Emerging out of a weak 2014, and witnessing growth in 2015, the year 2016 will bring growth to the Indian commercial vehicle sector. It will also pose challenges.
Story by: Bhushan Mhapralkar
Regulatory pressure exerted itself quite effectively in 2015. Anti-Lock Braking System (ABS) mandate rolled out in August. More regions of the country came under the influence of BS IV emission norms from August 01, 2015. Bus Code too was implemented on August 01, 2015. Fuel costs continued to stay in the comfort zone even though there was some hike in taxes. Costs of other consumables continued to rise against the lack of a formidable rise in the freight business and the emergence of the clear trend. This continued to exert pressure on operator margins, compelling them to seek more efficient, fast and reliable commercial vehicles, which would help to up productivity and stay ahead. In the wake of the transformation that touched the Commercial Vehicle (CV) sector in 2015, the year 2016, it looks like, will witness some very interesting developments in the CV sector.
Expressed Pierre Jean Verge-Salamon, President, Volvo Group Truck Sales India, “2015 was a good year. The Heavy-Duty (HD) truck market grew at around 40 per cent in 2015 emerging out of a weak 2014. The Light-Duty (LD) truck market and some segments of the bus market also saw good growth in 2015. With the current rate of economic growth we expect the market to remain buoyant in 2016 as well.” The LD truck market drove out of red ahead of the festive season even though its growth is not as strong as one would expect. The World Bank has pegged the Indian GDP growth at close to 7.9 per cent for 2016. Mentioned Kaushik Madhavan, Director – Automotive & Transportation, Middle East, North Africa & South Asia, Frost & Sullivan, that the CV industry is expected to follow a cyclical trend, mimicking the GDP growth. The Medium & Heavy Commercial Vehicle (M&HCV) segment is expected to rebound with a robust growth of 25 per cent (about 63,000 incremental units) in 2016 over 2015 according to Kaushik. The Light Commercial Vehicle (LCV) segment is expected to continue to post a de-growth of about 2 per cent (8,300 units). “Overall, the Indian CV industry would post close to 9 per cent growth in terms of volume over 2015, at an estimated 670,000 units,” explained Madhavan. More specifically, RT Wasan, Vice President, Sales & Marketing, Commercial Vehicles, Tata Motors, opined, “The outlook is different in different sectors, and accompanied by hope for a positive growth.”
Commercial Vehicle sector will continue to grow
Industry leaders and analysts alike seem confident of the Indian CV sector witnessing good buoyancy in 2016. If it will be broad-based and all-encompassive will need to be seen. Claimed an industry expert that growth in the Indian CV sector will not be broad based. Instead, it will be closely linked with the uptake in the overall economic activity. Abdul Majeed, Partner, Price Waterhouse, expressed that for sustained growth, it is absolutely necessary to have a robust growth in the overall economy, which in turn depends a lot more on the next level of reforms including the introduction of GST. The implementation of GST from the next fiscal looks doubtful. Even if it were a matter of implementation, the need would be for clarity on how it will pan out. Expressed SP Singh, Convenor, IFTRT, “CV sector growth in 2016 will depend on the future demand.” Drawing attention towards the fact that a good capacity has been created in the market, Singh averred, “regulatory issues are challenges that need to be tackled firmly.” Claiming that the CV population hasn’t changed, and there is no clear trend in freight that seems to emerge, Singh remarked that this is because freight is dependent on other factors of the economy. And, that the economy needs to pick up. He mentioned that fleet utilisation potential is high, and demand is visible. There’s however a lack of a strong signal. “Fleet utilisation therefore is not growing, and the gap between an operator with assured business and the one without, is growing wider. Small operators continue to fail as outsourcing of trucks is going down. Containerisation is going up, signalling a preference for fixed business. No breakthrough is in sight, and much will depend on budget allocation and the rise in purchasing power of the people,” Singh added.
Expressed a fleet operator that the next year will not be bad, it will not lead to a significant growth either. He indicated that he was looking forward to a stable working environment over rise in business. Remarked Singh, that the asset owning cost has got better and freight rates are remunerative. Stability is what is necessary, and above and over profits. He added, “SMEs provide 70 to 80 per cent cargo. It is they who are most keen to seek clarity on issues like GST. The need therefore is for transparency. Lack of transparency is affecting trading, and in turn the freight movement. There is also a need to transform from an opportunistic freight model to the one that is transparent through effective implementation of taxation activities. The need therefore is to link GST to economic growth for freight efficiency to go up.”
Growth will be on account of replacement demand, infra and mining
Claimed an analyst that the move up to higher tonnage commercial vehicles will continue in 2016. Replacement demand, he added, will also continue to drive growth, but with an added support coming from the emergence of activity in infrastructure and mining. Said PJ Salamon, “We are quite positive about the Government’s ambition to double the coal production by 2020. This will give good impetus to the coal mining sector. We expect good demand to come from the mining sector.” Madhavan averred, that in 2016, 85 per cent of the M&HCV segment by volume will be contributed by goods carriers and the remaining 15 per cent by passenger carriers. In the LCV segment, 94 per cent of the volume will come from goods carriers and the rest 6 per cent will come from passenger carriers. “The overall goods carrier market is expected to grow by 6 per cent (about 36,000 incremental units). The passenger carrier market is expected to grow by 37 per cent (18,500 incremental units) over 2015,” opined Madhavan.
According to Wasan, the cargo segment will be replacement driven, and on account of the pent-up demand as well. Drawing attention to factors like smart cities, taxation, emissions and safety, which would help to boost sales of passenger CVs, Wasan exclaimed, “Pick-up in mining and infrastructure activities will provide growth momentum in M&HCV construction segment.” He also drew attention to the rising inclination towards buying fully built vehicles (FBVs), following the implementation of uniform bus body norms. Rise in demand for fully built vehicles is expected to continue in 2016. Apart from motivating passengers to use public transport, the proliferation of fully built CVs is also expected to lead to a rise in showroom experience. Showroom experience will get a boost in 2016, presenting the dealers an opportunity to broaden their scope of business and earn more by offering a gamut of value added services.
Showroom experience will rise
Showroom experience is set to rise in tandem with the demand for modern, fully-built vehicles. Also, the need to service new generation CVs with the use of sophisticated diagnostic tools. Pointed an industry expert, that the market leader Tata Motors is ambitiously overhauling its CV dealer network. He also drew attention to the first ‘bus zone’ at Chennai, which Tata Motors launched in later 2015. More bus zones are expected to spring up in 2016, reflecting a growing attention towards buses in wake of their growth potential. Explained Madhavan, that the bus body fabrication norms, procurement by state government for inter-city and intra-city transportation, higher disposable incomes will drive demand for medium and heavy duty buses. Growth according to him is expected to be in the region of 56 per cent – to the tune of 17,000 incremental units over 2015. “Better road infrastructure will propel the demand for luxury and sleeper buses for journey distances within 700 km. As the smart cities plan unfolds, LCV passenger carriers will be in demand as feeder-lines to metro stations. Growth of about 6 per cent is expected primarily in the sub-urban and rural sectors, accounting to about 1,600 incremental units over 2015,” he said. In 2016, it would be interesting to see what the market currents are like.
Market currents
According to the Society of Indian Automobile Manufacturers (SIAM) report, in the period between April and October 2015, Tata Motors was a clear market leader, selling 162,845 CVs over 164,237 numbers sold during the same period last year, commanding a market share of 43.64 per cent. Mahindra was second with a market share of 25.14 per cent having sold 93,830 CVs in April-October 2015 as compared to 89,842 units sold during the same period last year. Ashok Leyland was third with a market share of 18.11 per cent, having sold 67,591 CVs in April-October 2015 against 89,842 units sold during the corresponding period the year prior. Claimed an analyst that Tata Motors will continue to lead the CV market in 2016, followed by Ashok Leyland. The two will dominate the domestic truck scene in India with a combined market share of over 85 to 90 per cent, he added. A report by Ernst & Young, titled ‘Mega trends shaping the Indian commercial vehicle market’ has estimated that the Indian commercial vehicle market will double to 1.6 million units in the next five years thanks to the increase in infrastructure spend, rapid urbanisation and entry of major multinational players in the country. Remarked Sugato Sen, Senior Director, SIAM, “Commercial vehicles in FY16 are expected to grow at 9 to 12 per cent. The improvement in demand would majorly be supported by recovery in LCVs where the demand has languished for the last three years.” “Improvement in consumption demand and expected improvement in financing environment would support the growth for SCVs. M&HCVs and buses would continue its growth with demand supported from replacement and fleet addition,” he mentioned.
Urbanisation is expected to benefit the SCV and pick-up segment, both in the area of cargo and passenger carriers. Demand for more powerful and higher payload is already driving a transformation in this segment, pushing SCVs to grow closer to the pick-up segment. In fact, three small trucks launched in 2015 – Tata Ace Mega, Tata SuperAce Mint and Mahindra Supro, are said to come under the category of pickups rather than SCVs. They also reflect an effort to blur the boundaries between CV segments apart from a distinct demand-based shift. Expressed Wasan, “The rate of decline of Small Commercial Vehicles (SCV) and LCVs has slowed down in the last two quarters, which is a positive sign. Factors like further proliferation of hub and spoke logistics model, implementation of GST, untapped semi-urban and rural markets, improving urbanisation and rapid ecommerce growth are likely to support a steady demand for SCVs and LCVs.” Shigeru Wakabayashi, Deputy Managing Director, Isuzu Motors India, expressed, “The year 2016 will be an important year for the Indian automobile sector with new products waiting to make inroads into the promising Indian market. We are gradually witnessing a change in trends and usage patterns in the pick-up segment, thanks to the performance, versatility and practicality it offers.” He mentioned that the volumes are slowly but steadily shifting towards pick-up trucks between 2-tonne and 3.5-tonne GVW from SCVs owing to the advantages pick-ups provide, both in terms of load carrying capacity and better turnaround.
Growth will come from new, higher tonnage CVs.
Claiming that polarisation is visible in every CV segment, an industry expert said that there looks like a concerted effort by CV manufacturers to offer higher tonnage CVs in various categories, leading to the emergence of new categories and application areas. He pointed at the launch of three Eicher reefer trucks based on their new Pro series in an effort to strengthen their reach in the reefer truck market. The demand for new, higher tonnage CVs is also driving technology and innovation in the CV sector. An expert cited the example of the JBM city bus, Ashok Leyland Janbus and BharatBenz 3143CM. The Janbus costs almost half of what a Volvo city bus costs, he claimed. The BharatBenz 3143CM will replace the Mercedes-Benz Actros in India, and costs almost half of what it took to buy the Actros, he added. Interestingly, both the CVs, the Janbus and the 3143CM are thoroughly modern and are supported by a good deal of technology and innovation. Ironically, they are also backed by high level of localisation, which also reflects upon the abilities of the CV component suppliers.
Demand for lower operating costs and lower acquisition costs
Expected to grow at a CAGR of 5 per cent or more during 2015-2020, the CV industry in India is expected to be cost conscious. This would continue to create a need for frugal engineering, albeit with a shift towards modern, world-class CVs. They would have to stay true to the fact that the average cost of a CV in India is lower than that of a CV in an advanced market. Demand for lower operating costs and lower acquisition costs will continue in 2016. What will be interesting under the given circumstances will be the growth of alternate fuel CVs. Opined Madhavan, “Of hybrid vehicles especially in the passenger carrier space, established domestic players foraying into the premium and super-premium segments that were earlier the forte of European brands, global platforms being introduced at optimum cost versus product value offered are some of the disruptive changes, which will cause many more product options to be presented to the Indian consumer.” He pointed at the challenges OEMs will face whike adapting to faster product development lifecycles, investments in research and development, investments in manufacturing to maximise global footprint, explore alternate revenue streams by foraying into telematics, infotainment systems, acquiring smaller supplier units in allied fields, and to protect operating margins and seek insulation against the cyclical nature of the Indian CV Industry.
Challenges
The biggest challenge for the CV industry in 2016 will be to find new avenues of growth. For CV OEMs, the challenge would be to retain domestic growth and market share, and continue to grab a greater pie of the export markets. Expressed PJ Salamon, “Policy changes and new policy implementation from the Government affecting the economy are important and have implications on the CV industry. While there are positive signs on the policy front by the government, any delays in implementation of GST for example, may have an impact on the CV industry. There is also the need to get further details on the implementation of accelerated emission norms as announced by the Government. We will have to gear up to meet those deadlines.” “On the regulatory aspect, the immediate respite would be the introduction of GST bill. It would help the CV industry significantly by making it more efficient in terms of operating cost and turnaround. Logistics companies will see a major change in transportation of goods and location of warehouses enabling end consumers to have efficient access to goods. On the other hand, the market is changing rapidly and expectation levels of the general public are increasing manifold,” remarked Wakabayashi. He added, “Regulations have to be specially formulated to benefit every segment of the transport industry in order to achieve greater operational efficiency. For instance, issuance of driver license has to be streamlined across various parameters and adherence to certain regulatory norms will ensure better competency levels of drivers across the industry. By doing this, the country can reduce life loss and material damage caused due to improper driving habits.”
A step in the direction of elevating safety has been taken by the Government through the implementation of ABS and Bus Code. Yet another development is the training for M&HCV drivers to deliver medical first aid at an accident spot before professional medical aid arrives. The use of telematics in the CV industry is going up. It may, going forward, have an effect on the insurance costs. As far as any disruptive changes are concerned, Kaushik is of the opinion that any hiccups in the of GST will shift any perceived impetus to the logistics sector to the later half of 2016. “Improvement in infrastructure will aid in faster turnaround time of vehicles, offset by the increased flow of goods across the country. Freight rates are not expected to change much along the dedicated freight corridors. However, with a continued emphasis on de-bottlenecking of mining sector and infrastructure projects, riding on the effective regulations and incentives floated by the Central Government like increasing FDI caps in the infrastructure sector, fast-tracking inter-ministerial clearances, the off-highway vehicles (Construction, Earth moving & Mining Equipment) segment is expected to moderately grow to about 50,000 units in 2016 as against 45,000 units in 2015,” he averred. Growth, it is certain, will find a way of creeping in.
