Tractor Design & Testing 3(2+1)

Lesson 27. Indian Tractor Industry

2. Comparison with Tractor Industry World over

The tractor industry in India has made a significant progress in terms of production and capacity as well as indigenization of technology. It is a typical sector where both imported technology and indigenous developed technology have developed towards meeting the overall national requirements. The global spotlight on tractor manufacturers certainly in terms of volume seems to be swinging away from the USA, UK and Western and Eastern Europe towards India where growth in the number of producers and the total volume in recent years have been impressive. In India tractor industry has played a vital role in the development. India's gross cropped area is next only to United States of America and Russia and long with fragmented land holdings has helped India to become the largest tractor market in the world. But it drops to eighth position in terms of total tractor use in the country when compared to international figures, only 3% of total tractors used all over the world . It is to be noted that while the overall automobile industry is facing recession the tractor industry is growing at 9-10%. About 20% of world tractor production is carried out in our country only. The arable land in India is high as 12% of the total arable land in the world. Tractor market in India is about Rs 60000 million. On an average around 400000 tractors are produced and their sale is 260000.Uttar Pradesh is the largest tractor market in our country. One out of every four tractor is being purchased in India.

3. Growth of Tractor Industry in India

The tractor penetration level in India is very low as compared to the world standards. Also the penetration levels are also not uniform throughout the country. While the northern region is now almost saturated in terms of new tractor sales, the southern region is still under penetrated. The medium horse power category tractors, 31-40 HP are the most popular in the country and fastest growing segment. There are currently 14 players in the industry including two major international players i.e. John Deere and New Holland.

Mahindra & Mahindra is the leading player in the industry. Monsoon season is a key driver for sales of tractors. A series of good or bad monsoon can affect the sales. In recent years the industry has registered a good growth in sales, both domestic as well as exports. This is also partly because of the initiative of the government to boost up agriculture and agricultural machinery industry. The tractor industry reported a strong 28.3% growth in sales volumes during 2009-10, there by ending the phase of cyclical correction that had pulled down tractor sales during the preceding two years (2007-09). Significantly, the revival of 2009-10 happened despite the drought-like conditions in many states during the kharif season dampening sentiments.

4. Tractor demand drivers in the country

The key factor enabling the demand growth of 2009-10 was strong rural liquidity, which in turn was sustained by several factors, including:

• Higher minimum support price (MSP) for crops

• More ability of farmers to make cash purchases (including the usage of Kisan Credit Card which are increasingly being used to part-finance tractor purchases)

• Enhanced employment opportunities (with rural employment schemes being implemented by the Government of India)

• An improved credit environment

• Continuance of replacement demand

Apart from these factors, non-agricultural use of tractors especially for haulage in construction and infrastructure projects continued to increase, benefiting tractor demand. Availability of labour for agricultural activities continued to decline, with infrastructure projects and rural employment schemes increasing employment opportunities. Hence, even farmers with medium-sized land holdings to either rent their land or purchase tractors. On a regional basis, the performance of the eastern, northern and western parts of the country was robust during 2009-10 in terms of tractor demand, while that of the southern region was moderate. A strong growth in tractor volumes, albeit on a low base, was witnessed in the eastern States, including Bihar, Orissa and Jharkhand, which had a good paddy crop.

Indian agriculture is characterised by low farm mechanization, fragmented land holdings, and high dependence on monsoon rains (in the absence of adequate irrigation facilities). Tractor penetration in India is low at around 13 tractors per 1,000 hectares as against the global average of 19 and the US average of 29. While this does indicate the relative backwardness of Indian agriculture, it also points to the significant scope that exists for raising tractor penetration, which is well for tractor demand over the long term.

5. Government support for tractor industry

Although agriculture contributes just around 20% to India’s GDP, it provides employment to a large rural population, which is why the sector remains a strong focus area for the Government. The tractor industry benefits significantly from the Governmental focus on agriculture, with measures such as nil excise duty on tractors (even the excise duty on tractor parts has been lowered from 16% to 8%) and inclusion of tractor financing under priority sector lending (by PSBs) serving as long-term demand drivers. Financing of tractor purchase is of great significance for the industry, it being a key demand facilitator.

6. Tractor Exports :

Indian tractor manufacturers have been increasingly targeting the international markets over the last few years. The industry exported a total of around 37,900 tractors during 2009-10, with the USA, Africa, South America, and some Asian countries being the top destinations. The industry leader, Mahindra and Mahindra (M&M), has acquired Yan cheng Tractors, the fourth largest tractor manufacturer in China (in terms of FY2008 volumes), to improve its presence in the country. In the developed markets, Indian tractors have a relatively marginal presence, with sales being largely restricted to the hobby farming segment. Tractor exports from India grew at a CAGR of 36 % from 2005-06 to 2009-10. Around 60 % (in 2005-06) of these exports were to the US mainly driven by an increase in hobby farming in the country. Exports to other countries such as South Asian countries, Malaysia, Turkey and Africa are estimated to have been growing fast as well. In year 2006-07, over 50 % of exports were to non US destinations.

7. Market Share of different players

The market shares of the top four players in the Indian tractor industry did not change much during 2009-10 in comparison with 2008-09. M&M remained the market leader with around 41.1% market share, followed by TAFE with a market share of around 22%, Escorts with around 12.1%, and International Tractors (ITL) with around 8.9%. M&M remains particularly strong in the southern region (50.4% market share during 2009-10). However,  John Deere was able to increase its market share in the region by around 250 bps in 2009-10, mainly at the expense of M&M (market share down by 140 bps) and Escorts (down by 140 bps). In the western region too, John Deere performed well in 2009-10, increasing its market share by 190 bps, even as TAFE lost market share by around 90 bps there. In the northern region, where M&M has been traditionally weak, the company increased its market share by 140 bps during 2009-10, even as ITL and Escorts lost market shares by around 90 bps and 60 bps respectively, there. In the eastern region, M&M was able to raise its market share by around 140 bps in 2009-10 at the expense of Escorts and TAFE.

8. Recent trend in volume and growth of tractor industry

 Volume and growth of tractors in last five year plan is shown in Table 27.1. The Indian tractor industry has experienced strong volume growth during last two years (2010-2012) on the back of favourable cyclical and structural demand drivers. The demand-side economics in the tractor industry continue to find favour from factors such as support from the Government of India (GOI) towards rural development and agri-mechanisation; scarcity of farm labour especially during the sowing season; increase in credit flow to agriculture; increase in non-agri application of tractors as in infrastructure projects; growth in niche power segments [<20HP (14.91 kW) and >50HP (37.28 kW)] and untapped territories; besides healthy export sales. However, there are some concerns emerging over the earnings of farmers from the crops; growing non-performing assets (NPAs) of tractor loans with public sector banks; and demand fatigue after strong sales growth during the last 2.5 years. On a regional basis, the western and southern parts of the country have performed above par while the eastern and central parts have reported muted growth figures in the year 2012. Further, the northern region, which is the largest tractor market of the country, grew at a healthy pace during the period, benefiting from sustained replacement demand.

Table 27.1: Volume and growth of tractor industry in India

	FY08	FY09	FY10	FY11	FY12
Volume (Domestic + Export)	346,508	345,827	441,174	545,128	605,092
Growth (%)	-2%	0%	28%	24%	11%

 

The demand outlook from southern India continues to be robust over the medium term and many OEMs are shifting focus from saturated markets to relatively under penetrated geographies in southern states. In fact, roughly 50% of the incremental capacity expansion for the industry is expected to come up in southern India. The domestic tractor industry is currently in a capacity augmentation phase and supply-demand dynamics of the industry are expected to change with the commissioning of large manufacturing capacity. Sharp increase in production capacity may have a bearing on the pricing power of tractor OEMs, ultimately putting pressure on their profitability metrices. Even during 2012, Indian tractor manufactures witnessed margin contraction in light of continued hardening of rubber and steel prices, notwithstanding price increases to offset hike in input cost as well as change in emission norms (only for greater than 50 HP (37.28 kW) category).

Volume growth in the Indian tractor industry has remained good in the year 2012 but lesser than half as for the previous two years. But in comparison, automotive industry has experienced slackening demand on account of rising inflation, hardening interest rates and increasing fuel prices. After a period of downturn during 2008-09, the up-cycle in the tractor market has extended over the last three years (2010-12). Some of the cyclical factors that have contributed to healthy demand side economics are good south-west monsoons supporting farm output, strong rural liquidity sustained by higher minimum support price (MSP) for crops and double digit food inflation, besides adequate credit availability driven by NBFCs and private banks. Structural drivers like scarcity of farm labour in light of alternate employment opportunities, steady replacement demand and growing non-agricultural use of tractors have also supported tractor volumes. In addition, long-term drivers of the industry such as low tractor penetration, increasing budgetary allocation towards the rural sector and government support for farm mechanisation remain favourable.