Auto: Slowdown Manoeuvres
A lot is riding on the early recovery of Indian automobile sector which is launching diverse models at catchy price points to fight declining sales
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As November drew to a close, India’s worst fears came startlingly true. Government data showed the economy had slipped further, with the July-September gross domestic product (GDP) growth slumping to 4.5 per cent, the seventh straight quarter of fall. And nowhere was this deceleration more apparent than in the country’s automobile industry. And justifiably so. After all, the auto sector contributes more than 6.5 per cent to the country’s GDP, and has strong backward linkages with supporting industries like rubber, plastic, auto-components and, of course, steel.
Beginning late last year, all segments including cars, two-wheelers or commercial vehicles have been consistently reporting dipping sales figures month after month. A fallout of this has been job losses at ancillary units and dealerships — 15,000 or more are out of work. There is a visible decline in passenger car sales every month (exception being October). Experts say the sector has virtually been set back by three-four years. Can it recover in 2020? Or will it take longer?
For the seven-month period ended October this fiscal, the car makers collectively have managed to sell 1.54 million units (15,48,486 units). In 2018-19, the car segment clocked total sales of 3.37 million units, the highest ever till date. Experts say if the average monthly sales for the remaining five months (till March 31, 2020) is around 200,000 units, then for FY 20, we will be staring at an estimated total sales of less than 2.6 million units, something the industry achieved in FY15.
To make matters worse, the next four to five months are also expected to be very difficult due to the transition from BS IV to BS VI emission norms. What can the car makers do to reverse the decline? What can consumers expect in 2020?
Incidentally, India is not alone in witnessing a slowdown in car sales. Auto sales in the Asia-Pacific, estimated at around 44 million units in the previous year, could contract by up to 3.5 per cent this year. Even in Germany, automobile production has reportedly declined by over 10 per cent in the first half of 2019. Why? Due to declining sales in North America.
The festive month of October did bring a small cheer when around a dozen carmakers reported a 1.5 per cent growth over the same period last year. In number terms, the carmakers sold a mere 4,020 units more than in October 2018. Also, barring three carmakers who together reported a Y-o-Y growth in October, the rest reported declining sales numbers. These performers — Maruti, Renault India and Volkswagon — have brought back a faint smile on the faces of industry experts. The worry is that it may be an exception than any sign of recovery. Agrees on R.C. Bhargava, Chairman of Maruti Suzuki India. “Both in retail and wholesale, October looks okay but that does not mean we are out of the woods yet. It is still too early to tell if it is a turnaround,” he says.
Market leader Maruti clocked a 2.3 per cent growth in dispatches of its passenger vehicles to dealers in October. Since March, this was the best figures Maruti had clocked selling 1.39 lakh units. Renault posted a 63 per cent jump in sales selling over 11,500 units on the back of its recently launched sub-4-metre, 7-seater, Triber.
Volkswagen managed to sell a few cars more than what it had sold in October 2018. It reported a sale of 3,213 units against 3,191 units in October 2018. New entrants like Kia Motors and MG Motors between themselves sold over 16,000 units thereby helping the industry post an overall growth.
S.S. Kim, the Managing Director and CEO of Hyundai Motor India, terms the current slowdown in the market as a “cyclical phenomenon” which, he says, will phase out as the socio-economic situation improves. But the big worry for carmakers, in general, is the sluggish credit market as nearly 40 per cent of Indian car and two-wheeler buyers depend on loans. Poor economic sentiments have deterred new buyers, a big contributor to declining car sales.
“Hyundai gained 3 per cent market share to 19.4 per cent in July-August 2019. Our market share stood at 18.4 per cent in the Jan-Sept period,” says Kim, adding, “We see 2020 as the Year of Transformation. The year 2020 will start with the launch of Hyundai Aura (one of the four planned for 2020) and in the coming Auto Expo we will showcase our future technology and game changer models. We expect a positive trend to shape the beginning of the year and stabilisation will help the economy grow.” Kim took charge of India when the monthly sales figures for Hyundai were at an all-time high. And then came the slowdown.
While Hyundai India remains optimistic about a turnaround, Maruti Suzuki India is not. Maruti posted a decline of 25 per cent in the first six months of this financial year, says Bhargava. Its parent company, Suzuki Motor Corp, recently gave guidance of 20 per cent decline in sales for its Indian subsidiary to the Japanese investors. “I don’t expect a major change, and the forecast of Suzuki on India’s growth to be minus 20 per cent seems fairly close,” says Bhargava. This means there is a good possibility that it may take several quarters before the sector starts to witness roaring sales.
Suzuki’s group net profit in the two quarters (April-June and July-September) tumbled more than 41 per cent from a year earlier to $730 million, with sales in India dropping 26.5 per cent to 675,000 units, says a report in a Japanese newspaper.
“The Indian auto and motorcycle markets are slowing due to a tightening of consumer credit while the country’s economic outlook remains unclear,” Honda Executive Vice President Seiji Kuraishi told reporters in Japan.
Mayank Pareek, President, Passenger Vehicles Business Unit for Tata Motors says he remains optimistic that the positive sentiments of the festive season will lead to a structural recovery in the market. But there may be some bad news installed for some of the employees of the country’s largest vehicle manufacturer. If news reports are to be believed, Tata Motors is working on a plan to offer a Voluntary Retirement Scheme or VRS to over 1,600 employees of different departments spanning its passenger as well as commercial vehicle businesses. Analysts point to the company’s employee cost as a percentage of its net sales during the September quarter expanding to 10.7 per cent from 5.9 per cent in the year-ago period. The auto major reported a standalone net loss of Rs 1,281.97 crore during the second quarter ended September 30, 2019, compared to a net profit of Rs 109.14 crore in the year-ago period. VRS has also been implemented by other auto majors including Hero MotoCorp, Toyota Kirloskar Motors and Ashok Leyland earlier this year
Why, How, What?
How has Maruti dealt with the slowdown blues? “As a first step it is important to understand the key reasons behind the slowdown,” says Shashank Srivastava, Executive Director, Maruti Suzuki. He goes on to list a few reasons including high acquisition cost of cars due to mandatory emission (BS-IV to BS-VI) and safety norms (ABS, airbags, speed sensors and crash tests), increase in road tax (up to 7 per cent) across nine states, and upfront payment of three years’ third party insurance have increased the on-road price of a car. “Adding to this is the liquidity crunch for consumers as well as dealers. Then, there were doubts in the mind of consumers over BS-IV and BS-VI compliant cars,” says Srivastava.
Among the steps taken by Maruti is shifting from BS-IV to BS-VI compliant vehicles. “In fact, Maruti Suzuki is the first company to have a range of 8 BS-VI compliant petrol vehicles with the first models launched in April 2019, a year ahead of the stipulated implementation date,” says Srivastava.
Besides, MSIL says it is the only OEM to pass on the benefit from the corporate tax cut to its customers. It reduced the price by Rs 5,000 (on ex-showroom price) on 10 high-volume models — Alto 800, Alto K10, Swift Diesel, Celerio, Baleno Diesel, Ignis, Dzire Diesel, Tour S Diesel, Vitara Brezza and S-Cross.
Even Hyundai India’s Kim asserts that his company is fully committed to meet the government’s BS-VI norms. “We will bring the BS-VI technology to all our products before the timeline,” he says. With BS-VI implementation, Hyundai is betting big on diesel engine options for customers. “The BS-VI diesel powertrain will be offered ranging from compact to SUV models including soon-to-be-launched Aura. At present, we are offering petrol BS-VI engines with Grand i10 Nios and New 2019 Elantra,” says Kim.
Kim goes on to talk about how Hyundai India continues to support its dealer network in troubled times. “The ERP system of HMIL has end-to-end integration of all the stakeholders in the value chain -- the dealers (sales points), production facility (factory) and the suppliers. All the suppliers are given enough lead time for them to comfortably plan their materials requirement, production and delivery process. The integrated vendor portal offers complete transparency of the entire transaction, including material orders, material movement, delivery status and payment status,” says Kim, adding that such a process ensures that the vendors’ working capital cycle is smooth and regular. Currently, HMIL works with around 150 tier-1 vendors and additional 650-plus vendors in tier-2 cities.
For Sugato Sen, Deputy Director General, SIAM, the slump is unprecedented. “In the last 10 years, we have not seen anything like this when all the segments are down. The start of the new financial year has not turned out to be very good,” he told media outlets. Vinkesh Gulati, Vice President, Federation of Automobile Dealers Associations (FADA) sounded equally gloomy: “The auto demand remains weak and there isn’t likely to be any uptick over the next few months.”
India Ratings and Research has maintained a stable outlook on the auto sector for FY20 on the expectation of moderate sales volume growth in the passenger segment, high single to low double-digit growth in the commercial vehicle segment and steady growth in the two-wheeler segment on a year-on-year basis. Experts also point to a slew of regulatory changes — BS–VI norms, CAFE norms, higher axle load norms, vehicle scrappage policy, alternate mobility, etc.— also contributing to the uncertainty in demand.
When was the last time that such subdued market conditions prevailed in the domestic auto industry? “Passenger vehicle and two-wheeler categories are relatively stable segments and have not seen such significant decline at least in the past five years,” says Richa Bulani, Senior Analyst—Corporate, India Ratings & Research (Fitch Group). “Although the commercial vehicle segment is prone to cyclicality and had seen a decline in FY14 and FY15,” she adds.
Car loans, which are availed by around 35-40 per cent of all new car buyers, has shrunk in the recent past due to a variety of reasons. “One in five new customers, particularly in the rural/semi-urban markets have seen their loan application getting rejected, particularly after the NBFC crisis,” says a senior executive of a prominent car dealership.
Bank credit to vehicle loans touched Rs 2 lakh crore at the end of FY19 and constituted 8.85 per cent of the total retail loans and 2.3 per cent of the total non-food credit, according to RBI data. The figures are expected to shrink when the full-year report is out next year, says one analyst tracking the auto sector.
According to India Ratings’ Bulani, the slowdown in the Indian auto sector would continue further due to the sluggish domestic economic growth and higher cost of ownership propelled by BS-VI emission norms, scheduled to be implemented from 1st April 2020. India Ratings, a Fitch Group company says that implementation of BS-VI will lead to a 10-15 per cent increase in the cost of production, thereby leading to lower profit for the automakers.
So, what’s in store in 2020? “HMIL aims to become a brand of choice for Indian customers giving them a ‘Happy Life’. We will be moving into our new world-class office in Gurugram. As part of its overall investment strategy, HMIL will be investing over $1 billion till 2020 (from 2018-2020). New products are lined up and we will be increasing our production capacity to 7.5 lakh units per annum,” says Puneet Anand, Sr. General Manager (Group Head – Corporate Affairs).
How about Maruti? Any new launches to expect in the early part of 2020? “We have already announced that MSIL will launch the BS-VI compliant petrol variants of Vitara Brezza and S-Cross before 1st April 2020,” says Srivastava, ED, Maruti.
Srivastava says recent initiatives like attractive promotional offers, tie-up with banks for easing the loans and new launches like S-Presso and XL6 helped drive the positive sentiment and boost sales. “However, we cannot definitively conclude that the sluggishness in the market has ended. We are carefully monitoring the market and taking measures accordingly,” he adds. Rakesh Srivastava, MD, Nissan India says the launch of Nissan Kicks XE diesel at Rs 9.89 lakh and first-in-segment automatic transmission at a most affordable price in the Datsun Go and Go+ models have managed to excite the customers even during the current slowdown.
There is indeed a silver lining amongst the dark clouds!
“All products will be upgraded to BS-VI technology”
Hyundai Motor India’s MD & CEO S. S. Kim shares with BW Businessworld’s Ashish Sinha and Siddharth Shankar the company’s India strategy in 2020 and beyond. Excerpts:
On diesel strategy and BS-VI vehicles for India
Hyundai is fully committed to meet the Indian government’s BS-VI norms and will bring the BS-VI technology to all our products before the deadline. There is a lot of enthusiasm amongst the customers to buy BS-VI-enabled products and, at the same time, with lucrative deals on the anvil, customers are making an informed choice of buying existing products. Currently, we have only Nios and Elantra with the BS-VI complaint petrol engines. However, as per our plan, all products, including diesel variants, will be upgraded to BS-VI level.
On acceptance of Kona Electric in India
Kona has created a huge anticipation for being India’s first and most efficient EV till date. We have received an electrifying response to India’s first long-range green SUV — Kona Electric with more than 300 bookings till date. This affirms Indian customers’ acceptability towards high-end future technologies.
On the rt outlook for HMIL and plant capacity utilisation
Since inception in 1998, Hyundai has been the largest exporter. Till date, e have exported 2.96 million units globally from our India plant. Our deep understanding of export markets has helped us balance out production plans for domestic and export markets which further support us manage our sales numbers for smooth business operations. Our present production capacity is 7 Lakh and we have extended it to 7.5 Lakh units per annum with Smart manufacturing processes to meet the additional demand.
On competition from Ola and Uber
Hyundai is already leading the future mobility solutions and is committed to realise India’s vision of ‘shared’, ‘connected’ and ‘zero-emission’ mobility. Hyundai Motor Company has made a rategic investment in Ola. Our objective is to give Hyundai experience to the customers who don’t want to purchase a vehicle but aspire to experience a Hyundai product.