Auto industry stuck in reverse

About 7 km from the Delhi-Haryana border on the Old Palam-Gurugram road sits one of the two main manufacturing plants of Maruti Suzuki India. It is a hive of activity: trucks move in and out of the 300-acre plant; workers clad in blue change shifts at exactly 3 pm. On an average, India’s largest carmaker by sales produces around 5,500 cars a day at its Gurugram and Manesar plants in Haryana. Well, it used to. The company cut production by a third in August from a year ago—the seventh straight month of production cuts. Total domestic sales for the month fell 36% year-on-year to 94,728 units. Production was also suspended on September 7 and 9.

The trend is not restricted to Maruti Suzuki. The automobile industry in India is in the throes of a slowdown that began almost a year ago. India’s second-largest carmaker Hyundai Motor India reported a 17% fall in domestic sales in August, and Tata Motors’ sales slumped 49%. Commercial vehicles major Ashok Leyland reported a sales drop of 50%. Add exports and the fall is a steep 357.14%. It suspended operations at five of its plants for 10-18 days. Even two wheelers, the second-largest segment after passenger cars by volume, have been seeing a big decline in sales.

“I have seen quite a few downturns in the industry,” says auto industry veteran Murad Ali Baig. “But I haven’t seen anything quite as bad as this.”

A year and a half ago, the picture was entirely different. A Nomura report released in July 2018 reckoned that the auto industry was likely to have a great year (FY19) with “healthy double-digit growth” across all segments. “We believe strong demand environment will lead to pricing power and operating leverage benefits for companies, thereby supporting margins despite rising commodity costs,” it said. The irony? Sales of passenger vehicles fell for the first time in nine months that July.

In the months that followed, passenger vehicle sales growth was between -5% and +5% before plunging 17% in April 2019, dealing a big blow to the industry. It had been hoping for an uptick especially during the festive season from October to December. People shied from buying as the overall cost of owning a car rose on account of increased insurance cost, price hikes announced by carmakers because of increased input costs, and fuel price volatility.

Also, with a view to check rising pollution levels, the Supreme Court ordered in October 2018 that only vehicles that conform to stricter Bharat Stage (BS) VI emission rules may be sold from April 1, 2020 and registration of BS IV vehicles should close on March 31, 2020. BS VI engines can considerably lower the emission of harmful particulate matter than BS IV engines. The catch? They cost more to make and will be heavier on customers’ pockets. Spending nearly ₹1,000 crore each to upgrade its product lines to new pollution norms, vehicle makers are racing against time to meet the deadline.

Meanwhile, market sentiment continued to wane for one reason or another. The situation grew worse as credit started to dry up with non-banking finance companies struggling for funds—an aftermath of the liquidity crisis set off by infra major IL&FS’ loan defaults.

Perhaps what perplexed the auto industry most were announcements made by the government in bolt-from-the-blue fashion on its electric vehicle (EV) push. From time to time, the government would declare in zealous tones how serious it was about its green goals and cutting crude oil import bills, urging the industry to develop and produce EVs. There is no significant development on the ground on setting up the necessary infrastructure, but generous incentives were declared in this year’s Union Budget for the purchase of EVs: The government reduced the goods and services tax (GST) on EVs from 12% to 5% and announced tax rebates of up to ₹1.5 lakh on interest paid on loans to buy them.

In the absence of such incentives for petrol and diesel-powered vehicles, the industry continued to flounder. By the time the government began to reassure the industry (it recently said it would not ban petrol and diesel vehicles), the damage was done. Sales of passenger cars fell 41.09% in August, the worst slump in two decades, according to industry body Society of Indian Automobile Manufacturers, or SIAM. Sales of commercial vehicles fell 39% and that of two-wheelers by 22%.

The ramifications are many. The health of the auto industry is a tell-tale sign of the state of the overall economy, for it forms 7.5% of India’s gross domestic product (GDP).

Besides, fears are rife about massive layoffs. Maruti Suzuki has not renewed the contracts of 3,000 temporary workers. The numbers are higher in ancillary industries such as auto components makers and dealerships. And there could be more in coming months. And if the slowdown continues? The rot will spread to the core. Not an encouraging sign for a country that announced its ambition of becoming a $5-trillion economy by 2025. “If the industry goes down, GDP will go down. It [auto industry] employs around 37 million people, directly and indirectly,” says SIAM director general Vishnu Mathur.

Auto parts makers and dealers feel they are the worst hit. “Last year, we had actually planned for a growth year,” says Ashish Harsharaj Kale, president, Federation of Automobile Dealers Associations (FADA). “We planned for 16%-18% growth and for the first four-five months it continued too. So, we got doubly hit. We had increased our costs for a growth year and against that we actually went down from our current normal. This hit us suddenly.”

FADA says about 300 dealerships have shut, costing the livelihoods of 200,000 people. “About 60%-70% of our businesses are run by middle-class families in every quarter of India. These are not big public limited companies, nor do we have the access to easy capital,” says Kale.

About 1 million people working in firms making auto components are likely to lose their jobs if the situation continues, the Automotive Component Manufacturers Association of India (ACMA) says.

Finally heeding the auto sector’s calls for a relief package, the government announced some measures in August. It said it was lifting a ban on purchase of new vehicles by government departments and allowing BS IV vehicles bought till March 2020 to be used till the expiry of the registration period. The rise in registration fee to ₹5,000 from ₹600 proposed in July has also been deferred.

However, it stopped short of lowering the goods and services tax (GST) levied on cars from 28% to 18%—a longstanding request of the industry. “We do hope that measures to improve liquidity and deferring of enhanced vehicle registration cost will revive the ailing sales in the auto sector,” says ACMA’s former president Ram Venkataramani, exuding hope that the government would consider a uniform rate of 18% on all auto components. “Currently 60% of auto components are at 18%, while the rest are at 28%. A lower rate of GST will not only ensure better compliance but also help curb grey operations in the aftermarket,” he says.

Baig sees no point in reducing the GST. He says the only way sales could pick up is if the government gives a major opportunity window to the customers. “Right now nobody is in a hurry to buy vehicles. If the government gives a three-month tax holiday and, for example, says that it’ll be back after three months, then I will be in a hurry to get it now instead of waiting.”

He feels that the situation is not as bad as the wholesale figures indicate but he sees a “gloomy period immediately ahead”. “Purchasing power of rural and urban India has gone down and automakers can’t do very much except to cut costs which they are doing. As far as cars are concerned, there is a huge difference between wholesale and retail. That’s because dealers are heavily loaded with stocks,” he says.

India is one of the few countries in the world to use wholesale figures instead of retail sales figures to track the industry. Take the figures for August: the wholesale number (units sold by automakers to dealers) fell 23.55% to 1,821,490 units from 2,382,436 units a year ago. Figures from VAHAN, a government website that tracks registrations, show retail sales dropped just 4.15% from 1,669,751 units to 1,600,376. Not only is there a marked difference between each comparable set, retail sales slowed at a rate five times lower than wholesale. Some in the industry say retail figures will give a better idea of market demand and market share. FADA’s Kale recently wrote to SIAM seeking the much needed reform of using retail figures for reckoning sales and demand. “The wholesale figures are down due to the cautious approach that the dealers are taking of not building a stock. Last year, we had started preparing for the season and started slowly building the inventory over and above the high inventory that we anyway had. All that is getting decongested at this time. Therefore, [drop in] wholesale figures would be higher than retail,” Kale said.

Millennials, generally defined as those born between 1981 and 1996, are on everyone’s mind these days. It is not without reason: about 34% of the population in India are millennials and they make a large part of the working population here. Finance minister Nirmala Sitharaman’s comment that this group preferring cab-hailing services such as Ola and Uber over owning a car might be a reason for the slowdown was not well received, but she is not alone in factoring in the impact of “the millennial mindset”. Guenter Butschek, managing director at Tata Motors, said at a recent event that millennial customers have faster “turnaround expectations and zero tolerance for [poor] quality”. He considers the current crisis as a fitness test. “The bar has been raised. Suppliers must identify gaps and pain points and address them. We must also quickly align to the changing market dynamics and technology at play,” said Butschek, who believes, ACES or autonomous, connectivity, electric and shared mobility, is the way forward for the industry.

Whether it signifies change or not, some new launches have managed to buck the gloom-doom trend. MG Motor’s Hector SUV had to halt bookings after receiving more than 21,000 orders and was sold out for the entire year. Kia Motors’ Seltos got more than 32,000 bookings and Hyundai’s Grand i10 Nios got 5,000 bookings within a month of their launch. Experts feel that the industry might revive on the back of new launches. Gaurav Vangaal, country lead, light vehicle production forecasting, IHS Markit, says the novelty factor always works. “If you have a new vehicle, then it will definitely help you to get incremental sales because you leave the competition behind for that time frame,” he says.

Vangaal says the industry is unlikely to see a revival before April or June 2020, for the current times are not so benign. In the first quarter of FY20, the economy grew at 5%, the slowest in six years. “We cannot ignore that there is an ongoing issue with the liquidity. Revival will only happen when the car manufacturers start rebuilding stocks post January 2020 after clearing the stocks,” he explains. “Currently they’re just de-stocking. That’s why their wholesales are going down and retails not as much. When they will start rebuilding their inventory, the numbers will come back from March-April.”

Subrata Ray, senior group vice president, ICRA, says agricultural output, and revival in economic and industrial growth will be critical to the auto sector. “It however remains to be seen how auto demand recovers during the festive season and likely pre-buying in Q4 FY20, in anticipation of post BS VI price hikes,” he says. Till then, India’s Motown is likely to continue in slowdown mode.

(This story was originally published in October 2019 issue of the magazine.)