Looking Back at 2020
The commercial vehicle industry like any other industry has been significantly impacted by the pandemic. In addition, the CV industry is also in the middle of a cyclical slowdown. However, the market has started recovering and is gaining traction steadily. Demand is on the rise and we expect the uptick to continue in the coming quarters as well. The recent budget announcements with huge investments in the infrastructure sector are also serving as an impetus, boosting the demand.
The medium and heavy commercial vehicle demand or market for the current year is expected to show a decline of around 25% to 30% due to the impact of the pandemic for the first two quarters. FY22 will see significant growth, mainly owing to two reasons – one, the base is very low and secondly, the CV market always bounces back strongly after cyclical downturns. Also, the scrappage policy implementation in the short term is expected to bring in considerable replacement demand in the market.
Takeaways and Positives
Last year has been a challenging time for the overall economy and the automotive industry as well. Like everyone, we also started adapting to the new normal in everything – manufacturing, sourcing, operations, HR practices, finance practices, customer engagement, communication and emergency response mechanisms. We have taken various initiatives keeping in mind the safety of our employees and all other stakeholders and at the same time ensuring that the business doesn’t get affected. The full year CV market went down by 25%, but that’s not the true reflection of how the market behaved.
The first quarter was a complete washout and the second quarter demand was significantly low. We had to adjust to this kind of situation for the first time in our history. If I look back I am happy to say we managed the situation extraordinarily well, despite struggling to cope up with the sudden surge in demand due to supply chain issues. Our operations and supply chain was well-prepared in terms of agility, thereby enabling us to respond quickly to customer needs and market changes. We took this time as an opportunity to relook into the entire manufacturing process and cost reduction.
As one can understand, during the peak demand years, lot of inefficiencies will crop into the system. We used this slowdown to relook into our costs and efficiency to become agile and flexible at lowest possible cost structure. We are also driving initiatives to prepare ourselves better for long term growth – we are continuing to focus on our new product development programs and Industry 4.0 initiatives. We have also significantly lowered our breakeven point with respect to capacity utilisation. One important learning that all of us know since ever and been reminded now with the current situation is that no one can predict the future. So we must learn to adapt to the situation, be agile with a lean cost structure and do the best to survive and thrive.
PLI Scheme, Scrappage Policy
The vehicle scrapping policy which aims at encouraging fuel-efficient and environment-friendly vehicles to replace older vehicles is a long-awaited announcement by the industry. It is estimated that the policy would cover over 10 million light, medium and heavy motor vehicles, which cause high pollution compared to the latest vehicles. A major impact or outcome of this policy would be the creation of significant replacement demand in the market and the MHCV market is to certainly benefit from this. It would also lead to recycling of scrapped metal, improved safety, lower air pollution, greater fuel efficiency, etc.
The government’s decision to extend the production-linked incentive scheme to the automobile industry would provide significant benefits to the sector over the next five years. Some of the major benefits from the scheme are that it will aid in making domestic manufacturing competitive and efficient, thereby supporting the Make in India vision. It can make India a part of the global supply chain and also boost exports growth in the long run. The scheme by nature is surely a welcome one for the automotive industry. The execution of it in terms of making the business support, resource availability, etc. is also equally important to reap the real benefits.
Current Year Plans
We had launched Mission 25 just before the pandemic, Meritor India’s business growth strategy for the next five years focuses around six pillars – growing revenue, enhancing profitability, manufacturing excellence, customer satisfaction, product and solutions strategy, and highly engaged people. The new strategy is formulated in such a way that the successful performance outcomes from the previous strategies are maintained and at the same time the organisation performance evolves into the next level in all aspects. I am happy to state that we are holding on to our targets amid the pandemic and hopeful that the industry peak might be attained during FY24.
We continue to work on maintaining and improving our product positioning and performance in terms of technology, features, quality and delivery to cater to our customer requirements and maintain our offerings competitive as well. We have substantially invested in new product launches with a view to keep pace with the changing trends and customer needs. Around 4 -5 new products are slated for introduction within the next couple of years. We are confident of maintaining our leadership position with the launch of these new products. In terms of capacity, we have augmented around 30% additional capacity last year for our main products axles and brakes and with the current market outlook we believe our capacity is significantly higher than the demand for next 3-4 years.
FY 2022 Outlook
Given the current visibility, we expect the market to grow significantly next year. The growth will be driven by multiple factors like increased infrastructure spend by the government, pent-up demand resulting from the current slowdown, replacement demand created by the new vehicle scrappage policy, etc. In line with the market, we are well-prepared for the growth phase to set in. Our growth is driven by the Mission 25 strategy which encompasses all the important facets like revenue growth, product offerings, operations excellence and people.
We are continuously working to enhance our business share with our existing customers as well penetrate into new business and source new customers. Our robust product portfolio of existing products and the new launches lined up are enabling us make steady progress in this direction. Our strong operations performance in terms of delivery and quality is also enabling us keep up the momentum in the increasing and volatile market.