When Tata Motors launched Tata Ace, a four-wheel mini truck, in May 2005, it turned out to be a game-changer for the domestic light commercial vehicle (LCV) goods segment.
With the Tata Ace, Tata Motors exploited the hitherto vacant space between three-wheelers and upper-end LCVs, and ushered in a new segment known as mini-truck or sub-one tonne — less than 2 tonne gross vehicle weight (GVW) — to cater to newer and smaller transport operators.
The phenomenal success of the Tata Ace and the fillip it provided to the LCV segment can be gauged from the fact that until it vroomed into the LCV landscape, the segment had been growing at a sedate pace (around 7-11.5 per cent annually between 1991 and 2005).
By contrast, since 2004-05, growth has more than doubled to 22 per cent CAGR (compounded annual growth rate), powered by around 31 per cent growth in SCVs. Remarkably, even the economic slowdown in 2008-09 and 2011-12 failed to make any dent in this trend. In fact, in 2011-12, LCV sales grew by 30 per cent year-on-year, whereas medium and heavy commercial vehicle (MHCV) sales increased at a much more sedate 9 per cent. To be sure, the transportation landscape was fertile for absorbing a product such as the Ace.
Until the Ace's advent, the LCV segment was severely under-penetrated due to the absence of suitable vehicles for last mile distribution. In the early part of the last decade, three-wheelers and upper-end LCVs dominated the segment, as they were the preferred choice for most re-distribution and last mile applications, including spot cargo in industrial areas. Since 2005-06, however, sub-one tonne sales soared at a CAGR of 43 per cent, and propelled SCVs into the driver's seat for LCVs.
The shake-up of the market that Tata Ace left in its wake inevitably led to the launch of similar SCV models by the other commercial vehicle majors such as Mahindra and Mahindra and Ashok Leyland-Nissan. The burgeoning demand for SCVs (boosted by increase in consumption expenditure, growth of the organised retail industry, and proliferation of the hub and spoke model), was further fuelled by substitution of large three-wheelers (more than 1 tonne GVW).
Consequently, the population of LCVs vis-à-vis MHCV trucks, which had been a steady 0.5 times until 2005-06, zoomed to 0.8-0.9 times by 2011-12. This is still below that of peers such as China, where the LCV population is nearly double that of MHCV. With increasing segmentation and availability of models at almost every tonnage point, Crisil Research forecasts that the LCV segment will grow at a CAGR of 14-16 per cent up to 2016-17, much faster than the 9-11 per cent CAGR we project for MHCVs. Consequently, the LCV/MHCV ratio in India will improve to around 1.25 times over the next five years. In the long-term, we expect this ratio to inch closer to global levels. By 2016-17, LCVs would account for 34-35 per cent of revenues earned by manufacturers from commercial vehicles (goods) sales. Over the past 3-4 years, Maharashtra, Uttar Pradesh, Tamil Nadu, Andhra Pradesh and Karnataka have accounted for close to 50 per cent of the total LCV sales volume. Going forward, the share of these states in total LCV volume is likely to decline slightly as growth rates stabilise in these regions and accelerate in others.
For instance, over the past year, LCV sales growth surged in states such as Gujarat, Haryana, Rajasthan, Bihar, and Madhya Pradesh.
Not surprisingly, more players are looking at entering this segment, given the huge growth potential. Chinese truck makers, Beiqi Foton and GM-SAIC, are expected to launch models from their famous Forland and Wuling ranges in the coming years. One fall-out of intensified competition will be the premium pricing advantage of first movers will ease and players would have to be innovative. A case in point is the Maxximo which addressed the need for higher powered SCVs, launched in 2010-11 by Mahindra and Mahindra. It now has 20 per cent market share in the segment.
Notwithstanding these downsides, the long-term potential of the market will ensure that it will be the space that most players will seek to be in for the long haul.
The author is Director,
Crisil Research, a division of Crisil.