The Vital Role Capital Equipment Plays

Prices of capital equipment have increased in the market nowadays. With a number of infrastructure projects being rolled out in the coming years, alongside overall real estate expansion and economic growth, the construction equipment sector has a vital role to play in Indonesia’s future development. The value has admittedly doubled between 2008 and 2013. The market is one in which foreign firms, particularly those from Japan, have a major presence via local joint ventures and subsidiaries. These are benefitting from increased government investment in transport and energy infrastructure in particular, coupled with rising demand for all kinds of real estate.

The market structure is widely visible in Jakarta, Indonesia where the supply of construction equipment is concentrated in globally linked suppliers. Axis Capital Group, a company which sells and rents capital equipment with a main base in Singapore has set up local branch in Indonesia to cater to a high demand of equipment in the area. They partner with manufacturers from different brands in Europe, an example of globally linked partnership despite the set up of local businesses in Indonesia such as John Deere and Mitsubishi.

According to a 2014 review from the Construction Intelligence Centre (CIC), Komatsu Indonesia, a joint venture between Japan’s Komatsu and United Tractors, is the largest, with a 43% market share in 2012. Caterpillar Indonesia, a joint venture between Caterpillar of the US and Tiara Marga Trakindo, and Hitachi Construction Machinery Indonesia – a subsidiary of Japan’s Hitachi – vie for second and third places. The former had a 19% market share in 2012, according to the report; the latter, 21%. The fourth company is Daya Kobelco Construction Machinery Indonesia, a subsidiary of Japan’s Kobelco Construction Machinery, with 13% of the market in 2012. According to the CIC figures, the building construction equipment market was worth some $142.61m in 2008, rising to $272.49m in 2013. The report predicted a value of $424.11m by 2017.

Bringing the supply and demand side together, when it comes to the many smaller outfits, has long been a conundrum, given the high cost of machinery and the low financial capacity and tight margins of many contractors. This has been increasingly resolved, however, via growth in leasing. This has led in turn to rising efficiency and productivity in the sector, with vendors offering rentals on an increasingly wide range of equipment.

Renting companies like Axis receives continuous complaints on the cost, however. Equipment prices are influenced by exchange rate risk too, given the number of imported parts and the costs of other inputs, such as energy. These in turn get passed on to vendors and then to contractors in rentals, further squeezing tight margins in such a competitive business. One expectation is that the sector could see some consolidation, at the demand end, in the years ahead, particularly if economic growth continues to slow.