Will India’s MHCV production surpass its 2018 peak by 2025?
With the current push by the Indian government for major infrastructure and development projects, expansion of the e-commerce network, and strong replacement demand from the domestic market, India is expected to grow its truck and bus production to a new peak by 2025 — crossing its 2018 peak of 531,500 units. By 2025, MHCV production should reach its new annual peak of 566,900 units, according to S&P Global Mobility analysis. But lack of funds, and high raw material and commodity costs are the challenges OEMs must overcome.
India enjoys a strong position in the global heavy vehicle market as the second-largest producer of trucks and buses in the world. India has a strong domestic market, and exports are growing.
The part of the market with gross vehicle weight above 6 metric tons (6T) is expected to have support from replacement demand as well as a growing economy, increasing mining, infrastructure and construction activities, and overall healthy fleet utilization levels.
Production is expected to grow further as the Indian government overhauls the country's transportation system and continues to expand the road infrastructure to the far corners. The many tailwinds of the local medium and heavy commercial vehicle industry are expected to lift the production of medium and heavy trucks and buses by nearly 20% year over year in calendar year 2023 and by another 5% in both 2024 and 2025. This is forecast on the heels of the 34% recovery in calendar year 2022, according to S&P Global Mobility analysis.
One factor to growth is the scrappage policy introduced in 2022, which will be implemented in phases.
Phase I (from April 2023): It was mandatory to scrap government MHCV vehicles older than 15 years with a target to reduce carbon footprints.
Phase II (From October 2024): Private and public vehicles will be scrapped based on a fitness test. The scrappage policy has the potential to replace more than 1 million vehicles. Although voluntary in nature, the policy plays upon several incentives such as new vehicle discounts from OEMs and rebates on registration fees with the submission of a scrappage certificate. This policy targets buses in public fleets, as most are older than 15 years.
Not all vehicle types may increase at the same rate, though. Electric buses, in particular, may struggle, although demand from the public for electric buses is present and policymaker ambitions are high. The public fleets are operated by the State Transport Undertakings (STU) and now are looking at alternative powertrains, especially electric buses. Convergence Energy Services Limited (CESL) is an entity under the Ministry of Power that is releasing tenders for electric buses under the National Electric Bus Programme (NEBP).
Under NEBP, more than 15,000 new electric buses will be introduced by 2025 to replace old diesel engine buses in the public fleet. However, the Gross Cost Contract business model that CESL is using for the adoption of electric buses is not profitable for OEMs. That's because CESL requests bidders to quote a price per kilometer for operating services over 12 years, including maintenance of the vehicle - under which OEMs are unable to recover the cost of the vehicle.
In addition, banks are reluctant to give loans to manufacturers of electric buses as they do not get timely payment from STUs - leading to a lack of funds for OEMs. As a result, the production of electric buses should remain at the same level as positive and negative drivers balance each other.
Bus production in general, however, is expected to profit from the opening of offices and educational institutions, and good replacement demand supported by mandatory scrapping of public vehicles older than 15 years.
Among commercial trucks, combined heavy- and medium-duty trucks witnessed growth in 2022, but heavy-duty trucks saw exceptional growth of 41% - supported by infrastructure and construction activities, increases in mining operations, and replacement demand.
Currently, the Indian truck industry is receiving tailwinds from urbanization, the growth of e-commerce, the auto production linked incentive (PLI) scheme, standardization of fuel, rapid infrastructure growth, and low interest rates. These factors should propel truck production to grow by 14% in 2023, with a compounded annual growth rate (CAGR) of 4% from 2023-25.
In heavy-duty trucks, a major part of the demand came for rigid trucks - where the tractor and trailer are fixed securely on the same chassis - as they are comparatively easy to operate in hilly and remote areas. Rigid trucks contributed more than 87% of total heavy truck production in 2022. We expect same buying trend to continue in 2023 as well.
Production of heavy trucks will be driven by the government push on infrastructure development, stable economic environment, and an increase in freight as well as replacement demand. We expect heavy truck segment to post a growth of 12% in CY 2023 and have a CAGR of 3.8% from 2023 to 2025. Both rigid and articulated models should have good demand from both domestic as well as export markets. The major OEM gainers in the segment should be Ashok Leyland, Eicher Motors, and Tata.
For medium-duty trucks, demand will continue to be led by the expansion of e-commerce networks and healthy demand from agriculture and allied sectors. With the introduction of the open network for digital commerce (ONDC), government is also supportive of expanding e-commerce in India, which will act as catalyst in the growth momentum of the segment.
We expect medium duty truck production to grow by 18% in 2023 and have a CAGR of 4.2% for 2023-2025. Tata is expected to lead the segment followed by Eicher Motors and Ashok Leyland.
Overall, we expect MHCV production to improve going forward, supported by a strong base, an expected pickup in economic activities, as well as policy initiatives including the auto PLI scheme and scrappage policy.
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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.