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BW Businessworld

In High Demand

Is this festive season going to set order books of the manufacturers full? The domino effect from the pandemic lockdowns has resulted in a severe global semiconductor shortage and the auto industry is in distress. By Siddharth Shankar

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Onam marks the beginning of the festive season, culminating with Dhanteras followed by Diwali celebrations in November, an auspicious time for the consumers to buy new products including a new car, a new bike or that trendy electric vehicle for personal usage.

In the first half of FY22 (April-September), the auto industry saw a high demand, after the second wave of Covid-19 receded. The figures provided by the Society of Indian Automobile Manufacturers (SIAM) show that in the second quarter of the current financial year the industry continued to cater to the high demand, resulting in a high domestic sales figures of 741,000 units compared to 621,000 units in Q2 of FY20 (pre-Covid time).

The numbers tracked by the Federation of Automobile Dealers Associations (FADA) retail data for September 21 reconfirms the argument that the passenger vehicle (PV) category grew 16 per cent while the commercial vehicle (CV) category zoomed 47 per cent compared to the same period, last year. FADA anticipates the recovery process to begin in the two-wheeler space as well thanks to the rampant vaccination drive, declining daily cases of Covid-19, and the opening up of economic activities across all major towns.

Shailesh Chandra, President, Passenger Vehicles Business Unit, Tata Motors, said, “Tata Motors PV business posted nearly a decade high quarterly sales of 83,933 units, registering a strong growth of 53 per cent versus Q2FY21. This growth has come on the back of demand recovery in the industry post the Covid second wave and a strong response to its New Forever range of cars and SUVs. Looking ahead, the demand for cars and SUVs is expected to remain strong in the forthcoming festive season; however, the supply situation for electronic components may continue to witness challenging times.

Kia Motors in September became the fourth highest selling carmaker with a healthy sales figure of 14,441 units and increased its total market share by 1.4 per cent to a total of 7.8 per cent, a big leap for a relatively new entrant in the Indian PV space.

Sensing the demand, carmakers are beginning to launch cars across varied price points including the facelift versions of their popular variants. Compared to only a couple of new launches last year (after the first wave of Covid had hit India in September 2020), Mahindra Thar and Nissan Magnite, this festive season at least half-dozen launches are happening.

Tata Punch, the new SUV is already out and generating massive curiosity, bookings and sales. Then the priority booking for MG Astor, another SUV with a starting price of Rs 10 lakh, has begun. The delivery may happen in 2022 but the launch is creating increased consumer interests. Tata Tiago CNG and all-new Celario from Maruti Suzuki are widely awaited. Volkswagen Tiguan facelift is also expected in November alongside an all-electric KUV from Mahindra’s stable.

Storm Ahead?

While the demand for ownership of two-wheelers and four-wheelers is rising every day, the auto companies are facing multiple challenges. Semi-conductor shortage, rising raw material costs and shortage of containers with rising freight costs are troubling the automakers who in turn are not able to meet the high demand. The semiconductor shortage, a global issue, has hit passenger vehicle sales in September, with major manufacturers like Maruti Suzuki, Hyundai and Mahindra & Mahindra reducing production.

The country's largest carmaker Maruti Suzuki India has already steered towards a production cut of around 60 per cent at its Haryana and Gujarat-based plants because of a shortage of components. MSI saw its domestic sales slipping 54.9 per cent to 68,815 units last month as against 1,52,608 units in September 2020. “Sales volume of the company in September 2021 was adversely impacted due to shortage of electronic components. The company took all possible measures to limit the adverse impact, MSI stated.

After MSI, Mahindra & Mahindra also went in for ‘no production days of around seven days in its automotive division plants in September 2021, which is estimated to result in reduction in production volumes by 20-25 per cent. M&M also saw its domestic passenger vehicle sales drop 12 per cent to 13,134 units last month from 14,857 units in the year-ago period. “The challenges around the supply of semiconductors continues to pose difficulties for the auto industry globally. We have taken several steps to mitigate the effect and are working towards managing the situation as best as possible, said Veejay Nakra, CEO, Mahindra and Mahindra Auto Division.

The country's second largest automaker Hyundai Motor India was affected as well and reported a 34.2 per cent decline in September sales owing to the semiconductor shortage. However despite supply chain issues few carmakers like Tata Motors, Toyota Kirloskar Motor, Nissan and Skoda, reported an increase in passenger vehicle dispatches last month. Customer sentiment is very positive this festive season with strong inflow of bookings. The challenge has been on the supply side with shortages of semi-conductors on which we continue to work with the supply chain partners to deliver more of the game changing SUV Nissan Magnite to delight the customers. said Rakesh Srivastava, Managing Director, Nissan Motor India.

The supply hurdle is expected to grow as demand for vehicles will rise sharply during the festive season of October and November. It may be noted that waiting periods for some models are already very long and as the list of vehicle bookings rise, the waiting periods will also rise, thus creating a significant gap between supply and demand during the crucial festive season. The low inventory levels at the dealerships mean even the most affordable cars models today have a waiting period of over 1.5 months and longer waiting periods for models in high demand.

In the two-wheeler segment, analysts from Emkay Global Financial Services noted, “Dealers expect double-digit growth in urban areas, supported by a pickup in business activity and the re-opening of educational institutions. In comparison, demand is expected to be subdued in rural areas as customer sentiments are yet to normalize after the Covid second wave.

Enquiries and bookings are increasing for e-two-wheelers, considering central/ state government incentives and increasing petrol prices. Dealers have built inventory levels of up to two months in anticipation of a healthy festive season.

Order bookings are extremely strong, with a waiting period of up to six months for top selling models. CNG vehicle demand is robust due to the lower cost of running in comparison to petrol/diesel vehicles. Dealers expect a subdued festive season, owing to supply constraints. Dealer inventory levels are low at 1-2 weeks. Assuming supply issues persist, dealers may run out of stock by October 21-end.

The auto industry accounts for about 10 per cent of the overall semiconductor demand with the rest coming from the electronic appliances and gadget industry, such as mobile phones and laptops, among others. In the first half of 2020, the auto industry faced a substantial drop in demand, with April 2020 marking zero sales for everyone and plant shutdowns. Moreover, while new-vehicle sales grew in the second half of the year, the highly uncertain sales outlook at the time meant that automakers didn’t meaningfully increase their semiconductor orders.

At the same time, driven by the shift to remote work, remote learning and the associated greater need for connectivity, consumer demand significantly rose for electronics like personal computers, servers, and equipment for wired communications, all of which heavily depend on semiconductors. That meant that even as the auto industry drastically cut chip orders, other sectors faced an increased need. When the auto sector’s demand recovered faster than anticipated in the second half of 2020, the semiconductor industry had already shifted production to meet demand for other applications.
New Launches

From XUV 700 to Tata Punch, even with the supply constraints the auto industry is not delaying any new launches to get the consumer to the showroom. In a run-up to the festive season, there has been a string of new car launches. Mahindra launched its flagship SUV, the XUV 700 loaded with tech features and new powertrains. Tata Motors recently launched its second EV, the Tigor EV with high voltage Ziptron technology, and more recently the Tata Punch, a sub-compact SUV. MG Motors has rolled out MG Astor, a mid-size SUV with AI and ADAS features, while Hyundai Motor India has driven in the new Sport N-Line variant of the i20. Honda has updated the Honda Amaze as well. Skoda and Volkswagen group has the new Skoda Kushaq and VW Tiagun ready for the festive season.

Kenichi Ayukawa, President of SIAM, said, “The Indian automobile industry continues to face new challenges. While on one hand, we are seeing a revival in vehicle demand, on the other hand, shortage of semi-conductor chips is causing a major concern for the industry. Many members have curtailed their production plans. Coupled with the festive season demand, this has led to long waiting time for the customers on popular models of some segments.

High raw material prices also continue to be a challenge. Experts say that the automotive companies are taking all possible measures to mitigate the impact of such supply chain issues and optimize production. Consumers continue to remain excited for PV despite high fuel prices.