‘By 2020, India will become among the top three M&HCV players globally.’

Dr Wilfried Aulbur, Managing Partner & CEO, India, Roland Berger Consultants, speaks to Kiran Bajad on the Indian CV sector, its challenges and why India should be good for 342,000 M&HCVs annually by 2020.  

Roland Berger has just released its India market medium and heavy commercial vehicle (M&HCV) report. What, in your opinion, is the long-term perspective for the sector?
Overall GDP growth has bottomed out and we have seen an increase in GDP. There is a co-relation between M&HCV growth and GDP and, as a consequence for the first time in a few years, growth is happening in the M&HCV segment.

In the M&HCV segment, particular focus is currently on large-tonnage vehicles such as 31-tonne vehicles, 35T and 49T tractor-trailers. These vehicles are seeing a large amount of activity driven by the fact that truck operators understand that the economics of these vehicles in an environment where infrastructure is getting better and overloading bans are strictly enforced. We see profit and benefits from Goods and Service Tax (GST) once it is rolled out and it would drive growth of these vehicles.

From a long-term perspective, we believe that by 2020, the M&HCV segment should account for about 342,000 units, which makes India one of the key markets globally. As far as M&HCVs are concerned, this also means about 15 percent more as compared to the previous high in 2012 of 299,000 units.

Once the M&HCV segment reaches 342,000 units, where would India stand globally in terms of market size?
India will become among the top three players globally and it would be a market that will be too big to ignore for any international player. This also leads to a situation that there would be quite a bit of market entry of players into India and we do foresee competitive intensity to increase.
As a consequence, the challenge for the domestic OEMs would be two-fold. Firstly, the sense of the home market advantage – if you look at the overall segment, the top two players have about 80 percent plus market share. Secondly, for the domestic players, they also have really establish themselves as global commercial vehicle MNCs.

What are the key trends that have emerged in the M&HCV segment as per the Roland Berger report?
Basically there are a number of trends. The first is towards higher-tonnage vehicles, driven by factors I have already mentioned.

The second trend is the total cost of ownership (TCO) consideration. The third is basically in an environment of increased competitiveness, a number of things are happening.

One, we see new products are being launched – for instance a whole new range in the Prima series by Tata Motors, the Captain range by Ashok Leyland, and the Pro Series from VE Commercial Vehicles. So the incumbents have answered the call of the global competitors.

We are definitely seeing a stronger focus on improving overall performance for example in the aftermarket, looking much more carefully into areas such as vehicle off-road response time and response time for parts delivery. All of these factors are crucial and clearly pave the way for improvement.

The report foresees India ranking among the top markets globally by 2020. Do you see challenges from the government and OEMs in reaching that goal?
I think the overall challenge for India is to maintain high GDP growth. This challenge can only be met by the government driving reforms of pro-business agenda. One cannot focus only on announcements; there has to be a focus on delivery.

It needs to be comprehensive. This means when we talk about Make in India, then we have to have a complete framework that looks at various effects and challenges of Make in India. This means solving issues like labour laws, infrastructure and single-window clearance among others.

Also make sure that decisions on the tax front are not confusing, either for individuals or companies. The decisions of permanent establishment do not suddenly create unnecessary risk or risk perception with global players. India has a unique opportunity to convince the rest of the world that India is indeed the place to be but that will require action.

What effect will GST have on the M&HCV segment?
I think GST is an extremely important initiative that is currently being undertaken by the government. Firstly, it really creates an integrated market in India. As a result, logistic costs and logistic efficiencies will determine how we distribute goods across the country rather than taxes. That will drive efficiency in logistics. Secondly, it will able to get rid of a lot of checkpoints at state and city boundaries. This will bring down the harassment of truck drivers and the driver shortage issue will also be mitigated.

Sales of M&HCVs have turned positive in the past 10 months. What do you attribute this growth to?
There has been some positive momentum that is been generated by announcements from the government’s side. When we talk to our customers, we see that the rail sector is actually moving as are investments in rail. That is creating some positive momentum; likewise the fact that the government is actively looking at driving mining. These are some of the areas which have been positive in terms of convincing everybody that there is a turnaround happening and the bottom has been reached, and that things will improve going forward.

The Indian CV sector is dominated by two home-grown OEMs. With a number of foreign OEMs now in India, what impact do you see of this in the future?
I believe that the domestic OEMs have done a remarkable job in terms of holding market share.
They have worked aggressively on improving the cost proposition. Tata Motors’ break-even has come down to 35-40 percent capacity utilisation and that is a benchmark globally. That obviously gives an opportunity to these OEMs to act in the market and defend their domestic market share. But how much market share is going to be taken by domestic or foreign new entrants remains to be seen.

I think the current situation of the domestic players is strong. They need to make the right moves and the right decisions going forward and it is clearly vital for India to have at least one or two automotive OEMs which are global. For that, it is essential for Indian OEMs to develop a clear structure and executable strategy to build a significant foreign footprint.

How you see technology evolving in the M&HCV segment in India?
In terms of technology, we will continue to see indulgence of technology. Basically, we see two things happening: competitive pressure which means people are looking at TCO. Customers will look at convenience of their drivers simply because drivers need to keep happy.

Secondly, regulations in emission and safety norms. I do also expect some development on that front to bring India in line with global standards. That has to be a gradual process because it drives up vehicle costs but it’s inevitable.

When you see the entire Indian commercial vehicle sector turning positive?
This depends on a number of factors. First and foremost is the overall economic environment of the country.
If you see the LCV sector and its last-mile connectivity and distribution driven by consumption, I think the overall environment for consumption has improved. India is not facing the same amount of uncertainty regarding job security that it was facing 18 months ago, and that positive that should trickle down to LCVs.

For segments like HCVs, financing plays a major role and the key challenge is really how to finance HCVs, how to prevent abuse of systems, and how to protect banks and NBFCs from percentages of NPAs that are high. That will take some time to correct. The time-frame is difficult to say but I would hope that it would happen between six to 12 months.