TAFE in the Tractor Industry: Strategic Insights
Faculty Contributor: Rejie George Palathitta, Assistant Professor
Student Contributors: Saurabh Bhansali, Anshul Gupta, Hitesh Tak
The Indian tractor industry is currently at a stabilized stage and a lower growth is expected over the next few years. However, there are lots of geographical and sector-wise differences in the expected growth. This article explores how Tractors and Farm Equipment Limited (TAFE) can exploit these opportunities by following a multi-pronged approach. This would include getting into joint ventures and acquiring other tractor companies both in India and abroad, scaling up its operations in Western and Southern India, improving its presence in the > 40HP segment and optimizing its dealer network.
The Indian tractor industry is the largest in the world and accounts for one third of the global production. Having grown at a rapid pace over the past few years, the industry has stabilized and is expected to grow at a much more modest rate in the future. Structural growth factors like irrigation potential, credit quality, penetration levels, and demand for farm power per hectare are not significant enough to support a double digit growth rate in the future. Hence, for a player like TAFE which is highly dependent on farm equipments for its total turnover, several alternative strategies need to be explored to beat the competition and register a satisfactory growth rate in the near future.
Indian Tractor Industry- An Overview
Current capacity of the Indian tractor industry is 400,000 units while the sales stands at 310,000 units per year. Major players include M&M Ltd, Tractor and Farm Equipment Ltd, International Tractors Ltd, Punjab Tractors Ltd and John Deere. 93% of the demand comes from 12 major states, of which UP is the largest market1. While agricultural growth is the primary demand driver, in recent years, allied usages of tractors and application for haulage have also been driving demand.2
Salient features of the Indian tractor industry today are as follows:
- The Major export markets for Indian tractor industry are USA and China (80% - USA).
- Adequately penetrated in volume terms but under penetrated in Horse Power (HP) terms.
- CAGR in volumes @ 10 % over past four decades with seasonal variations.
- Expectation by 2010: Domestic sales - 350,000 units p.a. and Exports - 60,000 units p.a.
- Long run expected CAGR - 5-7%.
- Credit availability, fuel costs and monsoons are the largest purchasing influencers.
- The tractor markets of Karnataka, Maharashtra, Tamil Nadu, and Gujarat are growing ~ 50%.
- The share of high HP segment (>40 HP) tractors in the total sales (including exports) has been rising and this trend is expected to continue.
Tractors and Farm Equipments Ltd.
TAFE is a US $750 million tractor major incorporated in 1960 at Chennai in India, in collaboration with Massey Ferguson (now owned by AGCO Corporation, USA)3. TAFE acquired the Eicher tractors business, its engine plant at Alwar (Rajasthan) and transmissions plant at Parwanoo (Himachal Pradesh) through a wholly owned subsidiary, TAFE Motors and Tractors Limited. A member of the Amalgamations Group of Chennai, this company has four plants involved in tractor manufacturing. One of the top five tractor manufacturers in the world, TAFE is also involved in making diesel engines, gears, panel instruments, engineering plastics, hydraulic pumps, plantations and passenger car distribution through other divisions and subsidiaries.
TAFE exports to 80 countries with major markets being Bangladesh, USA, Afghanistan, Yugoslavia and Sri Lanka. It has presence in three Segments – Small (<30 HP), Medium (31-40 HP) and Large (> 40 HP). TAFE also has an ongoing collaboration with AGCO Corporation, one of the world's largest manufacturer and distributor of agricultural equipments.4
Attractiveness of Indian Tractor Industry
The Indian tractor industry is analysed using Porter’s five forces framework, where the five forces are rivalry, buyer power, supplier power, barriers to entry and the threat of substitues. Bargaining power of both buyers and suppliers is found to be low, as they are fragmented. Rivalry among existing firms is also only moderate as the key is the distribution network and the major companies have carved out different segments and geographies to operate in. With the opening up of the Indian market and the removal of restrictions on imports coupled with stagnating mature markets, the threat of new entrants, though moderate, is more than it was in the past.
The industry is reasonably attractive with low buyer and supplier power, low threat of substitutes and only moderate threat of entry and substitutes.
Going forward, it can be safely assumed that industry has entered into a mature phase which will result in a slowdown in the demand from 20% CAGR (2002-06) to 5-7% over the next five years. Sales will be characterized by a greater number of repeat customers and high replacement sales. A low capacity utilization of 60-70%, limited new product introductions, technological breakthroughs, and stiff competition from international players will result in greater consolidation.
A spurt in the demand for LP tractors by golf courses, hotel & airlines industry may force companies to concentrate on aesthetics, noise reduction, and comfort aspects. Increasing prosperity in the rural areas leading to more haulage needs and large scale bio-mass cultivation can propel firms to design a multipurpose vehicle to take care of farming, transportation, and alternate power source needs.
Another observation is that high capacity utilization leads to better operating margins in this industry and companies like International Tractor Limited have proved this. The product offerings by the major players are largely homogenous. This means that differentiation is possible only through a diversified portfolio or provision of better services like wider distribution network and financial tie ups with banks.
Where Does TAFE Stand?
Low capacity utilization is the Achilles' heel of TAFE. The present capacity utilization of the company is about 70%. Prior to Eicher's tractor division acquisition, it was about 62.5%. With the industry expected to grow at a CAGR of 5-7% over the next 5 years, it will take a long time for the company to achieve full utilization if it grows at the expected CAGR. So the company needs to find ways to achieve 100% capacity utilization at the earliest.
Large dealer network, 500 in all, is resulting in high blockage of funds in channel inventory. Though large dealership means greater penetration considering that 70 % of the consumers are retail customers, there is need of better networking to optimally utilize the funds.
The Company is a very small player in the high margin large size tractor segment (Above 41 HP). Even geography wise, TAFE has limited presence in states of Western and Southern India which are expected to be the major growth drivers over the years to come.
Despite the fact that the company's website quotes the figure of exports to 80 countries, 80+ % of its exports are to low margin regions such as Nepal and Bangladesh whereas 80 % of the total Indian tractor exports are to USA which is a high margin region. Also TAFE has limited offerings in “Hobby” tractor segment.
Strategic Options Available for TAFE
Based on the earlier analysis, of TAFE’s standing in the Indian tractor industry and industry features, the following options are recommended.
Joint Ventures, Acquiring Firms in India and Abroad
The tractor industry is in a mature phase today. The demand has slowed down considerably vis-à-vis the past few years. Hence, there arises a need to grow through inorganic means. With M&M acquiring Punjab Tractors and TAFE acquiring Eicher, the total number of players in the Tractors market in India has decreased considerably. Hence, going forward, acquiring smaller players like Escorts could be an option to further reduce competition & maintain decent operating margins. Acquisitions abroad would help in reducing the dependence on the vagaries of the monsoons as well as the domestic market. Also, joint ventures with or acquisitions of foreign players shall provide access to their Research & Development facilities which would help in offering better quality products in the domestic market as well as improve reach in overseas markets. Besides the above, access to the acquired player's dealership network, technology and core competencies would help in consolidating their presence in both domestic as well as overseas markets.
Improving Presence in Large Size (>40 HP) Tractor Segment
The large HP segment (>40 HP) is expected to grow at a much faster pace as compared to the other segments. TAFE being a very small player in the high margin large size tractor segment needs to improve its presence so as to improve its overall profit margins. Also enhancement of its product offerings in the large size tractor segment would help TAFE improve its capacity utilization besides establishing a presence across all segments in the tractor industry.
Improving Regional Presence in Western and Southern India
The major chunk of growth is expected to come from the relatively under penetrated states of Western and Southern India. TAFE needs to devise a strategy to successfully capture a major part of the potential increase in the tractor sales in these regions. Currently, it lags behind the market leader, M&M in these regions by a substantial margin. Hence, the challenge for TAFE is to successfully bridge this gap through its diversified product offerings and vast distribution network.
Optimizing Dealer Networks and Improving Working Capital Management
A larger dealer-network than necessary underlines the need for TAFE to optimize its dealership network and reallocate dealers as per customer density. Optimal working capital management would in turn help in improving the wafer thin operating margins of TAFE in the slow growth & mature tractor industry.
Tapping the Market to Raise Funds
Debt/Equity ratio for TAFE is 0.22, much lower than the other listed players in the Industry. This gives TAFE sufficient scope to raise funds from the market to be utilized for funding its acquisition plans, entering the high HP segment as well as focusing more on export markets through offerings in areas such as hobby farming. The funds raised can also be utilized to fuel its diversification plans into farm related agricultural implements and emerging areas such as Airports, Hotels, Golf courses, etc.
Recommended Future Action Plan
As discussed above, an effective plan of action calls for the introduction of models in 41-50 HP segments to increase capacity utilization and fine tuning the strategy based on field feedbacks. The distribution network needs to be leveraged to cater to the under penetrated areas and proper plans have to be devised to come up with export oriented products.
At the functional level, this calls for sensitizing the R&D staff to export demands and concentrate on the finish, power and fuel efficiencies rather than just low cost. More resources need to be allocated to the medium and large HP segments. Dealers and Sales force for medium HP segment should be geared to address a mature and standardized market to push the products while those for large HP segment should be responsive to customers' specific needs and have a dedicated production line for them.
There is an obvious challenge of maintaining two different lines of business5 (Medium and High) at different stages of evolution (Mature & Growing) and catering to different markets (North and East India vs. West, South and the export market) in this new strategy, in addition to the search for a company with good R&D base and marketing network abroad to face competition of technologically superior products.
The management style for large HP segment should be 'Entrepreneurial' so that top management is involved but at the same time speed is ensured without worrying much about administrative constraints. While management style suited for medium HP segment would be that of an 'Administrative Manager' so that a smooth integration of the acquired company (Eicher and any future acquisition) is ensured without creating organizational upheavals.6
As the small HP segment is losing its traditional market, some people in sales will be affected and the management needs to prepare them for assignments in other segments or equip them to address new customers in the small HP segment i.e. hotels, airports & golf courses. A modified incentive structure to focus more on sales of tractors which generate higher margins per unit may do the trick.
Conclusion
TAFE has the necessary strengths to succeed and outsmart the competition in the tractor industry in India. It is present across all the market segments, has a vast distribution network, and is financially sound. So, the major challenge for TAFE is to exploit its current strengths and channelizing them in the right direction as discussed in the recommended plan of action.
Contributors
Rejie George Palathitta is an Assistant Professor in the Corporate Strategy & Policy Area at IIM Bangalore. He holds a PhD in Business- (Strategy & Finance) from Tilburg University, Netherlands, Masters in Business Economics from Cochin University of Science & Technology, Kerala & Bachelors Degree in Economics from St. Albert's College, Kerala. He can be reached at rejieg@iimb.ernet.in
Saurabh Bhansali (PGP 2007-09) holds the Chartered Accountancy Degree & is a Commerce Graduate from H.L.College of Commerce, Ahmedabad. He can be reached at saurabhs07@iimb.ernet.in
Anshul Gupta (PGP 2007-09) holds a M.Tech. in Electrical Engineering from Indian Institute of Technology, Kharagpur and can be reached at anshulg07@iimb.ernet.in
Hitesh Tak (PGP 2007-09) holds a B.Tech in Marine Engineering from Marine Engineering & Research Institute, Kolkata and can be reached at hitesht07@iimb.ernet.in
Keywords
Strategy, Automotives, Agricultural, India, Tractors, TAFE
References
- Jain, Ramesh C., 'The Tractor Industry in India – Present and Future', http://www.unapcaem.org/Activities%20Files/A0611/P-in.pdf. Last accessed on March 9, 2009.
- Crisil Research, 2007, 'Tractors Update', July 2007, http://www.crisil.com/research/research-industry-information-report-tractors-contents.pdf. Last accessed on March 9, 2009.
- TAFE Website, http://www.tafe.com. Last accessed on May 12, 2009.
- TAFE Website – Company History, http://tafe.com/companyHistory.htm. Last accessed on May 12, 2009.
- Hamermesh, Richard G., 'Note on Implementing Strategy', Harvard Business School Note 383-015.
- Christensen, Clayton M., and Tara Donovan, 'The Process of Strategy Development and Implementation', Harvard Business School Working Paper, No. 00-075, 2000
