‘If you do anything ad hoc, you are mortgaging your future’

I was at our tractor dealers meet recently and had the opportunity to interact with many of them. Our dealers appeared to be fairly positive on the festive season. The rains were delayed but now it has arrived and the farmers are beginning to look at buying tractors.

They believe that though the floods have been quite bad in some areas, it will not have a huge impact on tractor sales. From the interaction with our dealers, I am confident that we will get a 6-8 per cent growth in the next eight months, which means flat to 2 per cent growth for the year. Clearly, the positive sentiment in the tractor industry will rub off on the rural segment of auto industry.

There are three reasons being floated on the causes for the slowdown: One, the rise of shared mobility; two, the impact of electric vehicles (EVs); and three, the impending switchover to BS VI emission norms. While I think that these factors will affect sales in future, they are not the right reasons for the ongoing slowdown.

Why do I say that? It is because EV volumes even today for four-wheelers is only 300 to 400 units a month, when we are selling 2.5 lakh internal combustion engine (ICE) vehicles a month. And, I have not come across anyone who is eagerly waiting for EVs so much so that they are postponing buying an ICE vehicle because of this.

As far as shared mobility is concerned, if you look at the growth, it has somewhat flattened. I am not seeing too many vehicles going into this space and even so, the total number sold for shared mobility by the industry will still be a small percentage of the whole demand.

We believe what shared mobility is doing in India unlike other developed countries is that it is making mobility more accessible and not necessarily replacing a personal car ownership. Those who own cars may choose to use a cab hailing service for some inconvenience but that doesn’t mean they would not want to have personal cars.

Finally, it is not that customers do not want to buy BS IV vehicles fearing the arrival of BS VI. It is the usually the other way round as they will pre-buy since they don’t want to pay a higher price.

This is the fourth time in my career that we have had this slowdown. The previous occasions were in 2001-02, 2008-09, 2013-14 and now in 2019-20. I have always said that one should not do anything major or ad hoc in a time like this. If you do it, you are mortgaging your future. The bad times never last and if you are not preparing for the good times in terms of capacity and product, then you will not be able to leverage them (when they happen).

One thing which we always do in any slowdown — and we are doing it again this time — is that we never slow down on any product development or capex that is required for bringing the right product for the customers. I have also said in the past that a slowdown is a good time to cut down the flab, which we are doing in terms of reviewing our spends.

As far as workforce goes, from April 1 until now, we have probably removed about 1,500 temporary workers. We are trying not to remove more. But the concern on job losses will not be so much from OEMs. It will be more from suppliers and dealers as they cannot afford to hold on to them.

First, there are three reasons for the slowdown. The first is the tightness in financing, both wholesale and retail financing. The second is the rise in transaction cost of vehicles, and the third is sentiment.

The government can certainly give some push to NBFCs, PSU and private banks to see how better financing can be made available to dealers and customers. For lifting the overall sentiment, there is no magic wand. That will happen only when the economy looks up.

The transaction cost has to come down. It has increased in the last two-three years for a variety of reasons including commodity prices that had gone up for two years in a row fairly heavily. This apart, rise in registration cost, road taxes, insurance becoming long-term and regulations have also impacted the transaction cost.

GST rate reduction is one route the government can take. But instead of the GST rate, the cess can also be changed. If the government does not want loss of revenue, it could tinker with non-revenue items like insurance going back to one year, thereby bringing down the premiums.

The one per cent TCS is not a revenue item but it also can be eliminated as it is a transaction cost to the buyer (even though it gets refunded later). There have been some increase in road taxes. States need to relook on whether it is justified. And, the registration fee is likely to go up again. This should be avoided.

The first question is whether the auto industry will be ready with BS VI on time. While we may have the vehicles, we have to do a lot of work managing the inventory, slowing down on BS IV vehicles and ramping up BS VI vehicles. But technical challenges seem to have been met.

The second question is fuel availability, which is a concern. While it has been committed that fuel will be available from April 1 next year, it is not good enough. If we have to sell only BS VI vehicles from April 1, we have to start selling sooner than that. We can’t be selling BS IV until March 31 and shift to BS VI on April 1. So we need fuel before April 1. SIAM is talking to the Oil Ministry on this.

The third concern is pricing. The cost impact is lower than what we thought it would be. But that doesn’t mean it is insignificant. Yes, there will be a shock for a while. But our hope is that it will slowly settle down. In summary, I don’t want you to think that it will not have an impact on demand. It will!

The writer was in Colombo at the invitation of M&M