2012

Portfolio Analysis Of Commercial Vehicles

Submitted to Prof Prashant Salwan as a part of Strategic Management II curriculum
This project report is submitted as a part of curriculum followed in Strategic Management-II course and is intended to analyze the Commercial Vehicles Industry from strategy perspective.

Submitted by Group 8
Vivek Gupta Anusha K Ankit Garg Mantha Tejaswini Kannan G A Senthooran K Goutom Bodo

India surpassed every other country in 2011, including China, in sales of commercial vehicles, repeating its feat as the world's fastest growing truck and market for the second successive year in a row.- Economic Times

CONTENTS

Introduction Industry Analysis Drivers Players GE Matrix & Analysis Strategy for TATA Ace

INTRODUCTION: A commercial vehicle is a type of motor vehicle that may be used for transporting goods or passengers. The European Union defines "commercial motor vehicle" as any motorised road vehicle, which by its type of construction and equipment is designed for, and capable of transporting, whether for payment or not: (1) more than nine persons, including the driver; (2) goods and "standard fuel tanks". This means the tanks permanently fixed by the manufacturer to all motor vehicles of the same type as the vehicle in question and whose permanent fitting enables fuel to be used directly, both for the purposes of propulsion and, where appropriate, for the operation of a refrigeration system. Gas tanks fitted to motor vehicles designed for the direct use of gas as a fuel are considered to be standard fuel tanks. In the United States a vehicle is designated commercial when it is titled or registered to a company. This is a broad definition, as commercial vehicles may be fleet vehicles, company cars, or other vehicles used for business. Vehicles that are designed to carry more than 16 passengers are considered a commercial vehicle.Examples of Commercial vehicles are Truck Semi truck Van Coach Bus Taxicab Trailers Box truck

Commercial vehicles influence the trade, commerce and industry of a country in a major way. Vehicles falling under this category are buses, trucks, ambulance, jeeps and many others.

It comes in various uses such as transportation of goods, shipping and handling of various commodities and so on. The future of companies manufacturing these vehicles is very bright due to India's growing commercial sector. The export of commercial vehicles has gone up to 72% breaking all previous records. INDUSTRY OVERVIEW: One of the major sectors in India, Automobile sector has been called the Sunrise sector of the Indian economy. This industry was de-licensed in 1991 with the announcement of the New Industrial Policy. At present 100%, FDI route is available under automatic route in this segment including the passenger segment. The import of technology causes a royalty payment of 5% or a lump sum payment of 2 million USD. The CAGR of this industry for April December 2011 was 14.94% over 2010 figures. Production in December 2011 increased by 10.91% year on year. The Indian domestic CV industry is concentrated with the top three players accounting for 86 per cent (in volume terms) as of 2010-11. Tata Motors continues to dominate the CV industry with a nearly 58.2 per cent share, followed by Mahindra and Mahindra (M&M) with 15.4 per cent and Ashok Leyland with 12.4 per cent. The CV industry can be broadly divided on the basis of usage into two product segments: Goods vehicles (trucks) Passenger vehicles (buses) These can be further segmented on the basis of gross vehicle weight into : Light commercial vehicles (LCV) - Gross vehicle weight(GVW) of up to 3.5 tonnes Medium and Heavy commercial vehicles (MHCV) - Gross vehicle weight(GVW) of more than 3.5 tonnes In 2000-01, Tata motors and M&M were the main players in the LCV segment with Tata Motors being the leader with a market share of 46 per cent and M&M with a market share of 30 per cent. Tata Motors saw a substantial increase in market share in the LCV segment

after it launched Tata Ace in 2005, which also ate into sales of goods three-wheelers. In 2005-06 the share of Tata Motors jumped to 61 per cent from 51 per cent in 2004-05. As of 2010-11 Tata Motors and M&M held 57 per cent and 31 per cent of total market share respectively. The LCV segment also includes players like Eicher Motors, Force Motors and Swaraj Mazda who all together account for 8 per cent of the total sales as of 2010-11. Over the years, only M&M and Tata Motors have managed to retain a significant hold on the market. Piaggio Vehicles Ltd, a new entrant, held a 2.7 per cent share as of 2010-11. In the MHCV segment, despite the longstanding presence of players like Eicher Motors and Swaraj Mazda and the entry of new players like Asia Motor Works, Tata Motors continues to be the market leader, followed by Ashok Leyland. Between 2001-02 and 2006-07 both Tata Motors and Ashok Leyland together held a market share of around 91 per cent with the former holding a market share of around 63 per cent. Between the same period Eicher and Swaraj Mazda increased their market share marginally from 5 per cent to 8 per cent and 1 per cent to 3 per cent respectively. Asia Motor Works which entered the market in 2007-08 garnered a market share of around 2 per cent. Between 2007-08 and 2010-11 though Tata Motors maintained its market share, Ashok Leyland lost market market share to Eicher Motors and new entrants such as Asia Motor Works and Mahindra Navistar. TECHNOLOGICAL DEVELOPMENT IN CV INDUSTRY Success in the CV industry largely depends on technological innovations, which is why leading CV manufacturers have significantly enhanced their focus on moving up the technology ladder. They are engaged in actively developing the next generation of trucks and buses that will possess superior technology, conform to international standards and emission norms and will compete with products from leading international CV manufacturers (thereby boosting exports). Thus, domestic CV companies are forming JVs to bring about a technological revolution in the industry, which would in turn fuel competition and accelerated product development. Accelerated product development may also lead to faster replacement of vehicles, thereby boosting sales volumes. At the same time, it will increase product development costs and selling expenses, thereby putting margins under pressure.

Between 2008-09 and 2010-11 the industry witnessed the entry of foreign players through tie-ups, joint ventures and MoUs to set up manufacturing and assembly plants. The major steps taken by foreign players include joint ventures such as MAN-Force, Eicher-Volvo, Mahindra Navistar , entry of Hino Motors in both the passenger and goods vehicles segments and Beiqi Foton, China's largest commercial vehicle maker, planning to set up manufacturing plant near Pune . Conversely, Daimler pulled out of the Hero-Daimler venture and Hino and Ashok Leyland also broke technological tie-ups. PATTERN OF DEMAND Demand for commercial vehicles is driven by a country's overall economic growth as transportation is associated with all sectors of the economy. Hence, the CV industry in a way reflects the overall performance of an economy. The industry transports over 55 per cent of the total freight handled in the country. The correlation of freight movement with the aggregate GDP (industrial and agricultural) was significantly high at 0.98 times from 1970-71 to 2010-11. The CV industry is cyclical in nature as demand is driven by various factors such as growth in industrial and agricultural production, freight movement, share of roadways in freight movement, changes in freight rates and fuel prices, profitability of truck operators and STUs and government policies.

COMPETITION INTENSITY

A moderate level of competition exists in the industry as number of players is limited. The CV industry is relatively concentrated with Tata Motors, Ashok Leyland, Eicher Motors and M&M accounting for around 92.3 per cent of industry volumes.

At present, there are eight players in the medium and heavy commercial vehicles (MHCV) segment ' (Tata Motors, Ashok Leyland, Eicher Motors, Swaraj Mazda, Asia Motor Works Ltd, Mercedes-Benz, Tatra and Volvo) and eight players in the light commercial vehicles (LCV) segment (Tata Motors, M&M, Ashok Leyland, Piaggio Vehicles Pvt Ltd, Force Motors, Swaraj Mazda, Eicher Motors and Hindustan Motors)

KEY SUCCESS FACTORS FOR CV SECTOR:

Ability to diversify product range Due to the highly cyclical nature of the CV industry, it is important for the manufacturers to be able to diversify their product mix. This helps them offer a wide variety of transportation solutions across different load levels and also build a strong brand loyalty

Widespread distribution and service set-ups A wide distribution network and service set-ups are crucial for success in the CV industry as they enable CV manufacturers to ensure a geographically diversified client profile

Availability of CV finance Easy availability of finance is another important factor. Banks and NBFCs traditionally provided finance for CVs

Use of new technology and innovation Up gradation of technology is important to compete with new and advanced vehicles launched by competitors and to avoid obsolescence

Balance between outsourcing and in-house production The CV industry entails heavy fixed costs. This, combined with high integration levels, further pressurises a company's cost structure, thereby pushing fixed costs upwards.

Ability to offer wide variety of models The ability to vary the product mix and manufacture a wide variety of models in the same facility has assumed significance of late. This ensures better utilisation of available resources, reduces capital costs and enables the company to improve its asset turnover

THE INDIA ADVANTAGE: Favourable government policies Greater affordability of automobiles Increasing disposable income in rural areas Favourable demographic distribution with rising working population and middle class urbanisation Rising per capita income Easy finance schemes

PEST ANALYSIS FOR THE CV SECTOR:

POLITICAL: Governments increased spending on the infrastructure will increase the demand. Stringent emission norms and safety regulations might push the production costs higher. FDI investment cap increased to 100% in India now.

ECONOMIC: High material costs might push the profit margins lower. The commercial loans are on the verge of getting costlier.

SOCIAL: The rural consumers disposable income is increasing. Owing CV is perceived as a status symbol. Growth in the number of SMEs in the rural segment will also add to the sales.

 TECHNOLOGICAL: Constant up-gradation needed by the players to retain the market share. High R and D investment needed in future. Emission control technology need to be up-graded to meet BSIV requirements.

PORTER 5 FORCES ANALYSIS FOR THE SECTOR:

Industry rivalry: We see high level of industry rivalry in the segment due to oligopolistic nature of the industry.

Bargaining power of the suppliers: The bargaining power of the suppliers is also moderate as companies are going global for minimizing the cost of production.

 Bargaining power of the customer: The switching cost of the customers is less as the LCV and MHCVs are long-term usage products. Due to the entry of many foreign players, the competition is set to get more intense and the customers bargaining power in terms of the cost of vehicles are set to increase from the current moderate levels

Threat if substitutes : This is low-medium for the industry

Threat of new entrants: since this industry has high entry barriers in terms of R and D cost, Distribution channel and production facilities. Only established foreign players can enter this segment in India .Worldwide also there are a limited players in this segment.

COST DRIVING FACTORS

Raw material costs of CV manufacturers depend upon the product mix, vehicle weight and the extent of outsourcing of auto components. The main raw materials used to manufacture CVs are auto components/ ancillaries, steel and steel products, tyres and tubes. Raw material costs, as a percentage of net sales, have demonstrated an upward trend since 2003-04 and increased further during 2008-09. However in 2009-10, raw material costs as a percentage of net sales declined in tandem with the decline in prices of key inputs. Prices of

fuels and commodities like aluminium, copper and rubber, which were on a rising trend in 2007-08, began falling from the second half of 2008-09.

Hence, raw material costs for the industry, which peaked at around 73 per cent in 2008-09, declined to around 68 per cent of sales in 2009-10. Additionally, to reduce raw material costs, the industry started focusing more on vendor rationalisation, e-sourcing, value engineering and better supply chain management. In 2010-11, prices of basic raw materials increased by around 15 per cent mainly due to increase in prices of metals and tyres. The effect of increase in raw material prices was limited by partial pass-through of increase in costs through vehicle price increases to the extent of 6-8 percent.

MAJOR PLAYERS OF THE SEGMENT:

The industry is oligopolistic in nature, major players being Tata Motors, Ashok Leyland, Swaraj Mazda, Eicher, Volvo and Mahindra and Mahindra. The market shares are dynamically changing. As of 2000-01, Tata motors and M&M were the main players in the LCV segment with Tata Motors being the leader with a market share of 46 per cent and M&M with a market share of 30 per cent. Tata Motors saw a substantial increase in market share in the LCV segment after it launched Tata Ace in 2005, which also ate into sales of goods three-wheelers. This was a new segment created by Tata Motors, which provided low cost ferrying across the narrow streets of Indian semi urban areas. In 2005-06, the share of Tata Motors jumped to 61 per cent from 51 per cent in 2004-05. As of 2010-11, Tata Motors and M&M held 57 per cent and 31 per cent of total market share respectively. The LCV segment also includes players like Eicher Motors, Force Motors and Swaraj Mazda who all together account for 8 per cent of the total sales as of 2010-11.

Over the years, only M&M and Tata Motors have managed to retain a significant hold on the market. Piaggio Vehicles Ltd, a new entrant, held a 2.7 per cent share as of 2010-11. For the LCV segment, market shares are as follows:

For the MHCV segment, market shares are:

PLAYERS ANALYSIS

1) TATA MOTORS LIMITED: Tata Motors Limited (TML) leads the Indian commercial vehicles industry and dominates both the LCV and MHCV segments with close to 60% market share in 2011. It reported standalone revenues of Rs 353.6 billion in 2009-10.it leads the export segment of Indian LCVs with 65.5% share. Tata's cars, buses and trucks are being marketed in several countries in Europe, Africa, the Middle East, South Asia, Southeast Asia and South America. Tata Motors' international ventures include: Tata Daewoo Commercial Vehicle Company Limited in South Korea Hispano Carrocera, a Spanish bus and coach manufacturing company, in which Tata Motors has a 21 per cent stake A joint venture with Marco polo, a Brazilian manufacturer of bus and coach bodies A joint venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market pick-up vehicles in Thailand. DIFFERENTIATION STRATEGY With the introduction of its new vehicle the Ace, Tata Motors has sent a message to the world, it doesnt hurt to go old school. Pioneering a vehicle with no air conditioning, power brakes, or radios may seem absurd to US auto manufacturers whose thought process of innovation focuses on breakthrough technologies and more specifically, patents, but with Ace and its appeal has risen to a broader market which has helped defined Tatas distribution strategy. Tatas open distribution model focuses on a low price high volume method that allows entrepreneurs to establish an assembly operation that Tata would train.

Tatas focus on poor and rural customers holds an important lesson, find a niche in the marketplace and cater to their needs as a ground for innovation. With globalization as it is today, it is important for organizations to find emerging markets and act quickly upon them as many foreign companies have already done so. More importantly, it is imperative for many western companies to focus on not innovating a product or procedure, but by innovating distribution channels to target a broader array of customers.

2) ASHOK LEYLAND: Ashok Leyland Limited (ALL) began operations in 1955 and is the second-largest manufacturer of commercial vehicles in India. It manufactures heavy trucks and buses and is present mainly in the MHCV segment with a market share of 25.8%. It is the first Indian auto company to receive the latest ISO/TS 16949 Corporate Certification (in July 2006), which is specific to the auto industry. DIFFERENTIATION STRATEGY The differentiation of Ashok Leyland is in terms of its very strong dealer network. Good mileage has always been a strong trait of Ashok Leylands engines in any case. Ashok Leyland, which entered into an agreement to produce light commercial vehicles (LCVs) with Nissan, is gearing up to launch the Stile MPV into India sometime during the third quarter of the year.

The Ashok Leyland Stile will share much of the Nissan Evalias chassis, but will have a different face and will use different engines. The Stile will be available with both petrol and diesel powerplants. Further, the petrol engine will be a dual-fuel version, which could run on either petrol or CNG

3) MAHINDRA & MAHINDRA Mahindra & Mahindra (M&M) manufactures and sells utility vehicles and light commercial vehicles, including three-wheelers. The company was created in 1994 following an organisational restructuring and has a product portfolio that caters to rural and semi-urban customers, defence and urban requirements. Apart from India, the company operates in Europe, Africa, South America, South Asia and the Middle East. M&M and International Truck and Engine Corporation (ITEC) entered into a joint venture (51:49) in 2005 to create Mahindra International Limited, which has three businesses: Manufacturing trucks and buses in India for domestic as well as export markets Providing engineering services for the design and development of trucks and buses for ITEC globally. Enabling ITEC to use India as a significant supply base for sourcing components and materials.

DIFFERENTIATION STRATEGY

In the last three years, the spend on digital media, including social, has gone from nil to 10 per cent of media spends, according to the marketing head. Digital has also been a key platform for launches, including that of the XUV 500.

The company claims 3.5 million fans on Facebook for its brands. All brand teams have been trained on social media. At some point, integration started to kick in and fuelled the digital drive further each on-ground event for Mahindra owners, such as the Mahindra Great Escapes, are now advertised on social media and on the Web site. All 20 Great Escape events and the Specials' to Leh and Kerala, among others, are running full.

4) EICHER MOTORS Eicher Motors Ltd (EML) was founded in 1982 to manufacture a wide range of commercial vehicles. In 1986, the company entered into a technical and financial collaboration with Mitsubishi Motor Corporation of Japan to manufacture the Canter range of vehicles. The technical assistance ended in March 1994. EML's product range includes trucks with models like Eicher 10.50, Eicher 10.75, Eicher 10.90, Eicher 11.10, Eicher 20.16 and 30.25 and buses with models like Eicher Skyline, Eicher Cruiser and Eicher School Bus. In 2008, the Volvo group and Eicher formed a 50:50 JV, called VE Commercial Vehicles Ltd (VECV), to make the complete range of Eicher trucks and buses as well as sales of Volvo trucks.

DIFFERENTIATION STRATEGY Eicher has an extensive service reach and no matter where you are, Eicher Service is never too far away. Eicher provides its customers the benefit of an extensive sales and service network, customized solutions and an efficient cost of ownership. Eicher's manufacturing capabilities are backed by a sales and service network of over 950 Contact Points across India and over 8000 private mechanics trained by Eicher ensuring that your vehicle is in safe hands.

The manufacturing facility of Eicher Motors is located in Pithampur (Madya Pradesh). This state-of-the-art plant has a total area of 72 acres with 18000 sq. meters as the covered area. The plant houses some top-of-the-line equipments, a robust infrastructure and has an annual production capacity of 30,000 vehicles.

Leveraging its in-house expertise, Eicher Motors has successfully developed a wide range of Commercial Vehicles to meet the varying customer needs. These vehicles deliver value by providing low cost of ownership and increased profitability to the customers. The range offered includes fully built up Trucks which range from 6T to 25T, Buses and Chassis. All these products can be offered in BS II Compatible options. Eicher Motors arguably have the best CNG Technology in the world in their CNG Buses.

GE MATRIX PARAMETERS
Aggregate demand supply trend Player-wise sales Goods vehicles Passenger vehicles Market share Cost dynamics Aggregate financials Global comparison Company financials

EXCEL FILE SNAPSHOT FOR GENERATION OF MATRIX

GE MATRIX GENERATION

The GE matrix is an alternative technique used in brand marketing and product management to help a company decide what product(s) to add to its product portfolio, and which market opportunities are worthy of continued investment. The Y-Axis comprises industry attractiveness measures, such as Market Profitability, Fit with Core Skills etc. and The X-Axis comprises business strength measures, such as Price, Service Levels etc. Each product, brand, service, or potential product is mapped as a piechart onto this industry attractiveness/business strength space. The diameter of each piechart is proportional to the Volume or Revenue accruing to each opportunity, and the solid slice of each pie represents the share of the market enjoyed by the planning company. The planning company should invest in opportunities that appear to the top left of the matrix. The rationale is that the planning company should invest in segments that are both attractive and in which it has established some measure of competitive advantage. Opportunities appearing in the bottom right of the matrix are both unattractive to the planning company and in which it is competitively weak. At best, these are candidates for cash management; at worst candidates for divestment. Opportunities appearing 'in between' these extremes pose more of a problem, and the planning company has to make a strategic decision whether to 'redouble its efforts' in the hopes of achieving market leadership, manage them for cash, or cut its losses and divest.

STRATEGY BY TATA ACE: A CASE FOR STRATEGY

Before the launch of Ace, Tata Motors had to pay attention to one important aspect. "We could not go into the market with the mindset of selling a medium and heavy commercial vehicle," says Tata Motors' Mani. For instance, medium and heavy commercial vehicles typically cover hundreds of kilometres at a stretch - even the 207 DI travels an average distance of more than 200 kilometres a day. Not so for the Ace. The operators of the vehicle travel for a shorter distance as it is primarily used for last mile transport between the outskirts of a city to the centre (60-100 kilometres). One fallout: it would be too much to expect owners to drive a longer distance to get to an after-sales outlet. So, while focusing on maximum reach it tried to benchmark itself broadly with motorcycles. Typically, motorcycle manufacturers have a sales or service outlet every 10-20 kilometres. That scale of reach was not required for selling the Ace. Nevertheless, Tata Motors had to augment distribution. To increase the number of service outlets, the company trained automobile garages and branded them Tata-certified service points. At present, the company claims to have a sales or authorised service station at every 50-70 kilometres in the states where the Ace is sold. Now, Tata Motors was ready for the acid test in choosing its entry and market strategy. One choice was to follow a tried and successful route taken by the 207 DI during launch. The 207 DI made its foray in a smaller market such as the north-east. At that time, this region was out of market leader, Mahindra & Mahindra's radar and through this deliberate strategy, Tata Motors managed to create a market for pick-ups in that region.

But this time, Tata Motors took the battle straight to the enemy camp. With an aggressive pricing strategy, it launched the Ace in Tamil Nadu, Kerala [ Images ], Karnataka [ Images ], Andhra Pradesh and Maharashtra [ Images ] - 70 per cent of three- wheeler sales happen in these five states. At a value price point of Rs 220,000, the Ace was targeted to attract buyers who would otherwise buy three-wheelers at price points from Rs 120,000-Rs 190,000. Clearly, if the price and product were in place, positioning could not afford to be behind. But the advertising was careful that it did not hype-up the looks of the Ace. "There was a danger of being seen as a delicate vehicle that could not carry a heavy load," says another Tata executive. Hence, the company positioned the Ace as a Tata truck in a mini-size. The Ace effect In the future, to broaden its customer base, the Ace will also position itself now as a passenger vehicle. "The Ace will soon ferry passengers from the outskirts of a village to small towns," declares Mani. Carrying passengers is un-chartered territory for the Ace. And that's also a strategy that has its inherent dangers. While transporting passengers, the Ace might also cross the lane of Tata's own multi-utility vehicle, the Sumo, which is used as a vehicle by tour operators. Then, the advantage that the Ace has over three-wheelers (it can travel on highways and expressways because of the stability offered by four wheels) could hurt the prospect of pickups including Tata's own 207 DI. But Tata executives argue that for applications like transporting milk or vegetables over a distance of 200 kilometres, the 207 DI cannot be replaced. That's because its top speed is 100-120 kmph - roughly twice that of the Ace. To be sure, three-wheelers are far from being dislodged on Indian roads. According to SIAM estimates, during the period April 2005-March 06, the three-wheeler goods carrier segment grew by 8.05 per cent, when the entire automobile segment in India grew at 12.82 per cent.

References: 1. 2. 3. 4. 5. 6. 7. Commercial Vehicles Exports, Crisil Key International Markets for Commercial Vehicles, Crisil Overall export Market for Passenger Vehicles, Crisil Demand for exports of Passenger Vehicles, Crisil Auto Monitor, 19 Jan 2012 CRISIL report on Commercial Vehicles segments and plater profiles Annual Report 2010-11, Maruti Suzuki India Ltd.