Economy

Auto sector on thin ice as slowdown persists

Our Bureau Mumbai | Updated on June 10, 2019

Representative image   -  Bloomberg

Plant shutdowns on the rise; imminent move to BS VI norms promises even tougher quarters

Plant shutdowns have become rather routine for automakers, with sales plummeting by the day and no signs of a reprieve in sight.

The first two months of this fiscal have seen sales in free-fall mode. Market leader Maruti Suzuki is reportedly contemplating cutting back on production in the coming weeks. Mahindra & Mahindra has already made its intent known in a communique saying it will go in for a closure of up to 13 days this quarter.

If the slowdown continues, more names could join the list. This is because companies will really have no reason to produce cars/two-wheelers and contribute to inventory pileups at dealerships.

Industry captains are hoping the Budget will bring in some positive news which could draw customers back to showrooms. For now, lending by NBFCs has virtually dried up, which means even interested buyers can’t access loans.

 

GST markdown hopes

Automakers will be hoping that the GST on vehicles is brought down to 18 per cent from the existing 28 per cent, while the Centre will also do its bit to inject liquidity back into the system.

Manufacturers, meantime, are grappling with the pressure of material costs while working round the clock to get ready for the Bharat Stage VI (BS VI) emission norms, which kick off in April 2020.

The slowdown has caught the industry by surprise though it was getting apparent some months ago that demand in urban markets was drying up. This was reflected in falling sales though there was still some optimism that things would soon be back on track.

Caught off-guard

This was based on the assumption that there would be brisk buying of BS IV products which would be far more affordable than the BS VI options. After all, there are some pretty significant investments going into technology fitments for BS VI vehicles. This will translate into all vehicles becoming dearer.

It was this reality which possibly caused automakers to assume that this fiscal would see buoyant sales of the less expensive BS IV offerings.

The slowdown has caught everyone off-guard and manufacturers are now pretty much resigned to things not looking up till the end of the second quarter.

In the process, the supporting ecosystem, comprising ancillary suppliers and dealers, are also facing the pressure, especially when it means coughing up for overheads like labour costs and rentals. It’s hardly any surprise that dealerships are closing down while tier 2/3 suppliers are walking the tightrope between cutting back on BS IV production and investing in new lines for BS VI.

“It is a nightmare and we can only hope that there is some light at the end of the tunnel,” a supplier told BusinessLine. It’s only logical that following plant closures by their vehicle customers, vendors will also follow suit.

If a long slowdown occurs, things could get really tricky. “We don’t think this will happen and are hopeful that things will look up from October. We are already factoring slow sales for the April-June 2020 quarter, when customers will be lukewarm to expensive BS VI options,” said an industry official.

Published on June 10, 2019

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