Regulatory implications on the Indian bus industry will be disruptive, and throw up unlikely winners.
Story by: V G Ramakrishnan
To say the bus industry in India is undergoing a transformation is an understatement. Regulatory changes in the form of Bus Body Code, which has been implemented in totality from October 01, 2016, and BS IV emission norms, which will come into force pan-India from April 01, 2016, are two such transformational programmes that will deeply impact the participants in the ecosystem. BS VI emission norm regulation is also on its way. It is slated for 2020, and will be yet another transformational program that will deeply impact the participants in the ecosystem. With programmes like these, there is a definitive need to study them, and to evaluate them. The top level impact the programmes like these will have on various players across the value chain. There’s a definitive requirement for deep dive assessment on the regulatory impact. As is the case with any transformational change, the impact is broad based, and as the dust settles, there will be clear winners and losers.
Adapting to change
Adapting to change is imperative. There is no option. Resistance to change or efforts to maintain a status quo will delay the inevitable. The winners in this transformation will be the consumers, and people. They will be able to avail of safer transportation mediums. With anticipated lower emissions for new vehicles, they will also get to breathe cleaner air. The impact of the regulatory changes will be primarily felt by a large number of State Government owned and operated State Transport Undertakings (STUs) and bus body builders. It is these two that will find it difficult to improve manufacturing process to meet the requirements of the bus body code.
STUs operate large bus fleets in India and the capital cost of renewing their existing bus fleet with new buses adhering to bus body code and BS4, and subsequently BS6 buses, will be significantly higher. Of the over 60 STUs in India only three STUs are profitable. State Governments fund the STUs for the operational losses (due to uneconomical ticket prices) as well as fleet purchases. Higher bus prices will lead to larger fund requirement. This will potentially impact replacement demand and push bus operators to extend the use of their existing fleet beyond the service life. Private bus operators will look towards increasing user charges to offset higher purchase price of new vehicles. Another large segment of bus buyer, educational institutions will also look to pass on the higher vehicle cost as higher prices to the consumers.
Cost impact on fleet and travellers
Regulatory changes apart from those that concern the body and emissions will also contribute towards a rise in the cost of buses. These include fitting of GPS, live video feeds for passenger safety, and passenger convenience features like Wi-Fi. Customers (bus travellers) should brace for higher transportation costs when using private operator fleets. In comparison, the ones that travel by public transport buses will be less impacted. Governments are expected to step in, and reduce the price impact through higher subsidies. This will however impact the finances of state governments, and lead to higher taxes on consumers. There’s also the hope of tax buoyancy through faster economic growth to offset higher subsidies.
Hike in prices is likely to compel bus operators to extend the replacement cycle. They may decide to use buses beyond their replacement age. In India implementation of regulation on vehicle fitness is generally lax, and with state governments acting as both, operator and regulator, chances of stringent implementation of fitness tests on government fleet is low. Past incidents of poorly maintained buses causing accidents have been widely reported. Many STUs do not insure their buses. This acts over and above poor maintenance as a disincentive for fleet renewal on account of insurance oversight.
The short gap between the implementation of BS IV and BS VI emission norms, and the roll out of GST, will play a part in customer decision. Government bus operators as well as the private operators are expected to be cautious in their approach to invest further. STUs make a significant chunk of sales as far as bus manufacturers are concered. The manufacturers will stand to gain if STUs and other operators decide to pre-buy; buy new buses before the BS IV and BS VI norms are implemented. There’s also a possibility of operators, given the short, three-year time gap between BS IV and BS VI, wanting to postpone the purchase of buses to a later date. They can thus evaluate the cost impact better. A critical element here will be the fleet age and the replacement requirements of bus operators.
A likely scenario is customers indulging in advance purchase. They could purchase buses ahead of the BS VI emission norms roll out. This would help them to beat the price increase. Bus manufacturers can thus expect to witness a spike in growth in specific years to be followed by suboptimal growth for intermediate period and beyond 2020. The volume growth and higher prices of buses will help OEMs to improve their earnings even as they witness growth cycles with swift reversal between growth and de-growth.
Bus Code, a mixed bag
Changing regulations, the bus body code in particular, is expected to be a mixed bag for bus body builders. Operations of unorganised and semi-organised bus body builders are expected to be severely impacted due to their inability to invest in infrastructure, equipment, R&D and people expertise to meet the standards prescribed in the bus body code. These busineses will eventually have to shut down. The shutting down of unorganised and semi-organised bus body builders will benefit the organised bus body builders, OEMs and component suppliers. The three will be able to avail of new business opportunities. They will be able to expand their capacities and increase volumes.
The transformational changes in the bus industry will be disruptive, and throw up unlikely winners. The commercial vehicle industry will be watching how the unorganised and semi organised bus body builders respond to the challenge of bus body code. Smaller companies have used ingenuity to survive, grow and thrive in a challenging environment using innovative business models. The outcome of the regulation driven changes in the bus industry will be watched with interest as it could well serve as a road map for other markets to chalk out their strategy. Epecially those markets or sectors that are likely to witness changes driven by regulations. The bigger question is, are we moving from an unorganised sector to an organised sector? And, how prepared are we for the far reaching implications that will arise?
V G Ramakrishnan is Managing Director and Partner of Avant Advisors LLP.