CV industry future

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A panel discussion on the CV industry future at the beginning of Apollo CV Awards 2018 saw the leaders of the industry express their thoughts.

Story by:

Bhushan Mhapralkar

An expression by Girish Wagh, Head – Commercial Vehicles, Tata Motors Ltd., about the effects of GST and the behavioural changes seen at the fleet operator level set the tone for the panel discussion. “Post the second quarter of FY2017-18, fundamental reasons” mentioned Girish, “led to the demand for CVs going up.” Leave for some early apprehensions of how the industry will pan out, transporters reacted positively. Business has been good post the stocking and de-stocking hiccup averred Wagh. Stating that there were some headwinds after GST implementation, Shyam Maller, Executive Vice President – Sales, Marketing & Aftermarket (Light & Medium Duty Trucks, Buses), VE Commercial Vehicles, remarked that fleet owners, parts distributors and retailers felt the pain. “Vehicle dealers who were caught off guard in terms of additional working capital also felt the pain,” he mentioned. Triggering a massive change at the logistics and C&F level, GST is transforming the way goods are carried, announced Maller. Opining that rapid growth in infrastructure is also helping the industry transform, Maller said, “Thirty-seven-tonne trucks have been the star performers this year. Growth is set to unveil itself in the construction truck space. The happy days of 2011 and 2012 are back.”

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Pointing at the start of uncertainties in 2008, Erich Nesselhauf, MD & CEO, Daimler India Commercial Vehicles, attributed the return of strong demand to the backlog. Stating that buyers became nervous after the roll-out of BSIV roll-out, Erich mentioned that it took some time for them to understand BSIV technology. “Acceptance improved rapidly thereafter,” he remarked. Expressing that an earlier communication from the government about GST or its rates would have helped, Nesselhauf said that the fear was of a decline in truck utilisation. The magnitude of demand due to the backlog was however of such magnitude that it pushed truck utilisation to 200,000 km per year from the earlier level of 80,000 km per year. Claiming that international fleets are entering India, Nesselhauf averred, “The demand may be much bigger than utilisation. We have received huge orders from international fleets that are entering India. They are highly professional in nature.” Expressing that those in the business are investing as per government policies, Vinod Sahay, CEO, Mahindra Trucks and Buses, expressed that a good per centage of CVs in the future will be made up of alternate fuels and electricity. “At least for a couple of more years, a large part of heavy CVs will comprise of diesel. BSVI is a good and clean technology,” said Sahay.

Electric and other technologies

Of the opinion that buses will go towards electrification, and would be legislation and customer driven, Sahay averred that there will be a mix when one considers small CVs, inter and intra-city CVs. Stressing on electric vehicle transition accompanied by technology acceptance, ecosystem adoption and successful commercial adoption of technology, Sahay remarked, “Diesel will be a fuel of choice in the foreseeable future for inter-city and highway trucks.” Suresh Chettiyar, Business Head, Volvo Buses South Asia, mentioned that a different game will evolve for buses. “An important part of the technology roadmap is evolving in the form of BSVI and electromobility. It is necessary to watch how it goes back into the public life,” he said. Emphasising on regulatory driven processes, Chettiyar averred, “Cost will be driven up by technology roadmap, which in-turn will drive performance on the road. The performance will come from the way people will travel or how goods will move. It will also involve safety and energy efficiency. The need is to allow a developing ecosystem to have the right standardisation and scale to offer value in terms of cost.” Of the opinion that technology is not a limiting factor, Chettiyar remarked, “It may be good to be optimistic or leapfrog by crunching technology that took longer to develop in advanced markets. It would not bode well however to overlook the current ecosystem, and if there is space for investment, or if the operators know how to bring efficiencies in operations.”

Stating that it will not make a difference by putting 1000 vehicles with new technology on the road, Suresh averred, “The need would be to get old vehicles out.” Terming electric mobility as far stretched, Somasundaram S, Head – Sales, MAN Trucks India Pvt. Ltd., said that the CV industry is already leapfrogging from BSIV to BSVI in the shortest time ever for such a leap to take place in the world. “The need is to look at the product lifecycle. The BSIV lifecycle will be shorter. With the cost of operation important, a tendency to accept and quickly tackle any disruption that comes in the way is rising,” mentioned Somasundaram. Terming BSVI as the most challenging, he remarked, “The roadmap on electrification will depend on how the market accepts it, or if the right ecosystem is available. Even countries that pioneered a move to electric mobility are finding it difficult to get the right ecosystem.” Of the opinion that ecosystem takes time to develop, and will have to be economical to work in India, Somasundaram explained, “Simply enforcing it will not work.” He drew attention to BSVI technology and how the next three years will be spent doing it. “Diesel is going to have a longer life than is anticipated. For electrification, the availability of electricity has to be looked into. What happens when the entire ecosystem, shifts to electricity will also need to be seen,” he said.

Meeting the threshold

Of a clear view that technology has to meet certain thresholds, Girish Wagh mentioned that technology should make business sense. He averred, “The move to BSVI should make business sense to a customer. It is necessary for the OEM to be able to meet the government mandate. We need to ensure that the BSVI product we offer makes commercial sense to the customer apart from making business sense to us. We cannot develop every technology even though we keep track and pursue advanced developments in various areas. In the area of electrification, the technology should make economic sense to the customer. Consider the recent electric-bus tenders, the economic sense to the customer is currently linked to FAME Phase-one incentive.” Expressing that battery prices and those of the other associated bits are coming down, Wagh said, “We will cross that threshold one day for the customer. It will address the customer business part. For OEMs, the need is to have volumes because of the lack of backward integration.” Revealing that the government is looking at how backward integration can be achieved as far as electric mobility is concerned, Wagh mentioned, “Range and cost are a challenge. The two have an inverse relationship, and buses will be the first to see electric penetration.” Commenting that it will happen with the support of incentives, Wagh opined, “Intra-city transportation would be the next to see electric penetration. Intra-city goods transportation, if it will make business sense, will see electric penetration as well,“ he said.

Expressing that India has more engineers than anywhere else in the world, Erich mentioned that it is they who will offer the electro-mobility technology. Highlighting a need to change the mindset, Erich averred, “We have to invest in electrification, and now.” Stressing on the need to have a master plan in place, Nesselhauf expressed that India is behind Europe in electro-mobility. “I say this,” he explained, “is because electric trucks are already being sold in Europe and the United States.” “The gap is far more when it comes to having charging stations, and it does not help to talk about electricity from the tank to the engine, but about what energy will best serve the need. We have to think of how to produce energy. It is extremely bad if we were to produce electricity from Lignite. The BSVI engine would be much cleaner than to have an electric vehicle that gets electricity from burning Lignite,“ remarked Erich. Of the opinion that there is a need to align the incredible people (engineers) that India has, to engineer a master plan for electrification, Nesselhauf said, “The need is to unleash the capability; to unleash the potential. By doing this, there will be no need to depend on China. China is keen to be a front-runner in electrification and is subsidising it. If electricity would be the answer, diesel CVs will be found in the future. There will be scope for alternate fuels too.” Explaining that one should not think that a certain technology will last for long, Erich mentioned, “The need would be to get the cash back (ROI) before its too late.”

Regulations and safety

Expressing that there are bigger concerns than just what fuel will power a CV, Vinod Sahay remarked. “Regulations that look at other areas like improving safety need to be debated upon. Calling upon the need to align the CV industry and the government, Sahay said, “It is important to catch up with the rest of the world on the aspect of safety as well.” Stating that a large number of trucks do not have an OE cabin, Sahay expressed that a big part of the multi-axle trucks has to take the leap to fully-built safety cabins. He informed that accidents are happening because of a lot of untrained drivers are driving trucks. “There is a shortage of CV drivers in India. We (OEMs) are opening driver training schools, but there are no students,” said Sahay. Not attracting enough talent, the problem with driver profession is a problem of the society. It is a problem that the country is ignoring. Stressing on the need to introduce driver behaviour regulations in India, and which are found in Europe, Sahay opined that there is a need to work jointly. Pointing at scrappage policy, and how the country would benefit, and not just the OEMs, Sahay said, “There is no point in having polluting CVs out on the road than to introduce BSVI emission norms.”

The rising reliability of CVs requiring them to visit the workshop once or twice a year is heralding a big change. Expressing that there is a need to look beyond emissions to support modern CVs, Sahay said that doing so will be in the interest of the larger economy. Describing bus body code as a scam as it has not got implemented, Maller said, “We do not know when the truck code will come out.” Stating that BSVI CVs with bodies that do not prescribe to a certain stipulated standard would be a potential bomb on the road, Maller averred, “Some horrific accidents involving buses has led to a rise in consciousness about safety.” Responded Somasundaram S, “Utilisation of CVs is going up, and a shift towards higher tonnage is on. This will lead to the inclusion of better technology. The next two-three years will see the need emerge for vehicles that support higher utilisation. Better network reach will be necessary, and the CV industry will continue to evolve.” Suresh expressed, “The potential when it comes to buses is enormous. Mobility needs are going up since we are low per mass of people.” Stated Sahay, “The ratio tilt towards goods CV does not justify the demography we leave in and provides room for bus growth to surpass those of trucks. Stressing upon adoption of better technology, Sahay said that utilisation is going up considerably for operators to be more competitive. The allocation in the recent budget towards rural economy will prove to be a big enabler for CVs, he opined. A rise in the rural income and affordability will drive medium to long-term demand, remarked Sahay.

Connectivity and infrastructure

Expressing that connectivity is growing, Erich Nesselhauf mentioned that safety has to be pushed up, and better uptime has to be achieved. “Evolution in CVs will be very fast, and will be comparable to the evolution of mobile phones,” he stated. Informing that CV operator demographics are changing, Maller opined that bulk buying has gone up, and is triggered by an end customer looking to deal with fewer logistics partners. This, he mentioned, would lead to safer, company built trucks with the higher payload. Lauding government’s effort to curb overloading, Maller said, “Rising infrastructure will shift the focus towards larger trucks.” “The funny rule of a tractor married to a trailer should go,” Maller announced. Underlining three forces that are driving the CV industry — regulations, TCO and total operating revenue, Wagh concluded, “Total operating revenue will boost active safety and comfort, he concluded. The panel discussion was moderated by V G Ramakrishnan, Managing Director, Avanteum Advisors.

GST for the transportation sector

 

GST for the transportation sector and the commercial vehicle industry will dial significant changes.

Story by: V G Ramakrishnan

GST would have rolled out by now, not relenting to the rising clamour for deferring it by a few months from a wide range of industries, and the banking sector. Apart from the deadline to implement GST, much has been discussed about its impact from the product taxation point of view; from the inflation point of view, and from the GDP growth perspective among others. The transition to the new tax regime under GST is likely to have a neutral or slightly positive impact on the commercial vehicle industry. Primary benefit would accrue from the removal of cascading taxes. Experts from diverse fields are of the opinion that GST in its current form does not differ much from the tax it will replace in terms of complexity, the number of tax slabs, and the huge burden of increased paper work.

With close to 60 per cent of the GDP contributed by the service sector, India in 2017 is largely a service driven economy. Manufacturing accounts for 25 per cent of the GDP. With GST simplifying a multitude of taxes on manufactured goods, compliance burden has increased significantly on the services sector, including the transportation sector. If the existing system requires service providers to pay service tax at a flat rate and file returns twice a year, under GST, the number of forms that are required to be filled increases to 37 in a year. This will lead to an increase in the compliance costs. Service organisations that operate in multiple states will have to register in each state that they operate in. This would be necessitated by the complex structuring of GST into Central GST and State GST. Many believe that GST is VAT 2.0 with improvements thrown in for good measure.

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GST, there is no doubt, is a game changer. Whatever may be its shortcomings as of current, it is a game changer since it creates a single market with uniform tax rates across the country. This singular change has the potential to have a wide ranging impact on the transportation sector. It also has the potential to have a wide ranging impact on transport companies and truck manufacturers for years to come. GST is not the largest transformative tax legislation to either transform or disrupt the Indian economy. For the transportation and commercial vehicle industry, GST is expected to bring about a significant change. Changes that would broadly focus on the following factors: sales volume, segmental shifts, ancilliary businesses transitioning to the organised side, and OEMs developing strong positions and revenue streams. Changes would also broadly focus on factors such as the transformation and consolidation of the transportation industry. If and how the purchasing power of large fleet operators can be increased, and the impact on brand pofitability among others.

Warehouse transformation

The imminent change GST will drive is the redesign of warehouse network. Historically companies operated warehouses in various states to avoid multiple taxation. These warehouses were in many cases sub-optimally designed. They were used only to add additional costs across the supply chain, both in-bound and out-bound. With GST doing away with the need to maintain warehouses across states, manufacturers are quickly reorganising warehouse locations by shutting down sub-optimal facilities and consolidating into larger spaced facilities. In many cases organisations are cutting down the number of warehouses they have had by more than half, or by one third of their original network strength. Companies in high velocity inventory turns sectors may still continue to operate with many warehouses since their requirement is demand driven than being tax policy driven. The outcome of such rationalisation is expected to result in lesser yet larger warehouses that are markedly automated.

While it is likely that many companies will actively create or enhance warehouse closer to the manufacturing location as this will increase their ability to stock and service low volume products and improve efficiency, the impact of this reformation in warehouse network will impact transporter route plans, frequency of routes and vehicle tonnage requirement. As more goods are transported to larger stock holding warehouses, transporters will require higher tonnage trucks since the probability of corporates transforming to full load trucks over partial loads will be high. This trend is expected to increase demand for higher tonnage trucks in the next two-to-three years. Commercial vehicle manufacturers can expect a further acceleration of growth in the segments above 25-tonnes.

New routes will emerge as companies relocate warehouses to lower cost locations; locations with larger land availability. Market access and costs in balance will also play a role. This change will over time lead to the creation of a hub and spoke model. Markets particularly in East and parts of North India (like Punjab, Haryana, Himachal Pradesh, J&K and Delhi) are likely to move faster in creation of hub and spoke models. Over the long term, vehicles with less than two-tonnes will predominantly serve last mile connectivity. Vehicles in the four and 10-tonne segment (LCVs and some ICVs) will serve as a connection between the hub and spoke. Vehicles over 25-tonnes will serve as a connection between manufacturing locations and the hub.

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Since the transportation industry operates on the basis of growth by tonnage, higher economic growth may not necessarily translate into higher volume growth for truck manufacturers. Segmental shift to higher tonnage will be evident over the medium and short term as the market adjusts to a structural change. From a freight stand point, demand for larger trucks could push freight rates up, and until the market reaches a balance. As the size of trucks increases, ticket size of trucks will grow. The ability of transporters to invest in business will rise too. While service debt could affect fleet acquisition plans, it coupled with the implementation of Bharat Stage IV emission norms will increase vehicle prices significantly. It is fairly established that the cost of BSIV upgrade will be significantly higher (as a per centage of the product cost) in lower tonnage vehicles compared to higher tonnage vehicles. The combined factors of emission upgrade and GST could churn the transport segments. One possible scenario that may emerge is of large transporters increasing their grip on first mile. Medium-sized operators could operate predominately in the hub to spoke segment, and small and individual truckers operate the spoke and last mile based on their financial capability. Transporters could increase their focus on niche segments, which require particular vehicle type to optimise the balance sheet.

Supply chain and vendors

GST is expected to drive changes in the business model across sectors. The transportation sector will have to evolve quickly. Two aspects of GST, chosen as examples, provide an indication of the changes that will sweep the transportation sector. First, the score system – similar to credit rating scores provided for each registered entity, will reflect an entity’s adherence to tax system, process and procedure. Corporates and companies can choose who to contract transportation based on the scores. As GST works on the principle of input tax credit, only those vendors and supply chain partners that file returns, will attract business. Transporters will have to maintain clean books of accounts and refrain from tax avoidance to avoid the risk of losing business. Companies and corporates looking for input tax credits will choose vendors that adhere to the new tax regime. GST is ushering in an era where market will regulate tax payment practices. Second, is the e-way bills. e-way bills will have an impact on the way transporters function. In this regard, GST is creating a digital foot print of each transaction and transport. Every e-way bill will have a certain period of validity. Transporters would be required to complete the delivery within the stated period. This will act as a huge deterrent for transporters, market load operators and small transporters in particular, against delay in delivering the cargo. A new e-way bill (from the consigner) will have to be generated beyond the validity period. Transporters will need to evolve their business practices. GST will call for a change of mind-set.

Organisational change

The prime objective of GST is to bring more and more transactions under the tax net; to increase transparency and compliance. The threshold for companies to register for GST has been lowered to Rupees-two million per annum as compared to Rs.10 million per annum limit in the past. Companies that were exempt from tax will now come under the tax net. This has the risk of making their products more expensive, and less competitive, as compared to the products produced by large-size organisations. The economy on the whole, is likely to get more organised. With increase in competition, smaller sized organisations are likely to ‘professionalise’ their operations, and grow to scale or exit. This trend is expected to play out among transporters as well. Transporters are also expected to engage in business transactions with vendors that are organised. This will enable them to benefit from input tax credit. While the current practice of consigners paying the tax on transportation will continue under GST, transporters that provide additional services will eventually charge GST and take credit for many input items like lubes, insurance, and tyres among others. Some of the services offered by roadside service providers like tyre retreading, repairs and maintenance are to come under the GST net. They will thus move up the value chain as GST compliant enterprises. The velocity of this movement will increase after the government brings petroleum products under GST. With increasing complexity in trucks, truck manufacturers can look at an increase in maintenance contracts, increase in the quantity of vehicles serviced, and at authorised service points.

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Transformation long-haul

GST transformation is about change in money (tax reform), matter (business process, model) and mind (compliance). Rather than an overnight transformation, it will take time. Evidence of change will emerge only in the next 24 to 36 months. Any expectation of a quick change will lead to expectation mismatch and disappointment. GST entails a long-haul. It entails a long-haul journey for the transportation and commercial vehicle industry to realise the benefits. With GST the transportation sector and truck makers are embarking on a journey that will lead to a significant improvement in productivity, cost efficiency and growth.

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V G Ramakrishnan is the Managing Director and Partner of Avanteum Advisors.