Tractors: Ploughing thru' difficult times

Raghuvir Srinivasan

IT HAS always been the least glamorous segment of the automobile industry.

But considering the shape the Rs. 8,000-crore tractor segment is in, it runs the risk of losing the little glamour and following it had in the stock market. It has been a difficult period for the industry in the last three years with overall growth showing flat trends; the first quarter of this fiscal was probably the worst with volumes dropping a precipitous 17 per cent. Every single manufacturer, save Mahindra & Mahindra(M&M), has reported lower offtake in this period.

Of course, the May-September period is not exactly the best of times for tractor sales because it coincides with the monsoon. But the drop this year was significant leading to doubts over the performance of the sector over the rest of the fiscal. The general expectation is that the situation could improve after the withdrawal of the monsoon in September when demand could go up. Assuming this happens, then the industry could recover some of the lost ground; but it may still end the year with a small negative growth compared to the last fiscal. The worst case scenario is that the industry could end the year with a drop of 10-15 per cent compared to 1999-00.

Demand drop and supply excesses

The industry finds itself in this situation because of two main reasons. First, a drop in the offtake caused by fundamental factors beyond the control of the manufacturers. Second, the deliberate strategy of some major manufacturers to flood the system with their output, irrespective of the falling demand pattern. The steep drop in industry parameters is a direct result of the combination of the above two factors.

The tractor offtake has been showing a flat trend since 1998-99. This followed a high growth period since the early 1990s averaging 15 per cent. The industry posted a growth of just about 2 per cent in 1998-99 following a 13.27 per cent growth in 1997-98. It worsened to 1.55 per cent in 1999-00.

The industry operates on a cyclical basis just like the other segments of the automobile industry. This down-cycle was aggravated by a fall in farm incomes and the erratic behaviour of the monsoon last year which brought on drought conditions in the major agrarian States of Maharashtra, Gujarat, Andhra Pradesh and Rajasthan. Farm incomes took a hit last year as agricultural production declined by 1.9 per cent.

This had a natural impact on tractor offtake, the fortunes of which are directly linked to farm income levels in a given year. This genuine drop in demand was aggravated by over-production and resultant flooding of the market indulged in by some manufacturers such as Mahindra & Mahindra (M&M) and Escorts. The consequent overloading of the system impacted adversely on offtake by dealers who had the task of pushing the dumped vehicles in the market. This, at a time when farm incomes were already low and farmers were in no mood to go in for new tractors.

Not surprisingly, dealers and manufacturers came up with the concept of `advancing'. Here, the dealer would just advance a new tractor to a farmer with no immediate down-payment. The money would be collected later in instalments when the situation improved. The basic idea behind this was to capture as much of the market as possible at all cost. While the overall industry demand was, thus, artificially suppressed, the companies indulging in this practice also had no cause for joy because their outstanding amounts from debtors increased sharply.

It was a strategy akin to what Tata Engineering had perfected in the commercial vehicles segment. At the height of the competitive frenzy to grab market share, some manufacturers would also offer freebies such as gold coins or minor consumer durables with every purchase of a tractor. So to an extent, the current market situation is largely of their own making.

Competitive dynamics

To understand the competition in the industry, one has to first look at the market segmentation based on horse-power. The industry can be split into five major categories -- less than 20 hp, 21-30 hp, 31-40 hp, 41-50 hp, and 51 hp and above. Of this, 80 per cent of the demand is accounted for by just two segments -- 21-30 hp (25 per cent) and 31-40 hp (55 per cent). The 41-50 hp segment accounts for about 15 per cent of total sales while the 51 hp and above segment has a share of just 4.45 per cent, but is growing quite fast.

Among the major players, M&M, Escorts, Punjab Tractors (PTL) and to some extent, Eicher, have a presence across the major segments. Eicher, which was predominantly a player in the 21-30 hp segment has now moved upwards following the shrinking market in the low horse-power segment. But it is yet to make a mark in the market if the sales figures are anything to go by. In a market that shrank 17.3 per cent in the first quarter of this fiscal, Eicher has seen its growth fall by 23.51 per cent. The company's problems have also been taken note of by rating agency ICRA which downgraded its rating from LAA to LA+. The company was banking on the tie-up with Valtra of Finland to introduce the Valmet range of high horse-power tractors.

In the high-volume 31-40 hp segment, it is tight competition between M&M, PTL and Tractors and Farm Equipment (TAFE), the unlisted Chennai-based company from the Amalgamations group. These three are neck-to-neck with a share of around 25 per cent each with M&M holding the obvious edge. Escorts has been striving manfully to carve out its own place in this segment. It succeeded to a large extent pushing up its share to 15 per cent from 12 per cent in 1998-99, but this has obviously come by some `innovative' marketing which is reflected in the oustandings of the company. In the current fiscal, the company has backed off from its strategy and appears to be producing to fit demand.

TAFE was the major loser in this segment in the first quarter of this fiscal. Even in 1999-00 it saw its marketshare drop marginally from 25.95 per cent to 24.82 per cent. This only worsened in the first quarter of this year -- it has dropped to 17.50 per cent from 23.08 per cent in the same time last year. But Ms. Mallika Srinivasan, Director, TAFE, has a different interpretation. According to her, the company's share at the retail level has remained intact. In other words, dealer-to-farmer sales has kept up, with the dealers selling off from their inventory though company-to-dealer sales has dropped.

This is an interesting interpretation but it pre-supposes that the company's production was not tailored to market demand leading to a rise in inventory. Anyway, in any analysis of marketshare, it is the wholesale share, that is company-to-dealer sales, which is taken into account and not the retail. It would be impossible to collect and collate data across dealers of all companies in order to determine marketshare. Ultimately, it needs to be remembered that a sale is registered in the books of the company the moment the tractor is invoiced to the dealer.

M&M appears to be going strong even now when the overall industry growth is down by 17 per cent. Though the company denies that it is flooding the market, it is inconceivable how it can be the lone exception, registering a steep growth, at a time when the entire industry is reeling from falling demand. Of course, the company has the ability to take on a big debtor list and it has its own compulsions to grow. Sales of its multi-utility vehicles (MUV) are down 13 per cent in the first quarter of this fiscal. The company probably is out to squeeze the maximum possible from the tractor segment where it has a stranglehold, to make up for the bad performance in the MUV segment.

Rebound in 25 hp?

If the sales figures of the last couple of years are any indication, there seems to be a resurgence in the demand for tractors in the 21-30 hp segment. In fact, of the five segments, this and the over-51 hp segments are the only two to have registered a positive growth in 1999-00. The main 31-40 hp segment actually saw volumes fall by about 3 per cent to 1.42 lakh tractors from 1.46 lakhs in 1998-99. On the other hand, the 21-30 hp segment, which has been steadily losing ground over the years, saw volumes rise by 15 per cent to 67,401 units.

The volume push came mainly from Escorts and M&M, the two companies that went flat out on the sales front last fiscal. Escorts' sales in this segment shot up 27 per cent while M&M's offtake rose by about 20 per cent. Surprisingly, the erstwhile leader of this segment, Eicher, saw its volumes take a knock of 5 per cent last year. TAFE and PTL were the others to register a rise in sales of tractors in this range.

Thanks to this strong showing in 1999-00, the 21-30 hp segment now accounts for 25.84 per cent of the total tractor market -- up from 22.78 per cent in 1998-99 and 18.95 per cent in 1997-98. Correspondingly, the share of the high-volume 31-40 hp segment has dropped to 54.70 per cent in 1999-00 from 57.21 per cent in 1998-99 and 60.37 per cent in 1997-98. Simultaneously, the share of the above 51 hp segment has also been rising -- it has gained a full percentage point in the last two years moving up from 3.54 per cent in 1997-98 to 4.45 per cent in 1999-00.

These are rather confusing trends. Just when the industry was beginning to write-off low horse-power tractors as a low-volume business, it seems to be bouncing back. There is also a simultaneous upgradation to the higher horse-power ranges as evidenced by the rising volumes in that category. The flooding of the market could be one artificial cause for the rise in volumes in the low horse-power category. Tractor prices are typically lowest at the small horse-power segment which makes it easier to push in the market at a time when farm incomes are heading south.

Of course, the natural factor could also be that land-holdings are getting increasingly fragmented which pushes up demand for small tractors rather than big ones. There is also the `government factor' here -- excise duty on small tractors has been tampered with seven times in the last nine years and the year 1998-99 saw an increase in the duty on the 35 hp category. This obviously pushed volumes to the low horse-power range.