Auto focus

Auto sector in dire straits as slowdown worsens

Murali Gopalan | Updated on July 25, 2019 Published on July 25, 2019

File photo   -  Bloomberg

Huge layoffs across the supply chain as ancillary suppliers and dealers grapple with the crisis

With barely a week to go before the July sales figures come in, auto-makers are bracing themselves for yet another round of bad news. Customer sentiment has been at its lowest level in recent years and there is just no semblance of any recovery happening across vehicle segments. Be it two-wheelers, cars, or trucks, the story is the same everywhere with manufacturers and ancillary suppliers cutting back on production while dealers are trying their hardest to woo customers to showrooms. This also includes the construction equipment industry, an important part of the overall ecosystem, which is facing hard times.

The latest missive from the Automotive Component Manufacturers Association on job losses is, therefore, not entirely surprising. Nearly a million people have been asked to go over the last year with a lion’s share being contract workers. The numbers could grow even further in the coming months with absolutely no respite in sight.

Joblessness

“Obviously, this will create a lot of social tension especially when joblessness is already at an all-time high. People need to make their ends meet and you will see crime proliferating as a result,” a top ancillary supplier CEO told BusinessLine.

According to him, the slowdown began to set in from the second quarter of last fiscal and has only got progressively worse since. Industry was hopeful that the festive season of 2018 would bring the required mojo back into the system but that did not happen. As stocks began piling up in dealerships, the only way to clear them was through discounts.

Yet, there was reasonable optimism about pre-buying of BS IV vehicles given that the BS VI range available from April 2020 would be considerably more expensive. Truck-makers, in particular, were hopeful of a buoyant 2019-20, which would more than offset the expected lacklustre sentiment in the BS VI era.

Nothing of the kind has happened and the slowdown is now really beginning to bite. Plant shutdowns have now become the order of the day both for vehicle-makers and ancillary suppliers. Quite a number of dealers have shut shop too simply because it has become impossible to balance the outgo of rents/salaries with poor sales. “It’s a virtual bloodbath out there,” remarks an auto industry official.

While the diehard optimists believe that a revival will begin from September, there is no indication at the ground level to support this claim. Customers need a trigger to queue up at showrooms but there is no sign of that happening in terms of fiscal sops, etc. “If the auto sector itself is already seeing close to a million job losses, just think of what is happening in other industries like Jet Airways for instance. These unfortunate people are also potential customers who obviously cannot buy a two-wheeler or car now,” adds the official.

Finance crunch

The liquidity crunch arising from the present NBFC crisis is one big reason why buying is not happening. After all, customers need finance for their vehicle(s) and when this is not easily available, it only ends up gathering dust in factories/dealerships.

Beyond this, the auto industry is of the view that GST levels on cars and two-wheelers must come down to 18 per cent from 28 per cent in order to boost market sentiment. “Customers always make a beeline for showrooms when products get cheaper. The government’s fears of losing revenue on lower GST will be offset with higher vehicle sales,” reiterates an automobile executive.

The other grim reality is that there are no fresh investments happening, which pretty much means that hiring can be ruled out in the short to medium term. According to industry sources, when the going was good till early last year, there were manufacturers who had invested in capacity only to find that demand began drying up soon after.

“Obviously, borrowings were made to fund these expansions even while they are not required now. Loans will still need to be repaid and some of these companies are virtually skating on thin ice,” cautions an ancillary supplier. Right now, with the prevalent bearish outlook, companies are a lot more circumspect about budgetary outlays but for those who are already burdened with debt, the road ahead is fraught with anxiety.

For now, there are no indications if the Centre is inclined to doing something in a hurry. The top priority clearly seems to be electric mobility where the Budget has also made some generous allocations in terms of tax incentives to the customer as well as lower taxation levels.

No concrete roadmap

It is, of course, another matter that there is still no concrete roadmap in place even while the Centre’s think-tank, Niti Aayog, has indicated that two and three-wheelers will go completely electric by 2025/2023 respectively. This has become a bone of contention with the two-wheeler industry, which has made clear that such a deadline is both impractical and risky.

In the present context of job losses, there is no telling how an all-electric era will impact employment. After all, the number of parts in the conventional internal combustion engine (ICE) powertrain is considerably higher than an electric option.

“Going by that logic, there would really be no need for the extra manpower in electric, which means there will be more exits happening in the coming years,” says an auto executive. Beyond this, the industry will also need to come to terms with a “new animal” in the form of electric where the skill-sets required will be of a different order.

The other inevitable fallout will be massive Chinese imports in the electric two-wheeler space, which could lead to the closure of smaller domestic ancillary suppliers. There is no way they can compete with the aggressive pricing of Chinese parts, which could just lead to many of them downing their shutters.

“In this background, should electric mobility be the sole priority?” asks an industry official. He makes it clear that nobody in the two-wheeler industry has an objection to the cause of cleaner air but the way this is being planned is nothing short of disruptive. The price paid will be heavy, he warns, especially in terms of plant closures and job losses.

Two-wheeler woes

Two-wheelers have faced a particularly tough time in recent times with the hike in insurance levy last fiscal that was a big dampener to potential buyers. Fuel prices have also been on the rise as also material costs for manufacturers. The latest round of safety fitments like ABS/CBS have only led to bikes and scooters becoming pricier.

Clearly, the task on hand for the Centre is to get the economy back on track quickly before things get progressively worse. The auto industry is a key contributor to manufacturing GDP and just cannot afford to slip into a bottomless abyss. “Offering quick solutions in the form of an 18 per cent GST will be a big help,” says an official.

This is especially important, he adds, when India is being perceived as an important automotive hub worldwide. It is already the world’s largest producer of two-wheelers and on its way to reaching the third spot in cars after China and the US.

Motorcycles and scooters from India are exported worldwide while its ancillary supplier base is part of some important global projects for big auto brands.

“To surrender these strengths overnight would be suicidal,” warns a company executive. Two-wheeler makers have already made it clear that banning the ICE and bringing in electric will be catastrophic especially when the likes of Bajaj Auto and TVS Motor ship out their ICE products to different parts of the world.

“This will come to a screeching halt once the ICE is shown the door. And it is not as if customers will throng up for electric products,” adds the executive. They will either be too expensive, going by the present price tags in the offerings by startups, or downright cheap if they are Chinese. Customers will, in all likelihood, ignore both options and persist with their superior ICE option.

Long-term policy need

According to the executive cited above, India needs to outline long-term policies that are consistent and largely devoid of needless disruptions/shocks. The recent years have seen ad hoc announcements like the diesel ban in Delhi, the move from BS III to BS IV in less than four days and so on. Legislation is now a big factor to be reckoned with for sure especially when the Court steps into the picture but it puts tremendous pressure on industry and throws plans out of gear.

Right now, there is enough for manufacturers to worry about especially when they need to balance the realities of a slowdown with the transition to BS VI in the next eight months. They will need to extinguish their present BS IV pipeline of products before bringing in the new BS VI options into the system.

Industry needs time to recover these investments on BS VI, especially when companies are going through their worst slowdown in many years. There is no point changing the goalpost to electric in a hurry while banning the ICE; it will only end up boosting the tally of jobless people. As the saying goes, if it ain’t broke don’t fix it.

Published on July 25, 2019
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