By Dr. Wilfried G. Aulbur, Managing Partner, Roland Berger Strategy Consultants Pvt. Ltd.
Consumption and investment drive the commercial vehicle industry. However, both sectors are currently strained. The Indian
consumer has been severely stressed over the last 2-3 years. According to an analysis by Fitch based on the RBI data, the net financial position of Indian households has not changed in FY 13 after two consecutive years of net loss. Consumer confidence is shaken by a steady decline in the quarterly GDP numbers over the last 2+ years. At a GDP growth rate of 4-5 per cent, jobs are not as secure and easy to come by as they were a few years ago. Today, the Indian consumer faces probably the most severe economic challenge of the decade.
If anything, the situation of truck operators in the country is even worse. Low indices for industrial production and gross capital formation reflect lack of economic activity. While goods are still being transported across the country, a mismatch between supply and demand leads to stable or falling rates. While truck rentals have been flat in the period from April-December 2013 (+0.7 per cent), input costs have risen sharply. Diesel prices went up by 19.4 per cent in the same period, toll charges have increased as have prices for other commodities such as tyres. High interest rates of around 13-14 per cent for new and 15-17 per cent for used commercial vehicles as well as longer repayment cycles from corporates put additional stress on operators with small fleet owners being affected the most.
The resulting stress on margins leads to a change of purchase behavior. Purchases have been restricted and trucks are being used beyond the usual trade practice of four-five years. This changed purchase behavior has been reinforced by excise duty increases and has led to a significant depression of the commercial vehicle market. With reduced volumes and capacity utilization, operational costs have gone up as has the pressure to increase discounts in an effort to stimulate the market and drive volumes. As a consequence, used truck prices have reduced by 10-20 per cent, further complicating the financial condition of truck operators who face driver shortage as an additional challenge.
The root causes for this dilemma are not so difficult to locate. While the global economic environment had an impact on India’s GDP, it was limited. An estimate of the Asian Development Bank last year put the result of a full-blown global economic crisis at -0.5 to -1 per cent of Indian GDP. Clearly, global influences alone do not explain a contraction of India’s GDP growth from an average of about 8 per cent over the last few years to the current 4-5 per cent. The latter is due to a dramatic backlog of government projects (about $133 billion in FY2013 stalled projects grew at a CAGR of 42 per cent over the last five years).
Also, while cleaning up of corruption is necessary and inevitable, in the interest of the economy, we should try to identify opportunities that allow continued production, e.g., of iron ore and coal. We also need to check corrupt practices while keeping the lights running rather than shut down significant fractions of key industries.
The short-term future continues to be challenging. Further stagnation or contraction in the commercial vehicle industry is likely over 
the next six-nine months. After the general election, gradual growth seems possible aided by a low baseline effect. However, due to overcapacity, new truck sales will not pick up immediately. Further, with additional capacity of 0.2 million CVs going live in FY15, OEM capacity utilization will contract further from the current 40 per cent to around 35-37 per cent in FY15. This implies that significant bottom line strains are here to stay.
The steps that OEMs must take are many. The material cost must be brought down, processes need to be optimized, complexity must be taken out of the value chain, headcount needs to be aligned and the product portfolio must be sharpened.
Particularly beneficial is a focus on aftersales. Since vehicles are kept running longer their need for maintenance increases. At the same time, as the quotes in figure 1 show, aftersales is still an area of improvement.
A consistent focus on optimizing core aftersales services and their efficiency, analyzing and realigning the aftersales network according to customer groups, and tailoring your service offering to the needs of your customers (e.g., telematics) drive increased customer satisfaction and ultimately increase the brand premium and pricing power.
At the same time, despite its difficult budgetary situation, the Government has a role to play as well. As is shown in figure 2, a strong home market and consistent Government support were crucial for Hyundai’s journey from a little known automaker to the world’s third largest OEM.
Similarly, a strong automotive industry in India depends crucially on a consistent, long-term and well-executed Government policy for the sector. To put it in simple terms, promising 20 km/day of new road construction and delivering two km/day is just not acceptable.
While short-term measures such as the proposed one lakh “Cash for Clunkers” scheme or a partial roll-back in excise duty are welcome, the key issues regarding road, rail and port infrastructure, electricity, water and labor need to be addressed in a systematic manner. It is high time that the Government focused on creating a level playing field both for Indian companies trying to establish their global presence and foreign companies intending to leverage India because of its local market potential as well as its export opportunities.
India’s story is far from over. Growth will return. However, the return to growth rates around 8 per cent may take some time, and in the light of significant overcapacity in the commercial vehicle market, profit pools may remain stretched for the foreseeable future. There is no “silver bullet” that will bring immediate relief, but OEMs will need to continue to optimize their processes, drive customer satisfaction and work with the government to create a globally competitive manufacturing environment.