The demand for tractors in India is dictated by several factors namely monsoons, availability of irrigation and credit, farmer’s disposable incomes, cropping patterns, and the minimum support price for food grains.
The major factors which are in demand for tractors in India, have been found to be:
i. Gross irrigated area,
ii. Real price of tractor,
iii. Demand for tractors in the previous year, and
iv. Area under high yielding varieties.
But, in some regions like Punjab, it is the cropping intensity, cultivated area, and credit availability along with demand for tractors in the previous year and social considerations which determine demand for tractors. Companies have expanded capacities in expectations of good demand.
Influenced by the earlier growth figures in tractor industry, at least three new players, Bajaj Tempo, New Holland, and Case of USA (with M&M) have set up their shop in India. The nature of the Indian tractor market is described in terms of competition, buyer behaviour in tractors, and the marketing strategies of firms with a view to understand the market for business managers and trainees.
The tractor industry has performed steadily, with a compounded average growth rate (CAGR) of 18 per cent over the last three years. The larger availability of agricultural credit (almost 90 per cent of the tractors sold to farmers are financed by banks), coupled with good monsoons for the ninth consecutive year, good crops, and procurement price, has virtually put the whole tractor industry on a buoyant mood.
The tractor market segments can be in terms of the power configuration. In India there are five categories based on the engine horsepower (HP)—under 20 HP, 21 -30 HP, 31 -40 HP, 41 -50 HP and over 51 HP. Of these five sub-segments within the industry, as much as 61 per cent (some say, even 80 per cent) of the total sales is accounted for the 31-40 HP segment.
In recent months, changes seem to be taking place. Demand for higher HP tractors are expected to increase with the choices shifting to the high-powered tractors since they can be used for a variety of purposes. The demand for small HP tractors were started, when the farmers made primary transition from bullocks.
Later on, farmers moved into higher HP tractors. Two factors are considered responsible for this. Firstly, there has been erosion of the huge price differential between high and low HP tractors, following a revision in the excise duty structure by the government. Secondly, there has been a shift in geographical demand patterns.
Till recently, maximum number of tractors have been sold in the belt consisting of Punjab, Haryana and Uttar Pradesh (60 per cent) mainly due to the fertility of land and the resultant affluence of farmers. Further, there are specific geographical segments for particular brands and also the HP of tractors in each state varies depending on the cropping pattern and the size of land holdings.
But, the industry sources believe that the present markets in the north have reached a saturation point, with growth rates in the past hovering around 1-2 per cent. Also, most of the sales in this region are replacement sales. First time buyers are comparatively insignificant.
Even if farmers buy new tractors, it is mostly to obtain a loan from a bank so as to use it for other purposes, as most of the new tractors are directly taken to the ‘tractor mandis’ and sold at a discount of as much as Rs. 50,000 per tractor. The tractor mandis are the place where old and new tractors are sold. And it is a common weekly affair in most of the towns of Punjab, especially in the cotton belt.
Thus, there are daily, weekly, and fortnightly markets for the sale and purchase of new as well as second hand tractors in various market towns of the state, where thousands of farmers participate and sell or buy tractors (primary survey).
In a state which today has more than 3.87 lakh tractors accounting for 1/4 of the total population of tractors in the country with just 2.5 per cent of cultivated area, this phenomena is both encouraging as well as disturbing.
With only about 11.17 lakh operational holdings in the state, it means that every third holding in the state is equipped with a tractor. Added to this, is the fact that more than 70 per cent of the farms are below 10 acres each.
There are more than a dozen tractor markets, mainly, in the cotton belt of the state, which mainly facilitate buyers and sellers of second hand tractors in quick transactions. There are different reasons for the sale of old tractors, which in turn relate to the larger agricultural economy of the state.
The major reasons for sale of tractors in these markets are as follows:
1. The non-viability of the tractors due to the small size of the holdings,
2. Domestic financial crisis,
3. Repayment of bank or other loans,
4. Purchase of land,
5. Change of model/brand/horse power of the tractor,
6. Lack of business for tractors due to their overpopulation and competition,
7. Sale and purchase of tractors as a business proposition, and
8. Change of occupation.
The buyers are satisfied with the operations of these markets as they find a ready market where they can liquidate the tractors and other equipment in a short time to meet the exigencies. However, only a small proportion of those who sell tractors, bring another one from the tractor market (primary survey).
The operations of these markets are in the hands of a number of informal groups which are known as “Mandis” in each market. They are nothing but collectivities of few individuals (5-15) who operate as commission agents, for inside as well as outside the market.
These groups generally lease in land for the market, outside the town, on an annual basis and share this cost among them. This is the major cost. Other costs are working costs for facilities like tents, chairs, etc. About a few hundred tractors in small, and a few thousand tractors in bigger markets are brought every time (weekly or fortnightly) a market is held, and a few (20-50) are sold every such time.
The tractor model and price are displayed on the tractor to facilitate buyer-seller interaction. The commission agents also provide other facilities like space for parking the tractors, and chairs and tents for the farmers.
On every transaction, the agents charge Rs. 300-500 up to a transaction of Rs. one lakh and Rs. 600-1,000 on a transaction of above Rs. one lakh each from the buyer as well as the seller. The payments are made either on the spot or within a week after paying security. The commission agents are responsible for ensuring the payments (primary survey).
Besides the facilitation of business among farmers at one place, which lowers search and transaction costs, these markets also generate employment for those who cater to the needs of the people, assembled in the market.
Further, since these markets supply second hand tractors, small and medium farmers are able to mobilise money to buy these tractors, which are of low cost and easily available; besides being relevant for these classes of farmers.
Recently, even the tractor sales agencies have realised the value of these markets and have started displaying their new models of tractors in these markets so that farmers are made aware of their features. Besides, the new product is publicised among the potential buyers.
These markets are totally unregulated by any government agency, but they function fairly and efficiently as far as farmers are concerned. Only in one of the markets, the District Collector has allowed the union of these Mandis to issue licenses (identity cards as commission agents for tractor sale and purchase) to the members of the mandis. Also, the buyers and sellers are made to pay a red cross fee of Rs. 50 per transaction each (primary survey).
The Indian tractor industry has been traditionally dominated by six major players. But, among them, it is quite competitive as indicated by the concentration ratios (55 for 3-firm and 68 for 4-firm). Mahindra & Mahindra, TAFE, Escorts, Eicher, HMT and Punjab Tractors Limited are major players.
Apart from these, there are smaller ones such as Gujarat Tractors and Haryana Tractors. There are also couple of players in this unorganised sector mainly concentrated in the Punjab-Haryana belt, which specialise in the used tractors industry. The overall market leader among these old guards is M&M, with a market share of 27.52 per cent.
The company has its share of presence across the three major categories of 25 HP, 35 HP and 45 HP. (It has yet to establish itself in the higher HP ranges). Moreover M&M has a strong presence in the western and southern markets consisting of Maharashtra, Gujarat, Andhra Pradesh, Tamil Nadu and Karnataka.
Closely on the heels is TAFE which has a significant presence in Tamil Nadu, Kerala, Gujarat and Rajasthan. The Massey Ferguson brand has a presence across the three major HP segments which have the highest sales volumes. Escorts has a presence in Madhya Pradesh, Haryana and Uttar Pradesh.
PTL has a strong presence in Punjab and Uttar Pradesh. It has had no foreign connection whatsoever, but is still a highly successful tractor manufacturer today. The first model of the Swaraj tractor, which is PTL’s brand name, was developed indigenously in the early 1970s and today the company has a presence across the major HP ranges with indigenous technology.
The company is also working on developing a 65 HP tractor which is on the drawing boards. One of the reasons for the success of PTL has been the ancillarisation policy under which it gets components produced by the ancillary units.
Eicher Ltd, according to market sources, with its strong emphasis on the 25 HP segment facing a difficult time with the market moving towards the higher HP range. But the company still continues to enjoy 10 per cent of the overall market share. What the above break-up shows is that, while the “big six” of the Indian tractor industry has been dominating the different regions, none of them, except perhaps for M&M, have any all India presence.
At present, the level of mechanisation in India is quite low when compared with other countries. In 1993, India had 7.17 tractors per thousand hectares against 507.19 in Japan, 13.63 in Pakistan, and 7.89 in China when the world average was 19.14.
However, for the past few years, there has been a significant increase in annual sales of tractors. In terms of the regional markets, over 50 per cent of the tractors produced every year are sold in Punjab, Haryana, and Uttar Pradesh only.
There is both a replacement as well as new demand for tractors.
The important things that a farmer looks for in a tractor purchase are:
2. Low cost of operations,
3. Reliability of product,
4. Ease of operations,
5. After sales service,
6. Price, and
7. Resale value.
Though small in size tractors are popular; the demand in the new growth areas is for large tractors. Price of the tractor is crucial and this makes credit an important determinant of tractor sales as 80-90 per cent sales are due to bank credit.
As per the NABARD norms, any farmer who has 8 acres of land, can take a tractor loan which is to be repaid in 9 years with 12.5 per cent interest on the principal amount. The tractor is hypothecated as a primary security and there is registered mortgage of the land as a security against non-repayment.
The southern and western markets (with shares of 10 and 20 per cent respectively earlier) are now growing. Agriculture in these two areas offers great scope for mechanisation. The soil here is quite different to the Indo- gangetic plains.
This is basically harder and requires more powerful machines, i.e., machines with higher HP. Before 1975, there were hardly any big HP tractors sold. It is only now that the market has evolved and picked up. The farmers have also realised that per HP cost is lower in the case of the high HP tractors. It is a convergence of technology, mixed with customer aspirations and economy that has driven the change.
But, the emerging southern and western markets are not the only reason, for upward trend in HP requirements. Especially, a Punjabi farmer is more educated and enlightened and keeps track of tractor technology internationally. He knows the bigger tractors are more economical.
Therefore, the high HP tractors would initially have been more in demand in the northern states, though it is true that the soil conditions in the south requires high-power tractors. Hence, the demand there too can increase.
While today, the 45 HP and above range accounts for just about 19.65 per cent of the total tractors sold in the country. (Of a total of 1, 79,726 tractors sold in April-December 1997, 45 HP range accounted for just 35,319 tractors), in the near future this figure is likely to increase. It will be worth watching how the new MNC entrants will generate a demand for their products.
Further, in the last three decades, the most mechanised states of Punjab, and Haryana and parts of Uttar Pradesh have seen a transformation in the land holding pattern with the splitting of the families and land. Nevertheless, the requirement of tractor in these states has been steadily growing due to reverse tenancy and new crops.
The ownership of tractors is now extending to all segments of land holdings, as the usage has become universal. Tractor is now considered to be a production machine and an investment and used extensively for agriculture and for other purposes on hire.
Various concessions by the Government of India have also helped the small farmers in purchase of tractors.
Some of these are:
i. Exemption in the excise duty on tractors having engine capacity less than 1800 cc
ii. Minimum land holding size reduced from 10 to 8 acres for eligibility of loans
iii. Repayment period extended from seven to nine years
It is well known that the sales of tractors are credit dependent. Therefore, the farmer’s demand for tractors is realised largely due to credit facility availability. Further, past sales of a brand also affect its future sales, as the farmers go by the popularity of a tractor in their area.
This is further reinforced by the after-sales service facility offered by the companies through dealers, price of the tractor, efficiency of fuel consumption, maintenance cost, and resale value of the tractor. Sometimes, factors like design or look of the body of the tractor and the driver convenience also affect brand and model choice.
Besides this, social circle also affects the purchase of tractors as in some regions and communities tractor is a status symbol and is bought for social rather than economic reasons.
The main reasons for the purchase of tractors are:
i. Labour shortage or high cost of labour.
ii. Increased cropping intensity.
iii. Better farming.
Of the total tractor usage, almost 50 per cent is for custom hiring in all states, and even as high as 75 per cent in some of them This is necessitated by the small size of holdings which make the tractor unit non-viable, only if used for own farm work.
Infact, a survey in north Indian states in the early 1980s showed that the tractor power accounted only for 6-8 per cent of the total power input on the farm Manual labour and bullock power accounted for a major chunk of power input both in case of tractor-owning as well as tractor using farms. Among the reasons for non-purchase of a tractor are—lack of funds, perception of non-profitability of tractor usage, non-availability of preferred brand, and socio-cultural reasons.
Major product problems at the farmer level have been low fuel efficiency of some brands, poor quality of tyres, high battery consumption, diesel and water pump defects, oil leakage, and breakage of certain parts like front axle kingpin. This problem is compounded by non-availability of spare parts locally and of genuine quality (primary survey).
Role of Distribution:
Significantly, the sale of tractors mostly depends on the strength of— dealership network, easy availability of spare parts, contacts with credit agencies and customised after sales service. And, all these functions are with the distributors. Therefore, the role of distributors is of crucial nature in this industry.
Further, manufacturers generally have only a few dealers at the district or block level and there are a total of about 2000 dealers in the country. Due to the high cost of after-sales service, the manufacturers are generally dependent on the dealers for the service to the customers. Additionally, the high turnover of mechanics with the dealers further makes it difficult to provide quality service.
For example, New Holland is already providing superior customer support to the nearly 200,000 existing Ford tractor owners through a nationwide stockist network for genuine Ford tractor parts. Its products are currently being sold through a world-wide network of 5,850 independent dealers in more than 150 countries.
The company pays more attention to dealer support, provides them with enhanced service and credit packages so that they can build closer, more enduring relationship with their customers. To make the dealers a level above the rest in the cut-throat competitive market, they have launched a major corporate identity programme to raise the brand image. Most importantly, on-site dealer training has always been the key policy.
It has been observed from the market that single brand dealership is the norm and more than 2 models are sold by dealers on the average, to cater to different requirements of farmers. The dealers have to make substantial investments as they also pay advance security deposits with the company.
But, they also get dealer credit for a period ranging from 30-45 days. However, there have been constraints on obtaining funds for dealer credit from banks. That is why, recently, Eicher has made an arrangement with ICICI for providing easy and more efficient dealer credit. After sales service seems to the most crucial aspect of dealer management.
Tractor is a capital-intensive product and also symbol of prestige for the farmers. Therefore, there is always a high involvement at the time of purchase of the product. Moreover, since the product is a lifelong investment, additional care is taken at purchase.
Here, advertising influences the behaviour through the Hierarchy of Effects Model in which the attitude change is achieved by first increasing the awareness and then increasing knowledge. This would lead to liking for the product and preference for the product, finally leading to conviction and then purchase.
The word of mouth is the major type of promotion undertaken besides wall paintings and some ads in the local audio and video media. Besides, working with local bank branches also helps the sales as the dealers can help the farmers in obtaining a loan for the purchase of tractor which usually is a time consuming process and a complicated procedure, besides involving corrupt practices. Farmer’s education about the use of tractor can also help to build a good reputation.
In all the advertisements of the tractors, it is interesting to note that the logos of most of the firms dealing in tractors mostly depict either the wheel of the tractor or a seedling. This is true in the case of Mahindra, Tafe’s Massey Ferguson, Ford, and Sonalika. The technical details which are usually highlighted in the tractor advertisements are features like the horse power of the tractor, fuel efficiency, lights, battery, etc. Technology is associated with progress in almost all the advertisements.
However, in the POP material, the main emphasis for the advertisements of tractors is on the technical features. The handouts show the tractors in bright colours and the technical features are also highlighted.
More technical details about the different models available are usually highlighted on the reverse side of the handout. This is to facilitate the decision making process, as the buyer would like to take an informed decision and invest wisely. The technical features aim to influence the cognitive attitude of the buyer.
The posters, on the other hand, attack the affective behaviour of the farmer. In one of posters for Tafe’s Massey Ferguson, the posters use “slice of life” format of message execution and show a prosperous couple proudly riding a tractor. Here, the catch line used is “Jaise Sita ke man mein Ram ka vaas hai, waise hi Ram ko Massey par vishwaas hai” (‘As Sita lives by Ram similarly, Ram trusts Massey). As we can see, the message of faith and reliability is conveyed through farmers themselves. Here, we also see the concept of horizontal communication being used.
In another case of Mahindra, the attempt was to increase the awareness, by catching the attention of the farmer by catch lines like “One Tractor Free”. It is only when the consumer reads the advertisement, that it becomes apparent that the economic advantages and the long life of the tractor is as good as getting a new tractor free.
Such awareness has to be complemented by a follow up campaign, to positively influence the buyer behaviour. Both the posters and the handouts/flyers use lush green fields as the background and create a link between the use of the tractor and a good harvest.
The advertisements appearing in the newspapers are in the local language, since the target audience is the farmer. But, advertisements appearing in newspapers differ from the ads in handouts and the posters due to the absence of any detailed information regarding the technical details of all the models that are available for a brand of tractors.
At the same time, the photographs do depict the main features of the product. The human aspect is completely ignored, thus concentrating mostly on influencing the cognitive behaviour of the consumer. Advertisements in newspapers appear only occasionally which is usually at the time of launch of any new model or when there are special discounts and subsidies being announced.
Arrival of MNC tractor majors like New Holland, John Deere and Sisu Tractors are bound to shake up the existing “big six”. These MNCs are entering the Indian market with higher HP tractors, correctly in time, when the demand for higher HP tractors is increasing.
The worldwide demand is more in the high HP segments, ranging between 65 HP and 200 HP. Multinationals have strong products in the high HP ranges, while the 35 HP range is not their specialty. Most of the new MNC ventures in India are coming into the 75 and 80 HP range.
New Holland is setting up its own plant near Delhi, with a capacity to produce 36,000 high HP tractors per annum. Case and M&M will be producing tractors in the 60-200 HP range. The initial capacity will be 10,000 and go up to 40,000 tractors. John Deere of the US has signed an agreement with Larsen & Toubro (L&T) to set up a Greenfield tractor plant.
This 50:50 joint venture will have an annual capacity of 30,000 tractors of 35-65 HP range. The first tractor will roll out in 2001, that is when the payback on the Rs. 300 crore investment will begin.
Greaves is also planning a joint venture with the Italian firm, ‘SAME,’ for the higher HP range of tractors. MNC tractors are bound to unsettle the existing dominance of the “big six” in India for many reasons.
The following are some of them:
1. Existing tractor majors have been making fortunes in sellers’ market.
2. While tractors were meant for the farmers, the farmers mattered the least.
3. As long as bank credit was somehow organised, the farmer could be saddled with some outdated technology.
4. Marketing professionals of even reputed tractor companies do not find time to answer customer/farmer enquiries. The dealers are more ignorant and say- “we don’t know much about the model, features etc. This is the price, take it or leave it”. This is sellers’ market where the customer does not matter.
5. MNC models have better and advanced features like hydraulics which facilitate the implementation to a greater extent. Although these features may be complex to use, they can dramatically increase farm productivity.
6. MNC tractor majors have deep pockets to sustain marketing campaigns and wait a while before Indian farmers start switching over to modern machines.
All this is not to say that Indian tractor manufacturers cannot stand up to MNC onslaught. They surely can, by upgrading technology and putting the customer – the Indian farmer – first (Agriculture & Industry Survey, 1998).
The New Holland had a collaboration agreement with Escorts till 1995-96. Escorts was till then licensed to produce the Ford brand of tractors in the 45 HP range. Now, New Holland intends to offer a wider choice in the 37:75 HP range, “We have a long past association with the Indian farmers as nearly 200,000 of our tractors have been traversing the Indian soil for over a quarter of a century.” This has given us, an in-depth understanding of Indian agricultural policies to go alone.
Our global experience would enable us to bring in technological upgradation in tractors and farm machinery which can then be applied to Indian agriculture, says Mr. Jonathan Walsh, Director, and New Holland Tractors. “With 2.2 lakh units sold in 1996-97, the Rs. 6000 cr. Industry, could touch a sale of 2.45 lakh vehicles in 1997-98. In the first half of the current fiscal year, 121,214 tractors have been sold”.
Given the current ‘boomtime’ market sentiments in the tractor industry, the entry of multinationals and the re-entry of Ford range under the ‘parental guidance’ of New Holland could unsettle the market balance. Escorts is trying to compensate the loss of ‘Ford’ brand with the ‘Farmtrac’ range.
To maintain its leadership position, M&M, is commanding over 28 per cent in market share and is enhancing its capacity by 15,000 to 18,000 units per annum, whereas the upgradation of the existing product line is already on the anvil. Besides, M&M has entered into a joint venture with CASE of the US for higher HP market.
On the other hand, TAFE, having a total capacity of around 4,500 tractors per month, is setting up another plant with an expected capacity of 1,000 to 1,500 tractors per month at Madurai. PTL is expanding its overall capacity to 60,000 units per annum, besides entering into a JV with Steyr of Germany.
The New Holland and other companies will definitely have a run for their money when the domestic manufacturers gear themselves up with their established dealer networks, enhanced capacity and upgraded products.
However, an agri-based economy, increasing farm mechanisation, evolving of contract farming concept, and huge potential of the Indian food industry, coupled with entry of MNCs would definitely widen the horizon of high-power machines (Agriculture & Industry Survey, 1998).
Tractors have entered Indian farming pervasively owing to their functional versatility and vastly superior out-turn of work. But quite often, they are found to be underutilised which affects their overall economics adversely. Tractor capacity may be defined as the maximum possible use of tractor in a crop season, particularly for tillage and threshing operations.
Knowledge of tractor capacity available for utilisation is helpful in deciding the cropping schedule and the optimum area, which can be covered by one tractor. While calculating this, the number of rainy days along with the breakdown days also are taken into account to arrive at the critical number of days to operate the tractor.
Effective rainfall days are those when the rainfall exceeds 10 mm, which affects the operation of tractor. It is observed that after this rainfall, the soil normally takes about 4 days to return to a state suitable for operation of tractor.
No specific relationship seems to exist between farm size and tractor size. Tractors are purchased not only for own farm work but they also cater to custom work. Tillage, threshing and transportation of farm products and inputs constitute the major activities for which tractor is utilised.
Together these activities account for 90-95 per cent of the tractor time. However, transport of people and material alone takes away 60 per cent of a tractor’s life and only 40 per cent is spend on the field. The overall utilisation of available operational tractor capacity varies directly with farm size. However, over 40 per cent of available tractor capacity remains unutilised.
An average farmer finds work for his tractor for less than 400 hours in a year as against the norm of 1000 hours recommended by bankers to recover the fixed investment cost. Further, out of these 400 hours, less than 300 hours constitute strictly on farm operations and the remaining 100 hours are devoted to marketing of produce and purchase of inputs, custom hiring and social activities.
Farm size, cropped area, cropping pattern and intensity, cultivation technology, captive versus custom use mode, etc. influence the return on investment in tractor. The break-even point of tractor operation varies directly with tractor size. To operate a tractor on no-profit no-loss basis, a minimum area should be available, which varies with the size of the tractor. Below this break-even value, it is not advisable to purchase a tractor.
Again, fulfillment of peak seasonal capacity requires certain minimum cropped hectares. This calls for critical review of the investment policy and the loan policies to check over-investment on tractors. There is a higher return on investment in tractor in situations of extensive use of crucial inputs like good quality seeds, fertilisers and irrigation.
But, interest on the loan obtained for purchase of tractor is one of the biggest cost components of cost at the farmer level which accounted for 30 per cent of the annual cost of the tractor.