Indeed, it was a bolt from the blue for the Rs 6,000-crore Indian tractor industry, which was already ploughing southwards due with a negative growth rate of 11 per cent during last fiscal. The disrupted and weak monsoons have now posed fresh challenges of managing the dark skies. While it might still be early, industry estimates forecast a further decline in growth rate by around 19 per cent from 2.23 lakh to 1.8 lakh units this year, has aggravated the woes of the tractor manufacturers.
Perhaps the manufacturers have little choice but to join the farmers in praying to the rain gods to better their fortunes. But that alone will not pave a smoother track ahead as the weak monsoons have thrown up a host of others factors in compounding the woes of the industry.
Besides the drought, the overall tractor demand is also dependent on crop prices and availability of credit. The farmer sentiment is down especially since last year as farmers have not been able to realise money from crop sales made last year, says New Holland Tractors India managing director T L Palani Kumar. A steep decline in tractor demand last year was largely due to a high release of foodgrain by Food Corporation of India which had adversely impacted the procurement prices. It meant lower realisation to farmers and in turn acted as a disincentive for purchase of farm equipment.
As if a 12 per cent drop in industry sales in the first quarter as against last year and 25 per cent drop in tractor deliveries to customers in July-02 was not bad enough, erratic monsoons which is likely to affect forthcoming kharif and rabi crops have compounded apprehensions.
What has perhaps led to this prolonged slump is also mismatch in demand and supply. Against an annual demand of 2.60 lakh units the domestic industry sports a capacity of 4 lakh. This is partly due to the fresh capacities that latest entrants like New Holland and L&T John Deere have created. This happened because demand outstripped supply in 1997-98, and existing companies embarked upon capacity expansion and transnational players saw this as a good opportunity to cash in on this trend of higher growth, says K J Davasia, Executive Director and President, Mahindra & Mahindra and also President of Tractor Manufacturers Association. Consequentially, companies are being forced to compete on credit and pricing. Credit periods have increased from 15 to 20 days to nearly 60 days, thereby escalating the working capital costs of companies. Also, small regional players such as Sonalika Tractors and Standard Tractors with an aggressive pricing strategy have eaten into the market share of the biggies. Result: margins are getting squeezed. Thankfully, most of the manufacturers be it Mahindra, Eicher, Punjab Tractors, L&T John Deere or New Holland have all realised that it is time to rise to the occasion to overcome the hurdles that are beyond their control.
The only option for the players is to come together and decide on common code of conduct to minimise undercutting and heavy support of exchange sale, says Mr RC Jain, managing director of Eicher Tractors, a unit of Eicher Ltd. To that effect the Tractor Manufacturers Association took an unanimous decision to reduce dealer stocks. While, M&M reduced it by 47 per cent at one go, there were a few others who also corrected their inventories considerably. Says Dr Volker Knickel, CEO, L&T John Deere, a 50:50 joint venture between Larsen & Toubro and John Deere: Undercutting can only affect you, if you cant explain to your customer what value your product adds to him. Despite this, even as undercutting and push sales continue, the tractor manufacturers are chalking out a series of innovative strategies to reap a decent harvest.
The present conditions have made it mandatory for the industry to look beyond the traditional usage of tractors in ploughing the land and market it as an multi-functional vehicles. Mr Jain, for instance, explains that Eicher Tractors have always been the most coveted of the tractors for irrigation and pumping operations. In the drought-hit areas, air-cooled tractors offer further advantage of not worrying about filling radiator with water while working for prolonged hours in very hard soil conditions, says Mr Jain.
While pumping and power generation is a common extension of tractor usage, market leader M&M has also spotted a number of unique opportunities in these troubled times. Drought leads to food and water shortages and we believe that a tractor trolley can be effectively used for transportation of the same, says Mr Davasia. Some out of the six models slated to be launched this year, will be these dual application tractors. M&M is pinning its hopes on these dual application models to help them arrest declining sales even in difficult times. The company is also looking for alternative growth avenues and has started selling engines for generator sets leveraging its business expertise in the tractor business. The company is planning to sell engines in the 25-60 HP category and has also received the initial orders from various customers.
Critically, the domestic market conditions have propelled manufacturers to look at markets outside India. The industry has been eyeing exports, but it has its limitation in terms of product and market mismatch. The kind of products that are needed in domestic market has little demand in other countries. US is a major importer of Indian tractors but it is for the hobby farmers and week-end farmers, and not for the mainstream farmers. The sale to hobby week-end farmers is largely governed by US economy which is slow at the moment and hence near future in US market is not very optimistic. At present, Indias tractor exports are minuscule. Exports account for only 2 per cent of the current sales.
For M&M, however, tractor exports received a fillip showing a 77 per cent growth at 3,521 units last year, even while its domestic sales were down and it is expected to go up further this year. We are working on the Horizon IV platform which will concentrate solely on exports, says Mr Davasia.
M&M is also scouting for distributors and partners in major European countries and would be initially distributing its tractors through its trading company in the United Kingdom. The countries initially identified are UK, Ireland, France, Spain and Portugal. The demand in Europe for tractors range from 20-40 HP which are used for gardening purposes to the 60-90 HP range which are used for agricultural work.
Similarly, Escorts has entered into a joint venture with Polmot of Poland for assembly and marketing of tractors to reach out to the European markets and the company is developing tractors with four-wheel drives and other added features to match the requirements of these markets.
Even transnationals like New Holland and L&T John Deere who came to tap the then growing Indian market, is being forced to relook at their strategy. Says Dr Knickel: With John Deere being the worldwide leader in farm equipment and an excellent distribution system throughout the world this is definitely an option. The business model however is built on the success in the Indian market. Agrees Mr Kumar of New Holland: The potential to make India the global base for select lines is always there and given the mismatch in capacities versus demand all manufacturers are exploring this option.
When the going gets tough, the tough get going. Thankfully, many of the tractor players have been able to adopt a tough stance to protect its bottomline. Take M&M for instance, which had embarked upon a major cost re-engineering drive with the help of consultants McKinsey to rationalise material and logistics cost. In hindsight, Mr Davasia believes that it was these measures that has helped the company to withstand the dampening sales growth. The company had undertaken various cost re-engineering initiatives under Project Vishwajeet, such as design to cost concept and aggressive cost reduction through measures such as vendor consolidation and negotiations, technology upgrdation and indigenisation. This, Mr Davasia believes, has helped the organisation grapple with turbulent times.
Companies like Punjab Tractors, Escorts, Eicher have all looked at increasing efficiencies to tackle costs. Eicher, for instance, has invested in implementing an ERP package SAP R/3 in all its plants and regional offices to streamline supply-chain. Punjab Tractors have similarly proposed an overhaul in its plant machinery which is expected to enhance the installed capacity and allow the plant to run without replacing retiring labour till 2004.
We have been trying to cut costs in order to compete, Mr Kumar says. However, with a small presence in niche markets, there are fragile chances of these players making significant inroads into cost cutting initiatives, as scale of operations plays a vital role in cost reduction, says an an analyst. Not everyone agrees, says Dr Knickel: Cost Reduction is an ongoing discipline rather than a one-time event within L&T JD and is aggressively pursued in any business scenario.
Customer is king
While the manufacturers are facing all the heat, not surprisingly, they are now introducing cool offers for the customers. Says Dr Knickel: The customers are our number one priority. All measures we take, all technologies we add, all services we give are focused to give the customer additional value. M&M has plans to launch six new models this year, while Escorts plan to launch three to four every year. Players are introducing projects to educate farmers and upgrading services offered to them. M&Ms project Vishwakarma is a case in point. Escorts, have developed specially designed products for select markets in south India where wetland cultivation is prevalent.
It is early days yet to predict whether the moves taken now will yield lasting impact on the performance of companies. But clearly, the tractor industry has demonstrated rich lessons in coping with the sudden downturn.