Modernising the commercial vehicles fleet

The development of a sustainable replacement demand requires a comprehensive end of life policy for CVs

It has been a long-standing demand of the commercial vehicles industry that the government should incentivise the scrapping of old trucks, which would encourage the sale of new commercial vehicles. The sale of commercial vehicles is cyclical in nature — it moves in tandem with the general economic growth, albeit with a small lag. The commercial vehicles industry has been very myopic in its world view; it has not grown beyond seeking to boost sales by demanding some fiscal support from the government to see through the lean times with replacement demand. Their proposal of the government incentive to scrap old trucks and buy new ones is too narrow. It lacks a deeper understanding of the marketplace of used trucks, application-user changeover — from primary through tertiary applications — the role of used truck finance and financiers. The development of a sustainable replacement demand requires a comprehensive end of life policy for commercial vehicles that understands changes in application of a truck through its life cycle, the economics of each application-user segment and the role of used truck finance.

Putting in place an end of life policy for trucks is never an easy political decision. The government has been talking about commercial vehicle scrapping schemes for over a decade now but without mustering the required political courage to act. Hence, the popular support for urgent anti-pollution measures provides the government with a rare opportunity to put in place a sustainable end of life policy for commercial vehicles. 

There are approximately one million commercial vehicles in India, which are more than 15 years old. Scrapping them and creating a replacement demand has the potential to add approximately $15 billion to the sales of new commercial vehicles. This replacement demand is nearly 1.5 times the average annual sales of new commercial vehicles. The biggest beneficiaries of the huge replacement market will be vehicle manufacturers, ancillaries and vehicle financiers. This huge business opportunity should be used by the government to get the beneficiaries to put in place a sustainable and fully-funded voluntary retirement scheme to encourage and incentivise the modernisation of the nation’s fleet. The government should also participate through some fiscal support.

It augurs well that the popular demand for clean air has enthused the government to take some remedial action that shows the desire of the government to reduce urban pollution even as it gives a push to sales of new commercial vehicles.

While the government’s effort to solve two problems with one solution is indeed laudable and must receive our wholehearted support, merely incentivising scrapping will not immediately increase the sales of new commercial vehicles and hence it is not sustainable. There is an inevitable time lag between the scrapping of an old truck and the replacement demand for a new truck.

The average age of commercial vehicles plying in our country is over 10 years; a successful modernisation effort has the potential to bring down the average age to around five-six years over the next five years which will be in keeping with the economically advanced countries.

The proposal to give some cash incentive to the truck owner who scraps the truck is not sufficient in itself to modernise the nation’s fleet. A 15-year-old truck is commonly used for short distance transportation of sand or garbage within towns and in rural areas. An operator scrapping these trucks will not buy a new truck, even if he gets a sizeable cash incentive to scrap his old truck. He will only buy a relatively newer truck and continue to transport sand or garbage. He will not and cannot buy a new truck. Therefore, such piecemeal efforts are bound to have a limited impact. 

A sustainable end of life policy for commercial vehicles should have appropriate incentives for scrapping, the development of agencies to handle the scrapping which can also issue discount warrants in lieu of voluntary scrapping and the creation of a commercial vehicle modernisation fund.

Without doubt, the principal beneficiary of any fleet modernisation project will be the commercial vehicle manufacturers; but these manufacturers are neither central nor critical to the success of the project. The project is critically dependent for its success on the involvement and active participation of the used truck financiers. The manufacturers play virtually no role in the creation, development and management of the after-market. The role, effectiveness and the flexibility of the used-truck financier is critical to the development of replacement demand. It is the used truck financier who stays with the truck during its application-user and ownership change through its life cycle. 

Way back in 2003, when I was the CEO of Shriram Transport Finance Company Ltd, we facilitated a Deloitte study initiated by All India Commercial Vehicle Owners’ Association to put in place a complete policy framework for the modernisation of the nation’s fleet. The policy paper was presented to then Ministry of Surface Transport. The central idea of this policy paper was the creation of a commercial vehicle modernisation fund (CVMF) with the involvement of all the stakeholders – the government, vehicle manufacturers and truck finance companies. The government and the private players would contribute to the fund which could be given suitable fiscal incentives under section 35 of the Income Tax Act, to encourage contributions to the modernisation of the nation’s fleet.

The policy paper envisaged a voluntary end of life option to the truck owner, who would in response to suitable economic incentives, voluntarily give up his truck for scrapping. The government would certify scrapping agencies. The agencies would buy the 15-plus year-old trucks from the owners; pay them the salvage value and in addition, issue a discount warrant of Rs 50,000 on behalf of the CVMF. The scrapping agency would receive a fee for each truck scrapped from CVMF for its efforts.

The owner of the 15-plus year-old truck will use the scrap value together with the discount warrant as his equity to take a loan to buy and upgrade to a eight-year old truck. The seller of the eight-year old truck then will use the cash consideration and discount warrant to buy and upgrade to a four-year old truck. It must be understood here that in both these transactions, the role of the used truck financier is crucial, without whose valuation skills and flexible financing schemes the operator's ability to pay will be missing and the demand for newer truck will remain latent. The owner of the four-year old truck then approaches the vehicle manufacturer with the cash consideration and discount warrant as part of his equity to purchase a new truck. The vehicle manufacturer will eventually go to the CVMF and redeem the discount warrant. 

The above model creates an excellent ecosystem for handling replacement demand for commercial vehicles in a transparent manner. It is sustainable as it is accountable and fair to all the stakeholders. The social impact study of the proposal will win accolades for the government from environment lobbies within and outside the country.

I suggest the government constitute a committee of experts immediately —  to look at the proposal already submitted by the All India Commercial Vehicle Owners’ Association to develop a robust, comprehensive and sustainable commercial vehicle end of life policy.

The author is executive vice-chairman & CEO, IndoStar Capital Finance Ltd. rsridhar@indostarcapital.com