Group 8_portfolio analysis of commercial Vehicles

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.

2012

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: Government’s 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 doesn’t 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 Tata’s

distribution strategy. Tata’s “open distribution” model focuses on a low price high volume

method that allows entrepreneurs to establish an assembly operation that Tata would train.

Tata’s 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 Leyland’s 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 Evalia’s 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 pick-ups 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. “Commercial Vehicles Exports”, Crisil

2. “Key International Markets for Commercial Vehicles”, Crisil

3. “Overall export Market for Passenger Vehicles”, Crisil

4. “Demand for exports of Passenger Vehicles”, Crisil

5. Auto Monitor, 19 Jan 2012

6. CRISIL report on Commercial Vehicles segments and plater profiles

7. “Annual Report 2010-11”, Maruti Suzuki India Ltd.