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S H A K E O U T Stuck! Plagued by overcapacity and poor sales, the tractor industry could be chugging into a shakeout. By Ranju Sarkar
If you want to know how bad things are in the Rs 6,000-crore tractor industry, just walk into any small town dealership. You could pick any model that you want and drive away without paying anything upfront for it. That should sound sacrilegious to an industry long used to selling tractors against firm bank loans, and where price discounting was unheard of. But, then, things are not what they used to be. In the past four years, at least three new players have entered the market, pushing up the installed capacity in the industry. In contrast, demand is actually shrinking. For example, the industry sold 1,43,385 tractors between April and October, 2000, registering an 8 per cent drop over the same period last year. A large part of the slump was due to the continuing drought in the states of Madhya Pradesh, Rajasthan and Gujarat. Yet, the worse may not be over. Warns Rakesh Chopra, CEO, Escorts: ''If last year's drought was bad, this year will prove worse for these states.'' Chopra estimates that nearly half of the arable land in these states have gone without sowing this year, simply because there's no water. As if that weren't bad enough, the Food Corporation of India-which maintains buffer stock to control foodgrain prices-has been offloading the grain market, keeping prices low. That has severely affected agricultural income and, consequently, tractor offtake. Says T.L. Palani Kumar, CEO, Ford New Holland India: "The problem has been compounded by inventory at the dealer end. Companies have had to cut back on production.'' The worst affected has been the Chennai-based Tractor and Farm Equipment Ltd (TAFE), whose first half sales shrunk by 38 per cent. Even other established players like Escorts, Eicher, and Punjab Tractors have reported lower sales (See The Plunge). The only two significant players who have bucked the trend are Mahindra & Mahindra and International Tractors, where French company Renault is now a collaborator. But are drought and poor foodgrain prices in the open market the only reasons for the demand slump? Yes, as far as the negative demand is concerned. But there's little doubt the industry has more capacity than it needs. Against an annual demand of 2.60 lakh tractors, the industry is estimated to have a capacity of 4 lakh units. A chunk of this capacity has come from new transnational entrants. If despite the limited market size global majors are making a beeline to India, it's because the country is the world's largest buyer of tractors. Not all, however, think that the overcapacity is hurting. Chopra of Escorts, for instance, argues that the entry of foreign players doesn't really matter because they are not present in the 35-40 hp segment, which accounts for 80 per cent of the market. Instead, their sight is trained on the 45-hp and above niche. But as more tractors chase fewer customers, competition on the ground is getting more severe. Price discounts of 2-3 per cent (about Rs 7,000 per tractor) are already being made and credit periods have increased from 2-4 weeks in good times to nearly 6-8 weeks today. The result: the working capital requirements of manufactures are up by 10 per cent. With the market set to shrink by another 10 per cent when the fiscal year ends, some analysts are talking of a shakeout in the long run. Indeed, unless irrigation facilities, farm income and credit availability improve, the industry will be hard pressed to hit paydirt. |
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