Is the auto slowdown for real?

Published: September 10, 2019 1:34:31 AM

This article takes an integrated view of the issues involved with an intent to provoke thought. The author does not claim to be an auto expert.

Illustration: shyam kumar prasadIllustration: shyam kumar prasad

By Sanjeev Nayyar

Not a day passes without reading how the Indian automotive sector is in the midst of a crisis and its appeals to the government for help. This article takes an integrated view of the issues involved with an intent to provoke thought. The author does not claim to be an auto expert.

Amidst sagging animal spirits, Kia Seltos got 23,000 bookings and MG Hector 21,000 bookings, collecting a booking amount of Rs 57.5 crore and Rs 105 crore, respectively. Buyers aspire, have money, hence booked.

Modi 2.0 started on a wrong note by seeking to fast forward the use of electric vehicles (EVs) without any infrastructure for charging. It created a perception that only sales of EVs would be allowed and internal combustion engine (ICE) would be banned, especially in two-wheelers. Next, the Budget 2019 levied a special additional excise duty and road and infrastructure cess on petrol and diesel of Rs 1 each. An earlier Supreme Court order increased insurance cost by making it mandatory to have long-term third-party insurance, three years for cars and five years for two-wheelers. As if this was not enough, the government increased registration fees. Governments must stop milking the auto sector unless they wish it goes the telecom way. Neither consumers nor manufacturers want policy uncertainty. It affects consumer confidence and future investments.

Another related issue is introduction of Bharat Stage 6 norms in April 2020. As a consumer, why would I buy a BS4 car when April 2020 is just six months away? Since India has a vibrant second-hand car market, the resale value of a BS4 car in, say, 2024 would be much lower than a BS6 one. More about BS6 later.

Also, the popularity of shared mobility or cab services, which contributed to a surge in sales earlier, has begun to hurt. And the cost of owning a car has gone up. A consumer pays EMI (high interest rates), recurring cost of fuel, insurance, registration, maintenance, and hassle of car parking. Cab services reduce your investment and stress. Uday Kotak, the MD of Kotak Mahindra Bank, recently said that consumers prefer cab services. It is now considered cool to use cabs, not own a car. Consumer behaviour is changing. As the metro rail coverage increases across India, it might further reduce the demand for cars and two-wheelers.

By nature, Indians are bargain hunters. With the industry clamouring for a GST cut, they are waiting to see if the government succumbs. Modi 2.0 has compounded the problem by taking a piecemeal rather than integrated approach to address the alleged auto industry woes.

Let us look at sales numbers now.

Exports of passenger vehicles (PVs) peaked in 2016-17 (see table), growing by only 9% over a five-year period. India has a long tradition of making commercial vehicles (CVs), yet export numbers are an embarrassment. Three-wheeler exports grew by 39% and those of two-wheelers by 33% over a five-year period. Two-wheeler exports grew at a good 20.3% and 16.5% in 2017-18 and 2018-19, respectively. One does not need to be an IIM graduate to know that exports compel manufacturers to improve quality, technology and reduce per unit indirect cost, amongst others.

Also, over a five-year period, growth in domestic sales volumes was 30% for PVs, 64% for CVs, 32% for three-wheelers and 33% for two-wheelers (see table). PV sales grew at a high of 9.3% in 2016-17, falling to 2.7% in 2018-19. Actually, growth rates in PV sales started falling in 2017-18. The decline in sales could also be because of lack of new products, especially in the affordable segment. When I look at the top-20 cars by sales volume in July 2019, I see the same old models. Where is the motivation to buy!

In a recent interview to ET Now, Prashant Jain, CIO and ED of HDFC AMC, said, “Consumer discretionary spending is slowing down. The real reason for this slowdown is that white-collar wages in the private sector have not done well over the last many years. Actually, in many areas of the economy, they have de-grown in real terms. The last few years’ growth was sustained by increasing household borrowings and falling savings. Household leverage in India has gone up pretty sharply in the last 5-6 years. We are coming to a stage where we do not have much room to borrow and consume. Going forward, consumption will grow when jobs and wages increase.”

CVs grew at 20% in 2017-18 and 18% in 2018-19. If one compares sales of CVs in 2019-20 with the previous two periods, the fall would be sharp on account of a high base.

It can be argued new axle-load norms led to an increase in rated load capacity of trucks, allowing transporters to carry additional weight, and thus reduced demand for CVs. Actually, “The higher limit, i.e. increased load, has in a way legalised overloading and given fleet owners the opportunity to sweat their existing assets more instead of purchasing new trucks.” (https://bit.ly/2lZjiKu).

Two-wheeler sales grew at 14.8% in 2017-18 as against 6.9% in 2016-17 and 4.9% in 2018-19. Rajiv Bajaj, MD, Bajaj Auto, recently asked, “In terms of motorcycles, I was looking at these numbers, year on year the decline in retail sales is only around 5-7% … if that can be called a crisis, what is it we mean by the normal up and down cycle of a business?”

The above are wholesale numbers, i.e. from companies to wholesalers. Can the Society of Indian Automobile Manufacturers, the industry body, release retail sales for a better evaluation of trends?

The crisis in the NBFC sector has reduced financing options for consumers. The question is whether overleveraging by NBFCs should be brought out in the open or brushed under the carpet for fear of hitting growth rates?

In order to lure consumers, companies have invested in showrooms. These require investments and increase fixed costs. When demand fails to meet expectations, dealers come under pressure. Has the time come to experiment with multi-brand auto showrooms?

Another factor that has received inadequate attention is BS6 norms by April 2020. Are oil marketing companies ready to supply BS6-quality fuel? Since BS6 cars would coexist, would petrol pumps supply a separate fuel for those cars? How would these fuels be priced?

Here is an excerpt from a Team-BHP report ‘Busting the myth of BS6 engines in India’, “Since there is no clarity yet as to what the final rollout of BS6 norms and fuels would be like (restricted to a few tier-1 cities, or pan-India), we as car buyers and owners can only speculate about the various measures being taken by the government and automobile manufacturers to save money, make more money from customers, and work around the SC orders relating to BS6 rollout.”

Change and uncertainty are synonymous. It is imperative for the government and industry to rise above revenue considerations, sales targets and communicate clearly and consistently, failing which the consumer will wait till at least May 2020 to see how things pan out. The Supreme Court should trust these two and refrain from passing orders that will only compound policy uncertainty.

(The author is a chartered accountant and founder, eSamskriti.com. Twitter: @NayyarSanjeev)

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