The prolonged slowdown in the commercial vehicle (CV) segment may last longer than what was previously contemplated, believes the head of India's largest CV manufacturer.
Speaking at the ACMA Tech Summit in Pune on November 25, Girish Wagh, President of Commercial Vehicle Business Unit at Tata Motors, indicated that industry stakeholders earlier anticipated the downturn to start in 2020 when BS VI emission norms kick in. This is mainly because the upgraded vehicle emission norms increase the input costs of the vehicles, thereby resulting in a higher sticker price for the end consumer. Also, it has now been realised that the current slowdown is both cyclical as well as non-cyclical. “The CV industry is closely linked with the Indian economy, and scaling back to an earlier peak could take up to five years,” said Wagh.
According to Wagh, an industry slowdown usually lasts between 24-30 months and some have a shorter 12-month stint. Given that overall CV sales – at 442,253 units in the April-October 2019 period are down 23% year on year – the industry remains stuck in a growth-sapping stage. Even after the recovery happens, which is likely to ne next Diwali, it may take the industry a good 2-5 years after that to reach the peak volumes it had recorded in previous years. In FY2018, CV OEMs had sold a total of 1,007,319 units (17.55%), a new high that came about five years after attaining peak sales of 809,499 units in FY2012.
According to industry experts, the contraction in sales of the CV segment can be attributed to limited lending by NBFCs after the IL&FS scam and lower rentals that have compelled fleet owners to defer their purchases. Also, volatility in freight rates and increase in fuel prices, slowdown in the economy, lower sentiments among business community, new regulatory changes which have increased input costs for vehicles, increase in commodity prices, and new axle norms, have further impacted demand.
A recent India Ratings report points out that considering the sharp YoY fall in CV sales volumes of CVs since May 2019, the underwhelming pace of industrial activity and the higher cost of ownership of a BS VI CV, the implementation of BS VI could add to the sector’s woes. Furthermore, given the excess supply situation and muted demand-side fundamentals in the economy, the agency believes the pre-buying of BS IV CVs till end-Q4 FY20 is unlikely to be meaningful as compared with earlier occasions when new emission norms had been implemented. For fleet owners, the ownership of a BS VI CV would be credit neutral, as the benefits from fuel efficiency and maintenance would largely be offset by higher debt repayments. From April 2020, no BS IV vehicle will be registered in the country. Crisil in its latest report says that pre-buying is expected to increase fiscal 2020 CV growth rate by 800 bps while inventory liquidation is expected to reduce the same by 500 bps. The net impact will improve sales by 300bps.
Commenting on a perceived uptick in demand, Wagh said that the government has taken some measures to pep up demand which has started having some impact. However, he added, “When I say green shoots, I am cautious as it is for demand drivers and not actual demand within CVs. We will be able to bring the demand back in the system once we absorb the shock, bring liquidity back in the system and set up the required infrastructure,” Wagh concluded.
Stressing the need to accelerate exports amidst the slowdown as a measure to buffer the domestic market downturn, Wagh said that the increased regulation in the country’s automotive industry has increased harmonisation globally. “Therefore, one should start focusing on exports because the capabilities are going up,” he added, emphasising that industry should look at cost optimisation for one full cycle which may extend to up to seven years.
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