Limited impact from push towards electric vehicles

Parvatha Vardhini C BL Research Bureau | Updated on April 03, 2019 Published on April 03, 2019

Fleet replacement encouraged by better operating economics of higher axle vehicles and pre-buying before the BS VI emission norms will drive commercial vehicle (CV) sales this fiscal, says Jatinder S Gujral , CEO, Setco Automotive. Setco is a leading supplier of clutches to commercial vehicle manufacturers and also has a sizeable aftermarket presence.

Excerpts from an interview :

CV sales has slowed in recent months. What are the prospects for this fiscal?

Yes. In the last few months, CV sales has slowed. Despite that, the industry will end 2018-19 with a positive growth of 12-15 per cent. We expect sales volumes in the first quarter of 2019-20 to be around 10 per cent lower than the year ago period for the reason that there are elections now. There is some amount of uncertainty attached with not only on who will make the government but also on whether there will be any policy changes. However, what we have understood from the market sentiment and our customers is that the second quarter and third quarters of this fiscal are going to be on par with or better than 2018-19. The fourth quarter will definitely be better than last year because of pre-buying before the BS VI norms come in on April 1, 2020.

Sale of BS VI compliant vehicles have to start on April 1, 2020. At the same time, BS IV vehicles may be in high demand until March 31, 2020 due to their relatively lower costs. How will the production be managed in such a scenario?

In the last quarter of 2019-20, you will continue to have a customer driven demand for BS IV which could be is 50-60 per cent of the total demand. The balance, which is usually production for selling in future, will not happen this time around as sale of BS IV vehicles have to stop on March 31, 2020. All our customers are smart enough to produce only that many BS IV vehicles which they will be able to sell by then. This practically means all of them will be forced to move to BS VI production as early as January and in some cases, even before. In other words, BS IV vehicles will get into ‘bill to order’ in second half of this fiscal. So it will not be ‘bill to stock’ as no one wants to be saddled with unsold stock. Thus, the ruling (that sale of BS IV vehicles must stop on April 1, 2020) has forced manufacturers and the supply chain to be more efficient. What I see because of this trend is that the first quarter post the changeover - where sales used to be really bad in the past - will now see better off takes.

Schemes such as FAME II encourages shifting to electric vehicles in public transport. Since you supply clutches to buses as well, how will this move impact you?

Unfortunately, the bad news is that electric vehicles don’t have a clutch. Of the total CVs, 80 per cent is goods vehicles and 20 per cent is passenger (buses). Out of this 20 per cent, 12-13 per cent could be interstate buses and the remaining 7-8 per cent run within the city. So the real threat is on this 7-8 per cent. Otherwise, if I were a car or two-wheeler clutch manufacturer, I would be worried. That way, it was a very thoughtful decision on our part to diversify into supplying clutches for tractors than cars. As far as electric commercial vehicles go, from a 10 year perspective, I would say we are insulated from changes.

How has the backward integration into castings through Lavacast helped Setco ?

When we envisaged the Lavacast business, the idea was to have a facility which gives us control over a critical part of the clutch. Almost 85 per cent of our castings requirement is now supplied by Lavacast. 60 per cent of Lavacast’s capacity is earmarked for us. Inherently, there are three advantages. One is that we have a raw material security. Second advantage is that we do save on transportation costs as the supplier is located close to us. The third advantage is that this is a state of art foundry. So the quality and finish is much better than what we used to get. If I look at costs, with the interest, depreciation of a new facility, it would not be offering any cost advantage as of now since it was commissioned only two years back. Utilisation is around 65 per cent this in the just concluded year. Next year we are going to hit around 80-85 per cent utilisation at which foundries usually make money, which we will also make.

You have also begun in-house manufacturing of diaphragm springs. How has it picked up ?

About three-fourths of the CVs sold in India continue to use coil spring based clutches. Only the remaining 25 per cent use diaphragm springs. The latter is popular with European manufacturers. And some Indian manufacturers are using it for bigger vehicles. Diaphragm spring is less labour intensive and operates as use and throw. So if labour costs are high, diaphragm is the way to go. We set up this facility because earlier we were importing diaphragms from Germany to cater to our client’s needs. Imports meant a long lead time. We would also end up over- or under- stocking; we had to bear with exchange rate fluctuation too. The plant was set up two years back. While the pick –up has been a bit slow due to various testing and validation requirements, we have recently moved to two shifts.

(The writer was recently in Kalol, Gujarat at the invitation of Setco Automotive)

Published on April 03, 2019
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