The Hindu Business Line : ‘CV sales slowdown not just due to interest rates’

Chennai, Oct. 23 Sales of medium and heavy commercial vehicles or trucks and buses, have seen a decline of 15 per cent during the first six months of this fiscal. After growing at a rate of 20 per cent during the past five years, the latest numbers mark a drastic reversal of fortunes in an industry regarded as a bellwether of the economy.

Commercial vehicle manufacturers – Tata Motors and Ashok Leyland, blame high interest rates for the slowdown.

The financiers don’t agree.

OVERCAPACITY

Mr T.T. Srinivasaraghavan

Mr T.T. Srinivasaraghavan, Managing Director, Sundaram Finance, a major financier of commercial vehicles, says, “Interest rates certainly do have a role to play but that by no means is the only reason sales have slowed down. If you look at the two-wheeler and car segment, you can justify buying behaviour on the basis of interest rates. In CVs, unfortunately, that is not true.

“I really think it is overcapacity that is playing out – which to my mind – has been the writing on the wall for two years now. Last year, it was camouflaged because of this overloading ban – it sort of helped soak up excess capacity – but it had to finally play out.”

Mr R. Sridhar

Mr R. Sridhar, Managing Director, Shriram Transport Finance Company, a leading financier in this business, agrees that interest rate is only a trigger.

He says, “The CV business is cyclical and the industry makes its own adjustment. When supply or freight carrying capacity goes up, the freight rates go down. Then the industry postpones decision to buy new trucks.”

GOOD ROADS TO BLAME!

Mr Srinivasaraghavan provides another interesting reason why replacement of trucks is not happening. He says, “With the huge improvement in road infrastructure, there is a significant drop in travel time and a faster turnaround. A trip that used to take 7 days, now takes four. Vehicles turnaround quicker and the usage is higher. And because road conditions are better, maintenance cost of commercial vehicles has come down and replacement cycles have become longer due to lesser wear and tear.”

Mr Sridhar points out that the average age of the 3.5 million trucks roaming the Indian highways is more than 10 years.

In comparison, the average age of trucks in developed countries is about 5 years. There are trucks in India that operate for 20 to 30 years! Unless those vehicles are phased out, there will not be sufficient replacement demand, he says.

TONNAGE HAS GROWN

Mr Srinivasaraghavan brings up another dimension to this issue.

He says, “In the last four yeas there has been a 25 per cent CAGR in the last 4 years in the medium and heavy vehicles segment – that is in terms of units growth. But if you look at growth in terms of tonnage during the same period, you are looking at 100 per cent growth – because growth has been driven by multi-axle segment and more recently by tractor-trailer segment.

“The 16-tonne truck is being replaced by a 30-tonne truck - and now by a 40-tonne truck. I think it will be naïve to say that there has been a 25 per cent growth in units, when there has probably been a 100 per cent growth in tonnage. Over-capacity is written all over the place – therefore there is a slowdown. There is no running away from it.”

LIFE GOES ON

Does it mean doomsday for the industry and its financiers? No. That’s because this happens once every four or five years – and there’s always a correction.

How long will this go on? That’s anybody’s guess, says Mr Srinivasaraghavan. It could be 6 months or 18 months. He adds a bit philosophically, “We just need to live through it.”

He has some more words of hope for the industry, “With everything that has happened we are still 70 per cent freight on road and 80 per cent passenger by road. Roads are the life-line of this country and will continue to be. Hence, there is no need for panic.

“Everybody doesn’t have to shut shop. Every once in a while you get a dose of reality that makes you look at life through a normal pair of glasses.

“For those who have seen downturns in the past, this is one more downturn. There is no need to overhype this slowdown. I am not going to sit and cry – I know in two years, we’ll be on the growth curve again.”

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