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OEM Update

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.
 

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