scorecardresearch
Download the latest issue of Business Today Magazine just for Rs.49
Commercial vehicle industry at the threshold of yet another downturn

Commercial vehicle industry at the threshold of yet another downturn

A sharp increase in the cost of trucks due to higher input costs, higher interest rates, rising diesel prices and severe shortage of drivers coupled with no commensurate increase in freight rates have hurt demand.Nearly 10,000 trucks are lying idle in Bellary following the SC ban on mining there, while several sectors such as cement and cars are generating lower output. It seems the commercial vehicle industry is at the threshold of yet another downturn.

Truck chassis at Ashok Leyland's plant at Pantnagar in Uttarakhand Truck chassis at Ashok Leyland's plant at Pantnagar in Uttarakhand
When the Society of Indian Automobile Manufacturers, or SIAM, released data on sales of commercial vehicles, or CVs, during the four months ended July, the segment showed a healthy 16 per cent growth over the same period last year. It seemed to affirm the continuation of the dream run that the CV industry has enjoyed after the 2008 global downturn. The segment posted sales of 2.37 lakh units as against 2.03 lakh units over the corresponding period last year, numbers that were robust enough to point to the resilience of economic activity in the country. But on closer scrutiny, the data reveals stress points, which have most CV manufacturers, financiers and dealers more worried than enthused.

Demand for passenger carriers during the first four months of the financial year has shrunk by one per cent to 32,403 units from 32,566 during the same period last year. This category had seen strong growth over the past two years largely as a result of the government's economic stimulus that pumped money into schemes under the Jawaharlal Nehru National Urban Renewal Mission. "Growth rates have indeed slowed," says Siddhartha Lal, Managing Director and CEO of Eicher Motors, makers of the highend Volvo buses in India. "It is unclear whether demand will dip slightly or remain flat in the near future."

Demand for trucks weighing 12 to 25 tonne has fallen by a steeper eight per cent. These account for almost 48 per cent of the medium and heavy commercial vehicle, or M&HCV, category, which includes vehicles weighing 7.50 tonne and above. Overall, this category has posted an eight per cent growth. Vinod Dasari, Managing Director, Ashok Leyland, makers of predominantly heavy trucks and buses, attributes the fall in demand more to a temporary oversupply than to any change in the fundamentals.

 What lies beneath

Dig deeper into the sales numbers and all is not well in the commercial vehicle industry

The bus segment, which accounts for about 15 per cent of the industry, has seen a contraction

Sales of 12 to 25 tonne trucks, which account for half the M&HCV segment, have shrunk by 8 per cent

The overall M&HCV segment grew by just 8 per cent in April-July period. Last fiscal year it grew 32 per cent

SIAM has already lowered its industry growth estimate to 7 per cent against 27 per cent last fiscal

Higher acquisition and operating costs have forced fleet operators to hold back purchases

Flat freight costs and driver non-availability have compounded the problem

Quantum of discounts have registered a sharp rise

"There was a huge pre-buy last year just before the new emission standard came into effect from October," he says. But fears of a slowdown in the commercial vehicles industry are more real for finance companies and dealers. "The M&HCV segment is already in a slowdown," says T.T. Srinivasaraghavan, Managing Director of Sundaram Finance.

According to him, a sharp increase in the cost of trucks - there has been a 10 per cent increase in the past 10 months due to higher input costs - higher interest rates, rising diesel prices and severe shortage of drivers coupled with no commensurate increase in freight rates have hurt demand. Freight availability, too, is turning adverse. Nearly 10,000 trucks are lying idle in Bellary following the Supreme Court ban on mining there, while several sectors such as cement and cars are generating lower output. "Truckers typically borrow at a fixed rate for a five-year period. They do not get any benefit when the interest rate declines. With rates close to its peak today, truckers are waiting for them to come down," explains R. Sridhar, Managing Director, Shriram Transport Finance Company.

Besides, falling demand has led to massive discounts. "But for the discounts, the slowdown would have been a lot more apparent," says a dealer.

Boosting the overall sales numbers this time as well as optimism in the industry are light commercial vehicles, or LCVs, and heavy trucks weighing above 25 tonne. With demand for LCVs galloping at 25 per cent, Ashok Leyland is gearing up to launch LCVs in the Indian market later this year in a joint venture with Nissan Motor Company. "Demand for LCVs will jump to 800,000 units in the next five years. A hub-and-spoke setup is emerging in India where heavy trucks carry goods between various cities and LCVs handle the intracity transportation," says V. Sumantran, Executive Vice-Chairman at Hinduja Automotive. Demand for heavy trucks has risen sharply by 62 per cent to 17,959 units during the four-month period largely as a result of the hub-and-spoke model. It is estimated that for every heavy commercial vehicle sold, 10 LCVs are needed.

The industry is cautiously optimistic about its immediate future. "I do not expect galloping growth in the next six months. At the same time, I do not see a major slowdown either," says Eicher's Lal. Those in the industry will be more than happy if his prediction comes true.