Supply to demand: transition in India’s CV sector

India’s CV sector is in transition from being a supply-driven segment to one that is pushed by demand

India’s commercial vehicle market is in transition from being a supply-driven segment to one that is pushed by demand. With the recent entry of several international players and car OEMs announcing plans to enter the LCV market, the sector is expected to undergo significant changes over the next decade.

Future commercial vehicles on Indian roads are expected to feature advanced electronics, efficient fuel systems and have an increased lifetime. These factors alone are certainly significant game changers, but the most important market development is expected to come from how new entrants challenge the long-standing duopoly of domestic giants Tata Motors and Ashok Leyland, which currently hold around 80% of the market.

After experiencing year-on-year growth of 30% in 2009-10 and 2010-2011, the CV industry – mainly the medium and heavy segment – has remained flat for the past two years: slowdown in industrial growth, weak investment sentiment and significant fleet capacity addition have all adversely impacted the market.

It is, however, interesting to note the variation in growth rates for LCVs and M&HCVs in 2011-12 and 2012-13. While LCVs have sustained growth momentum, poor performance of M&HCVs in 2012-13 led to an overall contraction in the market of 2%. The slowdown gradually crept into the LCV segment in Q1 2013-14 too, prompting a sales decline of 3.9% year-on-year.

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With a challenging near-term macroeconomic outlook (at the time of writing, sales of medium and heavy-duty trucks have been declining for 17 consecutive months), demand for CVs is expected to remain subdued over the next several quarters.

Regardless, long-term indicators continue to be bullish, as tailwinds – such as expectations of economic growth improvement, structural changes and progressive infrastructure development aiding the demand for trucks – are expected to gather steam.

The next wave of growth

By the end of the current decade, the Indian CV sector is expected to have evolved along the lines of an already developed market. Improving road infrastructure, rapid urbanisation, tightening emission and safety norms, consolidation of fleet operators and increased focus on the total cost of ownership, are all expected to shape the industry’s evolution.

One particularly notable driver of growth will be the evolution from disorganised manufacturing and retail to a more structured form, leading players to invest in transportation and logistics. Demand for both self-managed CV fleets and third-party providers will thus increase, boosting the overall market.

In anticipation of the continued growth of the CV sector, several global players – including Volvo, Daimler, Navistar, MAN and Isuzu – have entered the market, either directly or in partnership with an Indian OEM.

Daimler has been particularly aggressive: it started selling locally manufactured, ‘made for India’ trucks in September 2012 and plans to launch 17 models by the end of 2013. The company sells trucks under the BharatBenz brand, which is the company’s fifth truck brand globally. With an investment of more than US$850m. India is Daimler’s largest greenfield venture outside Europe. In March 2013, within six months of its launch, BharatBenz overtook Mahindra Navistar which had been in the market’s HCV segment since 2009, signalling strong acceptance by customers.

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The potential of the CV market is so great that even OEMs outside this area of the industry have been tempted in: India’s leading passenger vehicle player Maruti Suzuki has announced plans to enter the LCV space by 2015. The OEM will bank on its vast nationwide sales and service network to penetrate the market, competing head-on with Tata Motors and Ashok Leyland.

The widening competition from both domestic and international OEMs can only work to improve organisation in the industry, prompting India to step up as a real competitor globally.

Key challenges

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In terms of challenging the long-standing duopoly of Tata Motors and Ashok Leyland, there will not be any major shift anytime soon, as new entrants will focus on tackling critical entry barriers, such as building a servicing network. Evolution of the industry would give new players an opportunity to establish themselves in the market but there will be significant changes in the competitive landscape.

Despite slowdown over the past 12-18 months, long-term fundamentals of the CV industry remain strong – a fact signified by the entry of a large number of global OEMs.

Previously famous for the lack of innovation, there has also been a spurt in Indian CV R&D over the past few years as new players have entered with state of the art, made for market products. Incumbent OEMs meanwhile have finally had to dig into their pockets to remain competitive. Besides supporting the market’s long-term credentials, R&D investment also indicates that the sector is rapidly evolving, across parameters such as market structure, customer behaviour, product portfolio and competitive landscape.

The Indian CV market is on an accelerated pace of convergence with established markets worldwide and it is just a matter of time before this sector makes its mark on the global stage.

Manmeet Malhi is a Senior Analyst at EOS Intelligence, and closely follows the emerging markets automotive sector

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