For those with old trucks, the policy’s appeal is limited due to poor cost economics
Owners of old trucks might not find it financially viable to scrap their old vehicle and invest in a new one, as per the Centre’s vehicle scrappage proposition, said Satyakam Arya, Managing Director and CEO, Daimler India Commercial Vehicles.
Another important aspect is that the waiver offered will not constitute more than one per cent of the cost of a new HCV truck, noted Arya. “Owners of old trucks might not find the entire proposition financially viable to scrap their old truck and invest in a new truck.”
“With this background, for the scrappage policy to be seamlessly implemented, we should have a comprehensive plan in terms of removing ELV (End of life vehicles) from the road. OEMs and freight transporters need stronger financial support. However, that said, it is important to note that unless old fleet vehicles are off the road, the benefits of implementation of BSVI vehicles will not be fully leveraged,” Arya explained.
Crisil Research findings
A report by Crisil Research on Wednesday pointed out that the Centre’s scrappage policy is unlikely to have freight transporters queuing up to replace old vehicles with new ones. The scrappage volume of buses, passenger vehicles (PVs) and two-wheelers will be limited as well, according to the analysis.
The recently announced vehicle scrappage scheme’s offtake will likely skid on limited incentive and poor cost economics for trucks and the lack of addressable volumes for other segments, the Crisil research had indicated. Even as the policy provides owners ample incentive to scrap their old vehicles as the date to renew their fitness certificate nears, a closer look, however, indicates that the scrappage policy will find few takers among owners of buses, PVs, and two-wheelers, Crisil said.
The key question is whether transporters eligible for scrapping their trucks opt for it. Two scenarios were reviewed by Crisil to assess the benefits the scrappage policy will provide. In the optimistic scenario, the potential benefit of scrapping a 15-year-old CV, and its resale value, are similar. As the age of vehicle increases, the benefit reduces, while incentives increase. That’s because the resale value of a 20-year-old truck is less compared with a 15-year-old truck, so scrapping makes sense, Crisil explained. However, in the base case, the potential benefit is less than the resale value of the truck, so scrapping does not make sense. Even in the optimistic scenario, it doesn’t make sense to scrap a 16-year-old truck, the analysis shows.
The distance a truck covers annually decreases with age. Typically, a 16-year-old truck will ply 40,000 km while a 20-year-old one will traverse about 35,000 km or less. In a scenario where a transporter using a 16-year-old truck chooses to scrap it, he will most likely replace with a used truck, say, 10 years or older, instead of buying a brand new vehicle. That’s because, typically, his business requirements would warrant a vehicle that can be driven for 4-5 years.
But despite having a better and younger truck, the transporter won’t be able to charge higher-than-market freight rates. Consequently, the freight rate will remain around ₹40 per km (₹3.4 per tonne km) — the same as when using the 16-year-old truck.
Moreover, the annual distance covered would also remain unchanged, while the interest burden would rise because of the higher price paid to buy the younger truck.
As such, the transporter’s annual earnings will reduce by a drastic 20-25 per cent after incremental annual loan payments of around ₹1.2 lakh for an 11-year-old truck bought in a scrappage deal. Operational profit will be ₹1.9 lakh compared with ₹2.4 lakh for a 16-year-old truck.
“Thus, the financial burden after replacement increases significantly, hence even in our optimistic scenario, we do not see much traction for the policy from an incremental demand perspective. That’s unviable and small-fleet owners — who account for around 85 per cent of the total transporter segment revenue — are thus likely to stay away from scrapping,” Crisil said.
In the bus segment, many buses owned by state transport undertakings will have a life of over 15 years, while buses operated for intercity, staff, school and tourist segments typically do not have a life beyond 15 years and would thus be outside the ambit of the scrappage policy, the Crisil report noted. Hence, Crisil Research estimates 45,000 buses, largely owned by state transport corporations, could be scrapped and replaced. Assuming a three-year window, starting April 2022, the scrappage of 15,000 buses annually could result in 15-20 per cent incremental new bus sales — based on the average of 90,000 buses sold between fiscals 2016 and 2020. This, however, would depend on the State government’s wherewithal to purchase new vehicles and therefore will be a monitorable, said Crisil.
Benefit of safety
Given the incentives are not mandatory, the voluntary scrappage schemes might not be as effective as intended, said Arya. “Nevertheless, the policy could create some additional demand for both passenger and commercial vehicles and provide access to raw materials for the auto industry at an optimal cost,” he added.
“Aside from having a positive impact on demand and helping the environment, the scrappage policy proposes another benefit: “Safety”. Older vehicles with poor maintenance and less safety and comfort features are a hindrance to road safety. An automated fitness test for commercial vehicles is an effective step in this direction. Overall, the scrappage policy and infrastructure spends will trigger demand for the M&HCV segment,” Arya further stated.
“According to estimates, new investments of worth ₹100 billion are expected to flow into scrapping and auto industry. The policy could also help in creating 35,000 new jobs in this space,” said Arya.