Commercial Vehicles Industry
Since 2013-14, the commercial vehicle industry has grown by 10% YoY with the growth being highest in 2018-19 at 17.5% (As per SIAM). This is expected to continue on the back of promising growth across sectors and industries which drive commercial vehicle demand and changing regulatory dynamics.
Tipper vehicle, used in road and building construction and mining applications, has led the 2018-19 growth with 40%+ rise vs the previous year and is expected to increase 15%+ YoY. Several positive trends including 4x increase in National Highway construction between 2015 and 2019 is driving this trend. Further, the Government has targeted 20,000 Km construction in 2019-20. As per Invest India, the construction industry covering real estate and urban development is growing at ~15.7% YoY and will drive associated industries such as steel, paint and glass.
Agriculture, consumer goods and automobile industries are major demand centers for the cargo vehicle segment. Better monsoons have helped improved agricultural output with industry posting ~2.6% CAGR in recent years. Consumer goods and durables are rising at 28% and 9% respectively indicating positive headwinds for the trucking industry overall. Increasing disposable incomes and reach through new age internet-based delivery models are expanding the market for companies in FMCG & durables industries.
Growth in these industries is largely restricted to major urban consumption centers currently. But as teething troubles with GST implementation are smoothened and warehousing & logistics industry expands to connect previously unserved but demand rich cities and towns, the trucking industry will see the rise of new autonagars across the country. First mover advantage will see long term and sustainable rewards, as we see from the Salem-Namakkal case study for Ashok Leyland.
2W, 3W and car segments have also seen above-average growth at 7.4%, 7.9% and 6.2% between 2014 and 2019. Increasing traffic on urban roads with a fast proliferation of app-based taxis and carpooling/ renting operating models are expected to dent this segment in the near future. Passenger vehicle companies will need to focus on tapping the under-served rural demand to negate drop in sales in urban markets.
Macro-economic and regulatory trends are continuing to impact the sector on a short-term basis. Fuel contributes to ~50% of truck operating costs and the increase in crude prices in 2017-18 had massively affected freight rates and threatened consumer inflation. The recent axle load norms in Sep’18 increasing official payloads by 20 – 25% has helped keep consumer inflation in check and protected livelihoods of several members of the trucking ecosystem. Apart from crude, the industry is susceptible to steel and aluminum price fluctuations.
Further, the impending mandatory migration to BSVI norms from 1st Apr 2020, will see significant demand in the near future. Truck owners will protect themselves from increased prices by buying BSIV vehicles in advance. The price-sensitive nature of the market will also squeeze most commercial vehicle players as they try to find a middle ground between passing additional investments costs to the consumer and absorbing internally. Automation and other supply chain cost reduction are key focus areas for OEMs (original equipment manufacturers) to help protect their bottom-lines. An after-sales service strategy is critical to financial health with healthier margins in service and spares and helps extract value over the entire lifecycle of the truck
The industry is also increasing bargaining powers of large fleet owners, as massive consolidation of purchases are seen. Individual truck owners who had contributed to ~80% of the total truck park have come down to ~65% due to several factors – GST, improved fleet operating economics vs single-vehicle operations, the societal status of driver owners and disruptive technological innovation (telematics services, relay trucking etc.). Key account management will hence be key along with a movement from product & price-based offering to a comprehensive product + price + value-added services offering.