The emphasis in developing countries on creating infrastructure and the need to repair ageing infrastructure in developed countries are set to open new opportunities for construction and mining equipment manufacturers such as Caterpillar. The company, which is also into diesel and natural gas engines and industrial gas turbines, operates through 110 plants in 23 countries. It opened its fourth plant in India last week. In Chennai for the inauguration of the new backhoe loader manufacturing facility, Caterpillar Asia President Kevin Thieneman spoke about the market and the need for predictability and certainty in regulatory framework, especially for environmental clearance. Excerpts of an interview with N. Ravi Kumar.
What will be key drivers of growth for a company like Caterpillar?
Infrastructure and energy are big drivers for us. Customers are saying we need more capacities to meet the growing demands. One of the drivers in India and China is creation of new infrastructure and repairing ageing infrastructure in places like Europe and the U.S.
How do you view the Indian construction industry and market for your products?
Long-term, we are very bullish. If you look at the ten year period 2011-20, the investment announced for infrastructure is triple that invested in the previous ten-year period. The question will be how much of it would be approved and how much will get financed. Those are two very different issues. You could have the plan, but if you don't get environment clearance, you don't get funded.
Let's start with coal. Today, two-thirds of the power in India is coal-sourced. By 2017, we see the number of coal-powered plants doubling. It would drive incremental amount of coal requirements which, in turn, will drive construction and mining equipment.
On the roads side, five countries — India, China, Indonesia, Brazil and Turkey — will have to pave 10 million km of roads to reach a density of 5,000 km of roads per one million people and get into the developed model. That's a phenomenal amount of investment. To get to 300 km of railroad per one million people, it is another big number, it is 700,000 km of new railroad for those five countries. Mining, roads and railroads are, to me, the three legs of the stool on what's going to drive industrial growth. So, you need construction equipment for all that. I think India has tremendous potential over the next several decades. The other thing driving India and China is urbanisation. In India, urbanisation is 30 per cent today. I think it will be between 50-60 per cent in the next 10-15 years. That's going to drive lot of need for commercial construction.
What are your plans for India?
For Caterpillar, investment continues in India, much like it does around the world. We are opening our backhoe loader facility in Tiruvallur. In November last, we announced the second phase of our expansion, on the Perkins 4000 series engine plant in Aurangabad, Maharashtra. It will be our first plant outside Tamil Nadu and we are excited about that. This will be also the first Perkins 4000 series engine plant outside the U.K.
We are just beginning construction and that's going to keep us busy for the rest of this year till we go into production, in the first quarter of 2015.
How are you coping with the power supply problem in Tamil Nadu?
Obviously Tamil Nadu has had some problem with the power supply over the last five years. We have been told that that's going to be abated as new supply comes on, but for us in our supply base, Tier-I and Tier-II suppliers have felt the pinch on planned and unplanned cuts. You can devise strategies to work around planned cuts, but unplanned bite pretty hard. It is difficult to work around, so we have appealed that unplanned cuts should not happen. It should only be planned, so that business can plan.
Is this driving more investors towards Maharashtra and Gujarat?
Power certainly is one, the other is port. We export out of Chennai. We also take some stuff out of Ennore. The efficiency of the ports in Tamil Nadu has deteriorated over the last couple of years and we have also talked about this to the government. There were well intentioned plans to expand, but they have not been executed for a variety of reasons. I think we have reached a choke point. We take containerised cargo out of Mumbai. As we feel the port situation is better up north, we decided to set up the Perkins plant at Aurangabad. It is lot easier to move the engines as they are containerised.
Will you be exporting Perkins engine from Aurangabad?
It will depend on the market conditions. We think half of the production would be for China and half for India. The initial capacity of the plant would be 3,000 units and we expect it to go up to 5,000 units.
How conducive is the regulatory framework in India? What changes do you look forward to?
Lots. Number one is environmental clearances. Last July there was a new Environment Minister from Tamil Nadu and we have very high expectations.
But, as of today, there are 571 environmental clearances pending, most of which relate to mining and construction projects. The issue is how do we get to a point where you have a fast and fair decision. My feeling is that environmentalists have prevailed. We should not impair the development potential of India and my belief is that's the root cause for the slow down in GDP.
What do investors expect from the government?
There needs to be some predictability and certainty for investors, whether domestic companies or foreign investors, to understand what the pros and cons of the engagement are. We have to plan our affairs right and investments like ours are not something that we put in place and then we can pull off and move to another market.