Story by : Sankaralakshmi Sundaram
A dynamic shift in Commercial Vehicles (CV) is under way the world over; especially in the medium and heavy-duty segments.
Global trade is expected to grow at 4 per cent in 2015. Spend on logistics is reaching USD 10 trillion, and enough to anticipate that it reaches 12 per cent of the Global Gross Domestic Product (GDP). This comes amidst a scenario where logistics spending in several Asian and developing nations such as Mexico and Egypt is expected to decline on the back of improving freight efficiencies. This will be on the basis of investments in fleet infrastructure, and a reduction in transportation costs by half on account of the declining oil prices over a period of next five years. Value-added services such as telematics and anti-lock braking systems (ABS), and trade facilitation are likely to experience a marginal increase, leading to new vehicle procurement. This is expected to drive the demand for new vehicles. Medium Commercial Vehicles (MCV) growth in India is expected to be higher at 9.8 per cent (YoY). In the case of Heavy Commercial Vehicles (HCV), it is expected to be higher as well, at 12.5 per cent (YoY). The overall CV growth is expected to be 11.3 per cent (YoY) in 2015 against a global average of 3.5 per cent. The only other markets that are expected to post higher growth rates are the Next 11 (Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, Vietnam and Bangladesh) at 8.7 per cent, and RoW (Eastern Europe except Turkey and Russia, Asia-Pacific, the Middle East and Africa) at 7.1 per cent. The winds of change in the form of changing customer buying preferences is not just likely to affect the operating dynamics, including total operational cost and lower downtime, it will, as a consequence, usher an evolution of business models and OEM product offerings in the global CV space.
Premium versus value
The global mass market (up to 220 hp) is forecast to decline by 2022 in percentage terms in the MDT (classified as good carriers with up to 16-tonne goods carrying capacity) and HDT (those that are capable of carrying more than 16-tonne) segments. In terms of unit sales however, it is forecast to grow by 18 per cent. The value segment (220-280 hp) is expected to more than double in the next eight years, largely driven by demand from China and India. Premium segment (over 280 hp) is expected to remain largely the same. Strict emission norms and evolving consumer requirements, coupled with the modernising of road and transport infrastructure, are rapidly altering China’s Commercial Vehicle (CV) dynamics. The market, dominated by Chinese OEMs (with over 90 per cent share), is expected to decisively move toward consolidation in the next six to eight years after decades of rapid growth. As a result, the entry-level mass market truck space is expected to remain flat. The growth impetus will lean more towards value trucks and premium trucks. India, in comparison, is expected to record double-digit growth rates of around 12 per cent across all segments. Combined MDT and HDT sales will reach more than 200,000 units in 2015. Low diesel prices and interest rate revisions, coupled with improving credit availability, will encourage fleets to invest in new equipment. Freight demand recovery, aided by the growth of the industrial sector, has driven demand from the start of 2015.
The Brazilian market will remain under severe stress as truck sales are expected to contract due to poor business conditions which is a result of low growth and high inflation. The economic scenario in Russia is likely to remain restrained as a weak ruble will curtail public infrastructure spending. Additionally, lower global oil prices have also affected the Russian economy. The combined truck market will shrink by 10 per cent in 2015. In US, market growth will continue into 2016 as freight demand expansion is expected to drive new truck sales in the region. The weakness in the economy since 2012 is expected to erode the market for commercial trucks in the Euro Zone.
Austerity measures, coupled with uncertainty surrounding member state defaults, have complicated the business environment in the Euro region leading to stringent vehicle financing options.
By 2022, 35 to 40 per cent of all the MDTs and HDTs sold globally are expected to be affordable. Market shares of western OEMs are expected to be increasingly challenged by low cost OEMs from China and India like FAW, Tata and Ashok Leyland in South America and Africa. The continuing economic uncertainty in North America and Western Europe is likely to push regional fleets to offer an entry to low-cost OEMs such as Hyundai. Entry-level trucks from most global OEMs will be priced at about USD 60,000-80,000 by 2022, creating opportunities for common global low cost truck platforms. Rising labour and material costs in emerging markets such as China and India have made the manufacture of low-cost products challenging. The value segment has grown in recent years in these markets, and mainly due to the need for engines with a higher power-to-weight ratio and the proliferation of more technology and safety features in trucks. Low fuel prices reduce running costs and make value segment trucks affordable, eventually leading to low Total Cost of Ownership (TCO). Value trucks possess better safety features such as ABS and airbags and more comfortable cabs (with air conditioning and adjustable seats, etc., available at a premium). OEMs from India and China have formed strategic alliances and joint ventures with North American and European OEMs to improve their product offerings in terms of technology, reliability, safety, and comfort. This puts excruciating pressure on the OEMs to invest in R&D activities for cost optimisation. Various avenues of implementing cost reduction ideas effectively are being explored. Premium truck manufacturers are reluctant to introduce low-cost trucks into the market for fear of brand dilution. Customer perceptions can change quickly due to doubts regarding truck quality, reliability, and durability, which could hamper sales and eventually the manufacturer’s margins.
Gearing up for the future
The global trucking industry is moving towards increased emphasis on alternate fuels, enhanced safety standards, substantial weight reduction in highway trucks and tractor-trailers, and automated platooning to improve mileage. While a majority of the consumers, especially in the emerging economies, will continue to choose economy over innovation, global OEMs are all set to increase spending. European players are headed towards de-contenting. They want to enter into the mass market segment whereas the entry level players with strong local competencies are expanding their product range into the value and premium segments to foray into the global HDT and MDT market. Increased penetration of telematics and deployment of big data analytics across the value chain will aid OEMs in identifying alternate revenue streams from existing business models. It will also help them to stay attuned to customer expectations.
Sankaralakshmi Sundaram is a senior research analyst at Automotive & Transportation Practice, Frost & Sullivan.