Reeling under the impact of falling truck demand, India's largest commercial vehicles manufacturer Tata Motors has doubled the amortisation period for new variants from three years to five years to between three years and 10 years, while model life for cars in India has been steadily declining.
This effectively allows the company to increase its reported profits as costs already incurred in one financial year are spread over several years into the future. Amortisation allows a company to treat the investment in developing a new car model or platform as a piece of machinery that gets worn out over time. While the useful economic life of this investment gets reduced as models are phased out sooner due to intense competition, Tata Motors new accounting policy would suggest the opposite is true.
"On an average, the product lifecycle in the industry has reduced by between six-18 months," says VG Ramakrishnan, senior director, South Asia, Middle East and North Africa, automotive and transportation, Frost & Sullivan.
Analysts believe that the move by Tata Motors is aimed at propping up the profits. "Since the Indica Victa and the Nano are aimed at higher sales volume over a long period, increasing amortisation period will definitely help the company," says Ram-anath S, director, research, IDFC-SSKI Securities.
The company has hiked its product development expenditure as it prepares to launch the new World Truck, a top-end heavy commercial vehicle platform and the new Indica Vista platform, in addition to the people's car Nano to stimulate sales in a weak market.
"The Indica platform has lasted for about 10 years, therefore for new vehicle platforms/products, Tata Motors decided to amortise such new vehicles over a period of 36-120 months," says the company spokesperson in an email reply. Interestingly, Tata Motors officials themselves privately admit that the average life of a model has come down, particularly in the car business. "To keep the growth trajectory on track, one needs new models that are the only ones driving sales. This is very necessary to sustain consumer interest as it's very difficult to boost sales of old models," says Harshul Verma, auto sector analyst, Khandwala Securities.
Even competitors agree with this view. Arvind Saxena, senior vice-president, marketing and sales, Hyundai Motor India, says, "The average life of a car model has come down from five to two years. It is always good to refresh the model, create variants and new technology so that customers like the product and purchases it."
"The volumes at which some of these old models sell are not profitable for the manufacturer. In fact, segment leaders such as Toyota and Honda in India completely phased out their old models," says Vineet Nigam, AGM at ICRA management consulting arm IMACS.
Not only passenger cars, but commercial vehicles too have turned competitive. "Now manufacturers are introducing new models and new segments are being created," says Revati Kasture, head research at credit rating agency Care.
Anirudh Bhuwalka, managing director and chief executive officer, Asia MotorWorks, says, "In case of trucks and commercial vehicles, the average model life is four years."
The provisions for bad debts fell by Rs 47.65 crore in the first half of the present fiscal year. Truck owners are finding it difficult to pay their dues to financiers in a timely manner but Tata Motors says otherwise. "Our provisioning historically has been much more conservative than required under the relevant guidelines for similar portfolios of non-banking financial companies) and continue to be more conservative (than the minimum required under the regulations)," says the company spokesperson.

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