SCV market – strong growth ahead

The Small Commercial Vehicle (SCV) segment is a truly Indian invention. Brought to life by the path-breaking Tata Ace in 2005, SCVs saw blistering growth until FY2012. With roughly 4,46,000 units sold that year, SCVs cornered an impressive 50 per cent of the overall CV market.

While the last two years have been difficult for the entire CV industry, SCVs managed to escape the economic downturn largely unscathed. Compared to a negative CAGR of 11 per cent from FY12 to FY14 for the industry as a whole, SCVs declined only by a CAGR of 1.4 per cent during the same period, driving up the segment’s market share to 61 per cent.

Drivers for the success of SCVs are many. Increasing rural consumption drives growth in the light CV segment. SCVs are an integral part of the hub and spoke model and necessary for last mile distribution. Opportunities also arise from increasing urbanization, stringent traffic regulations and an expanding metro rail network. Interest rates and relatively easy availability of loans have supported the segment as well. However, some banks have taken a more cautious approach, of late, due to rising delinquencies in the sector. Improved product quality and perceived increased safety of SCVs compared to three-wheelers, some of the key initial selling arguments in favor of the Tata ACE, go a long way in increasing pride of ownership.

The socio-economic impact of SCVs cannot be underestimated. SCVs are mostly driven by owner-operators who get into the transport business often due to lack of a viable employment alternative. For many applications, these owner-operators achieve higher profitability with SCVs rather than 3-Wheelers.

The SCV cargo segment <2T is a skewed two horse race. Tata Motors has been able to leverage its first mover advantage to the fullest extent and holds onto 78 per cent market share in FY14. Mahindra, relegated to a distant second place with 17 per cent market share, is however able to extend its traditional strength in SUVs to pick up trucks in the 2-3.5 T segment. Here, the Bolero Pick up and the Bolero Maxi Truck drive sales and are the mainstay of Mahindra’s dominant market share of 64 per cent.

The pick up segment has been growing strongly over the last few years aided by aggressive pricing. It currently accounts for about 54 per cent of the segment and is likely to be hotly contested by all three major players, Mahindra, Tata and Ashok Leyland (with its successful, albeit late, entrant Dost).

Interestingly, the 3-Wheeler cargo segment has managed to hold on to its volumes of 90,000 to a lakh units annually over the last five years despite stiff competition from SCVs. Price differentials of about 40 per cent between 3-Wheelers and entry level SCVs explain this resilience to a large extent. The 3-Wheeler segment itself has seen some interesting shifts, with notably significant market share gains by Atul Auto, a rather late entrant in the segment.

SCV passenger carriers amount to about 1.91 lakh units in FY14, about 20,000 units less than in FY11. Here, SCVs have not managed to displace 3-Wheelers (about 3.85 lakh units sold in FY14) due to cost issues, fuel efficiency differences and government regulations (most routes require permits). Overall, a shift in customer preferences from hard top vans towards soft tops and MPVs is visible. This results in stagnant volumes in the SCV passenger carrier segment going forward.

According to a recent Roland Berger study, the SCV segment will continue to grow at a CAGR of 13 per cent till 2020 and reach a staggering volume of 9.19 lakh units by then. The bulk of this growth will be in the cargo segment driven by OEMs development of new applications, e.g., poultry, milk and water distribution, easily accessible finance and continuous focus on driver education and training. Nevertheless, profitability in the segment will be a concern in the short to mid-term due to relatively low capacity utilization and increasing competition.

OEMs that want to win in this space will have to continue to develop a keen understanding of evolving customer requirements (e.g., the shift from the 2T segment to higher tonnage pickups). Spotting and potentially even creating segment shifts will provide an excellent opportunity for profitable growth.

Liaising with local government authorities in order to promote SCV passenger carriers will be crucial as well as spreading the awareness around the benefits, applications, etc., of SCVs among potential customers. Development of new applications to expand the market (e.g., paint/ gas cylinder/ water distribution, waste disposal, etc.) will remain a key focus for growth. Last but not least, OEMs will have to develop drivers for the segment as the majority of the end users belong to lower economic sections of society and will most likely be first time users of any kind of motorized vehicle.

Government needs to support the segment by investing in and promoting infrastructure projects such as Metro rail networks across various congested cities. The permit issuance system for SCV passenger carriers should be streamlined to create an environment for healthy competition between SCV passenger carriers and 3-Wheelers. Especially in rural areas, schemes for cheaper financing options should be explored to promote the usage of SCVs and with it improve the connectivity between rural and urban centers.

(The writer is Managing Partner, Roland Berger Strategy Consultants)

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