The Indian automotive industry is ascending again and the confidence the industry is exhibiting through its sales volumes speaks a lot for the journey that it has undertaken since last year. About a year ago when the industry plunged into uncertainty, original equipment manufacturers (OEMs) faced huge challenges with low consumer confidence resulting in plummeting sales, dried up funds, inventory build-ups, accumulating debts and excessive capacities with inefficient processes leading to little or no margins.
With these challenges, the automotive industry had spared no effort to get its act together to regain stability. The pace of launch of new models and upgrades was increased to create excitement in the market. Cost rationalising and cash management measures were strengthened at the OEM as well as at the suppliers? level. Extensive discounts and exchange schemes were offered to the customer. Certain features of vehicle safety, emissions and comfort were offered, which led to growing consumer interest.
It was in these circumstances that the government announced the phased stimulus package. This included a higher tax depreciation, lower excise duty and other indirect advantages to make funding feasible and available. The government initiatives also helped generate demand through the JNNURM scheme, which involved the buying of buses for urban transport.
The industry got an additional fillip by strong exports, resulting in India emerging as a manufacturing hub for small cars. A consequence of this was a salvaged situation with reduced impact on de-growth of commercial vehicles and a marginally increased growth rate of passenger cars during 2008-09.
Near the end of 2009 and especially in December, there was an overall buoyancy in the industry and that could be attributed to convenient interest rates, discounts offered by OEMs (which is normal each year end) and a comparably low cost of ownership following lower fuel prices.
This sentiment has flowed through into January this year with car sales volumes increasing by 18% as compared to December 2009 and by 33% as compared to January 2009. January, being the first month of the calendar year, has its positive impact on car sales. Some aspects of India?s demography vis-?-vis low penetration (a mere 10 per 1,000 as compared to 500 in developed economies) and rising consumerism have further helped the automotive industry in getting out of the woods. A classic case of consumerism is demonstrated by the two-wheeler segment, which has grown by 35%.
One can expect a wait-and-watch approach in February given that the budget generally has direct implications for taxes and consequently sales volumes, as well as indirect implications in the form of market sentiments.
A critical contributor to the overall economy and the automotive industry is the stimulus package. At some juncture the policymakers will consider rolling back the sops, which were suited and a must, given the then recessionary trends. While the month-on-month increase in volumes only justifies a rollback of the stimulus package, the automotive industry is at a precarious juncture. A rollback without considering the potential impact of interest rates or in a scenario where raw material and bought-out component prices are hardening (further driven by newer standards) can only have an undesirable effect, potentially setting the industry back by another year. In such a scenario, one can safely challenge and question whether the Indian passenger vehicle market is really set to achieve the four million mark by 2015.
However, with the global recognition of India as a small car hub, India has great export potential. This is also supported by a consensus view of companies surveyed in a recent KPMG Global Auto survey involving 200 respondents from 24 countries, that emerging markets like India will build most automotive capacities of the future.
The survey shows that the gradual reorientation of growth expectations away from mature economies and towards Asia and other significant emerging economies has passed a tipping point. The survey respondents expect the Indian automobile industry to grow at 17% annually, and over 50% of the companies think that India will achieve the milestone of exports over one million rank within five years.
With almost all major global OEMs setting up or planning to source small cars from India, the day is not far when the Indian automobile industry will be self-sustainable and when the strong export demand will help the industry withstand the tremors associated with changing economic cycles. Perhaps, that would be a good juncture for the Indian automotive industry to be able to survive independent of any stimulus at all.
?The author is head of automotive sector, KPMG. Views are personal