In Reverse Gear

The auto sector in India has not just witnessed a steep decline in sales, there are block closures in spare parts manufacturing units coupled with production holidays, layoffs and salary cuts. With the latest announcement by Mahindra & Mahindra to shut down its five manufacturing plants ? Nasik, Kandivli, Igatpuri, Zaheerabad and Haridwar, which produces cars, utility and commercial vehicles, for 3-6 days from this month onwards, the journey ahead for the sector will be a bumpy one with its share of jerks and speed breakers reads like an understatement for now. What with the auto sector being in a crises mode globally and Detroit Big 3 ? Ford, GM and Chrysler filing for bankruptcy protection, Indian auto sector too is feeling the heat of the global economic meltdown.

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The automobile industry has been severely hit by liquidity crunch, high interest rates and low confidence levels in recent times. The market matrix being simple, in a country where 80-85% vehicles are financed, uncertain economic conditions coupled with high interest rates are adding to consumer woes. Yashika Singh, Head Economic Analysis, Dun & Bradstreet, India explains the extent of influence of interest rates on vehicle off-take. In recent years, the auto industry had witnessed a boom in sales owing to favourable interest rates and easy access to cheap financing options. The firming up of interest rates, coupled with inadequate access to finance and strict lending norms by banks, have hit sales in recent months. Interest rates have risen from 11.5% (Prime Lending Rate [PLR] as of end-2006) to 14% (PLR as of October 2008). The ongoing market interest rates for passenger car hovers in the range of 12-17%, while for two-wheelers, it is in the range of 12.5 ? 14%. She adds that, ?Any change in financing rates or availability of credit has a severe impact on demand for commercial vehicles. Small/single truck operators (more than 70% of fleet) are more vulnerable to change in interest rates, as they operate in the unorganised sector and have to pay a relatively higher rate of interest as compared to large fleet operators; and have low financial capacity. In the passenger vehicle industry, any upward revision in interest rates has maximum impact on the small car segment, where customers are more inclined to taking loans.?

Whilst the current decline triggered with the bankers becoming hesitant to finance auto deals, it is not the sole reason for the decline, as Pankaj Chadha, Director Automotive Practice, Ernst & Young explains. ?Though the liquidity crisis had a ripple affect on various sectors including auto, but the key is the drop in customer confidence. If you look at decline in financed deals in the auto sector, it would be more significant than the overall sales decline. With finance generally drying up or available at high interest, and with ?conditions attached? tag, the financing option is no more lucrative for customers in most cases.?

Side trends

Amidst sliding sales there are some signs of relief from certain quarters. To begin with, upper-end models are faring better than the entry and mid-segment models in the domestic market and new high-end models are being introduced not only in the four-wheeler segment, but also in the two-wheeler segment as can be seen in Japan?s Honda plan to launch its premium sports motorcycles, including the CBR1000RR, adding to the range of superbikes which cost above Rs 10 lakh in India. On the export front too for some segments, it’s a different picture, as export figures for both Bajaj and TVS are steady with the former registering a 46% increase in exports while TVS showed a 100% growth in exports year-on-year.

The high-end sector remains largely unfazed by interest rates as the target segment for these vehicles is the urban middle and upper-class youth and honchos, who are not affected by credit squeeze and are easily influenced by latest designs. Though experts remain divided about these trends and believe that entry at this stage in the high-end segment can only be an effective strategic brand-building exercise, which could have a limited spillover effect on other segments. Also, the fact remains that these companies cannot defer their launches as they were planned much in advance, and now cannot dump their products in warehouses. With respect to the growing exports for two-wheelers, they caution that it is only limited to the African, South American and some Asian countries and not contributing substantially to overall sales and margins.

Downturn or decline?

With clouds of uncertainty and fears looming large, some experts opine that this downturn might just not be a transitory phase for the auto sector in India, but spell the beginning of the decline for the sector once with the meltdown over. As Tutu Dhawan, Consulting Editor, Overdrive Magazine and CNBC points out, ?I?ve had this dirty feeling for a while now for various reasons like: saturation point; fuel prices going up all the time; petrol being a fossil fuel it has to get exhausted some day; so far alternate energy is not cheap either and car companies like GM going bust and general state of uncertainty.? But, Yogendra Pratap, Editor, Auto Bild magazine defends that this is just a downturn and not a decline, ?There is no doubt that the Indian auto sector will be one of the fastest growing in the long term. Despite the downturn it will outperform most other markets. New products like the Nano will also revitalise the market. As you can see from the figures, the products that offer good value for money are not as badly hit as the others. Auto has traditionally been a cyclical industry and its cycles do not always exactly coincide with the swings of the economy, but I feel that with better and more efficient cars coming in, falling fuel prices and an upswing of the economy, the industry will also show a recovery. Actually with a few of the many factors that have attributed to this downturn being taken out of the equation, the auto sector may be one of the industries that will lead the country out of the downturn.? Though experts remain divided on the kind of affect Nano will have on the sector, as Yezdi Nagporewalla, Head Industrial Markets, KPMG, India affirms, ?Since it is a new product as well as a new segment, the Nano will definitely have all the advantages that a new product can have but with respect to the overall market, there will be a growth to the number of cars sold but that will be attributable only to the Nano. As regards Nano affecting the two-wheeler segment, I feel that they are inherently distinct with their peculiarities. While there will be some spillover, I don?t expect it to have a huge effect. Moreover in the initial years there will be limited availability of the Nano. It?s only after year 2 or 3 that one will see the impact of the Nano sales.?

The Nano affect aside, experts still remain confident of a sure revival as Abdul Majeed, Automotive Partner, PwC echoes, ?Auto sector in India by no means will witness a decline, and this is just a meltdown issue, which will last for some 12 to 18 months. India has huge potential, it is a growing market, and the ever burgeoning middle class will only make things better. Demand is going to be fantastic for everything, and Indian automotive industry will have a win-win situation. Things will definitely improve with central banks across the world taking stock of the situation, and along with respective governments come out will stimulus packages which will improve the scenario.?

The auto sector?s demand and supply are truly determinable over a longer term considering product gestation, both for production and purchase. Chadha reasons that a closer look at global sales and production figures reveals that only a very few countries will be producing over 10 million cars per year ? China, Japan and the United States. Of these countries, only China is forecast to continue for significantly increasing output. Beneath this is a second layer of significant producers, with an output of 4-7 million per year ? Germany, India, and South Korea. Of these, only India is forecast to continue to grow considerably. On closer evaluation these countries have a strong indigenous industry (Japan, Germany, and Korea) and/or a cost advantage (Japan, Korea). India has a fundamentally strong sector with distinctive core competencies in product development, manufacturing, supply base, R&D, cost competitiveness and innovation and should emerge stronger after the meltdown in what will be a new world order for the auto sector and this can be achieved with appropriate policy and government support and business confidence.

For now, to counter the domestic slump, manufacturers are coming out with schemes to spur sales. Bajaj Auto announced an intense new product initiative that will see the launch of a new motorcycle each month for the next six months beginning from January 2009 and in the meantime, Bajaj Auto Finance introduced a retail finance scheme with low interest rates of 7.99% across almost 300 Bajaj dealers across the country to revive sales. But experts opine that these measures will be effective in the short term and prop up sales of those individual models only. For how the government will respond to the industry’s call for reducing interest rates, excise duty, easing complex labour laws, assist in infrastructure development and help find long term solution to the slowdown would remain the big question.

Factor this

Maruti Suzuki

27.4%

The decline in sales ? its biggest fall this fiscal.

47,103

The number of cars sold in November, compared to 64,885 in the same month last year.

26.6%

The fall in sales of cars from Maruti?s A2 umbrella ? Alto, Wagon-R, Zen, Swift and the newly launched A-Star.

59%

Plunge in the sales of once iconic Maruti 800 this fiscal.

TATA Motors

30%

The decline in total sales. The country?s second largest vehicle manufacturer, reported a sales of 32,696 units, down from 46,947 vehicles sold in November last year.

40%

Decline in the domestic sales of commercial vehicles to 16,229 units from 26,895

12%

Sales of passenger vehicles were down to 14,327 units from 16,322

13.8%

The Indica range saw a decline in sales at 9,039 units.

43%

Exports declined to 2,140 vehicles from 3,730 a year ago.

General Motors India

19.5%

The car sales in November at 4,307 units compared to 5,356 units sold a year back is a marginal, yet crucial decline.

37.74%