Commercial Vehicles: Time for Structural Changes

February 15, 2011 11:41 am

Some important structural reforms in the commercial vehicles sector are important to ensure its good health. This is well likely to have a positive impact on the growth of the auto component sector involved with the growth of the commercial vehicle segment. An OEM Update report.
 
The growth of the commercial vehicles industry in any country is linked to and is an important parameter of its overall progress. The foundation of the commercial vehicles industry in India was laid in the 1950’s when domestic production of trucks and buses commenced .The industry has been growing steadily thereafter, though market expansion has been cyclic and has been punctuate by phases of upturns and downturns. Despite this periodic ups and downs overall market growth has been positive and India today after China, Japan and US the fourth largest manufacturer of medium and heavy commercial vehicles. In 2007-08, the industry had a turn over of Rs. 35,000 crore.
 
Barometer of Economy’s Health
The commercial vehicles market is a good indicator of the health of the overall economy. Demand of commercial vehicles is derived from the need to transport goods. Transportation in turn is linked to production of goods, particularly in industrial and agricultural sectors. According to estimates freight traffic has an elasticity of nearly one with respect to growth in overall economy. This implies that for a 1% growth in overall economy, total freight traffic is likely to increase by 1%. The incremental freight traffic thus generated is handled by all means of available transport, primarily rail and road. Economic growth in GDP is thus a major contributor to creation of demand of commercial vehicles and the components sector involved with it. Past data show that cyclic uptrend and down trend in commercial vehicles market coincide with economic ups and downs, though with certain time lag.
 
Key Cost Factors
Besides availability of freight, demand for commercial vehicles is driven by profitability of goods transportation. According to estimates, diesel accounts for 50-60% of total operating costs of commercial vehicles and hence is an important demand determinant. Other factors which affect the operating costs and influence demand include interest rates and vehicles price, both which influence EMI on borrowed capital. Besides, affecting overall demand, changes in various elements of operating costs also result in structural realignment in the composition of commercial vehicles market. In general, a rise in diesel price is likely to shift the demand pattern in favour of heavy vehicles, which are more fuel efficient. On the other hand, a rise in interest rates may be expected to shift the demand structure in favour of medium vehicles which have lower capital costs and hence less vulnerable to rise of interest rates. All these factors may have a direct or indirect bearing on the auto components sector involved with the commercial vehicles segment.
 
Passenger Transport
The demand for passenger transport is largely related to growth in population an increase in urbanization. With rising population and increasing urbanization, there is a consistent rise in demand of passenger travel. However, bus sales are unable to keep pace with the rise in demand. To remove imbalance between demand of passenger travel and availability of buses, there is need for reforms in the public transport sector to dismantle regulations that is stifling its growth. This can well indirectly provide a good thrust to the demand of auto component sector.
 
Infrastructure Imperatives
Demand of commercial vehicles and in turn of components can also be essentially led by improvement in infrastructure. A look at the data in road densities in various countries show that sales of commercial vehicles rise sharply with the growth of road network. Examples of developing countries such as China, Brazil and Argentina show that in the initial stages of road development (as measured by length of paved highway, country area) increase in road length has a dramatically positive impact on commercial vehicle sales. International comparisons indicate that currently road infrastructure in India suffer from certain shortcomings. These include, low highway density (India has a highway density-measured by highway length in km/country area in km2 of only 0.0177 which is substantially lower than in developed countries.
 
Comparable figures of highway density for China is as high as 0.37 poor road conditions and surface quality 25 % of national highways and more than 50% of state highways are in poor condition. Low average speed of vehicles and high turn around time. (Average speed of truck and bus on national and state highway are estimated to be around 35kms/hr. Inadequate highway network and poor road quality are estimated to cost the economy Rs. 20,000-30,000 crore annually because of low vehicle speed and inflated user cost.
 
The National Highway Development Plan now being implemented is likely to address at least some of these problems. In the next few years, a total invest of above Rs. 2,20,000 crore is envisaged in strengthening the road network, four laning and six laning of highways  and development of expressways. Road up-gradation is likely to have a positive impact on freight movement and hence create demand of commercial vehicles in two stages: while constructing road network there is a requirement of transporting large quantities of materials like cement and steel, which are required for road development. Completion of road development improves efficiency of road sector due to higher vehicle speed and faster turns round of vehicles resulting in greater cost competitiveness of the commercial vehicle service providers. This will positively lead to demand boost for auto components.
 
At par with development of road infrastructure there would be requirement to phase out old vehicles. Several states have implemented and are in the process of implementing of phasing out old commercial vehicles. This issue also needs to be viewed in context of overall environmental perspective. Older vehicles are poorly maintained and many of them belong to an era where there were practically no emission norms. According to estimates, nearly 75% of vehicular emissions are caused by pre 1996 vehicles, which are more than 12 years old. To compound matters even 30-35 years old trucks are sometimes in use for applications such as sand and coal movement, while in developed countries, the average life of commercial vehicles will under circumstance exceed 15 years. It is quite significant to note that new vehicles will provide greater thrust to auto components. Significantly, it will provide greater scope of research and development to the component manufacturers to meet the new standards of the original equipment manufacturers. All these factors are leading to demand push of auto components.