The Indian automobile industry is the 4th largest in the world, coming in behind Japan, and the country is the 7th largest manufacturer of commercial vehicles. Its strong engineering base coupled with the competence in manufacturing low-cost, fuel-efficient cars has resulted in the scaling up of manufacturing facilities of several automobile companies like Hyundai, Nissan, Toyota, Volkswagen, and Maruti Suzuki. India also emerged as the 4th largest exporter of automobiles in the last decade and the share of the automobile industry was pegged at 5% of GDP.
The projection by McKinsey & Co was that India's passenger-vehicle market would become the world's third-largest by 2021. In anticipation of high growth and demand, manufacturers expanded their capacity to 7.21 million units per quarter in 2019, up from 5.66 million units per quarter in 2014.
After six months of decline in the sales of passenger cars and two-wheelers – prominent car makers like Suzuki, Hyundai, Mahindra and Honda are witnessing perilous drop in sales. This has been the case for two-wheeler companies like TVS and Royal Enfield too.
Maruti has reported a decline of 35.52 % in July 2019 while Hyundai is down by 10.28% compared to July 2018. Mahindra has registered a drop of 15% while the domestic sales of Honda Cars India have nosedived to 48.67 %. Tata Motors reported the sale of 10,485 units in July 2019 with a 46 % year-on-year decline in sales. The slump in the deals has resulted in the closedown of showrooms across India over the last 18 months. Federation of Automobile Dealers Association (FADA) 's President Ashish Harsharaj Kale said "It's a severe slowdown," "The biggest shock was that even the festive season didn't lead to an uptick in demand." The pain is being felt across the country, with dealerships in New Delhi reporting much the same.
Deputy managing director of Toyota Kirloskar Motor, N. Raja, has stated that the industry is concerned with the increasing pressure of low customer sentiment. Also, the high insurance costs, rise in taxes, liquidity crunch across the nonbanking finance sector, and tightening of lending norms, have affected domestic sales in the last few months.
In an attempt to make things better, the ACMA (Automotive Component Manufacturers Association of India) has sought a uniform 18% GST rate across the auto and auto component sector. The auto component industry employs nearly 5 million people, and the ACMA has noted that if the slowdown continues, almost 10 lakh jobs could be on the line.
Prolonged slowdown and decline in sales have also led to non-repayment of loans. Due to this, banks have also stopped funding vehicle purchases by dealers. FADA's President Ashish Kale noted that the rate of closure has been higher than in previous years as banks have become cautious on the inventory funding and since stocks were the only collateral with the banks, the dip in sales have made the banks ask for more security. The banking industry has estimated outstanding loans to dealers to be in the range of 70000 to 80000 Cr. Many smaller dealers have been taken over by the more prominent manufacturers.
The government's plan to speed up the rollout of electric vehicles would also raise India's import bill and damage prospects for auto components manufacturers. Further, the investments in the auto sector have frozen due to a lack of clarity on its electric vehicles policy. Auto industry body SIAM (Society of Indian Automobile Manufacturers) has said in a statement that the auto industry is pleased that Finance Minister Nirmala Sitharaman has extended wholehearted support to electric mobility, but cautioned that this would not help the automotive sector in extricating itself from the current slowdown.
- The steps taken by the government to revive India's non-banking finance companies (NBFC) could improve the credit flow without having to reach out to public sector banks. Liquidity crunch is one of the major reasons for the slump in demand.
- Cleaner technology requirements such as Bharat Stage VI emission norms have made trucks and two-wheelers more expensive.
- We feel that the demand will shift towards pre-owned cars and the increased options to lease automobile could negatively impact new car sales.
- Reducing the GST from 28% to 18% could revive demand, but this would entail a revenue loss for the government.
- The dealers are still sitting on high inventory with 50000 passenger vehicles and 3 million two-wheelers. Inventory correction is likely to improve the situation. If there are no sales, debt repayment is not likely to happen, which will lead to unsecured loans.
Image Courtesy: AFP PHOTO DDP / DAVID HECKER GERMANY OUT