Even as demand currently continues to be tepid in the passenger vehicle and two wheeler categories, growth in both the segments is expected to outpace that of commercial vehicles (CVs) over the next five years.
While the long term prospects remain bright, there are short term challenges for some categories in the auto sector. The passenger vehicle (PV) industry has so far seen only a moderate recovery, while the two wheeler industry, particularly the motorcycle segment, has been hit by poor rural demand. But the commercial vehicle industry will continue to witness revival in demand over the near term, driven by economic recovery, urbanization and infrastructure development, according to a report by EY (Ernst & Young) India.
However, automotive firms need to realign themselves as the market moves toward the next stage of evolution. “They also need to re-evaluate their strategy in light of upcoming regulations such as stricter emission and crash testing norms,” said Rakesh Batra, Partner & National Leader – automotive practice, EY India.
“The GST reform, in particular, is likely to change the transportation scenario, and industry players must start thinking about re-aligning their supply chain, and specifically the distribution network. This single reform will impact vehicle pricing, sourcing strategies, distribution costs and dealer profitability,” he added.
In CVs, medium and heavy commercial vehicles in particular, growth is now is driven by replacement demand. However, the industry is likely to build on the growth momentum due to the lifting of mining bans, the government’s infrastructure push, increased freight movement and pent-up demand. “We expect the Indian CV industry to grow at a CAGR (compounded annual growth rate) of 7-9 per cent during FY15–20 to reach around 0.9 million units by FY20,” Mr. Batra said.
The report has recommended that CV companies should prepare for regulatory changes such as the uniform bus body code and tightening emission norms. Also, they have to work on innovative sales and service formats to widen reach and reduce vehicle downtime and leverage telematics services and analytics to differentiate offerings.
For PV industry, the growth is expected to be better than last year. But it is mainly driven by new model launches, low fuel prices and high discounts. “We expect market growth to pick up gradually and domestic PV sales to reach 4-4.5 million units by FY20 (CAGR of 9-11 per cent during FY15–20),” said Mr. Batra.
In PVs, new sub-segments will be created in line with the changing demands of the evolving Indian customers. Niche sub-segments such as premium hatchbacks, compact sedans and multi-utility vehicles (MUVs) are gaining stronger ground and will drive growth.
In two wheelers, the overall growth is expected to be in single digit due to unfavourable rural demand and the base effect. Long-term growth would be driven by economic revival, urbanization and low penetration. The two wheeler industry is expected to grow at a CAGR of 8-10 per cent during FY15–20 and reach about 25 million units by FY20.
According to the report there will be an increasing number of product introductions and variants across models as product life cycle are getting shorter. This is likely to result in increased production complexity and supply chain challenges, including forecasting, production planning and allocation. Further, the products must evolve with a focus on increasing safety requirements, higher electronic content and a move toward more feature-rich and fuel-efficient vehicles, it added.
