Planned

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ORGANIC VS INORGANIC GROWTH BACKUP

Large and medium sized CE companies focus on inorganic growth to further penetrate existing and enter new markets
Influence of company size1) on growth ambitions [%]
TYPE OF EXPANSION

ORGANIC
SMALL 9% 0% 91% MEDIUM 15% 0% 85% MEDIUM 0% 55% 45% 41% LARGE 0% 59% LARGE 0% 28% 72%

INORGANIC (through M&A)

SMALL 30% 30% SMALL MEDIUM 5% 50% 45% 33% 50% 44% FOCUS AREA
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CURRENT MARKETS
Through gain of market shares

MEDIUM 10% 40% 40% 50%

LARGE 24% 41% LARGE

35%

NEW MARKETS
Through market entry

SMALL

27% 0% 73%

30% 20%

22%

Currently in implementation/realization Planned Not intended at all 1) Company size by revenues: Small: < EUR 1 bn, Medium: EUR 1-5 bn, Large: > EUR 5 bn
Source: Roland Berger

ORGANIC VS INORGANIC GROWTH

Product portfolio expansion is considered a key priority with room for M&A deals, whereas pure extension of value chain is less favored
Consideration and implementation of growth options [%]
TYPE OF EXPANSION ADDITION OF NEW PRODUCTS OVERALL DEGREE OF CONSIDERATION ORGANIC
& 4% 37% 59% 41% 52% 7%

INORGANIC

96% through organic

Considered

COMMENTS COMMENTS

4%

Not considered at all

> Most companies consider adding further products to their product portfolio > Degree of implementation is low, especially for the inorganic option, indicating further M&A potential

and/or inorganic

EXTENSION OF VALUE CHAIN

31% at all

Not considered 23%

&

6%
55% 38%

69%

Considered through organic and/or inorganic

40% 38%

> Extension of value chain is not as attractive to the majority of companies, with 1/3 not considering it at all > Around 1/4 of companies is currently extending its value chain through organic growth

Currently in implementation
Source: Roland Berger

Planned

Not intended
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ORGANIC VS INORGANIC GROWTH BACKUP

Product portfolio extension especially for large and medium player is intended through M&A Small player focus on organic value chain ext.
Influence of company size1) on growth ambitions [%]
TYPE OF EXPANSION ADDITION OF NEW PRODUCTS

ORGANIC
SMALL 27% 0% 73% MEDIUM 5% 35% 60% LARGE 6%

INORGANIC (through M&A)

SMALL 33% 22% 44%
FOCUS AREA

MEDIUM 5% 45% 50%

LARGE 0% 41% 50%

50%

44%

EXTENSION OF VALUE CHAIN

SMALL 18% 18%

MEDIUM 15% 50%

LARGE

SMALL 11% 44%

MEDIUM 0%

LARGE 11%

41% 35%

35% 24%

44%

55%

45%

61%

28%

64%
FOCUS AREA

Currently in implementation/realization Planned Not intended at all 1) Company size by revenues: Small: < EUR 1 bn, Medium: EUR 1-5 bn, Large: > EUR 5 bn
Source: Roland Berger 18

MOST ATTRACTIVE PRODUCTS

Rating of most attractive core construction equipment vehicles ranks excavators and wheel loaders as most attractive products
Rating of top-5 core construction equipment products Current and future trends
TOP-5 TODAY AND PROSPECTED CHANGE IN ATTRACTIVENESS COMMENTS > Excavators will remain number 1 construction equipment, as they continue to develop into multi-functional applications > Among top-5 construction equipment, only backhoe loaders expand in attractiveness > Skid steer loaders and motor graders have declining attractiveness IMPACTING TECHNOLOGICAL TRENDS

1. 2.
3. 4. 5.
Future attractiveness:
Source: Roland Berger

Excavators Wheel loaders Backhoe loaders Skid steer loaders Motor graders
Increasing Stable

CONNECTIVITY

> Electrical control devices/GPS applications (e.g. Caterpillar accugrade technology)

MONITORING
> Realtime monitoring of activity and performance, e.g. vehicle parts operation detection module > Equipment failure monitoring computer

EMISSIONS REDUCTION
> Viable hybridization applications are still to be developed
Decreasing
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MOST ATTRACTIVE PRODUCTS

Within CE products, transmission and engine are and remain the most attractive components, but body trading up
Rating of attractiveness of selected products1)
ATTRACTIVENESS OF KEY COMPONENTS POSSIBLE STRATEGIES COMMENTS > For the best use of captive resources, focus on the most attractive components > Engine and transmission are in general most attractive for growth ambitions due to role in fuel efficiency and emission reduction > Body/undercarriage are gaining importance due to product differentiation > Auxiliary modules are least attractive for OEMs as supplied by common/ regional suppliers
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4.1 Transmission

KEY COMPONENTS

1st
4.0 Engine

POTENTIAL FOR DIFFERENTIATION

3.7

Body/ Undercarriage Auxiliary modules

Future attractiveness: Increasing

2nd
3.6

OUTSOURCING WHERE REQUIRED

1) Grades from highest (5) to lowest (1)

Source: Roland Berger

Stable

Decreasing

PRODUCT PROPERTIES FOR DISTINCTNESS

Quality, price and replacement services are the most important characteristics on the market Quality in top-3 in most markets
Ranking of product characteristics regarding potential to be distinguished on the market
GLOBAL RANKING (current)1)
1. Product quality 2. Purchasing price 3. Supply of replacement parts 4. Local/on-site service capabilities 5. Maintenance and service costs 6. Costomized vehicle configurations 7. Breadth of product range offered 8. In-house capabilities for core vehicle compon. 9. Coverage of used equipment
Low (1)

TREND
4.5 4.2 4.2 4.0 4.0 3.7 3.4 3.2 2.9
High (5)

The three properties PRODUCT RANGE, CUSTOMIZATION and QUALITY have seen the strongest rise in importance

Future attractiveness:

Increasing

Stable

Decreasing

1) Grades from highest (5) to lowest (1)

Source: Roland Berger 21

PRODUCT PROPERTIES FOR DISTINCTNESS

Quality, price and replacement services are the most important characteristics on the market Rankings strongly depend on country
Regional ranking of product characteristics regarding potential to be disting. on the market
REGIONAL RANKING

1. 2. 3. 4. 5. 6. 7. 8. 9.

Quality Price

Quality Replacement parts Local/on-site service Customization Maintenance costs Price Product range In-house components Coverage used equipment

Price Quality

Maintenance costs Replacement parts Local/on-site service Customization

Product range Coverage used equipment In-house components

Customization
Local/on-site service Replacement parts Product range Maintenance costs In-house components Coverage used equipment

Replacement parts Coverage used equipment Price Quality Maintenance costs Local/on-site service Customization Product range In-house components

Price Quality

Quality Maintenance costs

Maintenance costs
Local/on-site service Replacement parts Product range Customization In-house components Coverage used equipment

Local/on-site service Price

Customization Product range Replacement parts In-house components Coverage used equipment
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Source: Roland Berger

GROWTH POTENTIAL IN FINANCIAL SERVICES

The study reveals rising importance of leasing with loans still the no. 1 financial service However regional differentiation can be observed
Importance of financial services to realize growth potentials1)
GLOBAL VIEW
Loans
4.0 4.1 3.8 4.1 3.0 3.2 2.5 2.8 +0.1

REGIONAL VIEW (current)

Loans Leasing Insurance Joint ownerships 3.5 3.9 4.3

COMMENTS > Overall loans are the number 1 financial service > Leasing has significant importance in Germany and Russia and is on the rise > In Brazil and China, leasing will gain importance to be the number 1 financial service in the future

2.8

Leasing

+0.3

Loans Leasing Insurance Joint ownerships

Loans Leasing Insurance Joint ownerships

3.5
2.1

4.1

2.5
4.0 4.0

2.0

2.8
2.8

Insurance

+0.2

Loans Leasing Insurance Joint ownerships Loans Leasing Insurance Joint ownerships Loans Leasing Insurance Joint ownerships

2.4 2.2 3.6

4.4

Joint equipment ownerships

Today Future

+0.3

4.2 2.4 3.0

Most important for future

1) Grades from highest (5) to lowest (1)
Source: Roland Berger

3.2 3.2

4.4 4.6

= Countries with leasing as number 1 financial service in the future

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GROWTH POTENTIAL IN AFTERMARKET SERVICES

Supply of replacement parts will remain most important AM service with further increasing importance of 24/7 and long term service
Importance ranking1) of aftermarket services to realize growth potentials
RANKING and CHANGE of interviewed aftermarket services
1. 2. Supply of replacement parts Professional key account customer management 24/7 service availability (Longterm) service agreements Mobile service units

TREND

KEY FINDINGS

4.5 4.4 4.2 4.1

3. 4. 5. 6.

ALL PRODUCT RELATED SERVICES rank very high on the rating scale

3.9
3.5
Low (1) High (5)

All-in-one solutions2)

ALL IN ONE SOLUTIONS (financing/ insurance/ services) are ranked at lower priority but with increasing importance
Little differences across the countries included in the interviews were found
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Future importance:

Increasing

Stable

Decreasing

1) Grades from highest (5) to lowest (1)

Source: Roland Berger

2) Financing/insurance/services

REGIONAL SPECIFICS

Growth enablers and market specifics for CE in BRIC are closely linked to national government support and market regulation
Regional growth requirements and challenges BRIC
REGIONALITY OF MARKET CHALLENGES
Are market trends rather diverse depending on the region? No 14% 86% Yes India Russia

KEY MARKET SPECIFICS IDENTIFIED

Brazil > Tariffs and financing restrictions make market very difficult to penetrate without localized manufacturing base > However even strong differences between Brazilian regions lead to different markets trends

> Promising market limited mostly by market inefficiencies and political issues > Unforeseeable changes in customer regulation can occur
> Market already dominated by large global players aligned with local Indian JV partners

China

> Growing market with room for JVs to participate

Source: Roland Berger

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REGIONAL SPECIFICS

While TRIAD markets are very competitive, Africa, Middle East and Southeast Asia have lower barriers to entry
Regional growth requirements and challenges Outside BRIC
REGIONALITY OF MARKET CHALLENGES
Are market trends rather diverse depending on the region? No 14% 86% Yes MIDDLE EAST SOUTHEAST ASIA

KEY MARKET SPECIFICS IDENTIFIED

NAFTA AND WESTERN EUROPE > Saturated markets: Little room for growth for new competitors due to high overall operating costs > Users demand the utmost in quality, uptime, comfort and safety Developing regions have lesser expectations AFRICA > Major projects being serviced by multinationals > Local distribution highly dependent on stability of in country sales and service organizations > Political instability will continue to hinder growth > Recovery in global markets and petroleum demand will spur continued growth > Growing manufacturing base and market sophistication will make these attractive opportunities

Source: Roland Berger

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KEY MARKET CHALLENGES

Top-3 market challenges are import restrictions, emissions regulations and pressure from emerging market competitors
Overall market challenges for construction equipment1) across all regions
REGULATIONS
Import duties/ restrictions Emissions regulations Safety regulations Recycling and environmental regulations Phase-out of governmental stimulus package 4.1 4.0 3.6

COMPETITION
Pressure from emerging market competitors Pressure from East-Asian competitors (excl. China) Shift of value creation to low cost locations e.g. China Pressure from horizontally more integrated players Pressure from vertically more integrated players 4.0 3.6 3.4

OTHERS
Technological developments e.g. alternative powertrains Bottlenecks in financing / funding Declining market demand Consolidation on demand side 3.5 3.2 3.1

3.3
2.7

3.1
3.1

3.0

DEVELOPMENT OF TOP-3 MARKET CHALLENGES

Future development:

RANKING
1. Import duties/restrictions 2. Emissions regulations 3. Pressure from emerging market competitors
Increasing Stable Decreasing Top -3 market challenge

Regulation and competition based key market challenges are most important today

1) Grades from highest (5) to lowest (1)

Source: Roland Berger 27

KEY MARKET CHALLENGES

In each country, certain challenges are most relevant Some of these however are dominant only in certain regions
Participants indicated different top-3 challenges in their respective markets
RANK

1.

Import duties/ restrictions Emissions regulations Value creation shift to low cost

Emissions regulations East Asian competition Emerging market competition

Import duties/ restrictions Government support Emerging market competition

Import duties/ restrictions Horizontally integrated players Emerging market competition

Import duties/ restrictions Emerging market competition Financing/ funding

Emissions regulations Import duties/ restrictions Emerging market competition

2.
3.

TRIAD1) Some of the challenges are present in certain countries and regions
TRIAD1)

BRIC
BRIC

> Emissions regulation > Safety regulation > Recycling and environmental issues
2) Focus on Brazil, Russia, China

> Import duties/ restrictions2)

REGIONAL SPECIFICS
1) North America, Europe and Japan
Source: Roland Berger 28

D.

Conclusive implications for CE players

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To capture growth opportunities in BRIC and beyond, key levers to ensures competitive positioning need to be addressed globally
FINDINGS 1
MARKETS

DETAILS
Target most attractive CE growth markets > BRIC markets are today the most attractive growth regions and need to be targeted in a country-specific way > Windows of opportunity to tackle further growth markets beyond BRIC, e.g. Africa, South America, ASEAN to ensure competitive advantage
Optimize product and service portfolio > Focus on most attractive product segments (excavators, backhoe loaders) by leveraging differentiators engine and transmissions > Global expansion of financing and aftermarket services needed, but regional specifics need to be considered

PRODUCTS

Enhance competitiveness on global scale COMPETITIVE- > Optimize product offering based on harmonized vehicle platforms, but compliant with regional market specifics (emissions, price levels) NESS > Actively participate in market consolidation through M&A and JVs Formulate suitable growth strategies encompassing key CE growth priorities > Key value proposition and product/service portfolio > Countries targeted and footprint design > Core competencies and differentiating technologies
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Source: Roland Berger

GROWTH STRATEGIES

It's character that creates impact!

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