The sale of commercial vehicles is cyclical and moves in tandem with the general economic growth, albeit with a small time lag.
The industry has been very myopic in its world view. It has not grown beyond seeking to boost its sales by demanding fiscal support from the government to see through lean times with replacement demand.
The proposal of government incentive to scrap old trucks and buy new trucks is too narrow. The development of a sustainable replacement demand requires a comprehensive end-of-life policy. The widespread support for urgent anti-pollution measures provides the government with a rare opportunity to put in place such a policy for commercial vehicles.
20 lakh old vehicles to be scrapped...
There are an estimated 20 lakh commercial vehicles in India, which are more than 15 years old. Scrapping them and creating a replacement demand has the potential to add US $ 25 billion to the sales of new commercial vehicles. This replacement market is 2.5 times the average annual sales of such vehicles. The biggest beneficiaries will be the vehicle manufacturers, the ancillaries and vehicle financiers. This huge business opportunity should be used by the government to get the beneficiaries to put in place a sustainable and fully funded Voluntary Retirement Scheme to encourage and incentivise the modernisation of the nation’s fleet. The government should participate through fiscal support.
It augurs well that the popular demand for clean air has enthused the government to take remedial action. The statements of Surface Transport Minister Nitin Gadkari on the end-of-life of commercial vehicles shows the desire of the minister to reduce urban pollution even as he gives a push to sales of new commercial vehicles.
Mere incentive will not do....
The minister’s effort to solve two problems with one solution is laudable and must receive wholehearted support. But merely incentivise scrapping will not immediately increase sales. There is an inevitable time lag between scrapping an old truck and replacing it with a new truck.
The average age of commercial vehicles plying in our country is ten years. A successful modernisation effort has the potential to bring down the age to around six years over the next five years which will be in keeping with the economically advanced countries.
The proposal to give cash incentive to the truck owner who scraps the vehicle is not sufficient. A 15-year-old truck is commonly used for short distance transportation within the towns and in rural areas. An operator scrapping them will buy only a relatively newer and not a brand new truck. Therefore, such piecemeal efforts will have a limited impact.
Developing a vehicle end-of-life policy
A sustainable end-of-life policy for commercial vehicles should have appropriate incentives for scrapping, development of agencies to handle the scrapping which can also issue Discount Warrants and the creation of a Commercial Vehicle Modernisation Fund (CVMF).
While the principal beneficiary of fleet modernisation project will be the manufacturers, they are not central to the success of the project. The project is critically dependent on the active participation of the used truck financiers. The manufacturers play virtually no role in the creation, development and management of the after-market. It is the used truck financier who stays with the truck during its application-user and ownership change through its entire life cycle.
Way back in 2003, when I was the CEO of Shriram Transport Finance Company Ltd, we facilitated a Deloitte study initiated by All India Commercial Vehicle Owners’ Associations to put in place a complete policy framework for modernisation of the nation’s fleet. The policy paper was presented to the then Ministry of Surface Transport.
The central idea of this paper was the creation of a Commercial Vehicle Modernisation Fund with the involvement of all the stakeholders - the government, vehicle manufacturers and the truck finance companies. The government and the private players would contribute to the fund which could be given suitable fiscal incentives under Section 35 of the Income Tax Act, to encourage contributions.
The policy paper envisaged a voluntary end- of-life option to the truck owner, who would in response to suitable economic incentives, voluntarily give up his truck for scrapping. The government would certify scrapping agencies. The companies would buy the 15+ years old truck from the truck owner, pay him the salvage value and also, issue a Discount Warrant of Rs 50,000 on behalf of the CVMF. The scrapping agency would receive a fee for each truck scrapped from the CVMF for is efforts.
The chain of upgrades
The owner of the 15+-year-old truck will use the scrap value together with the Discount Warrant as his equity to take a loan to buy and upgrade to an eight-year-old truck. The seller of the eight-year-old truck then will use the cash consideration and Discount Warrant to buy and upgrade to a four-year-old truck. Remember that in both these transactions, the role of the used truck financier is crucial without whose valuation skills and flexible financing schemes, the operator’s ability to pay will be missing and the demand for the newer truck will remain latent. The owner of the four-year-old truck then approaches the vehicle manufacturer with the cash consideration and Discount Warrant as part of his equity to purchase a new truck. The vehicle manufacturer will eventually go to the CVMF and redeem the Discount Warrant.
The above model creates an excellent ecosystem for handling replacement demand for commercial vehicles in a transparent manner. It is sustainable as it is accountable and fair to all the stakeholders. The social impact study of the proposal will win accolades for the government from environment lobbies within and outside the country.
The government must immediately constitute a committee of experts to look at the proposal already submitted by the All India Commercial Vehicle Owners’ Associations to develop a robust, comprehensive and sustainable commercial vehicle end of life policy.
(With inputs from Ganesh Arnaal)