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The tractor industry was a sellers' market until a few years ago, so much that, companies could
collect an advance from the dealer before delivering the product. Even the end-user, the farmer,
was willing to endure long lead times before obtaining a tractor. However, things were bound to
change, and today it is a buyer's market. Farmers can walk into the dealer showroom and drive
out in a tractor. Companies are forced to extend credit up to 45 to 60 days - a practice, which was
unheard of in this industry. Over the past two decades, the $1.36 billion tractor industry has
recorded a compound annual growth rate of 8.31 percent as compared to a GDP growth of 5.15
percent and agricultural production growth of 2.20 percent. However, in the past year the
demand for tractors has seen a decline.
Tractors in India - Background
In developed countries, tractors are dedicated to perform farming-related activities. However, in
India, tractors are also used for applications including transportation, power generation, and
industrial applications such as forklifts, loaders, road rollers, and baggage carriers (at airports).
Hence, although the primary demand driver is agriculture, other applications also influence the
demand of tractors in India.
The tractor industry in India is segmented into four categories based on the engine horsepower:
less than 30 HP
31 to 40 HP
41 to 50 HP
greater than 50 HP
Historically, the 31 to 50 HP segment contributed to over 50 percent of the market owing to the
demand from the northern states of India (Punjab, Haryana, and Uttar Pradesh).
The factors that drive the demand for tractors in India are:
Agricultural production and government procurement price movements directly influence the
earning power of farmers.
The agricultural output is heavily dependent on the monsoons, as only 38.6 percent of the net
sown area is under irrigation.
Almost 90 percent of the tractors are sold on credit, as a result, availability of easy financing is
an important demand driver.
The loans given by banks for farm mechanization are refinanced by the National Bank for
Agriculture and Rural Development, India (NABARD). Hence, changes in the priority sector
lending norms (by the Reserve Bank of India) affect credit availability.
Implementation of scientific farming practices such as irrigation, high yielding seed varieties,
and fertilizers facilitate farm mechanization and hence increase tractor demand.
Industry Participants
The industry has five major competitors, that together account for approximately 91 percent of
the tractor sales in the country. Market shares are presented in Chart 1 based on sales recorded
for calendar year 2000.
The overall industry has recorded a negative growth of 12.46 percent in calendar year 2000.This
negative growth can be attributed to:
About half the total arable land in Gujarat, Rajasthan, and Maharashtra is believed to have gone
without sowing this year owing to shortage of irrigational water.
The traditionally high tractor usage states namely Uttar Pradesh, Haryana, Tamil Nadu, and
Andhra Pradesh have also witnessed a fall in demand levels due to the high release of food grain
by Food Corporation of India (FCI) in the market which has adversely impacted procurement
prices.
This genuine drop in demand is further aggravated by over-production and market flooding by
some manufacturers such as Mahindra & Mahindra (M&M) and Escorts.
The only company to show a positive year-on-year growth is Mahindra & Mahindra (M&M).
This is because of:
a wide product range
aggressive marketing of products
increased duration for finance schemes from three to four years
increased price discounts
Although these measures may bring respite in the near term, they are likely to have an adverse
impact in the long run.
The Change Factors
second-hand tractors has not been increased. In addition, the 10 percent surcharge has been
waived, resulting in the effective customs duty coming down to 62.8 percent from 67 percent.
The opening of this market can attract import tractors from markets such as China and Europe.
Tractors are often scrapped after just two years of use in Europe. Such tractors can attract very
competitive prices as compared to local products in the same segment.
The Future
Although the government has announced measures to boost the agriculture sector and the
demand for tractors, the industry is not likely to achieve its erstwhile growth rates in the near
future. Some factors that are likely to contribute to a negative growth in the short term are:
Agricultural production is expected to grow by only about 0.5 percent owing to the vagaries of
the monsoons.
The offloading of excess stock of food grain by Food Corporation of India (FCI) at low prices
will affect the procurement prices and hence income of farmers.
The market flooding by some of the key companies is likely to worsen the impact of the genuine
drop in tractor demand.
In addition to the sluggish demand, domestic manufacturers are going to face a belt-tightening
exercise. With the entry of international competitors and expansion plans by existing
manufacturers, the production capacity has bloated to over 400,000 tractors as compared to a
demand for only around 250,000 tractors per annum.
The current scenario indicates that the industry is headed for a major shakeout. HMT, which was
up for sale two years ago (but no suitors were found) has lost a lot of ground. Others including
TAFE, Eicher, and Escorts, have lost major shares of their markets to M&M, PTL, and some
smaller competitors. The companies are today focussing on developing new products in the
above 31 to 50 HP and above 51 HP markets. The manufacturers who are likely to maintain a
stronghold in the market are Mahindra & Mahindra and Punjab Tractors owing to faster new
product introductions across HP segments at competitive prices.
In the long run, the industry is likely to settle down at an annual growth rate of 8 percent, with
the market shares more evenly distributed. In all, the clear winner is the farmer, who today has a
variety of high quality products to choose from, improved after-sales service, minimal leadtimes, and favorable financing schemes that do not hurt their already-strained pockets.