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The auto bloodbath


Going by how matters have been in the past year, there is little hope that India’s auto industry will grow beyond the single-digit mark in FY2013-14, even if macroeconomic indicators and economic sentiments improve substantially. By sutanu guru
SUTANU GURU, MANAGING EDITOR, THE SUNDAY INDIAN. | Issue Dated: April 28, 2013, New Delhi
Tags : Financial meltdown | Passenger car | Commercial vehicles | Indian market |

This kind of brutal bloodbath was not witnessed even after the global financial meltdown of 2008 when it appeared as if Apocalypse and Armageddon had jointly invaded the global economy. From about 1.6 million domestic sales in 2007-08, passenger car sales fell marginally to about 1.55 million units in 2008-09. Not just that, the auto industry registered a spectacular turnaround almost immediately and kept growing at a very healthy pace. By 2011-12, passenger car sales had reached close to 2.68 million units.

Something similar happened with sales of commercial vehicles that reflect even better the state of health of an economy. From about 490,000 units in 2007-08, sales crashed to about 384,000 units in 2008-09 in the aftermath of the global financial meltdown. But as with passenger cars, the recovery was swift and sure. By 2009-10, sales of commercial vehicles had recovered smartly to 532,000 units and crossed 800,000 units by 2011-12. The magic one million mark was looking very much within reach. And everybody was going ga ga over the brilliant prospects of the Indian auto industry. Some over optimistic souls even started predicting that the auto industry growth rates in India will keep outpacing that of China and that India could well emerge as one of the five largest auto markets in the world by 2020.

In 2010, the consultancy firm Ernst & Young conducted a study on behalf of Automotive Component Manufacturers Association of India. The E&Y study predicted that the Indian automobile market would clock the fastest growth rates between 2010 and 2020. Average annual growth rate for the Indian market between 2010 and 2020 was pegged at 14%. The average annual growth rate for the Chinese market was pegged at 8%; the forecast was 6% for other emerging markets and just about 4% for developed markets belonging to G-7 countries.

According to the survey, domestic sales of cars and SUVs would jump to 5 million by 2015 and further double to 10 million by 2020.

Is it any surprise then that every automobile company in India and its third cousin has been making a beeline for the Indian market? Is it any surprise that states like Haryana, Maharashtra, Tamil Nadu and Gujarat are fighting pitched battles to attract automobile companies to their states. Is it any surprise that the quick decision of Narendra Modi to encourage Ratan Tata to relocate his Nano manufacturing plant to Gujarat in the aftermath of Singur added spice and polish to his already glowing halo? And why not since the numbers being bandied about have been so jaw droppingly awesome. The same E&Y study predicted that the size of the Indian auto industry will balloon from $25 billion to $110 billion by 2020; the value of exports will rise from $3.5 billion to $30 billion and the size of the auto components industry too will balloon from $26 billion to more than $110 billion by 2020.

So what happened? Far from maintaining the much touted growth momentum, auto sales have actually crashed in recent months. The decline in sales has been so widespread and so precipitous that 2012-13 is guaranteed to register an actual decline in numbers as compared to the previous year. And hardly anybody seems to have been spared from the onslaught. Hyundai has seen sales falling more than 16% y-o-y in March 2013. Tata Motors has had to suffer the trauma of a more than 60% fall in sales in the same month. The only company that seems to have come up smelling of flowers in the aftermath of his bloodbath is Mahindra & Mahindra, whose gamble on the rising popularity of multi-utility vehicles seems to be paying off.

The two wheeler market too, is going through a series of potholes. The market leader Hero Motocorp has reported an 11% y-o-y decline in sales in March 2013. The erstwhile partner of Hero, Honda seems to be the only major two wheeler company whose fortunes continue to improve in this gloomy scenario. But across the board, the breathless optimism about the prospects of the Indian auto industry seem to have evaporated.

Virtually no one is willing to bet on anything more than single-digit growth rates for the industry even if macroeconomic conditions and economic sentiments improve substantially in 2013-14. In effect, we could be looking at car and SUV sales of about 2.5 million units in the year 2013-14. So if the E&Y forecast about domestic sales of 5 million units by 2015 has to come true, Indian consumers will need to double their car and SUV purchases in just one year. Even the most optimistic of Indians does not expect GDP growth rate to improve substantially beyond the 5% or so it has managed to eke out in the year just gone by. Equally important, despite the Reserve Bank of India finally taking some steps, nobody expects a dramatic fall in interest rates. But the most important factor is what we call investor as well as consumer sentiment. With General Elections round the corner, the citizen or the analyst is not expecting any drastic step or any bold decision that could boost sentiments in the economy. In fact, with each passing week, the intensity of bad news keeps increasing. The current account deficit is already at an astonishing 6.7% of GDP, the highest ever in the history of independent India. Latest figures reveal that manufacturing output, including that in the so called core sector has actually declined. Newly released data also shows that cutting fares has not improved passenger traffic for airlines. Consumer inflation also remains stubbornly high, refusing to come down below double-digit levels. In the event, it is but natural for consumers to postpone their car purchases till the situation improves. Says Kumar Kandaswami, Senior Director at Deloitte India to B&E, “The only macroeconomic reason for the slowdown is that people buy cars only when there is some growth in disposable income. And there hasn’t been much in recent months. Other factors like interest rates and fuel prices have also played their part.”

Of course, there is every possibility of the economic scenario improving considerably in the near future. But one thing is for certain: the five million units sales forecast for cars will remain a pipe dream.

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Issue Dated: Feb 5, 2017