After a slowdown corresponding with the economic crisis of 2008-09, commercial vehicle (CV) makers have had a dream run, with year-on-year volumes (goods carriers) growing by 41 per cent and 30 per cent in 2009-10 and 2010-11 respectively.

A pick-up in demand for cargo movement following the industrial recovery, easy availability of finance and the increasing penetration of the hub and spoke model have chiefly contributed to this resurgence. As the industry enters another year, a repeat of the scorching pace of growth seems unlikely, given the high base and other headwinds threatening the sector.

The Society of Indian Automobile Manufacturers (SIAM) too expects the overall industry volume growth (inclusive of cars, bikes and CVs) to settle at 12-15 per cent in 2011-12 after two successive years of 26 per cent growth. There are no clear signs of moderation in volumes yet, but what are the challenges and opportunities for the CV industry at this possible inflection point?

Decelerating economy?

Considering that the demand for freight comes from industrial, agricultural and export growth, the fortunes of the CV industry are closely linked with that of the economy. Hence, the major challenge for volume growth is a possible slowing down of the economy.

The IMF recently lowered India's growth forecast to 8.2 per cent in 2011, warning of signs of over-heating. It further projected growth at 7.8 per cent for 2012.

Besides, at 3.6 per cent year-on-year, February 2011 was the fourth successive month of lacklustre growth in the IIP. Although this can partly be attributed to base effect, for the April-February period as a whole, the IIP grew at 7.8 per cent as against 10 per cent a year ago, casting doubts on the achievability of the projected GDP growth of 8.6 per cent for 2010-11 and the way forward in 2011-12. Uncertainty on oil and commodity prices and inflation too pose a risk to the growth trajectory.

But every cloud has its silver lining.

Strong freight rates

For the immediate future, a positive for the industry is that truck rentals are still holding up. Sample data on freight rates in trunk routes collected by the Indian Foundation of Transport Research and Training (IFTRT) show that truck rentals have remained firm till recently. In March, it increased by 3-3.5 per cent, closing 2010-11 with a healthy 17-20 per cent jump.

A strong rentals scenario spells good times, as it is reflective of the demand for goods carriage. It also shows that fleet owners have been able to pass on cost increases (eg.diesel prices) to customers. Strong rentals might help sustain demand for new trucks.

Record agricultural output, good export growth and a pick-up in construction activity support this viewpoint. This implies that there may still be time left before the CV sales peak out.

LCVs less cyclical

Compared to medium and heavy vehicles (MHCVs), the demand for light commercial vehicles (LCVs) tends to be less affected by the cyclicality of the industry. For instance, during the slowdown in 2008-09, MHCV volumes fell by 37 per cent while LCV volumes fell only by about 7.5 per cent.

Besides, from about 44 per cent of total goods carrier sales in 2007-08, LCVs have now garnered about 55 per cent of the total volumes, indicating that it can partly help volume growth in times of a slowdown.

This apart, the expanding market for sub-3.5 ton vehicles that bring in 85 per cent of the LCV volumes also means that the leaders in this segment — Tata Motors (eg.Ace) and Mahindra and Mahindra (eg. Gio, Maxximo) will benefit from the seemingly ceaseless demand for such small vehicles. Little wonder that the Ashok Leyland (ALL)-Nissan joint venture has rolled out its first small LCV, Dost, recently.

Hub and spoke model

While the small LCV brings benefits at one end of the spectrum for companies, the growing market for higher tonnage vehicles (multi-axle vehicles, tractor trailers) is expected to be remunerative at the other end, indicating the coming of age of the hub and spoke model in India.

Considering that customers today are beginning to overlook a higher initial purchase cost in favour of the life-cycle cost of the vehicle, market leaders, Tata Motors and ALL, are launching more products in the 16-49 ton segment for the performance-sensitive customers.

The former's world truck range (PRIMA) of vehicles promise improved performance, reliability and cabin comfort.

ALL is launching about 25 vehicles in its new ‘U-Truck' platform that assures fuel efficiency and ride quality improvement leading to better operating economics.

Mahindra-Navistar too has joined the fray. With these companies having an advantage over foreign players in this segment, in terms of distribution and service network, the demand for such new vehicles may also keep their volumes ticking.

Improving highways

Finally, over the next couple of years, the huge investments in road infrastructure means that the quicker turnaround time and lower cost per km. will help improve the roadways' share of freight transport, especially in the long-haul. To that extent, demand remains assured. Railways share of freight traffic, which stands at 30 per cent currently, is not expected to pose a threat, given the execution hassles in the dedicated freight corridor.

Accelerating costs

While there are many factors to support demand, the rise in input costs is a challenge for CV makers. Given the robust demand so far, companies have been able to pass on spikes in prices of steel, aluminium and rubber to a considerable extent to customers in the last one year. For example, ALL has made a cumulative price increase of over 10 per cent in 2010-11. Besides, the migration from BS-II to BS-III (change in emission norms) has meant an average increase of Rs 31,000 per vehicle. Aggressive price increases have helped companies part-protect their margins so far.

Going forward, it remains to be seen how much more can be passed on. Possible hikes in fuel prices and interest costs might make fleet owners more sensitive to further price increases and soften the demand.

In such a situation, although Tata Motors might feel the pinch in its margins in the standalone business, it could be countered by the superior margins from the Jaguar Land Rover business (assuming demand for JLR vehicles remain intact), as it has been happening in the last two-three quarters.

ALL too might be able to partially mitigate raw material price escalations from the ramping up of capacity at the Pantnagar plant, which enjoys tax benefits.

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