Trucking Through Flat Demand

What drives demand?

Since much of the attention that has been focused on the industry has been a result of the (wildly?) fluctuating demand for its products, let us begin with an attempt to understand what makes the CV industry tick. Historically, the demand for CVs has been influenced by the interplay of a wide variety of factors as illustrated in figure 1.

Economic growth: Truck markets, the world over, tend to be closely linked to overall economic growth and understandably so, since growth provides the fundamental requirement for an increase in haulage services. Since the late 1970s, growth in CV sales have mirrored the world economy and a clear upward trend of about 5 per cent per annum has been discernible, which corresponds almost exactly with industrial growth. Also having a direct impact on demand would be the sectoral mix and the contribution of different sectors and regions to the overall growth.

 

Transport intensity:Another significant variable influencing demand is the transport intensity of the economy, which is the growth in demand for transport that results from a unit increase in economic growth. This is influenced in turn by the sectoral mix, geographical expanse of the country and the level of trade between different regions. Large countries (in terms of area) typically exhibit a higher transport intensity than smaller ones. A World Bank study of the Indian transportation sector shows that India has had a relatively high transport intensity in the past, with demand for freight transport growing at roughly 1.5 times the growth in GDP as against a proportional increase in most developed countries.

Operating environment: This comprises country/state specific factors such as the quality of road infrastructure, government policy, credit availability, etc. Often regulation can exert significant influence on demand, for example, the demand for trucks in Western Europe has been strongly influenced by the effects of regulation mandating operating permits and restricting pricing and cabotage (the ability of an operator in one country to engage in purely domestic pick-ups and deliveries in another country). Similarly, in India decisions by state governments to allow transporters to freely operate regular bus services on all routes could cause a spurt in vehicle sales. It is estimated that close to 90 per cent of the commercial vehicles purchased (in India) make use of some form of financing. An increase in interest rates or a credit squeeze has an immediate impact on vehicle sales.

The inter-modal split: The importance of road transport in the economy is a function of the extent, the cost and the quality of service that can be provided by competing modes of transport. Depending on the quality of infrastructure and the feasibility of the different modes of transport and the requirements of the economy, different modes of transport will dominate in different regions. This can be seen in Exhibit 2, which shows the proportion of cargo carried by different modes of transport in the USA and Europe.

So who stepped on the accelerator

Having identified the significant variables, we now attempt to study their impact in the Indian context. To understand the current dilemma facing CV manufacturers it is necessary to go back around three to four years when a surging demand for CVs was witnessed. It can be observed that the recovery in the CV market coincided with the recovery of the economy. With the rate of growth between 1994-95 and 96-97 averaging more than 6.5 per cent, a rough estimate of the annual growth in freight transport requirements is around 10 per cent.

However, with the transport requirements being met by the entire population of commercial vehicles (as against one year's sales) a small change in the rate of increase (or decrease) in freight requirement can have a magnified impact on sales in any one year and may cause an increase. stagnation or even decline in CV sales. This fundamental relationship seems to suggest that as long as there remains variability in economic growth, it would continue to have disproportionate effect on the demand for new CVs.

In India, road and rail are the dominant modes of goods transport within the country accounting for over 90 per cent of the cargo transport. Road transport has steadily been gaining share over the last 10 years as illustrated in Exhibit 3.

However, during the period between 1992-93 and 1996-97 the Railways experienced a severs bottleneck in terms of cargo carriage, with freight traffic transported by the Railways stagnating in absolute terms (refer Exhibit 4) the entire increase in transportation requirement had to be met by road transport. The share of Railways in the overall freight transported consequently plummeted. It has been estimated that by the end of 1995 the share of rail in freight transport had already decreased to 30 per cent. Thus, the economic recovery coupled with a disastrous performance by the Railways combined to give rise to a booming demand for trucks.

If these factors resulted in a boom then the next obvious question is who or what is responsible for the equally sharp decline in demand? Different elements have once again combined to bring this about. The first and most obvious is the general slowdown in the economy. As in the case of the economic recovery four years back, the current slowdown, albeit small, has had a direct impact on the market.

In addition to this, the Railways overall performance may be improving in terms of the movement of cargo. The wagon acquisition has certainly after hitting an all time low in 1994-95 (refer Exhibit 5) and this is likely to improve performance with respect to freight transport.

Though the above reasons are primarily responsible for the slowdown in sales a third factor has also contributed to exaggerating the extent of the decline. During the second half of the year vehicle sales were lower than those from the OEMs to dealers. As a result, manufacturers were able to report substantial growth in sales, however, in reality there were large stocks building up with the dealers. The results of this stockpiling are being experienced in the current financial year and this is pulling down the reported AU sales.

The road ahead

Having examined the demand patterns in the recent past and the linkages between different variables influencing the requirement for road freight transport, we can attempt to anticipate what could be expected in the years to come.

Although changes in economic growth and in the inter-modal split should continue to be key variables affecting demand, manufacturers would do well to keep track of changes in the operating environment as well. The regulatory framework governing road transportation could undergo several changes which might impact both the magnitude as well as the nature of demand in each sector.

Growing concern about environmental pollution may lead to the adoption of legislation which targets the compulsory scrapping of vehicles beyond a particular age. The adoption of the EURO1 norms introduced in Europe in 1991-92 are likely to come into force in India by the year 2000. Enforcement of such legislation would definitely alter their engines to conform to the new norms and vehicles that are not in a position to meet these standards would need to be discarded.

Similarly, improvements to the existing road infrastructure is a change that would lead to a quantitative and a qualitative change in the nature of demand. Whereas on the one hand better roads would directly influence productivity of the entire population and consequently lower the requirement for new vehicles, on the other hand, it could also lead to increased traffic on the roads due to the improved efficiency of the road transport system. Better roads would also lead to a higher demand for heavier commercial vehicles the use of which has been limited so far.

The thrust for change and improvement would not only be driven by direct changes in the operating environment, but also by the changing perceptions and requirements of the users. Vehicles that might perform well on existing roads and in an overloaded conditions might not be able to meet users expectations of speed and reliability on expressways where overloading is strictly monitored.

In conclusion, it can be said that the fluctuating demand patterns are likely to continue, and any changes anticipated are unlikely to alter this. In fact, the flexibility and responsiveness required of manufacturers might actually increase since in future the variability would not only be in the volume but also in the nature of vehicles required. The ability to look beyond the next month's sales and focus instead of keeping track of the rapidly changing environment and its implications, would be necessary simply to ensure survival, winners would need to do something more! n

(The author is consultant with Tata Strategic Management Group, Mumbai)