Small commercial vehicle India's little elephant September, 2014
Contents Page A. Overview in a nutshell 3 B. Rapid growth & high dynamism are the hallmarks of the Indian SCV market 6 C. Demand drivers to trump short to mid term challenges 20 D. Solid growth expected but not across all sub segments 25 E. Choose wisely where to play and drive government engagement 27 This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation. It may not be passed on and/or may not be made available to third parties without prior written consent from Roland Berger Strategy Consultants. RBSC does not assume any responsibility for the completeness and accuracy of the statements made in this document. Roland Berger Strategy Consultants 2
A. Overview in a nutshell 3
SCV segment is the largest segment in the CV industry in terms of volume and will continue to remain so over the next 6 years Executive summary [1/2] > Current scenario The SCV segment is the largest segment within the CV industry with sales of ~432k units in FY2014 contributing 60% to the overall industry. It has outperformed all other segments declining by ~1% CAGR only over the last 2 years against the industry average of ~11% CAGR The SCV Cargo continues to be the biggest segment and will account for ~80+% of the total market by FY2020 Within the SCV Cargo segment large pick-ups (2-3.5T) have been growing & account for ~54% of the segment SCV Passenger is a highly regulated segment and faces tough competition from 3 wheelers. Over the last year, the segment has suffered extremely high delinquency rates Tata Motors and Mahindra & Mahindra continue to be the top 2 players in the industry Tata Motors leads the market in the sub 2T truck category and the SCV Passenger segment Mahindra & Mahindra is expected to do well in the 2-3.5 Ton category in the SCV Cargo segment due to its strong hold in the Pick-up segment. It has also managed to attract ACE customers to higher tonnage Bolero Maxi Truck Ashok Leyland is one of the late entrants but has been successful with Dost cornering 14% market share in the 2-3.5 Ton category Source: Roland Berger 4
SCV segment is the largest segment in the CV industry in terms of volume and will continue to remain so over the next 6 years Executive summary [2/2] > Key demand drivers Need for last mile connectivity for both goods and people transportation. Supported by increasing rate of urbanization Better operating economics clubbed with better financing options making SCVs more lucrative for end customers New applications are being developed to expand the market prompting newer customers to buy SCVs. Poultry, milk and water distribution industries are some of the new segments established over the last year > Challenges OEMs need to continuously develop new applications and also educate the customers on the usage to continue segment expansion SCV Passenger carriers rely heavily on permits issued by Government agencies. Therefore, there is a need to work closely with the government which faces heavy lobbying from the strong 3-Wheeler unions > Future projections We expect the market to get back to the growth trajectory sometime in the 3rd quarter of the current fiscal The SCV industry is expected to reach ~919,000 units by FY2020 growing at a CAGR of ~13% over the next 6 years Source: Roland Berger 5
B. Rapid growth & high dynamism are the hallmarks of the Indian SCV market 6
Overall CV Industry SCV is a relatively new segment in the Indian commercial vehicle industry; rapid growth turned it into the largest volume segment CV Industry growth by segment CV Industry market evolution [Sales volume, '000 units] CAGR [%] 580 7% 35% 45% 6% 7% +24% 729 7% 38% 45% 5% 6% 893 6% 34% 50% 6% 6% -11% 910 5% 5% 25% 61% 4% 4% 712 6% 5% 24% 61% LCV Passenger LCV Goods M&HCV Passenger M&HCV Goods SCV 1) FY 2010-12 FY 2012-14 19.8-6.9 12.8-23.5 7.1-11.5 21.7-26.4 30.4-1.4 > SCV segment was established in 2005 with the launch of ACE Truck in the sub 2 ton category. Since then it has grown considerably > SCV segment grew by ~30% CAGR between 2010-2012 whereas it only declined by ~1% CAGR over the last 2 years. During the same time overall industry declined by ~11% CAGR > The SCV segment has outperformed all the other CV segments and now accounts for more than 60% of the CV industry FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 1) SCV segment includes Tata Magic/IRIS segment and also <3.5 ton cargo vehicles like ACE, Dost, Super Ace, etc For this comparison we have not included hard top vans (e.g: Omni & Eco) Source: SIAM, Roland Berger Analysis 7
Overall SCV Industry SCV industry has been impacted by the downturn declining by 22% over last year; SCV Passenger has declined more than SCV Cargo SCV 1) Industry growth by segment SCV Industry market evolution [Sales volume, '000 units] +24% 552 21% +30% 444 19% 325 261 16% 19% 79% 81% 84% 81% -22% 432 17% SCV Passenger 83% SCV Cargo Growth rates [%] FY 2010-12 FY 2012-14 30.4-6.9 30.4-0.2 > SCV Cargo segment has outperformed SCV Passenger segment driven by growth in the 2 Ton 3.5 Ton category which includes the successful Bolero Maxi Truck > SCV passenger faces tough competition from 3Ws which account for more than ~85% of the segment. Also, competition from MPV/SUV for customers looking for comfort whereas soft top vehicles are more in demand for shared taxi applications > SCV Passenger segment suffered due to high delinquency rate and limited government support in terms of issuance of new permits FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 1) SCV segment includes Tata Magic/IRIS segment and also <3.5 ton cargo vehicles like ACE, Dost, Super Ace, etc For this comparison we have not included hard top vans (eg: Omni & Eco) Source: SIAM, Roland Berger Analysis 8
SCV Cargo Tata reinforced its dominance in the <2T category by creating the Zip segment positioned between Ace and the 3W segment Market share development - Goods carrier <2T Model wise segment share trend 2010-14 Trump 15 M&M Gio Maxximo 191 3% 3% 2% 4% 18% 251 1% 3% 2% 19% 8% 2% 247 1% 1% 15% 14% 1% 0% 167 1% 1% 4% 16% 15% Porter1000 Porter600 Ace Zip > Since product launch, Ace has remained the market leader in the <2T segment > The 0.5T payload category competes directly with the 3W vehicles and is priced between the 0.75T segment and the 3-Wheelers. However, it has not managed to create a threat for 3- Wheelers as the 0.5T vehicles cost at least 40% more than 3-Wheelers > Piaggio regained its market share with the launch of the Porter series Ape truck failure mainly attributed to the product related issues 70% 65% 68% 63% Ace 2010-11 2011-12 2012-13 2013-14 Tata Motors Mahindra Piaggio Force Motors Source: SIAM; Roland Berger 9
SCV Cargo 3W Cargo 3W Cargo segment has managed to hold its ground even though it faces tough competition from SCV Cargo segment Market share development 3W Cargo Model wise segment share trend 2010-14 Force Motors Mahindra & Mahindra 91 1% 13% 7% 8% 15% 56% 101 107 97 3% 95 0% 4% 0% 7% 0% 0% 8% 7% 9% 9% 9% 17% 15% 12% 19% 18% 21% 23% 61% 54% 53% 52% Bajaj Scooters India Atul Auto Piaggio Vehicles > Overall 3W Cargo segment has increased by CAGR ~1% over the last 5 years. However, it declined by ~2.5% the last year > This segment though faces more competition than 3W passenger since there are no regulations in terms of permits. However, they have managed to sustain their volumes since they also cost ~40% less than the SCV cargo entry range vehicles (For eg: Tata Ace Zip) > Piaggio continues to be a market leader in the 3W cargo segment and now accounts for ~52% of the market > Atul Auto has been a success story. It has gained ~10% market share over the last 5 years driven by the launch of rear mounted engines and their focus towards Tier II & Tier III cities 2009-10 2010-11 2011-12 2012-13 2013-14 Source: SIAM; Roland Berger 10
SCV Cargo Rapid growth of Dost indicates significant opportunities exist for new players. Right product and good network critical for success Market share development - Goods carrier 2-3.5T Model wise segment share trend 2010-14 Winner Trump40 Trax Pick-up 82 6% 1% 16% 3% 2% 18% 0% 110 4% 1% 7% 14% 0% 7% 10% 13% 190 1% 1% 18% 7% 4% 15% 4% 18% 193 1% 0% 14% 3% 7% 12% 1% 25% Dost 207 Xenon Superace Genio Bolero Maxi Truck > M&M dominates the pick-up segment with its products derived from SUV/ MUV platforms > M&M has also managed to attract customers from less than 2T category by keeping the price gap between Bolero Maxi Truck and lesser tonnage ACE to less than INR 39,000 as a result of which it has gained 12% market share over the last 2 years > Most OEMs provide loans through their financing arms in order to increase penetration in this segment 53% 43% 33% 38% Bolero Pick-up 2010-11 2011-12 2012-13 2013-14 Mahindra Tata Motors Ashok Leyland Force motors Hindustan Motors Source: SIAM; Roland Berger 11
SCV Cargo M&M has successfully managed to convert <2T customers by reducing the price gap between Bolero Maxi Truck & ACE Case study Bolero Pickup & Bolero Maxi Truck Annual volumes and market share Segment share (%) Volumes ('000 units) Bolero Maxi Truck Bolero Pickup 72% 57% 51% 63% 59 15 44 FY 2011 62 15 48 FY 2012 +27% 96 34 62 FY 2013 121 48 73 FY 2014 CAGR growth rate 47% 18% > 1.5-2T truck customers are shifting to Bolero Maxi Truck (BMT) due to the following reasons: Price differential: Tata Ace which is a market leader in sub 2T category is only cheaper by less than INR 40K from Bolero Maxi Truck Product differential: Incremental product improvements makes Bolero Maxi Truck even more attractive: - Pay load increases from 1.5T to 2.5T - Engine displacement increases from 705 cc to 2523 cc - Power increases from 16 HP to 62 HP > M&M also has managed to launch several customer centric programs in order to retain and grow SCV customer loyalty for example: In May 2014, M&M launched Uday under which following benefits are being offered to customers: - Discounted mobile recharge coupons - Accidental insurance (upto INR 2 lakhs) - Referral bonus in the form of free service benefit - Discounts on labor and spare parts Source: SIAM, press research, primary interviews, Roland Berger 12
SCV Cargo Backup Ashok Leyland followed a partner based approach for its SCV entry and has established a significant brand value with success of Dost Case study Dost Annual volumes and market share Segment share (%) Volumes (units) n/a 7% 18% 14% +89% 34,794 27,080 > First product from the Ashok Leyland Nissan Joint Venture based on the Nissan Vanette > Commercial launch of Dost in September 2011 Phased launch covering only 6 states in the first few months > Dost product upgrade in July 2013 to marginally increase engine power and cosmetic changes such as headlight, tail light, guard, steering wheel, instrumental cluster, dashboard and rear ventilated glass > Commission of new plant delayed due to the current market slowdown. Plant to have a capacity of 150,000 units once completed > Passenger carrier (Dost Express) based on the same platform already under trials > Plans to have annual sales of around 45,000 in the next couple of years 7,593 n/a FY11 FY12 FY13 FY14 Source: SIAM, press research, primary interviews, Roland Berger 13
SCV Passenger Preference for soft top vehicles for intra-city and rural applications has resulted in market share growth for Tata and Mahindra Market share development Passenger carrier 1) Model wise segment share trend 2010-14 Trip Venture 214 24% 0% 32% 43% 235 237 191 3% 2% 1% 8% 7% 5% 4% 11% 12% 20% 21% 3% 27% 2% 7% 25% 1% 4% 20% 17% 36% 30% 34% Gio Maxximo Iris Magic Maxximo minivan Eeco Omni Soft top: 72,116 units Hard top: 118,628 units > Customers are increasingly preferring soft top 4W vehicles over the conventional 3W for urban share taxi application > Hard top vans are being replaced by MPVs as end users demand more comfort > As a result, both Tata Motors and M&M have managed to grow their market share. Tata Motors owns more than 30% of the market > However, 4Ws have not managed to topple 3Ws as they cost ~40% more than 3W and weigh almost double making them less fuel efficient 2010-11 2011-12 2012-13 2013-14 Maruti Suzuki Tata Motors Mahindra Force Motors 1) SCV segment includes Tata Magic/IRIS segment. However, for comparing purposes we have included hard top segment Source: SIAM; Roland Berger 14
SCV Passenger 3W Passenger SCV Passenger segment has not been able to create in roads into the 3W passenger segment where Bajaj Auto is the market leader Market share development 3W Passenger carrier Model wise segment share trend 2010-14 Force Motors Mahindra & Mahindra 350 1% 9% 4% 425 5% 2% 2% 406 441 385 3% 2% 3% 4% 3% 4% 5% 10% 12% 10% 11% 37% 33% 31% 30% 30% 47% 47% 48% 51% 49% 2009-10 2010-11 2011-12 2012-13 2013-14 2% 2% Scooters India TVS Atul Auto Piaggio Bajaj > Overall 3W Passenger segment has increased by CAGR ~2.4% over the last 5 years. However, it has declined by ~13% the last year > This segment continues to remain highly regulated with most routes requiring permits from government authorities > Bajaj Auto continues to be a market leader in the 3W passenger segment and continues to account for ~49% of the market > This segment has managed to keep the competition off from SCV Passengers mainly due to the price gap (~40% less than SCV Passenger). Also, they enjoy strong lobbying with the government bodies through the unions Source: SIAM; Roland Berger 15
SCV Passenger Backup Negative growth in passenger carriers is driven by the increasing preference for MPVs over hard top vans Historical and projected sales, SCV passenger segment, 2011 2020 ['000] Segment volumes 2011-20 Passenger carriers 1) Segment share - MPV vs. Van Hard tops 214 161 235 152 237 123 191 119 CAGR +1% 205 38 CAGR 14-20 -17% 300 322 29% 27% 434 348 45% 45% 465 70% MPV Soft tops 52 83 114 72 167 +15% 71% 73% 55% 55% 30% Van 2011 2012 2013 2014 1) 2020 2011 2012 2013 2014 2020 > Hard top vans (primarily used as personal vehicle and as taxis) expected to have a negative growth due to shift towards MPVs and soft tops > MPVs are preferred over conventional vans due to customer preference for better comfort and vehicle features > Soft top vans used for intra city transport as an alternative for 3 wheelers expected to have a positive growth rate of 15% CAGR 1) SCV segment includes Tata Magic/IRIS segment. However, for comparing purposes we have included hard top segment Source: IHS; SIAM; Roland Berger 16
SCV product landscape Key players augment their volumes by having presence across all sub-segments in the SCV space Product overview <2T GVW <1.5T Gio Zip Porter 600 GVW 1.5-2.0T Trump 15 1) Maxximo Ace Porter 1000 Mini truck 2-3.5T Trump 40 Bolero maxi Truck Superace Dost Winner Pickup Trax Pickup Genio Bolero Pickup 207 Xenon Passenger carrier Trip 1) Gio Maxximo Iris Magic Omni Eeco 1) Not in production Source: SIAM; Roland Berger 17
SCV Industry expansion plans Most OEMs have aggressive expansion plans in India. Significant overcapacities to increase margin pressures in SCV Investment landscape SCV installed capacities ['000 units] Selected future OEM investments in India [INR cr] 3,000 2,500 500,000 1,500 750 250 Isuzu Ashok Leyland Tata 2) Mahindra Eicher 24,000 260,000 1) 27,000 115,000 12,000 36,000 Total capacity : 974 k units 1) Estimated combined SCV/pickups production capacity across plants 2) Tata Motors: overall future investments in CV Source: Company websites; Press research; Roland Berger > Isuzu investment of 3000 Cr. for production of both SUVs and LCVs (pickups) Plant capacity of 100,000 in its AP plant > Ashok Leyland Nissan JV total investment of 2500 Cr. of which 50% has been spent already. Plant with capacity of 150,000 being built > Tata Motors overall investment of 1500 Cr. for FY14-15. Investments only for new product development. No additional capacity being planned > Mahindra to invest 250 Cr. for expanding capacity in AP for SCV and PV. Additional 500 Cr. for new product in ICV and LCV product refreshes > Eicher to invest 250 Cr. in the JV with Polaris. Potential additional investments for own SCV models 18
SCV applications SCV Cargo is used in several industries across multiple applications. SCV passenger support last mile connectivity Application examples 1) SCV cargo Construction Material delivery Cold drink/water delivery Electrical goods customer delivery Vegetable selling Closed container Cash van Mobile billboard Milk/water tanker SCV Passen- -ger 1) Not exhaustive: Other applications include delivery vehicles for paint industry, poultry and mobile food vans etc. Source: Company websites School van Black & yellow taxi Private office pickup & drop Intercity travel like metro station pickup & drop 19
C. Demand drivers to trump short to mid term challenges 20
Demand drivers Growth of SCV segment will be driven by volume shift from other vehicle segments and increasing need for last mile connectivity Key demand drivers [1/2] 1 Need for last mile connectivity > Increase in rural consumption drives growth in the light CV segment SCVs form an integral part of the hub & spoke model SCVs required to reach the last mile > Increasing urbanization and stringent traffic regulations in major cities limiting movement of higher tonnage vehicles also aids the growth of the LCV/SCV segment > Metro rail network is planned/under development in as many as 10 cities across India amounting to ~650 km of metro lines further expanding market for last mile connectivity Urban population ratio [%] Rural Urban 100% 69% 31% 10 100% 63% 37% 25 2 Better operating economics > Preference for 4-Wheel higher tonnage vehicles over the smaller 3-Wheel vehicles primarily due to the higher profitability with the 4W vehicle > Within the SCV segment 2-3.5T is being preferred more due to the higher tonnage while the.75t payload category (Zip/Gio) still remains a small volume segment Margins EBITDA PAT RoE 4W 31.0% 6.8% 19.7% 3W 15.5% 2.3% 7.9% 3 Availability of finance/interest rates > SCV sales depend on the ease of availability of loan, % LTV and interest rates > Higher delinquency rates in CV loans have led to tightening of lending norms - reducing LTVs, more stringent due diligence processes and focusing only on large fleet operators with clean track record Delinquency rates 4.0% 2.0% 0.0% 1 6 Months since issuance 11 2012 2011 2009 2010 Source: RBI; UN; Analyst reports; Roland Berger 21
Demand drivers Growth of SCV segment will be driven by volume shift from other vehicle segments and increasing need for last mile connectivity Key demand drivers [2/2] 4 Better product quality than 3W > Small commercial vehicles offer more headroom, leg room and cargo area > Small commercial vehicles also have independent strut suspensions which help in reducing vibrations, noise, waggling and shakes while traveling. It has coil-springs with semi-trailing arm at the rear. These features gives it a car-like driving comfort and riding comfort > SCVs come with doors and 4Ws are considered safer than 3Ws > As a result products like Ace Zip (0.5 T) are growing at a rate ~10-15% Specs Power GVW Mileage (Kmpl) 4W 3W 11-60 HP 0.5-3T 8-15 HP < 0.5T ~10-28 1) ~30 5 Development of new applications for SCVs > OEMs have been developing several applications for the SCVs in order to increase penetration across industries > Some of the new applications include paint industry, poultry, small water tankers, garbage disposals, etc. > This has helped in expanding the market for SCVs 1) Mileage varies by tonnage category Source: Expert Interviews, Analyst reports; Roland Berger 22
Challenges Several challenges need to be overtaken in order to achieve higher penetration of SCV Cargo and Passenger carriers Major challenges SCV Cargo > This is a relatively new segment and not many customers are aware about its applications > As a result it is the responsibility of the OEM to develop and educate customers on the various applications > Last mile delivery system is highly unorganized still depending greatly on 3Ws and other traditional modes of transportation Overall > Most drivers are first time users of any automobile. As a result considerable effort is needed to train/educate them about the vehicle/applications, etc. > Lack of financing options: Drivers lack credible credit history and it becomes difficult for banks, etc, to give them loans > High delinquency rates: Tough economic situation has lead to really high delinquency rates (especially in SCV passenger ) SCV Passenger > This segment relies primarily on government permits. Therefore, it becomes extremely important to liaise with government authorities to procure the permits > 3-wheeler lobby is extremely strong and manages to take the bigger pie of the permits > There is a price gap of ~INR 90k between SCV Passenger and 3- Wheelers making it difficult for 3- Wheeler customers to graduate to 4- Wheeler carriers (Sales 3W: ~480k, SCV P: ~72k) > Considerable effort still needed to improve the penetration of SCV Cargo and Passenger carriers like better financing schemes > Need to develop an eco system around this segment including driver training schools, SCV Passenger carrier unions/associations to counter the powerful 3W lobby and actively liaise with Government authorities Source: Expert interviews, Roland Berger Analysis 23
Challenges Backup Strong 3-Wheelers unions lobbying and lack of coordination between government bodies impact SCV passenger carriers Press clips Source: Press clips 24
D. Solid growth expected but not across all sub segments 25
Future outlook & projections SCV industry will grow at a CAGR of ~13% till FY 2020 driven by demand for better quality last mile connectivity/delivery vehicles SCV Industry projected market evolution ['000 units] 552 21% 79% 432 17% 83% +13% 919 18% SCV Passenger 82% SCV Cargo Growth rates [%] FY 2013-20 FY 2014-20 5.6 15.1 8.0 13.1 > Growth projections are based on the regression analysis based on GDP growth as SCV > Rise in demand of SCVs in the rural sector driven by better connectivity, rising income levels and further urbanization of tier 3/4 towns and cities > OEMs will continue to focus on this high growth sector due to low penetration and huge potential customer base > Steady government for the next 5 years that is focused on infrastructure development like metro rail network and other growth related policies > Customer preferences will continue to evolve (soft tops, MPV/SUV, higher tonnage vehicles) ensuring OEMs continue to innovate to develop & market products as demanded FY 2013 FY 2014 FY 2020 1) SCV segment includes Tata Magic/IRIS segment and also <3.5 ton cargo vehicles like ACE, Dost, Super Ace, etc For this comparison we have not included hard top vans (eg: Omni & Eco) Source: SIAM, Roland Berger Analysis 26
E. Choose wisely where to play and drive government engagement 27
Recommendations OEMs need to focus on developing applications, understanding customer needs and liaising with government authorities Recommendations OEM Government > Understand the customer requirements as they keep on evolving. For example: Over the last 2 years customers have moved to higher tonnage pickups. Important to pre-empt these trends and adapt > Liaise with the local government authorities in order to further promote SCV Passengers > Continue to spread awareness around the benefits, applications etc among its potential customers to further grow the market > Develop new applications in order to expand the market. Paint distribution, gas cylinders, water, waste disposal examples of some of the new applications > Develop drivers for this segment as majority of the end users belong to lower economic section of the society and most likely will be the first time users of any kind of automobile > Start investing and promoting infrastructure projects like Metro rail networks across the various congested cities. This will help create opportunities for last mile connectivity > Streamline the Permit issuance system for SCV passenger carriers and create an environment for healthy competition between SCV Passenger carriers & 3-Wheelers > Come up with schemes like cheaper financing options to promote the usage of SCVs, specially in the rural segment in order to further promote connectivity of rural areas with urban centers Source: VECV; Roland Berger 28
Please contact us in person if you have any questions Your contact at Roland Berger Strategy Consultants Dr. Wilfried Aulbur Jeffry Jacob Managing Partner Senior Project Manager E-mail: wilfried.aulbur@rolandberger.com E-mail: jeffry.jacob@ rolandberger.com Mobile: +91 9920 6301 31 Mobile: +91 8879 3876 35 MUMBAI OFFICE: 7 th Floor, VIBGYOR Tower Bandra Kurla Complex, Bandra (E), Mumbai 400 051 DELHI OFFICE: Level 18, DLF Cyber City Building No. 5, Tower A, Gurgaon 122 002, PUNE OFFICE: 4 th Floor, ALAINA Building Lane 8, Koregaon Park, Pune - 411001 29