The Indian Government has decided to scrap commercial vehicles older than 20 years which can be upto 700,000 units in a year.. The current total Indian CV capacity is 3.5mn vehicles and this program will benefit OEMs and Auto Ancillaries emmensly.
OEMs to benefit:
- Tata Motors – 44% market share in MHCVs
- Ashok Leyland – 34% market share in MHCVs
- Volvo Eicher Commercial Vehicles – 5.2% in Heavy Duty Segment
Auto Component manufacturers to benefit:
- Wabco India: 65% revenue from M&HCVs
- Jamna Auto: 85% market share in leafsprings with OEMs
- Setco Automotive: 85%+ OEM market share in clutches in MHCVs
- Harita Seatings: 18% of the business comes from MHCVs
- Bharat Forge: 15% market share in OEMs in MHCVs
- Bosch: 26% contribution from Indian OEMs in MHCVs
Older vehicles, typically more than 10 years of age and pre-BS I compliant, constitute 15% of the total fleet but pollute 10-12 times more than a new vehicle because of drastic change in pollution norms, thus, there is an urgent need for implementation of this scheme.
The program will result in improvement in fuel efficiency with the new vehicle replacement. This would lead to lower oil consumption to the tune of 3.2 billion liters per year translating. Crude oil import savings will also be higher to the tune of Rs 7,000cr. MHCVs (both buses and trucks) will account for ~55% of these fuel savings.
Benefits OEM Suppliers
The policy would boost sales of OEMs leading to higher production capacity utilisation and the automobile manufacturers would support the government in this initiative “financially by giving special discounts to customers buying vehicles under this scheme”.
Scrappage policy expected to come in by Apr-20 will be a major growth driver for the CV industry. 200‐250K vehicles will come under the ‘over 20 years’ scrappage policy while in case of a scrappage policy for vehicles older than 15 years, ~600‐700K units will need to be scrapped.
Besides reducing emissions, it generates steel scrap worth Rs. 11, 500 annually, reducing steel import burden.
Though manufacturers are lauding the move, they say the impact will play out over two to three years. According to them, transporters are unlikely to rush to buy vehicles immediately.
How the policy will be implemented?
The programme will follow a structured implementation and execution process, coordinated between the vehicle owner, the recycling and shredding center, OEMs, dealers and government representatives.
Change of hand
Given that commercial vehicles change hands two to three times during their lifecycle, the government has to work out ways to issue tradeable certificates which would incentivize the last owner to scrap the truck and subsidize the purchase of the primary buyer. This will in turn create a win-win situation for all stakeholders and make the overall dynamics of commercial vehicle trade more vibrant.
|Scrap Value||Part of scrap value from old vehicle to be given as payback|
|OEM Discounts||Special discounts to be given as incentive|
|Excise Duty||Upto 50% ecxcise duty to be passed on as incentive|
The CV industry remains heavily fragmented, unorganized and very rough in nature. The fleet owners are heavily fragmented in India, with more than 80% of the fleets owned by people having less than 10 vehicles, which gives birth to the intermediaries. There are multiple entities involved in the entire transaction and multiple activities happen in the background before the vehicle can actually be in-transit.
The most critical enablers required for smooth implementation of this programme are robust IT infrastructure (ensure measurement of programme effectiveness through MIS generation) and setting up of Recycling and Shredding Centers.
Scrapping of End of life vehicles is carried out all across the world wherein vehicles are shredded and the metal content is recovered for recycling, while in many areas, the rest is further sorted by machine for recycling of additional materials such as glass and plastics. Approximately 10 million vehicles are recycled annually. The successful ones in the CV space have been Japan and Germany, where post the incentivization scheme, truck sales increased by 9% and 17% respectively.
Currently, 75% of the materials are able to be recycled. As the most recycled consumer product, end-of-life vehicles provide the steel industry with more than 14 million tons of steel.
New vehicle purchases will be even lower
Over 20-year old trucks normally ply in rural areas (national permits are typically for 12 years, state permits for 15 years) as vehicles with high operating costs are not viable on long distance routes. Consequently, it is unlikely that these operators will purchase new vehicles to replace the older ones. While new purchases may lead to higher replacement demand in the long term, in the near to medium term (i.e. after 2020), the impact could be limited. This is because any incentives of buying a truck may eventually flow through to fleet owners that were already looking to purchase new vehicles.
Long way between now and 2020
The policy has yet to be approved by the GST council. Further, we believe there is a high possibility of the policy shifting between now and 2020, considering the election cycle in 2019 and likely lobbying in the interim. A similar policy with detailed calculations was floated about 2 years ago (with age criterion at 15 years). Hence, we would be surprised if the scrappage policy were to be implemented as currently envisaged.
Overall, while the policy is a step in the positive direction, the boost to volumes could be limited. Adoption of BS VI standards by itself will reduce HDV emissions in India, but the near-term benefits are restricted because older, poorly maintained vehicles will still contribute most of the in-use fleet emissions in the near-term. Both direct and indirect subsidies are key in supporting a scrappage program, as is the early introduction of the cleanest vehicles available. Sufficient financial subsidies, offered by government and manufacturers, can reduce, or even eliminate the price gap led by the technology improvement between BS IV and BS VI vehicles.
This article is penned by Sneha Prashant, Investment Adviser, Moneybee Investment Adviser Private Limited. For more details please call on +91 22 4030 2090