Beast of Burden: Better roads and bigger trucks are coming

If you want to see what impact India's growing economy has had on the automotive industry, don't look at cars, look at trucks instead. While passenger car manufacturers were patting themselves on the back for doubling sales to a million units in 10 long years, truckmakers quietly more than doubled numbers to 3.18 lakh in four years. Big trucks did brisk business (sales grew 23 per cent last year over the previous), as did light commercial vehicles, or LCVs, which account for 40 per cent of the market. Reflecting the big-city congestion, sales of small trucks, such as quadricycles, surged. More importantly, fleet operators are moving away from the one-size-fits-all truck to more specialised carriers. "The 15-16 ton truck, which constituted the bulk of the market a few years ago, is almost extinct. Operators, it seems, are going in for much larger vehicles on the highway," points out Arindam Bhattacharya, Director, Boston Consulting Group (BCG).

In an economy projected to become the third-largest globally by 2035, commercial vehicle demand will continue to be robust. And as in the car sector, global truck manufacturers are driving into the country. DaimlerChrysler, man AG, and International Truck & Engine Corp. are among those coming. The latter two have tied up with Arun Firodia's Force Motors (previously Bajaj Tempo) and Mahindra & Mahindra, respectively. Their area of focus will be the high-tonnage trucks, where demand is expected to explode in the years to come. Explains R. Seshasayee, Managing Director, Ashok Leyland: "The unit loads are getting larger thanks to the burgeoning economy; highway development has meant there are roads that can support such vehicles and the practice of overloading is gradually ending." By some estimates, the total market for trucks could touch 500,000 (light and heavy) units by 2010.

So far, Tata Motors and Ashok Leyland have dominated the medium-to-heavy truck segment, with an 89 per cent share (the lion's share of 65 per cent is with Tata Motors). Why, although the entire auto sector was opened up to foreign players way back in 1998? There are several reasons, but mainly two: their low-priced and rugged trucks, and an extensive sales and service network. That's one reason why a foreign manufacturer like Volvo has sold just 2,500 trucks (each costing upwards of Rs 50 lakh versus Tata's high-end 20-ton range, which starts at Rs 30 lakh) in the six years it has been around in India.

"Daewoo was an important landmark in the company's history, it created breakthroughs in several dimensions" Ravi Kant Managing Director/Tata Motors

In the years ahead, Tata and Leyland will be lucky if they manage to hold on to their shares. There is a definite shift taking place towards high-tonnage, multi-axle trucks. For example, in 1997, 90 per cent of the market was for two-axle trucks, but last year, half of the heavy trucks were multi-axles. Volvo, which started this trend that both Indian manufacturers subsequently took advantage of, has alone sold 270 trucks to three fleet operators in the last six months alone. "If you discount labour costs, the cost-per-tonne kilometre of a truck in India is virtually the same as that of a truck in a more developed nation like Germany," says bcg's Bhattacharya.

How can that be when, in Europe, both trucks and fuel cost more? Here's the painful secret: In India, trucks take three times longer to do the same distance. Part of the reason is the pathetic state of our highways, which limits the speed at which a truck can travel (according to fleet operators, a truck does an abysmal 300-400 kilometres a day-and that too on major highways). The other part is India's toll-gate bureaucracy. It's not unusual for trucks to spend hours-sometimes days-queued up at the toll points. With the result, the average truck utilisation in India is about 40 per cent compared to 75 per cent in developed countries, says Bhattacharya. "Engines today are more fuel efficient, which means that utilisation will go up," feels Ravi Kant, Managing Director, Tata Motors.

Foreign truckmakers can do little about toll gate problems, but better highways is equal to bigger trucks is an arithmetic they understand. When M&M signed the agreement with International Truck's parent, Navistar Corporation, CEO Daniel Ustian was clear about the potential. "With so many infrastructure projects in place, and the need for bigger and better trucks to cope with India's burgeoning economy, we feel that the Indian market for commercial vehicles will grow rapidly." man AG plans to do one better. It wants to make India a hub for truck exports to countries around India and Eastern Europe. Its export target: 14,000 trucks a year.

"The unit loads are getting bigger thanks to the burgeoning economy, but the practice of overloading is gradually ending" R. Seshasayee Managing Director/Ashok Leyland

Defending The Turf

The challenge for Indian truckmakers (read: Tata Motors and Ashok Leyland) is two-fold: Protect their market shares and build capabilities to tap markets abroad. Of the two companies, Tata Motors has made greater headway in shoring up its own capabilities. In 2004, Tata acquired for $102 million (Rs 459 crore then) the bankrupt Daewoo Commercial Vehicle Company (DCVC), which is Korea's second-largest heavy truck manufacturer with an annual capacity of 20,000 trucks and a market share of 25 per cent. Critically for Tata Motors, Daewoo gives it access to high-end engines and crucial R&D capabilities. And last year, Tata bought a 25 per cent stake in Hispano Carrocera, a Spanish commercial vehicle manufacturer. "Daewoo was an important landmark in the company's history, it created breakthroughs in several dimensions," says Kant, who was the head of commercial vehicles before he became the MD.

As for Ashok Leyland, the company has significantly upped its R&D spend to over Rs 80 crore this year, augmenting its research staff as well as developing new products. Interestingly, the way Ashok Leyland is choosing to face the competition is to up the ante in the features it offers its customers. It is developing trucks with air-conditioned cabins and air-suspensions. "From being a replaceable 'thing', the driver is now the pivot for change, which is a shift from pure costs to efficiency, a shift which is dictating our product philosophy," says a company spokesperson.

Because its fortunes are so closely interlinked to those of the economy, the truck business is vulnerable to slowdowns. Not too far back-1998-99 to be precise-truckmakers were awash in red ink when sales plummeted to 130,000 from 221,000 in 1996-97. But most truckmakers believe that such a slump is unlikely to occur in the industry again. With the industry clipping at 21 per cent annually, their confidence doesn't seem misplaced.

BT SPECIAL
AUTO AUTO COMPONENTS
The $25-Billion Promise
Low costs and good engineering skills are helping lure auto-parts manufacture into India. But China could still spoil the party.

Forging ahead: India's #1 auto-components exporter, Bharat Forge is also taking advantage of the 'China price'

Over the last seven years, one country has been figuring prominently on the list of Deming Prize winners. It's not Japan, but India. Ever since Sundaram-Clayton became the first Indian company to win the award in 1998, 11 more Indian firms have won it-eight of them from the auto ancillary industry alone. No wonder, when Toyota's Chairman Okuda Hiroshi visited India late last year, he didn't miss pointing out the growing list of Deming winners.

Okuda was only partly right. The quality movement among auto-part manufacturers is spreading fast, but not fast enough. Despite growing from Rs 10,000 crore in 1995 to Rs 40,000 crore now in revenues, the industry is highly fragmented. There are an estimated 1,000 manufacturers of various auto-parts, and just 480 of them are members of industry association ACMA. The typical vendor does Rs 50 crore in annual revenues and employs just 500 workers.

Yet, if there's a tremendous amount of buzz about the industry-mostly relating to high-profile global acquisitions by leading vendors-the credit for it is only partly deserved. As the largest auto-part company Delphi's recent bankruptcy demonstrates, there's unprecedented pressure on suppliers to cut costs. Unable to increase retail prices, vehicle manufacturers such as General Motors, Ford and DaimlerChrysler (the Big Three) have been turning the screws on their suppliers, demanding lower and lower prices each year. Vendors, on their part, have responded by shifting production to low-cost countries like India. The smaller suppliers in America and Europe, where the automotive industry has been worse hit, have simply gone belly up, making easy game for the bigger Indian vendors such as Bharat Forge, Sundram Fasteners, Sona-Koyo, Tata Automotive Components and Mahindra & Mahindra, among others.

A McKinsey study estimates that Indian suppliers could potentially tap $25 billion (Rs 1,12,500 crore) in exports alone by 2015. Add another $20 billion (Rs 90,000 crore) that the consulting firm expects the domestic market to fetch by then, India could soon have one of the largest auto-parts industries in the world. "India has great advantages in labour, raw material supplies, and engineering skills that make it well-suited to the needs of western automakers," says S. Ramnath, an analyst at Mumbai's sski Securities.

"Sooner or later someone or the other will have a lower cost, and that someone is likely to be China" Hemant Luthra CEO/Mahindra Systems & Automotive Technologies

Growing Chasm

There's little doubt that Indian vendors will gain, but not all. Low cost of manufacture is not a long-term advantage and, in fact, neither is low-end engineering. Says Hemant Luthra, CEO, Mahindra Systems and Automotive Technologies (MSAT): "If all that we are doing is reverse engineering and duplicating products, we are nothing more than a commodities supplier. Sooner or later someone or the other will have a lower cost, and that someone is likely to be China."

Evidently, it is going to be sooner than later. Tata Motors, Ashok Leyland and even TVS Motors have begun sourcing components from China. The former two are importing steering columns and several manufacturers are importing pressed steel wheels that are 25 to 30 per cent cheaper than those made in India. ACMA's Executive President Vishnu Mathur says Chinese component pricing is a "mystery" and that Chinese suppliers don't take rejection costs into account. But as Tata Motors' Managing Director Ravi Kant asks, "If China can produce components to the quality we require and cheaper, and if that allows me to give my customer a slightly better price, what's wrong in it?"

ACMA wants India to up import tariffs, pointing out that the country's WTO commitments require it to cap duties at 40 per cent, but that India has already cut them to 15 and is now planning to drop them further to 10 per cent. "That can destroy the local industry," rues Mathur. Nobody need doubt what'll happen to small vendors, but the bigger suppliers are already moving to counter the Chinese threat. The preferred strategy is simple: Acquire a European or American vendor that brings you the customer relationship, and then transfer a significant part of manufacturing to India. Some others, like Bharat Forge and Sundram Fasteners, have not just done that, but also set up manufacturing beachheads in China (as part of a "dual-shore" strategy) to take advantage of the "China price". Says Amit Kalyani, Executive Director, Bharat Forge: "The plan is to initially service our customers in China, but then expand into exports."

There are concerns still: A lack of high-end skills for electronic components, for instance. But global auto-parts giants may bring more such work to India to beat price pressures. That means the $25-billion opportunity may not be all pie in the sky. And it really shouldn't matter if encashing that cheque are India-based vendors, and not Indian vendors.