China’s commercial vehicle market is keeping pace with the boom but don’t expect to see Chinese trucks in the West. Meanwhile, a robust economy and keen interest in Indian vehicles is driving sales for the country’s commercial vehicle makers

With all those outbound container ships laden with cheap Chinese consumer goods steaming from the Middle Kingdom to world markets, it stands to reason that there’s a healthy truck market helping to move those goods along from factory to port.

The fact is Chinese trucking firms have been snapping up trucks – almost exclusively locally built vehicles like Dongfengs and Fotons – at a rate in line with the country’s booming economy. Since 1998, the Chinese truck market has been growing at around 13 per cent per year. And as long as the economy remains robust and diesel stays relatively cheap (about half the price of European fuel), it shows no sign of abating.

“The total amount of foreign direct investment in China continues to grow which means if you build a factory, you’re going to need to transport goods,” says Christophe Bauduin, Managing Director of Polk China. “That’s the main driving factor. Everything is booming and it requires trucks to move it all around.”

Overloaded roads

Obviously the Chinese economy and a domestic and export market hungry for Chinese manufactured goods is helping sell trucks, but there are other factors contributing to the growth as well.

All those insanely overstuffed vehicles trundling down Chinese highways?

The government wants those off the roads – at least in time for the Shanghai Olympics.

“The government is trying to wean everyone off the smaller, overloaded vehicles and convert them to the heavier trucks – up in the 4.5-ton range that you see in North America and Europe,” says Chris Fisher, a commercial vehicle analyst with global market research firm Power Systems Research, which specialises in the engine, OE and components industries.

“That’s for safety concerns, emissions, fuel economy, and just plain congestion on the roads.”

Bauduin agrees: “Overloaded trucks are serious issue from an infrastructure perspective as well – they just destroy the roads. The range of overload you see in some provinces is in the range of 400 per cent – it’s absurd. The authorities are trying to deal with it by pushing for more transport-style trucks on the road rather than a bunch of badly overloaded smaller trucks.”

And extensive road building in China is also selling trucks in a kind of “build it and they will come” scenario for heavy vehicles. The country is making good progress in building an extensive interstate system that will bypass small towns and concentrate on linking major cities. “The eastern seaboard road infrastructure is already quite well developed, but if you go further west it’s not as good,” says Bauduin.

“They’re making efforts to increase the quality and number of roads in this part of the country.”

Technology transfer

Like all foreign manufacturers, Western truckmakers have been clamouring for a piece of the action in China and Chinese manufacturers are eager to enter into joint ventures to learn and benefit from Western technology transfers.

“Basically all local manufacturers are quite active in JVs with foreign partners. You’ve got Foton with Mercedes, Dongfeng with Nissan, Shan Xi with MAN, Wuling GM with GM, to name a few,” says Bauduin. “What typically happens is you’ve got a Chinese manufacturer producing its own products, and then on top of that they’ll have a joint venture with a foreign partner and they produce something else with them. But of course, whatever a Chinese company is learning through their JV relationship, I’m pretty sure they’re going to implement that into their own vehicles.

“The foreign partner is generally in charge of production, and the Chinese side handles the sales and marketing. But there’s always a struggle – the foreign OE has to figure out how much it wants to give in terms of technology transfer and the Chinese side naturally wants to have as much as possible; that’s the situation.”

“A lot of foreign OEs go to China with high hopes and then their Chinese partners just turn around and say ‘thanks for the technology,’ says Fisher. “I know Volvo doesn’t have a lot of confidence in its recent JV – sales are around 250 trucks per year and they were hoping for more in the range of 10,000.”

Brand loyalty

Foreign OEs also have a struggle selling their products in a market that is incredibly brand loyal to the home side.

“The commercial vehicle market in China is really dominated by local manufacturers, which is quite different than the personal vehicle market. If you look at imports, there are very few; it’s a tiny fraction of the commercial vehicle market,” says Fisher.

The major reason for this is price. In the Chinese market, the local product is very competitive. For example, a Volvo truck costs around 700,000 RMB (nearly $100,000). A similar Chinese truck, equipped with a 380 hp engine, is about half the price. Sure, the Volvo is going to have a sumptuous cabin but foreign OEs can’t compete with the 50 per cent price differential.

Another reason is aftermarket service. If you have a Chinese truck, you can get it repaired anywhere in the country. “If you have an imported truck and suffer a breakdown, then what do you do? There’s probably a tiny network of repair facilities for the brand and you’re going to end up losing money with your truck out of service,” says Bauduin.

Most of these local truck manufacturers have been around for a long time. Major players include: Dongfeng, which accounts for about 30 per cent of the Chinese market. Last year it sold around 170,000 heavy trucks. First Autoworks with its Jie Fang brand is another big OE with around 17 per cent market share; and Foton, which produces light- to medium-range trucks, enjoys a 25 per cent market share. China National Heavy Truck, Shan Xi and Sino Truck are smaller players in the Chinese market.

Export markets

China is a net exporter of a whole lot of manufactured goods, but trucks aren’t among them. While the export market is growing, 90 per cent of Chinese truck production is sold in China.

“These manufacturers are trying to develop an export market, but it’s still very small,” says Fisher. “For example, Foton is selling around 350,000 trucks in China and exporting maybe 16,000. It’s quite low compared to domestic sales, but they’re trying to grow the export side.

The objective from government is to export 10 per cent of production by 2010. Right now the big export markets are the Middle East (Iran, Iraq), Southeast Asia (Indonesia, Malaysia), and they’re trying to get into South America.

“Obviously they can’t export to Europe or North America because the technology isn’t there. The trucks are very basic compared to the international market, but they’re trying to change that via joint ventures with foreign OEs.

“Personally, I believe Chinese exports are only going to go up. They’re getting better technology – the Europeans have gone in there, the Chinese have built on it, and they’re starting to make some decent trucks. If they increase quality, I can only see exports going up.”

India in the ascendent

A robust economy, growing road infrastructure, and keen interest in Indian vehicles outside the subcontinent is driving sales for Indian commercial vehicle makers. Automotive Manufacturing Solutions talked to Tata Motors’ VP of Communications Debassis Ray and Ashok Leyland’s Director of Communications Thomas Abraham about the state of the local commercial vehicle market and what the future holds for their respective companies.

AMS: How would you characterise the Indian commercial vehicle market at present? What segments are growing?

Debassis Ray: The medium- and heavy-duty commercial trucks segment recorded sales of 246,862 for 2006-07, growing by 37.6 per cent over the previous year. We attribute this growth to the positive impact of government restriction on vehicle overloading, as well as increased demand from the construction and mining sectors.

Rising interest rates have recently begun affecting sales, but India’s developing highway network will further fuel goods transportation, and the outlook for the future looks robust.

Thomas Abraham: The last year marked the sixth consecutive year of growth in the Indian medium- and heavy-duty commercial vehicle market.

The growth has been most dramatic in the goods range and the growth impulse has been moving up the weight ranges of medium- and heavyduty trucks. Starting in the last decade, there has been a shift toward multi-axle vehicles. Currently, the higher end tractor-trailers have been registering the highest growth, largely because falling interest rates that have reduced the monthly repayment instalments for truckers.

And with road infrastructure improving, truckers are getting more revenue from the newer, higher capacity vehicles. There is also the demand for reliable deliveries forced by just-in-time practices and project contracts where beating the deadline earns bonuses and failing them, penalties. In that sense the rewarding of efficiency, has triggered the on-going modernisation of India’s transport sector.

The other high growth segment is the sub-three ton, smaller vehicles – the last mile performers in the hub and spoke model of transportation, complementing the higher tonnage vehicles that do the longer, national routes.

AMS: Does the same apply for buses?

DR: In 2006-07, the medium and heavy bus segment in India grew by about two per cent, with the light bus segment growing at about six per cent. The growth in the bus segment is always less than truck because bus sales depend either on state transport undertakings or is regulated by government permits.

However, as in the case of trucks, the developing infrastructure in terms of the roads and highway network will further fuel people transportation through buses in India and the bus segment should enjoy good growth potential in the years to come.

TA: Medium and heavy buses have stayed within the 18,000-24,000 range annually. By not growing in tandem with the high growth goods segment, their percentage has come down. Where bus transport is nationalised, there are social compulsions to keep fares low, often affecting the financial health of the corporations. Fair parity also affects the profitability of competing private sector companies. This depresses the demand for buses.

However, higher capacity and more user-friendly modern buses – at differential fares – are becoming popular in the cities.

AMS: How has India’s recent Golden Quadrilateral national highway project affected sales for your firms?

DR: In the last decade, India’s national highways have doubled to 65,570 kilometres, and the government has plans to add 25,000 kilometres – including the 5,846 Golden Quadrilateral and the 7,300 North-South-East- West Corridor. Wherever already constructed, the better road infrastructure is delivering results in increasing goods and people transportation.

In commercial goods transportation, heavier trucks with higher power and applications, like telematics for tracking, will be commonplace on the highways. Small trucks will provide last-mile connectivity, together delivering improved turnaround and better operating economies.

Tata Motors has increased its market share in commercial vehicles from 61 per cent in 2005-06 to 64 per cent in 2006-07. The launch of our sub-one tonne Ace truck, a last mile distribution vehicle, has helped in this growth. The Ace has sold over 1,00,000 since its launch in May 2005.

TA: The massive road projects have acted as a buffer for the commercial vehicle industry, absorbing economic down-turn and sustaining demand.

Ashok Leyland has a strong presence in the tipper, multi-axle and tractor segments. These segments have all benefi ted from the projects – tippers at the construction stage; and tractors through the higher productivity thanks to improved road speeds. Multi-axle vehicles benefi t at both stages.

AMS: How are the export markets for your fi rms? Where are the areas of greatest growth?

DR: We do not declare separate numbers for heavy truck exports, but truck exports are a good growth opportunity for us.

Our international business strategy is to focus on select markets that are contiguous and similar to ours in terms of evolution. For example, one of our focus markets is South Africa, where we are already number three in the commercial vehicle segment. Also, our subsidiary, Tata Daewoo Commercial Vehicles Company (TDCV), plays a role in our international business. TDCV exports heavy trucks. It accounts for two-thirds of heavy commercial vehicle exports out of South Korea.

TA: India is currently at Euro 3 equivalent for emissions. Every progression up the emissions ladder, every improvement in power, performance and aesthetics, opens up additional global markets for India. This is true for Ashok Leyland as well.

Our exports grew to 23 per cent, to 6,025 vehicles in 2006-07. Sri Lanka is our strong market where we are market leaders. We are also leaders in the Middle East bus market. Currently we are setting up an integrated bus assembly plant at Ras Al Khaima, UAE. Initial capacity is 1,000 vehicles.

AMS: What are your expansion plans over the next five years? What kinds of investments are you planning in terms of new facilities or updating older facilities?

DR: We are increasing capacities in our existing plants and will also set up new plants. These activities will increase capacities for both our trucks and buses.

The company has set up a plant for its mini-truck, Ace, at Pant Nagar in Uttarakhand. The plant will begin commercial production during the course of the year. Among our new manufacturing facilities will be a manufacturing and assembly plant with Thonburi Automotive Assembly Plant in Thailand for pick-up trucks, and a new bus manufacturing facility in India.

We also have franchisee/joint venture assembly operations in Malaysia, Kenya, Bangladesh, Ukraine and Russia.

TA: Our manufacturing capacity in India is being raised from the current 84,000 vehicles to over 100,000 per annum this year. Work is underway on a greenfield site in Uttarkhand, where the Ashok Leyland’s seventh manufacturing unit in the country is being set up. It will have an eventual capacity of 50,000 vehicles.

We are employing more modern and efficient manufacturing processes and also undertaking the technological rejuvenation of our existing facilities.

AMS: What challenges do you foresee in the commercial vehicle market over the next five years, both domestic and export?

TA: The key challenges Tata will have to manage in the domestic market are input costs and the vehicle financing interest rate regime. For external markets, exchange rates will be a challenge.

DR: Ensuing emission norms and emerging market demands will add greater sophistication including electronics. This brings in its wake the issues of cost, customer education and usage.