INTERVIEW | Auto dealers, OEMs unlikely to resume overstocking, says Litesh Majethia, head of supply chain finance, BoB

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February 20, 2020 2:00 AM

Some OEMs have told their dealers that if BS-IV inventory does not get picked up by March 31, they will offer discounts.

bank of baroda, auto sectorInventory pileup had been happening for several years.

Demand for automobiles is likely to pick up by the festive season this year, Litesh Majethia, senior vice-president and head-supply chain finance, Bank of Baroda, told Shritama Bose. The slowdown in 2019 was a lesson for both dealers and manufacturers to avoid piling up excess inventory, he said. Excerpts:

The auto industry had a difficult year in 2019. How do you expect 2020 to pan out for them?

In the auto segment, this quarter looks better than the last quarter, even though the numbers are not showing that as yet. But April-June 2020 quarter may see a dip because of pre-buying of BS-IV vehicles in the January-March quarter. Steps that the government and central bank have taken to improve the situation may then start kicking in and we will start doing better. It will be a gradual improvement, but the worst is over. For the auto sector, there is also a scrappage policy coming up. If that comes before March 2020, it will help in the April-June quarter. From October, the festive season starts; so, we expect demand to move upwards gradually.

Last year, there was a huge pileup of inventory, after which some banks tightened lending terms. How is the inventory situation now?

Inventory pileup had been happening for several years. In fact, last year (2019) it was the reverse and we saw a lot of destocking happening. In January 2019, many companies saw the eventuality coming and aligned their production accordingly. Some OEMs (original equipment manufacturers) saw it a little late in April 2019 and then you saw a lot of them taking corrective steps to reduce supplies. Hence, the stock at the dealer level came down to an acceptable level of anywhere between 15-45 days. Today, when the auto sector is transitioning from BS-IV to BS-VI, every OEM is following their own strategy. The first set of OEMs is judging the real requirement (actual/anticipated order from the end consumer to the dealer) of BS-IV vehicles. They are only ordering as many BS-IV vehicles as the dealer wants. As of now, there is limited demand for BS-VI and everyone wants a cost advantage. So, if the same vehicle is available at a discounted price in a BS-IV variant, customers are going for it.

The second set of companies is doing it the other way round. They are still not making BS-VI models and are trying to push BS-IV as much as possible. But this scenario lasted only between January 1 and February 15. After that, they will only manufacture if there is demand from the dealer for BS-IVs. The third set of OEMs consists of those who have taken a conscious call not supply any BS-IV vehicles from January 1, 2020. So, only BS-VI variants are available and dealers and customers have no choice of BS-IV vehicles. In this scenario, OEMs and dealers are losing out on sales opportunities.

How could inventories pan out in the months ahead?

The industry has learnt a hard lesson due to the auto sector slowdown that blindly piling up inventory helps nobody. Financiers have also learnt that we should not let dealers overleverage. That is why you have seen some banks and financial institutions bringing down their limits, increasing pricing or asking for more collateral. So, dealers or OEMs are now unlikely to overstock.

How are different OEMs planning their retail strategy?

Many OEMs have assured discounts to their dealers and customers for BS-IV vehicles to clear stocks. Some of them are still watching the space and will take a decision in March to offer discounts. Some OEMs have taken the opposite strategy as they feel there is a shortage of BS-IV vehicles, so there is no need for giving discounts.

If demand does not pick up later in the year, how will OEMs and dealers react?

Some OEMs have told their dealers that if BS-IV inventory does not get picked up by March 31, they will offer discounts. The second set of OEMs has decided that BS-IV will not be supplied even if there are orders for them. The third set of OEMs are manufacturing BS-IV where there is demand. Most OEMs have said they will support their dealers. If there are still some unsold vehicles on March 31, then dealers will have to get the vehicles registered in their own name and then sell the vehicle as second-hand unused vehicles. There will be a cost differential here. This loss will be borne either by the OEM or it will be distributed between the OEM and the dealer or in some cases, it may be entirely absorbed by the dealer.

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