Tractor Industry Porters Five Forces Model

Structural analysis of the tractor industry

We have used Porter's five forces model to make a structural analysis on the attractiveness of the tractor industry and identifying the extent of competition within the industry. This analysis is made by identifying the five fundamental competitive forces and how these forces are relevant in the context of the tractor industry.

·         Threat of new entrants

Access to technology is not an entry barrier in tractors, and capital investment requirements are low. The key entry barriers are developing products suitable for diverse regional requirements, build a brand name and set up an extensive rural distribution network.

·         Threat of substitutes

Tractors are used for agricultural and commercial purposes, based on which the threat of substitutes has been assessed. Human labour in the case of agriculture and commercial vehicles [tippers for goods and 3-wheelers, light commercial vehicles (LCVs) and utility vehicles for passengers] in the case of commercial usage act as substitutes. But tractors help in increasing agriculture productivity, save time and improve efficiently. They are used for the transportation of goods and passengers, construction activities and hauling of luggage when not used for farming purposes. Hence, as a result, the presence of substitutes is not a major concern for tractor players. 

·         Bargaining power of suppliers

Almost all major tractor players have long term relationships with suppliers, several of which are group companies (in case of critical inputs). This results in players being sure of timely and quality supplies of major inputs.

·         Bargaining power of buyers

The top four players (in terms of market share) - M&M [including Punjab Tractors Ltd (PTL)], TAFE, Escorts and International Tractors Ltd (ITL) - accounted for around 83 per cent of the tractor industry volumes in 2007-08. As against this, buyers of tractors (farmers) are highly fragmented, which reduces their bargaining power with the tractor manufacturers.

·         Intensity of rivalry among players

The intensity of rivalry among players has reduced in the last 3 years (based on the Herfindahl-Hirschman Index) partly due to TAFE's acquisition of Eicher Motors' tractor business and M&M's acquisition of PTL. Hence, the key differentiating factors among the players are product portfolio and distribution reach. This moderate intensity of rivalry can be seen from the pricing flexibility enjoyed by tractor manufacturers.

Penetration rate of tractors in India

Over the past four decades, with the increase in the awareness and understanding of the advantages of mechanised farming, the penetration level of tractors in India has risen. Between 1971 and 2008, the tractor population is estimated to have risen from 0.19 million to 3.2 million units. According to the Food and Agriculture Organisation, tractor penetration in India in 2006 was estimated at around 18 units per 1,000 hectares of arable land, whereas the world average was around 20 units per 1,000 hectares of arable land. According to CRISIL Research estimates, tractor penetration in India was 23 units per 1,000 hectares of arable land in 2008. However, given use of higher horsepower (HP) tractors in the US and Western Europe, India's HP per hectare may be lower than some of the peer countries. Further, between 2002-03 and 2007-08, though tractor sales grew at a CAGR of 15.1 per cent, the fact is that tractor penetration is fragmented across various states. While states such as Punjab and Haryana have very high levels of penetration, southern and eastern states have very low penetration levels.

Segmentation of tractors

Tractors are classified as small, medium and large based on the power delivered by the engine, i.e. HP. The average size of tractors in India is 35 HP. In the international markets, tractors of 50 HP are considered small tractors whereas in India less than 30 HP tractors are considered to be small, 31-40 HP as medium and over 40 HP as large.