Driven Up The Wall

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No upward curve The auto industry faces tough times with declining car sales, Photo: AFP

India’s auto sector is struggling to get back behind the wheels. From growing at 15 percent a year ago, it’s down sharply to negative growth. Even though the RBI’s latest rate cut may change sentiments marginally, it will hardly help shift gears. To do that, the industry will have to brave slow infrastructure growth and consumers shy of spending.

In any economy, automobile sales are driven by infrastructure, consumer demand and global trends. But these are drivers for any market and not exclusive to India. If we want to get more out of global funds, then, offering a stable climate for investment and a consistent policy will be key to revival.

As a sector, the auto industry has emerged as a significant contributor to growth and India is now ranked as the sixth largest producer of motor vehicles in the world. The vast majority of these vehicles are manufactured for domestic use. But the challenge facing the sector now is a classic chicken and egg situation. Will growth drive car sales or will demand boost car purchases, manufacturing and therefore, GDP?

The market deceleration of the past 12 months have hit car manufacturers hard. Large companies are struggling with over-capacity, inventory, cost over-runs and vagueness about sales forecasts. Due to the sector’s cyclical nature, there is now a wait-and-watch approach towards growth and a rush to capture more of the existing market share. Companies are wary of raising prices even though high taxation in some segments and rising input costs are bringing down short-term profit prospects.

The industry has looked to three quarters for solutions: the RBI to cut rates to give more purchasing power to the consumer, the government for easing duties (no respite there since the Budget hiked duties on some segments) and a jump in infrastructure, which would spearhead growth and hence, manufacturing of vehicles.

On the first count, the Society of Indian Automobile Manufacturers (SIAM) is disappointed with the quarter percent cut in rates by the Central Bank. “The 25 basis point cut is nothing, we need at least 100 basis points reduction,” says Deputy Director General of SIAM Sugato Sen. Maruti Suzuki Chairman RC Bhargava also endorses Sen’s views. “I don’t think 25 percent reduction makes any significant difference to car sales. Even if banks pass it on, there will be little impact on consumers’ EMIs,” he says.

But rates are not the only determinant. Passenger car sales in India declined by 25 percent in February 2013 over the same period last year, the lowest in 12 years. The auto market is indeed seeing the worst lull in decades. Bhargav points out: “For it to return to 15 percent growth, the economy would need to go back to 8-9 percent growth.” (Read RC Bhargava’s interview.)

Industry honchos believe there is a knee-jerk approach to the sector particularly with respect to duty tinkerings in the Union Budget. Audi India CEO Michael Perschke articulates this as a problem of stable policy.

“If you want domestic players to defend their market, then you need to have a sound auto policy,” says Perschke. “The sector is based on medium to long-term investments. If you want automakers to succeed, then you need to put guidelines in place that hold good in the long run.”

Global marketing firm JD Power has estimated the Indian auto market will grow threefold to 9.3 million by the end of 2020. “For global players the question is of where they get the best returns. BRICS are the key markets but the likelihood of money going to China and Russia is higher,” says Perschke.

At a recent SIAM event, Ratan Tata highlighted why the auto sector can truly drive the next wave of growth. “All I can say is each one of us needs to drive home to the government that this is one sector that fuels the country’s growth and prosperity,” he said. “The multiplier effect in this sector is greater than most industries and it should be seen that way. Not only as a revenue generator for tax, but also as a growth engine and a job creator.”

Growth challenges are higher for the short term, since over a period of 18 months the market is expected to stabilise and the demand may settle as inflation comes under control, the government’s efforts to revive growth kick in and the economy improves with improved business and consumer confidence. How many companies can survive this slowdown without laying off people?

Companies are getting around this by partially closing plants or by slowing their announced expansion plans. Mahindra & Mahindra informed the Bombay Stock Exchange that it would align its tractor production with sales requirements by shutting down plants at Jaipur and Rudrapur for five and two days respectively at the end of March. Maruti too has slowed the pace at which it is adding capacity.

The auto sector may spend the next year pushing for higher exports (given the weakness in the domestic market), pushing for newer and innovative products (such as eco-friendly vehicles), explore productivity increases and launch high-end car models that are less price sensitive as segments.

Simultaneously, any effort to boost infrastructure can prove to be a fillip for the sector. According to a report from business solution providers Dun & Bradstreet, the auto industry is likely to gain considerably from the various initiatives on infrastructure development, rural focus and improved road infrastructure. Any effort to add more and better quality roads will spur construction activity and bring the sector back into gear. The government’s latest push to rural markets and social schemes may also support higher rural demand.

There are no shortcuts to growth this time, given how quickly the figures have slipped. It is nevertheless a good opportunity for automakers to get their act together, realign production and productivity and focus on new and sustainable models of manufacturing. Any extras in terms of rate cuts, a change in global sentiment may only be a bonus.

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2 COMMENTS

  1. Auto sector did well around commonwealth games and before so it is payback time now. The need is to look at other sectors for improvement and improve local manufacturing like textiles,crafts etc MNCs won’t drive market for long in India.

  2. Does not this all show obsession of media with glamourous sectors like auto and aviation while very few are willing to go into rural parts of country and find out about the banefits of reforms like aadhar, cash transfer and retail sector

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