Indian truck makers face the heat from Chinese brands in Sri Lanka
Monday, 29 July 2013 00:00
Economic Times (Chennai): India truck makers are quickly losing their dominance in Sri Lanka, where sales have slumped, even as cheaper Chinese rivals have made inroads, piggybacking on their country’s mega participation in the island’s infrastructure development.
Truck sales in Sri Lanka, which almost entirely depends on imports, have fallen dramatically from their peak in early 2012 owing to economic slowdown and high borrowing cost. From average monthly volumes of around 1,700 units of medium and heavy trucks, sales is now down to 374 units (June 2013).
Likewise, light trucks sales have fallen from 1,700 units to 1,578 units. During this time, the share of Indian truck makers in the medium-heavy category has fallen from more than 74% to 42%. In light trucks, Indian players have fallen less precipitously – from nearly 90% to 77%.
Troubles for Indian auto companies started when Sri Lanka increased import duties across segments like cars, two-wheelers in March last year. It also imposed an absolute levy of Sri Lankan Rs. 109,000 (Indian Rs. 49,050 according to current rates) on commercial vehicles, in addition to a 12% excise duty. The new structure came into effect from 9 November.
The slowdown coupled with the import duties has taken a toll on volumes across auto categories.
Frost and Sullivan pegs the Sri Lankan commercial vehicle market to be close to 34,000 units annually, including buses and goods carriers. The medium and heavy commercial market is dominated by India’s No 2. truck maker Ashok Leyland, which has a joint venture with the Sri Lankan Government, Lanka Leyland, and its bigger Indian peer Tata Motors. Also playing a part is Mahindra & Mahindra. All three Indian players have been impacted.
“In some cases, prices have doubled,” said a Tata Motors spokesperson, of the duty changes. “It is true that Chinese original equipment manufacturers have entered the Sri Lankan market, with demand for their vehicles holding good due to the Chinese projects in Sri Lanka,” the spokesperson said.
Ashok Leyland made this point evident in its annual report itself. Its volumes in Lanka have fallen by over two-thirds to about 2,200 units in fiscal 2013. The trend has continued in the initial months of the new fiscal year.
What further made it further worse was, like India, Sri Lanka’s currency also depreciated sharply. Around the time the duties were imposed, the Sri Lankan Rupee fell to 133 from 114. “Dealers were not willing to accept imports from India, because it was totally unsustainable for them. That saw the increased procurement from China and Japan,” said a senior Ashok Leyland official, who did not wished to be named.
He also said that China, as a part of its strategic relationship with Lanka, brought in line of credits into their banking system and offered cheap loans for their commercial vehicles.
Official data in 2010 showed China was Sri Lanka’s biggest lender, with loans amounting to $821 million. China has been pumping in millions of dollars (the plan in 2010 was an investment of $1.5 billion over three years) into Sri Lanka to develop infrastructure such as roads, bridges, power and ports. Recently, China has signed an agreement to provide a further $2.2 billion in loans toward infrastructure to Lanka. India, on the other hand, has been one of the top-most providers of foreign direct investment (it did $110 million in 2010).
The issue of China’s interest in Sri Lanka’s economy, that too in core sectors, has been a sensitive issue in India.
It is Chinese truck-makers such as Foton, JMC and FAW who have managed to grow their market share in a difficult period. Foton, for instance has doubled its monthly volumes in two years – increasing its share from 4.9% to 7.4% in light trucks market in the process. Chinese players now have a 20% share in this segment, from barely 5% two years back.
What more, the Chinese players could smell an opportunity here. Vijay Kakade, Director at Automotive & Transportation Practice, Frost and Sullivan, said: “India always holds a strategic position with Sri Lanka. However, lately, huge investments were made by Chinese majors in Sri Lanka which has facilitated them in drawing Sri Lankan governments as well consumers’ attention. In our opinion, in the longer run it will also help in generating further preference towards Chinese products as compared to offerings of Indian majors.”
Kumar Kandaswami, Senior Director at Deloitte Touche Tohmatsu India, agreed. “China and Sri Lanka seem to have a good relationship at the Governmental level and that would play a part in the markets being opened.”
However, Murtaza Jafferjee, Managing Director at Colombo-based brokerage firm JB Securities, refused to buy the argument. On the contrary, he blamed the economic slowdown in Sri Lanka and higher borrowing cost. “Also there was lot of repossessed vehicles on sale, which brought down the new vehicle sales. Indian brands will still continue to dominate the medium and heavy trucks market here.”