In­dian CVs: The road ahead

Af­ter a tu­mul­tuous last year, the CV in­dus­try is look­ing at a rare new pe­riod.

Commercial Vehicle - - WHAT'S INSIDE - Story by: Ashish Bha­tia

Af­ter a tu­mul­tuous last year, the CV in­dus­try is look­ing at a rare new pe­riod.

Supreme Court’s judge­ment to stop the sale of BSIII emis­sion com­pli­ant ve­hi­cles on April 01, 2017, led to an un­prece­dented sit­u­a­tion. CV man­u­fac­tur­ers and deal­ers were left with an es­ti­mated in­ven­tory of 96,700 (and 40,048 three-wheel­ers) BSIII emis­sion com­pli­ant CVs as on March 30, 2017, amount­ing to a sum of Rs.2500 crore ap­prox­i­mately. With the Supreme Court or­der clearly stat­ing that on and from April 01, 2017, such ve­hi­cles that are not BSIV com­pli­ant shall not be sold in In­dia by any man­u­fac­turer or dealer, led CV in­dus­try stake­hold­ers to look at quick ways of off-load­ing as many BSIII emis­sion com­pli­ant CVs as they could in a short span of three-to-four days; from the time the Supreme Court gave the or­der and from the time BSIV emis­sion norms came into force on April 01, 2017. The scope of the Supreme Court judge­ment can be had from the fact that it or­dered all the ve­hi­cle-reg­is­tra­tion author­i­ties un­der the Motor Ve­hi­cles Act, 1988, to not reg­is­ter such ve­hi­cles on and from April 01, 2017, that do not meet BSIV emis­sion stan­dards, ex­cept on proof that such a ve­hi­cle has al­ready been sold on or be­fore March 31, 2017. It was no se­cret that BSIV emis­sion norms will come into force from April 01, 2017. The CV in­dus­try knew it. What the CV in­dus­try did not know, claimed an in­dus­try source, was if they should dis­con­tinue man­u­fac­tur­ing BSIII ve­hi­cles such that there will not lie a sin­gle unit with them or their deal­ers on April 01, 2017. He drew at­ten­tion to the fact that man­u­fac­tur­ers were en­ti­tled to man­u­fac­ture BSIII emis­sion com­pli­ant ve­hi­cles till March 31,

2017. He also drew at­ten­tion to the Cen­tre’s re­sponse on pleas filed by Ba­jaj Auto and En­vi­ron­men­tal Pol­lu­tion Con­trol Author­ity (EPCA) in the Supreme Court, that the sale and reg­is­tra­tion of BSIII ve­hi­cles can con­tinue af­ter March 31, 2017, and the cut-off ap­plies to man­u­fac­tur­ing only. Dur­ing the March 24, 2017, hear­ing, claimed an in­dus­try source, the court had con­sid­ered al­low­ing reg­is­tra­tion of BSIII ve­hi­cles by im­pos­ing a com­pen­satory cess. The Cen­tre’s re­sponse is said to have been based on two ear­lier in­stances of up­grad­ing to BSII and BSIII emis­sion norms re­spec­tively. Then, the sale of ex­ist­ing stock was al­lowed.

Bone of con­tention

Men­tion­ing in its or­der that the health of the peo­ple of In­dia is of greater im­por­tance than the losses the auto in­dus­try would suf­fer (sic), the Supreme Court was not im­pressed by the ar­gu­ment that man­u­fac­tur­ers be al­lowed to sale BSIII ve­hi­cles even af­ter the BSIV reg­u­la­tion was im­ple­mented. Claimed an in­dus­try source that the min­istry of trans­port is­sued a no­ti­fi­ca­tion on Au­gust 19, 2015, to switch to BSIV emis­sion com­pli­ant ve­hi­cles on April 01, 2017. It did not how­ever clar­ify whether pro­duc­tion of BSIII ve­hi­cles would have to be stopped, or also their sale. In­ter­est­ingly, the Supreme Court did not fail to ob­serve the fact that an ex­pen­di­ture of Rs.30,000 crore was in­curred by re­finer­ies to pro­duce BSIV grade of fuel. The Court in its or­der stated that man­u­fac­tur­ers failed to take pro-ac­tive steps de­spite be­ing aware of the time­lines. Much con­fu­sion pre­vailed un­til the Supreme Court is­sued an or­der on March 28, 2017, to stop the sale of BSIII ve­hi­cles on March 31, 2017.

Deal­ing with the im­pact

Left with no choice, CV in­dus­try stake­hold­ers came up with the prospect of fire-sale. With the Court or­der com­ing out threeto-four days be­fore April 01, 2017, the auto in­dus­try, and not just the CV in­dus­try saw fire-sale as a promis­ing prospect, which is not sur­pris­ing. Many two wheeler man­u­fac­tur­ers too re­sorted to fire­sale of their BSIII ve­hi­cles as well.

Ex­pressed Vinod K. Dasari, Man­ag­ing Di­rec­tor and Chief Ex­ec­u­tive Of­fi­cer, Ashok Ley­land, and Pres­i­dent, So­ci­ety of In­dian Automobile Man­u­fac­tur­ers (SIAM), that they are look­ing at ex­port­ing the left­over (BSIII ve­hi­cles) in­ven­tory to emerg­ing mar­kets, cur­rently com­ply­ing with BSIII norms. Claimed an in­dus­try source that those (ve­hi­cles) that are left be­hind will be dis­man­tled. Some of the ag­gre­gates could be res­cued. Al­ter­na­tively, the ve­hi­cles could be up­graded to BSIV if pos­si­ble. A state­ment is­sued by Mahin­dra & Mahin­dra an­nounced that the Group is ramp­ing up BSIV ve­hi­cle pro­duc­tion. The OEM, the state­ment read, is also ex­plor­ing op­tions within the frame­work to min­imise the im­pact. The brisk dis­count sales and in­cen­tives CV mak­ers of­fered to off-load BSIII ve­hi­cles in the three-to-four days costed them in the re­gion of Rs.2500 crore, claimed an in­dus­try source. Ac­cord­ing to a re­port by re­search firm Crisil, com­pa­nies sold a lit­tle over half of their BSIII in­ven­tory by March 31, and have lost Rs 1,200 crore on dis­counts and in­cen­tives. They are ex­pected to lose an­other Rs.1,300 crore to dis­pose off the un­sold in­ven­tory.

Men­tioned a Tata Mo­tors source that the ban would have a ma­te­rial im­pact on all the CV in­dus­try stake­hold­ers. They are, he men­tioned, as­sess­ing un­sold in­ven­tory that lies with the com­pany and the deal­er­ships. Ac­cord­ing to the Tata Mo­tors spokesper­son, the de­ci­sion to ban the sale of BSIII ve­hi­cles was un­prece­dented and un­ex­pected. Erich Nes­sel­hauf, Man­ag­ing Di­rec­tor and Chief Ex­ec­u­tive Of­fi­cer, Daim­ler In­dia Com­mer­cial Ve­hi­cles (DICV), ex­pressed that they planned a year in ad­vance to meet the BSIV dead­line. The com­pany, he added, has sold its

1000th BSIV truck in the state of Ker­ala re­cently. Ker­ala mi­grated to BSIV emis­sion norms in Novem­ber 2016, much be­fore the pan-In­dia BSIV reg­u­la­tion came into force last month. De­spite prior plan­ning, DICV has come to have an un­sold in­ven­tory of 200 BSIII CVs, said Nes­sel­hauf on the side­lines of the launch of BSIV BharatBenz HDTs at Chen­nai. DICV had its CVs shed 400 kgs to ac­com­mo­date BSIV ap­pa­ra­tus. The com­pany has adapted SCR tech­nol­ogy to meet BSIV emis­sion norms un­like Ashok Ley­land, which has adapted in­tel­li­gent EGR tech­nol­ogy to meet BSIV emis­sion norms. DICV is sup­ply­ing AdBlue so­lu­tion to its deal­ers (and to petrol pumps) to en­sure qual­ity and re­li­a­bil­ity. The price of BharatBenz BSIV CVs is the same as the price of the BSIII CVs.

Dealer im­pact

The im­pact on CV deal­er­ships was con­sid­er­able. Deal­ers came un­der im­mense pres­sure to off­load BSIII CVs. If slow mov­ing in­ven­tory made for a higher im­pact, deal­ers pan­icked at least in the be­gin­ning. Averred Piyush Jain of A V Mo­tors, a SML Isuzu dealer, that the rul­ing is hard hit­ting, and has ren­dered deal­ers help­less. Jain com­pared the devel­op­ment with that of de­mon­eti­sa­tion. De­mon­eti­sa­tion too hit us hard in the third quar­ter of FY2016-17, he said. “A strong (and clear) judg­ment should have been passed about dis­con­tin­u­ing the man­u­fac­ture of BSIII ve­hi­cles in 2016 it­self,” opined Jain. “Had such a rul­ing been passed in 2016, it would have not re­sulted in the quan­tum of losses that we are star­ing at to­day,” he added.

Jain also touched upon the fear of elec­tron­ics among CV buy­ers and op­er­a­tors. “The cus­tomer here is far from be­ing ac­cus­tomed with the high level of so­phis­ti­ca­tion (elec­tronic en­gine) BSIV emis­sion reg­u­la­tion will call for,” said Piyush. He in­formed that he had an in­ven­tory of 20 BSIII ve­hi­cles. Ap­pre­hen­sive of the vol­umes in the first quar­ter of FY2017-18, Tej Ghatge of Chetan Mo­tors, a Tata SCV dealer from Kol­ha­pur said that he held an in­ven­tory of 55 ve­hi­cles as on March 31, 2017. Of these, he man­aged to fire-sale 20 ve­hi­cles. Huge dis­counts were of­fered. Dis­counts of Rs.50,000 on a Tata Ace was of­fered. Vi­mal Gu­jral of Cargo Mo­tors, a Gand­hid­ham­based Tata CV dealer, ex­pressed that the devel­op­ment was shock­ing. He held an in­ven­tory of 500 ve­hi­cles as on March 31, 2017. If his regional cen­tres would be ac­counted for, the count would go up to 700 ve­hi­cles. Not a happy prospect for cer­tain, opined Gu­jral. With un­sold in­ven­tory ac­count­ing mainly for Small Com­mer­cial Ve­hi­cles (SCVs) and pick-up trucks, Gu­jral re­vealed that they have hiked the dis­counts con­sid­er­ably.

Stat­ing that the higher price dif­fer­en­tial be­tween BSIII and BSIV emis­sion com­pli­ant CVs is yet to re­sult in a clear pic­ture as far as the de­mand in CV in­dus­try goes, Gur­jral said, “We are yet to wit­ness de­mand for BSIV CVs.” Men­tioned a promi­nent CV dealer, that they have been ad­vised by their prin­ci­pal to reg­is­ter (BSIII) ve­hi­cles in their name. “There is

a limit to the num­ber of ve­hi­cles we can reg­is­ter in our name,” he said. Suresh Jain of Veer­prabhu Mar­ket­ing, a CV dealer from Jodh­pur, ex­pressed that in­ven­tory lev­els are usu­ally higher at the end of the fi­nan­cial year. This is done to re­alise de­pre­ci­a­tion ben­e­fits by billing the in­ven­tory over the fi­nan­cial year end. With cus­tomers ex­pect­ing un­re­al­is­tic dis­counts, and at times be­low the cost of goods sold, it is not a happy prospect since the dealer has al­ready been billed for lo­cal trans­porta­tion, lo­cal tax­a­tion and sales tax among other charges, averred Jain. Jain’s deal­er­ship held an in­ven­tory of 200 ve­hi­cles as on March 31, 2017.

As a des­per­ate mea­sure CV deal­ers are known to give an ex­tended credit of up to 30 days to some of their large fleet op­er­a­tor clients to off-load BSIII in­ven­tory. Said a dealer on the con­di­tion of anonymity, that the im­pact of Supreme Court’s or­der and the slow de­mand for BSIV CVs will re­flect in the sales sta­tis­tics for the first quar­ter of FY2017-18. The CV in­dus­try, he averred, will per­form worst than when it was im­pacted by de­mon­eti­sa­tion.

Ex­pert anal­y­sis

With the Crisil re­port peg­ging the CV in­dus­try loss at Rs.2,500 crore, the to­tal im­pact of the Supreme Court or­der is claimed to be 2.5 per cent of the an­nual rev­enues of listed CV man­u­fac­tur­ers. Ac­cord­ing to the Crisil re­port, an ex­pense of an­other Rs.1,300 crore will be in­curred to dis­pose off un­sold in­ven­tory of BSIII CVs. The ef­fect of this devel­op­ment, claimed an in­dus­try source, will be spread across FY2017-18. The dis­counts of­fered dur­ing the fire-sale of BSIII ve­hi­cles is also ex­pected to neg­a­tively im­pact EBITDA mar­gins by 100 bps (one per cent) in FY2017-18. Ex­pressed Rakesh Ba­tra, Part­ner and au­to­mo­tive sec­tor leader at Ernst and Young Ser­vices, that it is nec­es­sary to con­sider that the CV in­dus­try works glob­ally on 20 to 30 days of in­ven­tory. This is within the dis­tri­bu­tion chan­nel, and should have been ac­counted for as part of the plan to tran­si­tion from BSIII to BSIV emis­sion norms. An ICRA re­port pegged un­sold in­ven­tory of BSIII CVs to be­tween Rs.4600 and Rs.5800 crore ap­prox­i­mately. De­spite be­ing caught off-guard by the SC rul­ing, SIAM’s lat­est re­port states the over­all com­mer­cial ve­hi­cle seg­ment to have reg­is­tered a 4.16 per cent growth in FY2016-17. Medium and Heavy Com­mer­cial Ve­hi­cles (M&HCVs) grew by 0.04 per cent over the same pe­riod last year. Light Com­mer­cial Ve­hi­cles (LCVs) wit­nessed a 7.41 per cent growth while CV ex­ports reg­is­tered a 4.99 per cent growth.

Look­ing for clar­ity

The So­ci­ety of In­dian Automobile Man­u­fac­tur­ers (SIAM) has writ­ten to Prime Min­is­ter Naren­dra Modi, seek­ing a meet­ing, claimed an in­dus­try source. The let­ter, he men­tioned, speaks about the auto in­dus­try want­ing to thrive in an en­vi­ron­ment where there is pol­icy clar­ity and cer­tainty. Es­pe­cially, due to the long ges­ta­tion pe­riod in­volved. Claimed a source on the con­di­tion of anonymity that the re­cent Supreme Court rul­ing con­tra­dicts the 2015 no­ti­fi­ca­tion by the trans­port min­istry. He men­tioned that this has been men­tioned by SIAM in the let­ter it wrote to the Prime Min­is­ter. The fact is, the die has been cast. BSIII CVs are history. The road ahead lies on the frame work of tight­en­ing reg­u­la­tions start­ing with BSIV. With the crash reg­u­la­tions said to come into force from next fis­cal, the road ahead for the In­dian CV in­dus­try is go­ing to be as chal­leng­ing as it has been for some­time now. With GST round the cor­ner, the CV in­dus­try, it is look­ing like, is al­ready an­tic­i­pat­ing big changes. In 2020, the bridge to BSVI emis­sion norms will have to be crossed too.

ØThe im­pact of the move to BSIV emis­sion norms on CV deal­er­ships has been con­sid­er­able.

⇧ Daim­ler In­dia Com­mer­cial Ve­hi­cles planned the tran­si­tion to BSIV emis­sion norms a year in ad­vance.

⇦ The move to BSIV emis­sion norms ush­ers in an era of elec­tron­ics in CVs.

⇩ The road ahead lies on the frame­work of tight­en­ing reg­u­la­tions start­ing with BSIV.

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