Automobile: Firmly in the grip of a slowdown

The year 2019 was one of the worst years for the automobile industry with falling sales and piling inventory.

The overall slowdown in the economy, liquidity crunch, the crisis in the non-banking finance companies (NBFC) sector, the increase in third party insurance and road tax, and the consequent hike in the cost of acquisition, uncertainty arising out of inventory liquidation prior to the BS-VI transition and expectations of a possible GST reduction were the primary reasons for the prolonged slowdown this year, according to experts.

Passenger vehicle sales declined by 17.98 per cent in April-November 2019 over the same period last year, according to the Society of Indian Automobile Manufacturers (SIAM). The industry is expected to close the year with a drop in wholesale dispatches of 13-17 per cent vis-à-vis 2018, Sugato Sen, Deputy Director-General, SIAM, told BusinessLine. While passenger vehicles and two-wheelers will decline by 13-17 per cent, commercial vehicles will go down by 22-27 per cent overall, with heavy vehicles falling by more than 40 per cent, he added.

Stable policy

Despite the slowdown, SIAM feels that the worst is behind the automobile industry. “However, it is important that no sudden policy change happens that derails industry growth. Auto industry requires a long-term stable policy environment to grow sustainably and the government should provide such a policy environment,” he added.

SIAM expects the industry to start reviving from the second quarter of the next financial year —July 2020 — with the effects of it expected to be visible from the third quarter of the year. The liquidation of BS-IV stock and the building of new inventory with BS-VI norms will give some upside to production and sale, said Sen.

SS Kim, MD & CEO – Hyundai Motor India Ltd, also said the automobile industry will see a revival and improvement in sales from the second quarter of 2020.

The second quarter of 2020 will see proceeds of the upcoming rabi season — whose prospects have improved due to higher reservoir levels — coming in, which will aid demand, especially for two-wheelers and light commercial vehicles, said Hetal Gandhi – Director, Crisil Research. Automobile demand is expected to grow by mid-single digits in CY20 despite the BS-VI price hike, she added.

“The de-growth witnessed in the automobile sector this year is expected to fall in the next calendar year. Current year saw recession of 18-19 per cent in car sales which is expected to come down to around 15 per cent in the coming year,” said N. Raja, Deputy Managing Director, Toyota Kirloskar Motor.

Tata Motors hopes to see some revival in the coming quarter on the back of waning uncertainty around the BS-VI norms, said Mayank Pareek, President – Passenger Vehicle Business Unit (PVBU), Tata Motors.

SIAM’s Sen said the negative effect of a lot of dampening factors will reduce going forward.

Discounts, exchange offers and easier finance are strategies adopted by OEMs to deal with slowing sales growth and these worked well in improving retail sales during the festival season, said Sen. Companies have gone lean on their expenditure and are looking at consolidation options to increase efficiency and reduce cost, he added.

“Passenger car companies have now learnt that volatility is going to be higher in the car industry given the higher share of commercial sales. Players have now begun to be aware of adjusting quickly to production changes,” said Gandhi.

Focus on retail sales

A focus on retail sales, as opposed to the traditional method of focusing on wholesale dispatches, is something most companies have been adopting during the slowdown.

On the disruptions the automobile industry has been witnessing this year, Hyundai’s Kim said the industry has been going through a massive transformation with respect to new product launches, policy implementation, as well as the entry of new companies.

New launches, players

“The year 2020 will witness a lot of action. With new players entering the market to plethora of launches by the automobile companies, including Hyundai, the market will become extremely competitive,” he said.

Shashank Srivastava, Executive Director - Marketing and Sales, Maruti Suzuki, said one of the trends to look forward to in 2020 will be a lot of action on the SUV front, with many launches lined up. The SUV segment will continue to show strength in 2020, as it has been doing in 2019, he said.

Hyundai Venue, MG Hector and Kia Seltos did well despite the slowdown and these were products equipped with the latest powertrain, infotainment, connectivity and safety features, indicating a shift in consumer preference for advanced and differentiated offerings, said Suraj Ghosh, Principal Analyst, Powertrain & Compliance Forecasts, IHS Markit.

The crucial part would be to see how the customer responds to the increased vehicle pricing post BS-VI, especially in the diesel car market, said Toyota Kirloskar Motor’s Raja.

On the expectations from the government to help revive growth, SIAM’s Sen said taking into consideration how the cost will be going up due to the BS-VI transition, the government can bring the purchase price of vehicles down by reducing GST rate from 28 per cent to 18 per cent. An incentive-based vehicle scrappage scheme will also be effective in reducing the cost of acquisition of vehicles and creating demand, said Sen. SIAM has made submissions to the government regarding the same, he said.

A strong economic impetus is also required from the government to bring positive sentiments back to the market, help the banking sector improve liquidity situation and establish clear and stable long-term policies, said IHS Markit’s Ghosh.