Truck Demand To Sustain For Up To Two Years, Says Volvo Eicher CEO
"The economic activity is picking up and overdue replacements mean that the commercial vehicle industry is in a sweet spot."
Demand for medium and heavy trucks is back above the pre-pandemic levels for the first time, aided by an economic recovery. But will it last?
There are reasons to suggest the recovery should sustain over the next one to two years, Vinod Aggarwal, managing director and chief executive officer at Volvo Eicher Commercial Vehicles Ltd., said in an interview with BloombergQuint's Niraj Shah.
The cycle is as its lowest after dropping for three consecutive years, Agarwal said. The annual offtake has more than halved, he said, and the only way ahead is up. "The economic activity is picking up and overdue replacements mean that the commercial vehicle industry is in a sweet spot."
Economic indicators are recovering. E-way bills, a measure of road freight movement, has also shown signs of an uptick in the last two to three months. Registration of medium and heavy commercial vehicles in September were 5% above 2019 numbers, and nearly three times the 2020 level. Demand had started falling even prior to the pandemic though.
Agarwal said transporters have not conduct major replacements in the last two to three years. Lack of faith in the economic recovery coupled with issues in retail financing post-IL&FS crisis and 2018-19 rules allowing trucks to ferry more load led to a sense of unease and indecisiveness.
But there is a strong case for replacing the old trucks as there is a better movement of goods and services and increased confidence in the economic recovery, he said. It may finally make people replace old trucks, he said.
Volvo Eicher doesn't expect the impact of a third wave as deep as the first and second ones on sales. While all segments will fare well, Aggarwal said heavy commercial vehicles will bounce back the fastest.
Higher fuel prices are the biggest risk to a recovery, according to Aggarwal. Freight rates have not gone up as much as fuel costs, he said. Since costlier fuel would hurt the smaller transporters more, that might cause them to defer purchases, he said.
But if demand for movement of goods and services rises, transporters won't have a choice but to buy, Aggarwal said.
While the global chip shortage is another risk, Aggarwal expects the problem to persist for only two to three months.
Volvo Eicher has increased prices once and may further hike them in October. The challenge lies in realisation of hikes as capacities are not fully utilised and more trucks are chasing the same customers, he said.
Big transporters have the muscle power to bargain and discounts are negating the increase in prices, according to Aggarwal.
The only way to maintain margins is to keep on cutting internal costs and educating customers on buying better-quality trucks.
Watch| Volvo Eicher's next leg of growth will come from...