Tough times to continue for India Commercial Vehicle Segment; decline in 2017 certain
SUMMARY: The poor performance of the CV industry in recent months is largely due to extraordinary events in the industry, rather than purely macro factors. However, sales of commercial vehicles are facing slow growth for several reasons, including major macro-economic changes. These have been driven by demonetization, emissions changes, GST (Goods & Service Tax – One Nation-One Tax), slowing replacement demand, weak industrial activity, rising diesel prices and overcapacity.
Impact of Demonetization
Demonetization impacted the second-hand CV market (a significant proportion of transactions are made in cash), hurting the efforts of fleet operators to sell old vehicles to raise funds for the purchases of new CVs.
Implementation of GST
The implementation of the Goods and Service Tax (GST) could reduce transportation time significantly as goods will be transported freely from one state to another, bypassing check points and octroi (tax) posts. This also means a reduction in the number of warehouses, improved efficiencies, better control, and reduction in inventories due to fewer stocking points. With the improvement in efficiency, the productivity per vehicle is likely to improve. This will create additional spare capacity in the road transportation sector, creating a drag on new MHCV sales.
Also, the taxability of stock transfers under GST will have an impact on the cash flow of firms and might force rationalization of their back-end infrastructure. This will have a long-term impact on commercial vehicles, including, possibly, an increase in demand for trucks of lower tonnage.
The replacement demand, a key driver of MHCV sales in 2015 and 2016, largely has been exhausted. The >25 ton capacity segment of MHCVs was the driver of volumes in 2015 but has declined very sharply in 2016-17, suggesting overcapacity in the road transportation industry.
Emission Regulation BS-III to BS-IV and Its Impact on CV Business
The major change in the BS-IV regulation affected the M&H CV products such as trailers, tippers, and multi-axle trucks.
There are early signs of sales of BS-IV vehicles, but it has still been slow as buyers are evaluating the performance of the new BS-IV vehicles. They also are looking for any improvement in the industrial performance and improvements in demand from the mining segment.
Truck prices are likely to see hikes of 9%-15% which could postpone sales in this category.
Lack of Readiness of Vendors To Supply BS-IV Components and Higher March Inventories
Companies dumped BS-III inventory at dealerships in March, boosting March sales for vehicle manufacturers, but not retailers. Also, the entire effort in April was devoted to streamlining the sales which had happened on the last two days of March.
Assuming BS-III vehicles would be allowed to be sold post March, vehicle manufacturers, including TATA Motors and their vendors, were not prepared for demand of BS-IV vehicles in April. The fuel pump supply shortage impacted TATA production by about 58% and other CV suppliers to the tune of 15%-25%.
PSR’s Viewpoint Going Forward: Owing to multiple uncertainties in the market, the demand environment is likely to be challenging in H2 2017. Vendor side supplies have to get normalized regarding BS-IV and the new situation of GST, as well as buyers' wait-and-watch policy before purchasing BS-IV vehicles because of GST and new MHCV prices.
It appears that situation is likely to improve around or Post Diwali and we believe the MHCV industry will see a decline of about 10%-12% for 2017, driven largely by Class 8 vehicles. However, it could register some growth in 2018.
Going forward, demand for LCVs is expected to grow more as it will receive a big boost from the Goods and Services Tax. PSR
This article originally appeared in the July 2017 issue of the Power Systems Research PowerTALK newsletter.