Missing some aces up its sleeve

Tata Motors is looking at new launches to arrest the slide in its share of the LCV market; but customers are looking for more

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With the launch of its new light commercial vehicles (LCV) this financial year, the first of which was rolled out last week, Tata Motors is trying to plug the gaps in its product portfolio and regain lost ground in this segment. But, with the segment itself undergoing a shakedown of sorts as customers go for LCVs with greater carrying capacities, the company might need to go beyond the launches and rethink its brand strategies.

On Thursday, Tata Motors introduced its new one-tonne mini truck, the Ace Mega. It plans to bring out another 2-3 vehicles (two-tonne plus) over the next couple of years. The LCV segment is typically broken down into vehicles in the sub two-tonne category and above. In recent months customers have voted with their wallets for the above two-tonne vehicles, or what are popularly tagged as pick-up vehicles. This has led to a drop in demand for the lighter LCVs, a category that Tata Motors dominates. Its market share in under two-tonne vehicles is 85 per cent. Shifting customer preferences has hit the company hard and it is trailing other LCV players whose portfolio has vehicles with higher capacity.

Ashish Nigam and Ronak Sharda of Axis Capital say that the share of the sub two-tonne segment has shrunk to 39 per cent of all LCVs from 61 per cent, three years ago. This is due to over capacity coupled with stringent lending norms for single fleet owners. In July, the research house says, M&M became the largest LCV maker due to higher sales of its pick-up portfolio with a market share of 39 per cent as against Tata Motors's 37 per cent. The latter however continues to be the largest player by market share if the year-to-date figures are taken into consideration.

Tata Motors is looking at the new launches as a way to regain its place in the segment. But many wonder if the company that created the micro small commercial vehicle segment in 2005 with the one-tonne Ace and cannibalised the three wheeler cargo segment, is reading the segment shift right?

Customers are going for the heavier LCVs, an analyst at a domestic brokerage explains, because the operating economics of these vehicles are robust vis-à-vis the smaller vehicles. And given this, the 2-2.5 tonners will continue to find favour with buyers in the long run. Also, given the overcapacity in the micro commercial vehicle segment, it will be a while before companies in this category see an improvement in fortunes.

Tata Motors, however, does not quite view the market through the same lens. The segment shift according to Ramki Ramakrishnan, senior vice president, commercial vehicles at Tata Motors, is temporary. He says that the under two-tonne segment will continue to grow and will remain the largest segment by volume going ahead. He believes that pick-ups have done well because of the availability of new models. And sales of lower powered vehicles have suffered on account of a lack of funding. 'Finance availability is the biggest hurdle that is hampering the sales of sub two-tonne units. Lenders given the slowdown and non-performing assets have become cautious. This has pegged back sales,' he adds. Unlike pick-ups, people who purchase micro commercial vehicles are first time buyers and given the lack of credit history find it difficult to secure loans. Further, the high prices of the company's Super Ace MINT and Xenon brands could be the reason for its lower market share in the pick-up segment, believes Ramakrishnan.

Rating agency ICRA says that poor sales numbers in the entire LCV segment reflect surplus capacity and a challenging financing environment. Will there be a turnaround as has been the case with medium and heavy commercial vehicles? That depends on an improvement in industrial activity as well as agricultural demand. While neither has seen consistent improvement, for the M&HCVs, sale uptick is largely replacement demand and not new purchases. As industrial activity picks up, higher new truck purchases will lead to an improvement in last mile demand for smaller commercial vehicles.

At the start of the year, the LCV space was expected to grow at low single digits but the sales in the first few months indicate that the sector could end the year without any growth. And it may be a while before Tata Motors which is doing about 13,000 units now can come close to its peak sales of 34,000 light commercial vehicles per month which it achieved in March 2013. While the goods segment has seen a decline, the passenger segment (within LCVs) has seen a steeper fall. Of the 34,000 units, about 10,000 units were passenger vehicles.

This has now crashed to about 2,000 units from the 13,000 units the company does currently.

While the product launches especially in the higher tonnage segment are expected to arrest the slide in market shares, Tata Motors will be hoping for a revival in new vehicle demand both in the medium and heavy as well as light commercial segments. It would also have its fingers crossed over easier financing opportunities. In the absence of any of these triggers, the company's LCV brands will continue to underperform.