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Chairman's Speech 2002

Friday, July 26, 2002

Ladies and Gentleman,
I have great pleasure in extending to you a warm welcome to this fifty third Annual General Meeting of the Company. The report of the Directors and the audited accounts for the year ended March 31, 2002 have been with you for some time and with your permission, may I take them as read.
Review 2001-02
The year under review has been an exceptionally difficult one for the world at large and equally so far India where GDP growth rate for the second consecutive year was well below expectation.In this depressed scenario, overall demand for automobiles was stagnant with the commercial vehicle segment registering a decline of about 3%. Within this segment, demand for medium and heavy vehicles, the mainstay for your Company, increased by only 2.5%. However, the distribution of demand acrossthe country has been different from earlier years and contradicting past trends, with negative growth in market segments where your Company dominates, which set a stiff challenge to the Company. The Southern and Western markets for medium and heavy duty vehicles declined by 15.9% and 6.8% respectively whilst the bus segment, which held firm through the worst of recession, fell by 33.6 %. What helped us surmount this challenge was the increasing growth rates your Company secured in the geographical and product segments that registered healthy growth. The increased market reach we have established in the Northern region gave us the platform for increasing market shares in that region. Our pioneering presence in the multi-axled vehicles and tractor-trailers, both of which grew at the expense of the traditional two-axled vehicles, was yet another strength that buoyed our performance. Despite a fall of 8.6% in the sale of commercial vehicles, thanks to a favourable vehicle mix and improved off-take by the defence sector, we could more than maintain our top line. By consolidating and improving upon the efficiency gains in the past years, your Company improved its profit before tax by 30% and could maintain the bottom line despite a substantially higher tax provision than in the previous year.
Prospects 2002-03
The first quarter of the current fiscal has witnessed a steady though not spectacular growth in the commercial vehicle segment. Many factors have contributed. The war clouds have receded and there are multiple indicationsthat the Government's focus is back on the economic agenda. The disinvestment programme has gained somemomentum and latest indications are that Government will take up the sensitive labour reforms. The economy shows some signs of revival. Though there is anxiety about delays in the monsoon in some parts of India, recent trends in agricultural and industrial production, tax collection, exports and a drop in nominal lending rates together provide reason for optimism, with a GDP growth of 5.5% in prospect. Higher demand for cement and steel indicates a pick-up in construction industry, with a somewhat higher growth rate for cement suggesting road construction as the main propellant. Meanwhile, some of the State Transport Undertakings who had deferred fleet replenishment last year are likely to resume purchasing activity. Following the Supreme Court's reaffirmation, the uncertainty in respect of CNG-powered vehicles in the National Capital Region (NCR) seems to be over. Your Company is currently executing a fresh order received from the Delhi Transport Corporation for the supply of 500 CNG bus chassis
Modernizing Indian Road Sector
Our Annual Report offers you a bird's eye-view of the changes occurring and expected in the commercial vehicle industry, together with the Company's plans for new product introductions. Each of these products represents new strides in the on-going modernization of commercial vehicle technology. Prompted initially by successive emission regulations and of late by customers' search for greater efficiency of operations, the Indian commercial vehicle has been changing for the better, especially over the last decade. The vital innards of the vehicles, upgraded through newer product and process technologies, are today contemporary by world standards. If we factor in the operating context, practices and duty cycles, the life factors of Indian commercial vehicle are far superior to what any other class of vehicle offers. The transport economics of the country, which are quite unique, dictate the technology that the market absorbs. Simultaneously the manufacturer can and should expose the customers to modern technology options, which acts as a preview and can prime up the market. Your Company, for instance, pioneered tractor-trailers over two decades ago and enjoys a dominant share of this specialised segment but road limitations kept them out of favour till recently. The Indian manufacturers have the technology to offer modern truck cabins and bodies as also bus bodies but the higher excise penalty negates their participation and induces the customer to turn to the unorganized sector. Another instance is the current insistence on registration of a prime mover and a maximum of two trailers as a single unit. Complete flexibility to use any prime mover with any trailer will enhance the capacity utilization of trailers and improve operational efficiencies, thus facilitating technology induction. In other words, while the technology is available, opportunities have been rendered sub-optimal. This is the very reason that despite the opening up of the automobile sector, the commercial vehicle segment has failed to attract many new players. It also has the effect of thwarting the aspirations of Indian manufacturers to become global players. In short, the country is denied the benefits of globalisation. What changes will facilitate modernization of the commercial vehicle industry? How can we maximize the benefits through accelerated modernization? I believe that having covered some ground in vehicle modernization on the back of emission regulations, the time has come to enlarge the objectives and concurrently drive for ecology, safety and efficiency. The three objectives are concurrent and sufficiently inter-linked, with substantial common ground in terms of required actions. This makes our experiences with regard to emission regulations ¿ undoubtedly the defining force of the last decade ¿ a live reference and guide for future action. On the positive side, the country opted for accelerated emission regulations to make up for a late start - vehicle technology and oil quality kept pace with the requirements and deadlines. Yet, barring geographical pockets where a concurrent set of accompanying actions were taken, we will be hard pressed to justify the economic cost for vehicle and fuel upgradation in terms of the difference it has made to air quality.
Where did we go wrong?
I have, on many occasions, drawn attention to the dangers of treating new vehicle technology as the sole solution and the focus that was needed to be placed on in-use vehicles as well as on concurrent parallel actions, so as to derive the full benefits of emission regulation. The sub- optimal benefits are primarily on account of the fact that vehicles of pre-1991 vintage, produced prior to the emission regulations, continue to ply and pollute. In the case of commercial vehicles, more than half of the total population belongs to this category. What is more, these vehicles cost the country more through higher fuel consumption. Yet, in the market, while vying for freight, these fully depreciated vehicles hold an undue advantage against the new, more modern and fuel-efficient vehicles and in the process, denying the society and the country the intended benefits of emission regulations implemented at considerable investments. An aging, ill-maintained vehicle population comes loaded with added penalties ¿ of poor safety on the roads and of inefficient, unreliable service to the users. The Inspection and Certification (I&C) programme may sound a rational solution but the laxity of the system will defeat the process. In any case, beyond a certain age, vehicles deteriorate beyond the point of redemption to meet safety and environmental standards required by the I&C system. Retrofitting is technically not feasible for all old vehicles and in any case can at best address emission considerations and not vehicle safety. It is this logic that prompted several developed countries, based on data yielded by their I&C systems, to adopt fleet modernization programmes. For India, too, the first step towards reaching global standards is to correct the unhealthy and debilitating profile of the commercial vehicle population.
Project Modernfleet
Society of Indian Automobile Manufacturers (SIAM) has already submitted to the Ministry of Heavy Industries, a comprehensive proposal titled "Project Modernfleet". Essentially aimed at an accelerated improvement in the environmental profile of in-use vehicles, it proposes a combination of incentives and mandate to retire old vehicles, starting with the oldest. As an additional disincentive against retention of old vehicles, SIAM has suggested that road tax and insurance premium rates be fixed in inverse proportion to age of the vehicle Here, I would like to add one suggestion which stems from the fact that the Indian truck, as a capital good, perhaps has the fastest wear out rate. A 100% depreciation for commercial vehicles will be a good incentive for leasing activity that can channelise the cost-effective funds with banks and NBFCs to this priority sector. I can only hope that the Government would take urgent action in this regard as Project modernfleet, when implemented, will be of far-reaching impact and by striking at the root of the problem, will facilitate a holistic improvement of the road transport sector
A holistic modernization
A holistic modernizationof the road transport sector will bestow the benefits of cost efficiency, safety, resource conservation and along with it, faster economic growth and accelerated eradication of poverty. Road transportation and economic growth have a two-way cause-and-effect relationship. On the back of unprecedented 6 ~ 6.5% annual growth rate in GDP in the last decade, the country's ninth five year plan targets an annual growth of 7.4% over the next ten years. The road transport sector, which virtually gives the economy its wheels, can make a huge contribution to meet this raised target level. The Rakesh Mohan committee report of 1996 put the economic losses from retarded fleet movement at an estimated Rs 12000 ~ Rs 30000 crores. This translates to 0.5 ~ 1.3 % of our annual GDP! What causes this enormous leakage of national wealth are the various elements that constitute the road transport system and its operating environment which include the road infrastructure and a plethora of governmental and other agencies. They have inter-linkages that cannot be severed and hence have to be modernized simultaneously with the vehicles themselves.
Road infrastructure
Contrary to popular belief, India does not lack highway network, quantitatively anyway. Road-to-land density is comparable to large sized global economies. Yet, only a small portion of our national and state highways are multi-lane, making them constrictingly thin arteries. Then there are geographic inadequacies. The size of the national economy can be boosted by providing adequate access for some of the border States of North and North-East to the country's major economic centres. Close to three lakhs rural villages are partially excluded from the main stream, as they do not have all weather access and social services. Armed by a Central Road Fund, the National Highways Authority of India (NHAI) plans to widen 13,000 kms of national highways. The Golden Quadrilateral project is path breaking for its unprecedented scale and equally for setting new standards in efficiency and speed, thus demonstrating what a government agency can achieve even with a frugal structure, by offloading execution to the private sector. The Golden Quadrilateral project is an empirical example of how infrastructural projects can create a domino effect in demand, including for commercial vehicles. Looked at differently, it shows the enormity of the unfinished task: creating a countrywide network of super highways of global standards.
Road and traffic management
Policy and funding neglect, together with lack of accountability has been responsible for the poor condition of roads already built. Poor roads and ill- maintained old vehicles negatively impact each other. At the same time, any mismatch in the pace of modernization between the different elements can be counterproductive. For instance, till commercial speeds and throughput improve dramatically, the country may pay a high price in terms of road safety and maintenance for high productivity vehicles when operating economics dictate overloading to offset the high acquisition cost. Global experiences show that traffic efficiency can be improved by as much as 45% through scientific traffic management alone. There are documented cases in India, too. In our country, traffic speeds suffer from a wide vehicle mix, lack of synchronized signals and old and narrow bridges, to name a few causative factors. It augurs well that already timesaving, toll-controlled expressways and bridges are finding favour with road users. The time is ripe to maximize cost recovery from users. This will facilitate entry of private sector and IT enabled efficiencies. The toll systems at express highways will also effect filtering out of overloading. Overall, there will be pressure for stricter controls so that the surface quality is not lost through overloading.
The after-market support network is also set to change, what withhigher level of technology sophistication inevitable with the implementation of Euro 3 norms. This responsibility will be answered by sophisticated service points, authorised and quality controlled by the manufacturers. As technology gains in sophistication, there will be greater need for scientific driver training. A stricter licensing system will become inevitable. Organised sector, including the manufacturers I am sure, will respond to the opportunity ¿ and responsibility ¿ to set up scientific driver training schools such as the one your Company established seven years ago at Namakkal.
VAT regime
For long the Indian commercial vehicle industry has suffered from the cascading effect of multi-stage taxation. The principle of Value Added Tax (VAT) is unexceptional. However, there are fears and worries on the incidence of CST in the proposals. As is well known, the manufacture of commercial vehicles involves the natural movement of raw materials, sub-assemblies, aggregates and the vehicle itself from and via various part of the country, the routes determined by proven economic efficiencies. Continuance of CST will mean continuance of the debilitating cascading effect. Inspired by global examples, the industry had anticipated a uniform VAT rate across all States, and a rate that will reduce the overall tax burden. It would now seem that instead of attempting rationalization of taxation, the States are targeting high rates for higher revenue generation. Unless these anomalies are corrected before implementation, VAT holds little meaning.
Integrated modernization of the road transport sector will boost our economy by allowing it to play its current role more efficiently and reliably. It will help trim the wastage and waiting along the supply chain. It will slash transit time between centres of production and centres of consumption, thus enlarging markets for producers and choices for the consumers. It will also raise the domestic market to techno-commercial contiguity with vast regions of the global market. The commercial vehicle industry will then be able to deliver in full on its promise to be a growth engine for the country's economy.
Mr G Boschetti has resigned from your Board in March consequent upon his taking up new responsibility as Chief Executive of Fiat Auto, the car-manufacturing arm of Fiat. I am sure you will join me in wishing him well in his new assignment. I would like to place on record the tremendous contribution that Mr. Boschetti has made to your Company since 1987 and the global perspective he brought to bear on our product technology. Mr. R. Sorce, whom you know, has been appointed in his place. Mr D J Balaji Rao, with his rich knowledge and experience, was persuaded to continue on our Board on his ceasing to be a nominee director of ICICI. We have recently received letter of resignation from Mr. P A Balasubramaniam, a nominee Director of LIC, consequent upon his relocation to Delhi as a Member of the Insurance Regulatory Authority. We wish him well in his new assignment. I would like to place on record our gratitude for the guidance and contribution made by Mr. Balasubramaniam during his tenure on our Board. At the meeting of the Board after this AGM, we shall be appointing Mr. S R Krishnaswamy, Executive Director, LIC, as nominee Director of LIC in place of Mr. Balasubramaniam.
I take this opportunity to express our thanks to the Central and State Governments, the Banks, Financial Institutions and various quasi-government and private agencies for their continued support to the Company and its operations. My special thanks to our customers and the road transport community, dealers and vendors for helping the Company turn in a good performance. The management of the Company is privileged to receive the continued trust of the shareholders, for which I must express our gratitude. I would like to place on record our appreciation for the guidance and technological support from our principal shareholders, the Hinduja Group and IVECO, acting through LRLIH Limited. By turning in improved performance year after year, the employees of the Company have proved their mettle and deserve full appreciation for their invaluable contribution
Yours Sincerely,
Mr. R . J. Shahaney
Chairman, Ashok Leyland Limited