To curb unsold inventory, OEMs cut production in February
Published On Mar 17, 2020
Truck makers turn cautious, to avoid sizeable unsold inventory after 31st March, companies cut output of nearly half in the month.
The production figures for February 2020 indicates how truck makers are planning to contain any unsold inventory. As per the court direction, BS4 trucks can be registered for the next 15 days, and 31st March is the last date before these vehicles become absolute. India will make a historic transition to BS6 emission norms to become part of select few countries globally.
This transition is undoubtedly a positive step both to address environmental issues and, at the same time, a huge technological leap forward for the Indian auto sector. However, this transition also brings its own set of challenges as truck makers must not only start producing and make BS6 vehicles available at retail outlets but also contain the BS4 truck production to avoid any unsold inventory in the retail distribution. This is necessary to prevent last-minute discounts and help the dealers liquidate stock to avoid financial loss out of unsold stock.
This production number released for February by Industry body SIAM indicates that truck makers turned highly cautious to contain the production of BS4 vehicles. The total commercial vehicle products dropped 40% to 54,896 units in the month as compared to 91,794 units in the same month last year. This means the factories were running on far lower capacities to avoid surplus production; this was reflected in the production numbers reported by all the leading OEMs.
OEMs Production cut
The critical medium and heavy commercial vehicle (M&HCV) production decreased by 50% in the month, the LCVs were down by 40%. Tata Motors (-36%), M&M (-44%), Ashok Leyland (-47%), VE Commercial Vehicles (-39%), SML Isuzu (-47%), Piaggio (100%) and Force Motors (-8%) among other have reduced monthly productions considerably in February. This is likely to continue in March 2020, too, as the expected pre-buying hasn’t kicked-in the last two months; thus, the sales remain laggard.
The production cut is a strategic move by the OEMs to be ready for any eventuality. Unlike the transition from BSIII to BS4 in April 2017, due to uncertainly around the sell and registration of vehicles, OEMs were left with huge unsold inventory, prompting them to offer massive discounts to liquidate the stock, this wasn’t enough to cut the losses incurred by the truck makers as well the dealers. Despite the discounts, a sizeable number of trucks remain unsold. OEMs had the choice to either covert them to BS4 for domestic sales or push the BSIII trucks to overseas markets contain losses. However, in the BS6 emission regime, this isn’t possible as the BS4 vehicle can’t be converted to BS6 as the technological progress is exceptionally high.
Impact on key products
As truck makers rationalized production, there is a significant drop in the sales of top models, both in the LCV and M&HCV segments. This is indeed a setback to the OEMs and the segment growth, yet, manufacturers remain optimistic as the customer will come back to the market in the next fiscal.
The lower production of BS4 truck means not all the truck variants are available for customers as lower volumes product already been taken out from production ahead of schedule. Yet, customers can check-out dealership to find out the status; this may perhaps offer a good bargain for some of the critical products as dealers may willing to provide a customized package to liquidate the stock as quickly as possible.
In this uncertainty around the registration of the vehicle, the financier, including Banks and NBFC have turned extremely vigilant in financing loan before making sure the vehicle gets registered before the deadline. Also, considering the time needs to build a body or any particular application after purchase is made often makes vehicle finance even harder. Therefore, a lot of finance companies have slowed down loan requests.
Speaking to Trucksdekho on industry’s performance, Vinod Aggarwal, MD&CEO, VE Commercial Vehicle said, “This industry is going through challenging time, the anticipation of the pre-buying in the last three months hasn’t happened. In fact, in February, the total volume was among the lowest and the M&HCVs are down 50% and 5-15T segment down more than 35% as compared to last year.”
However, he expects the absence of pre-buying in this fiscal may help the industry in the first quarter of FY21 in the hope that customer who has postponed their purchases will come back to market April onwards.
While, the transition to BS6 has certainly put the CV sector under tight spot, and the slowdown in the overall economy isn’t a positive news for the industry. Now, since the pre-buying hasn’t happened, companies are expecting the Q1 of FY21 will be perhaps better than expected, as customers who postponed their purchases may come back in April onwards as the market stabilize.