SynopsisSince the beginning of the lockdown last year, small fleet owners had been facing utilisation issues due to low demand and unavailability of loads for trucks on return trips. Though there has been a revival in demand of late, they are struggling to stay afloat due to high operating costs and increased competition.
The pandemic has hit almost every industry hard. But one of the worst-affected sectors has been road transport, India’s lifeline when it comes to ferrying a variety of goods across the length and breadth of the country. And as the invisible enemy brought logistics to a screeching halt last summer, the domestic trucking industry, which carries more than 60% of the nation’s freight, took a nasty blow like none other.
Consequently, the sector has been witnessing a drastic change in ownership patterns of trucks over the last two years. While small fleet operators are getting increasingly marginalised, organised players have been quick to adapt to the new normal. They have been on an expansion spree by purchasing new trucks, upgrading technology, and adopting digitisation to cater to changing needs of the industry.
“In three to four years, there will be a massive change in fleet ownership patterns as small players may not be able to survive for medium-and-long haulage. They may turn truck drivers for large fleet owners — akin to small farmers working on the farms of others,” says SP Singh, senior fellow at Indian Foundation of Transport Research and Training.
Multiple factors beyond their control have pushed small fleet owners, or micro entrepreneurs who own and operate only two to five trucks for a living, into a corner. Together, these small players own around 85% of India’s total truck fleet. This community depends on brokers and intermediaries for loads and are often exploited. As per Indian Foundation of Transport Research and Training’s estimate, about 15%-20% of these entrepreneurs would have gone off the road in the last couple of years. Some of them, with say 10 trucks or fewer, have cut down their fleet sizes further to bring costs under control and stay afloat amid challenges.
“This [smaller fleet owners getting marginalised] is bound to happen,” says Sonesh Jain, founding member and entrepreneur in residence at logistics tech startup WheelsEye. He adds that rising fuel costs and inefficient and ineffective operations of small fleet owners have pushed them behind. Also, the ever growing presence of intermediaries is further shrinking their margins, making it tougher for fleet owners.
So, what are small fleet owners doing to keep their engines purring?
The cost burden
As a survival strategy, many small operators are shifting from bigger 12-14 wheel trucks to 6-to-10 wheelers as they cost less and there is better availability of loads for smaller vehicles. Further, they now prefer used trucks over new ones as the prices of BS-VI trucks are high across models and range between INR32 lakh and INR35 lakh just for the chassis and engine. Add to it fabrication costs, insurance, registration and permit charges, and the on-road cost of the vehicle goes up to INR40 lakh. So the equated monthly instalment (EMI) on loan per vehicle would be around INR80,000-INR1 lakh, making it unaffordable for small fleet owners who at best can shell out around INR50,000 in EMI per truck.
“The demand from small fleet owners for medium and heavy commercial vehicles has come down by 50% since March 2020. A lot of this demand is shifting to second-hand vehicles which are available at 50%-60% of the price of new ones,” says BM Patil, vice-president at Shriram Transport Finance, one of the largest vehicle financing companies in the country.
Since the beginning of the lockdown last year, small fleet operators had been facing utilisation issues due to low demand and unavailability of loads for trucks on return trips. Now, even though there is a revival in demand, they are struggling due to high operating costs and increased competition. Moreover, while road taxes and charges for fitness, permits etc. were deferred multiple times since last year, truck owners are supposed to pay all of this from November 1, 2021, onwards to get their vehicles back on the road.“On an average, the cost of bringing a truck back on the road costs INR3 lakh per truck. About 20%-30% of vehicles are now off the road because their owners do not have the funds to pay these taxes. Many will be off the market soon if they are unable to pay their EMIs for three-four months, increasing the chances of NPAs (non-performing assets),”says Ashok Goyal, director at BLR Logistiks.
Further, small transporters are at a disadvantage as they have to now compete with organised players.
For instance, truck owners per se are exempted from goods and services tax (GST). But if a transport company is a service provider and owns its own trucks, it can enjoy the benefit of input tax credit under GST. This is significantly changing the market dynamics in the favour of organised players.
“In the last two years, we have seen a substantial downturn in terms of small fleet owners. Those with three-five trucks, who used to attach their trucks with us and operate, could not sustain the pressures of the pandemic.”
— Akash Bansal, head of logistics at Om Logistics.Big boys go shopping
As the demand is recovering, large companies are investing in their own fleet because they are getting the benefit of input tax credit under GST. Also, the interest on vehicle loans has come down to as low as 6.5%-7 % from around 9% two years ago. Hence, fleet strengthening by large operators is eating into the demand in the open market from where the small players get their loads — thereby further marginalising the latter.
The GST on new trucks is in the highest slab of 28%. Under GST, transporters can claim input credit for the tax they paid while purchasing capital goods for their company. There are two sets of taxes under GST. One is the reverse charge mechanism which is 5%, and the other is forward charge mechanism which is 12%. Small fleet owners follow the reverse charge mechanism. This means that if an operator charges its customer INR1 lakh for a trip, the customer is supposed to pay 5% GST, directly to the government. As per the forward charge mechanism, big operators collect 12% from the customer, take the input credit and then pay to the government whatever is payable.
“Somebody who has bought his own trucks and enjoys a 28% tax credit on the capital cost has a big cushion in hand and hence can quote a lower price to the customer. This has put small transporters or fleet owners at a disadvantage,” says Mahendra Arya, President at All India Transporters Welfare Association. Also, the amount of paperwork required to claim input credit is huge, something that small players can’t manage.
Many companies are augmenting their fleet. BLR Logistiks has added 200 trucks over the last two months, taking its total fleet size to 500. Given that BLR outsources about 4,000 trucks from the vendor market on a monthly basis, the Mumbai-based company has the capacity to add more trucks to its fleet.
Om Logistics, a major player in the diversified express logistics market, has bought about 100 trucks in the last six months. The company follows an asset-heavy approach, owning about 50% of the 5,000-odd trucks it operates on a monthly basis. It works with truck vendors on long-term leased and attached trucks.
“In the last two years, we have seen a substantial downturn in terms of small fleet owners. Those with three-five trucks, who used to attach their trucks with us and operate, could not sustain the pressures of the pandemic,” says Akash Bansal, head of logistics at Om Logistics. The number of vendors that used to attach their vehicles with the Delhi-based company has come down by 20%-25%, making a compelling case for buying trucks.
Truck availability is very erratic and often vendors charge 20%-30% higher than the market rate. Since the small timers have shed their vehicle loads, there is a crunch at some locations and abundance at other places. Freight rates are tied to supply and demand of trucks.Another rationale to buy trucks is that the compliance requirements have gone up for some customers, making it difficult for transporters to provide the desired service levels. That’s why V-Trans bought 43 new trucks in the last six months. The Mumbai-based company operates in both full truck-load and part truck-load businesses and works with about 1,000 outsourced trucks while owning 225 trucks.
Embracing technology and efficiency
According to Singh of Indian Foundation of Transport Research and Training, the demand for modern containerised trucks has been growing, thereby replacing the need for open-body trucks. Customers want the trucks to be fitted with all gadgets such as rear and front view cameras, advanced vehicle tracking systems, and so on. For small fleet operators with two-five trucks, it is becoming increasingly difficult to provide the quality of service demanded by corporate clients.
Meanwhile, the big players are tightening their processes and getting tech savvy to reduce the overall cost of operations and improve vehicle turnaround time and the number of kilometres travelled. For instance, instead of buying diesel trucks, V-Trans bought mostly CNG vehicles to cut fuel costs. It also invested in five-year annual maintenance contracts (AMCs) with manufacturers to reduce the headache of vehicle servicing expenditure. The company has also invested in tubeless tyres for all its trucks to get 3%-4% higher mileage per vehicle. Moreover, it uses nitrogen in tyres instead of normal air to realise additional cost savings of 2%-3% percent of the tyre costs because they have higher running capacity. The company has a nitrogen plant at Vapi, Gujarat.
“Efficiency is the main game now. If you have your own trucks, you need to manage return loads very well,” says BLR Logistiks’ Goyal. He says that his company is focusing on evolving technologically. BLR’s operations, accounts, and tracking, are all now run on a single software. With live tracking of truck movement, the company is able to get loads for its trucks on return trips from the nearest possible location.
Another big shift is also underway in the domestic trucking industry. A majority of fleet owners continue to work with intermediaries such as Gati, TCI Express, or Safexpress by attaching their fleet. However, many are now more inclined towards working directly with manufacturers or e-commerce companies by entering into contracts valid for three-four years as such an arrangement helps them achieve better realisations.
“This is a very important development. Two years back, the contractual business was around 25% of the total truck fleet. Now it is around 35%,” says Singh.
For big fleet owners, although business is growing because of the recovery in demand, the bottom line is a bit compromised due to multiple factors such as higher diesel prices, higher rates for hired trucks, and rising labour costs. After diesel, which forms 55% of the total trip cost, toll fees is also one of the highest component today, making up for 17-18% of the total trip cost. Similarly the expenditure on drivers is nearly the double for companies as their salaries have components such as provident fund, insurance, and gratuity. Small operators, on the other hand, pay drivers for each trip.
The bottom line
For many companies, buying more trucks will depend on freight pricing in the new contracts. “If we are not able to get better prices, profitability will be challenged, because buying BS-VI vehicles is a huge investment,” says Manish Gupta, executive director at Express Roadways, which has 400 self-owned trucks and plans to buy another 200 in the next one year.
However, fleet modernisation is not just about adding vehicles. Modern fleets need to be managed as per their prescribed standard operating procedure matching international standards as demand for logistics from e-commerce and international brands continues to grow in India.
(Graphics by Sadhana Saxena)
(Originally published on Dec 10, 2021, 12:01 AM IST)
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