Tractors: Ploughing a difficult furrow

S. Muralidhar

THE TRACTOR industry's rather dismal performance this year has led many manufacturers to wonder if it is stuck in a Catch-22 situation.

Tractor sales headed south when the monsoon failed in many States last year. Madhya Pradesh, Gujarat and Rajasthan experienced severe drought conditions. However, this year the monsoon has been good in most States and even those that faced a drought last year have received a fair amount of rainfall.

Yet, tractor sales are on an unprecedented downward spiral, and the industry might close the year lower by over 16 per cent. In comparison, the fall in tractor sales last year (considered a bad year vis-a-vis the success of the monsoon) was just over 9 per cent.

Decline across the board...

The dramatic fall in volumes has not spared any tractor manufacturer. The tractor industry as a whole registered sales of only about one lakh units in the six months up to September compared to about 1.23 lakh units in the first half of 2000-01.

The lower sales this year is less pronounced in the case of multinational and joint venture tractor companies such as L&T John Deere, New Holland and Same Greaves. But a few of the established domestic players such as Mahindra and Mahindra, Escorts and TAFE have been badly affected by the poor offtake and have contributed to the overall decline in volumes. In fact, the only major manufacturer to record a jump in sales in the first half of this year was Eicher Ltd.

There has been an across-the-board fall in sales for all Indian companies, the decline varying segment-wise. The two mid-market segments -- 21-30 horse power (HP) and the 30-40 HP range -- recorded a 21 per cent fall in sales in the first half of this year. These two segments traditionally account for over 75 per cent of the total output of the organised tractor industry.

The other emerging segment, the 41-50 HP range, recorded sales of about 15,000 units in the six months, lower by 17 per cent over the corresponding previous period. The only segment that did not seem to be as affected by the slowdown in demand was the over-51 HP tractors. Sales in this segment stagnated partly due to the new launches by MNC tractor companies. Even domestic players registered only a marginal fall of about 0.05 per cent. However, the volumes in this segment constitute only 7-8 per cent of the total industry volumes.

...but new products keep coming

The fall in sales has not, however, dissuaded tractor manufacturers from launching new products and variants of existing models. All the MNC tractor-makers are launching new products. L&T John Deere rolled out a 40 HP model this year and planning a 47 HP one to bridge the gap between its two products -- the 55 HP range and the new 40 HP. New Holland India, a subsidiary of the Fiat Group of Italy, plans to launch a 35 HP by the 2002 first quarter. And Same Greaves, based in Ranipet (near Chennai), has introduced a 35 HP and a 40 HP model this year.

Among the domestic manufacturers, Bajaj Tempo has launched a 25 HP tractor and two new variants of its existing 35 and 45 HP tractors. It is also working on a new-generation 60 HP tractor.

The Chennai-based Tractors and Farm Equipment Ltd (TAFE), a leading tractor manufacturer in the South, has introduced two new tractors this year, and two more in the next. TAFE, of the Amalgamations group, has nine models from 25 HP to 75 HP. It plans to introduce two models in the 50-60 HP capacities.

Not to be left behind, the public sector HMT has launched a 49 HP model to fill the gap between its 45 and 55 HP range. This is expected to cater to the requirements of both medium and large farmers. HMT manufactures tractors in the 25, 30, 35, 45, 58 and 75 HP ranges at its Pinjore, Hyderabad and Mohali plants.

More players, more capacity

New product launches notwithstanding, most companies are saddled with excess capacities. Additional capacities created by new entrants such as L&T John Deere, International Tractors Ltd (which manufactures the Sonalika brand) and New Holland India may be understandable. But the capacity expansion done by the established, domestic players in the last three-four years is going to prove a drain for them.

The number of manufacturers in the organised sector has risen from 6 to 12 and the industry as a whole is working on a capacity utilisation of just 40-45 per cent. The installed capacity of the industry is over 4.7 lakh units per annum. This year's fall in sales is accentuating the problems faced by the industry.

Dented by rural incomes

There are clear indicators that farm incomes have been hit over the last three years. The years 1999-2000 and 2000-01 were particularly bad for farmers across the country, when prices and actual production were low.

The sustained fall in the income levels has, in turn, affected the sales of a number of products ranging from consumer durables and non-durables to agricultural inputs such as fertilisers, pesticides and tractors.

A tractor is usually at the bottom of the farmer's list of purchases. Last year lower crop realisations lead to lower income levels among farmers in many drought-hit States.

On the contrary, this year the procurement programme seems to be the reason for lower incomes. The procurement prices have been increased marginally. In addition, the Government's slowdown of actual procurement, except for Punjab and Haryana, means farmers in many States are left holding unsold stocks.

The actual procurement has not been stepped up due to an already high level of stocks with the Government. This, in turn, has been due to a slowdown in releases to the public distribution system. Procurement has been concentrated in Punjab and Haryana, States that already have a large tractor population. These trend have had an adverse effect on the demand for tractors (see box).

Pump-priming turns trouble-spot

Industry observers point out that in addition to these natural factors, many of the manufacturers themselves are to blame for the fall in sales this year. The practice of pushing sales during the slack season through cheap credit and long tenure loans to dealers, and in turn to buyers, has left a number of manufacturers stuck with bad or doubtful debt.

According to Mr Palani Kumar, Managing Director, New Holland Tractors (India), manufacturers will not be able to support stocking this year due to the increase in interest costs and overdue loans. So, the current fall in sales also factors in the inability of some manufacturers to support such stocking at the dealer's end. This has often been the reason for differences between the retail level and dealer level sales of some manufacturers.