The automobile industry in India is evolving and the last financial year has been a mixed bag of positives and negatives that analysts feel will determine the future growth of the sector. If on one hand there were slew of launches that helped boost the sentiment of the industry, on the other hand, it was hard hitting interest rates, liquidity crunch in the system and the high cost of raw materials that dampened the spirit of manufacturers and buyers alike.
In totality the industry posted a 4.7% dip in growth at 96,48,105 units in FY?07-08 as compared to 1,01,23,988 units in FY?06-07. However, the wide range of product offerings and frequent discounts and offers that have come to symbolise the passenger car industry in the last one year helped the segment register a growth of 11.79% during the last financial year at 12,03,531 units vis-?-vis 10,76,582 units in 2006-07.
?The Indian automobile industry has become a war ground not in terms of competition within models but also in terms of marketing of products and the whole of last year saw original equipment manufacturers (OEMs) widening their product portfolio.They have also become very aggressive in offering discounts and promotional schemes to retain their market share,? says Arvind Saxena, senior vice-president, Hyundai Motor India Ltd (HMIL), adding that this has led to a steady increase in advertising spends by major OEMs.
?Discount war will continue, with dealers and manufacturers doing it as a collaborative effort, even in the long run because of the accumulation of inventory. Manufacturers are also shelling out substantially to increase their distribution network to enhance their brand recall and product visibility,? adds Abdul Majeed, auto partner, Price Waterhouse.
But freebies apart, the high interest rate, continuous increase in steel prices and non-availability of finance, especially in some parts of rural India, have hit the overall growth of the industry with two-wheelers as well as commercial vehicles being the worst hit sectors.
According to an auto finance head of a leading bank the interest rate on auto loans have gone up by 25-30% over the last two years. It is currently hovering around 13.5% to 14.5% and this has impacted sales. Over 80% vehicles in India are financed unlike China where only 50% people opt for auto finance.
Moreover, major banks have lately cut down finance on select pockets in Rajasthan, Punjab, Bihar and UP due to high delinquency both in cases of two-wheelers and commercial vehicles. No wonder, two-wheelers witnessed a decline of 7.92% at 72,48,600 units in the last financial year and the commercial vehicles managed to post a growth of 4.07% at 4,86,817 units during the same period.
Even steel, a major component of auto industry has seen a surge in price to as high as 45-50% since last year and that had impacted the margins of major players. According to industry estimates, while margins of OEMs were down by 100-200 basis points, for auto ancillary players, it was a decline of 300-500 basis points in margins. This resulted in a series of price hikes by all players across the category, thus impacting overall growth.
However, according to the Automotive Component Manufacturers Association (ACMA), the recent cut in steel prices seems to have no positive impact on the auto industry as it largely relies on alloy steel and there has been no impact on price of specific grades of alloy steel. ?The alloy steel have not been impacted by the price cuts at all, leaving the industry sandwiched between fixed-price supply contracts on one hand and the rising prices of steel on the other, which has severely impacted the profitability of the industry,? says Sanjay Labroo, president of ACMA.
All this resulted in a dip of 7% in the auto index over the whole of last year till May 13, while the Bombay Stock Exchange gave a return of 20%. As a result the entire auto index underperformed 12-13% as compared to the Sensex. ?Due to an increase in non-performing assets in two-wheelers and commercial vehicles, high interest rate and a rise in the cost of owning a vehicle, stocks of major listed auto companies under performed in 2007,? says Vaishali Jajoo, senior analyst, Angel Broking, adding that the rising inflation had slowed down the overall growth in the industry that had seen a growth of over 15% over the last four consecutive years.
However, with the country moving up in terms of value chain and the extremely low level of reach across the interiors of the country, industry experts are optimistic that there would be a huge potential for growth in days to come.
?Penetration levels in India are very low. While in two-wheelers 60-70 people own a vehicle per 1,000 people, the condition is dismal for passenger cars where it?s 8 vehicles per 1,000 people. This is way behind US and UK where the penetration levels are as high as 400 units per 1,000 people. Hence, Indian manufacturers have huge opportunity that needs to be tapped and this will drive the growth of the industry,? says Majeed.
According to Majeed, the rising per capita income, that has brought a change in lifestyles, and lot of innovation in products would be the key to future growth. ?Interestingly, the growth would not restrict to the entry-level vehicles, even top-end brands like premium and luxury cars would see a substantial growth as the disposable income goes up and the retention period of vehicles coming down to three to four years from five to six years earlier,? he says.
