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Mr Kapil Arora

Manu P. Toms

Mumbai, June 22 The current financial year will be a flat period for the domestic passenger car market while commercial vehicle segment may see a negative growth. The two-wheeler sector is expected to show moderate growth, according to Mr Kapil Arora, Partner-automotive practice, Ernst & Young India. He spoke to Business Line on subjects related to the automobile industry ranging from international tie-ups in the commercial vehicle (CV) segment to exports. Excerpts:

What is the market situation? How well would the passenger vehicle market perform this financial year?

I don’t see a return to robust growth anytime soon. FY10 is going to remain a relatively flat period for the passenger vehicle market with projected volume growth in the range of 2-5 per cent despite new product launches. However, the long-term growth drivers for the passenger segment – which are increasing levels of disposable income, aspirations of an expanding middle class, easing liquidity and access to affordable credit – remain intact.

Historically, growth for the car market has been coming from the metros. Now, semi-urban and rural markets, which are de-coupled from the global economic meltdown, are growing, particularly in the small car segment. Public sector banks are also starting to step up their lending; they are at least not showing the reluctance that they were showing six months ago. The main challenge for banks now is the need for enforcing vehicle repossession regulations.

Does the focus on infrastructure projects pave way for a revival in commercial vehicle segment this financial year?

There is a high level of correlation between economic activity and commercial vehicle sales. Infrastructure projects tend to have a long gestation period and there is a positive lag effect on CV sales. However, the renewed focus on infrastructure may not immediately translate into higher sales for commercial vehicles. My view is that there may even be a negative growth for the CV segment this year. At best it can be flat. However, certain segments such as bus and light commercial vehicles may see growth.

Last year saw a lot of activity in the CV space in terms of tie-ups between international and domestic manufacturers. Does it suggest that everyone foresees an uptrend in the Indian CV market?

The sheer pace and magnitude of the global downturn has impacted the viability of automotive projects of all the major manufacturers. Those OEMs who operate in mature markets are facing the situation of excess capacity. Some of them are struggling for survival in their home markets. As far as the Indian commercial vehicle industry is concerned, significant inventory pile up was witnessed during August 2008-January 2009. The current adverse situation has impacted expansion plans and planned investments with the OEMs either pulling out of new ventures, deferring or scaling down projects for the next 12 months till the market situation improves.

What about the Indian subsidiaries of trouble-ridden global car manufacturers, for example, GM?

GM India has been operationally profitable for the last five years and is not included in the Chapter 11 filing by the US parent. The immediate challenge is to reinforce confidence in the brand and reassure customers about perceived concerns relating to availability of spare parts, validity of warranty and continued existence of a reliable service network. There is a short-term risk of revenue and market share erosion. In the long-term, country subsidiaries of global OEMs will need financial and technical support from the parent to enable new product development, expansion and growth. If the troubled parent can successfully reorganise its business and emerge as a leaner and viable organisation in the next three to six months, there should be minimal long-term impact.

What is the medium-term prospect for the Indian automobile sector?

India has the potential to become one of the top six automobile markets by 2015. After the US, China and Japan – which dominate the global auto market – the next set of countries with significant volume are Germany, India, Brazil and South Korea. Of these, only India is forecast to grow significantly in the medium term. Industry estimates that the passenger vehicle market will be nearly 2.8 million units by 2015 at a CAG of 10 per cent. Not only vehicles, but auto components should actively contribute to this growth. On the other hand, we will see diminishing importance of the mature markets of the US, Western Europe and Japan.

The Automotive Mission Plan 2016 gives emphasis on exports. What are the prospects of automobile exports from India?

India’s vast labour pool, low-cost manufacturing and proven engineering capabilities are its advantages. However, India’s export competitiveness will be impacted by trade restrictions and import tariffs imposed by certain countries as well as the threat from other low-cost hubs such as China, Korea, Mexico, Brazil. Auto component players in mature markets, who have distressed assets, may respond to the downturn by slashing their pricing to survive. Over the next five years, the real challenge for the Indian auto component companies is to achieve global size and scale by building capabilities and proactively responding to market trends in R&D, technology and innovation, sustainability and recyclability initiatives, new vehicle emission and safety norms.

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