It is no secret that the automobile industry in India is facing an unprecedented slowdown. The sales numbers continue to slide month on month leading to planned production shutdown from time to time by manufacturing giants like Maruti Suzuki, Tata Motors and Ashok Leyland. A consequence of this slowdown includes cutting of jobs. Reports suggest that over three lakh jobs have been hit in the automobile and auto component manufacturing industry since April 2019. More than 200 dealerships have also shut shop across the country and if this downward trend continues, the numbers are likely to rise.
As per statistics provided by The Society of Indian Automobile Manufacturers (SIAM) on their official website, the auto industry produced 13,699,848 vehicles between April-August 2018. This includes passenger vehicles, commercial vehicles, three-wheelers, two-wheelers and quadricycles. The industry, on the other hand, produced only 12,020,944 vehicles between April-August 2019, a significant drop of 12.25 per cent. According to SIAM, the sale of passenger vehicles in the country declined by a whopping 23.54 per cent when compared to the same period, last year.
The current slowdown in the automobile sector in the country has been attributed to the overall poor state of the economy. Demonetisation in 2016 was one of the turning points and continues to find mention even today when we speak of the economic slowdown the country is reeling under. The industry bounced back after an initial hit but the growth trends never fully recovered.
With the arrival of Goods and Services Tax (GST), there was a flat 28 per cent tax levied on all four-wheelers. Taxes like excise, VAT, sales tax, road tax, motor vehicle tax, registration duty etc. became one under the GST regime. But not all segments benefited as the cess levied varied from three per cent on small cars to 20 per cent on luxury cars, eventually resulting in a price hike.
Many in the industry had called for lowing of the GST slab which led to buyers postponing their purchases until the government clarified its stand.
In a GST Council review meet in Goa held on Friday, Finance Minister Nirmala Sitharaman slashed the effective corporate tax to 25.17 per cent inclusive of all cess and surcharges for domestic companies. However, the auto sector is unlikely to get direct relief as there was no GST slab reduction from the current 28 per cent.
There was an increasing demand for cars in rural areas, at times higher than urban sales. But a fall in rural income due to irregular monsoon, price rise and unsteady jobs affected the market.
Mandatory insurance of three years (Third Party) for all newly registered vehicles also left many people bitter. The percentage increase varies from 4 per cent to 21 per cent depending on your choice of vehicle and the steep rise deterred many two-wheeler buyers.
A sales professional working in a Hyundai dealership in the city said that Hyundai has not faced a major impact of the slowdown as newly launched vehicles by the company received an extremely good response. “We faced around 10 per cent degrowth but it was not as much as the other manufacturing companies as Hyundai Venue and the Nios variant received an overwhelming response. GST and insurance hike has not refrained serious car buyers from making purchases,” he said.
BSVI emission norms
In October 2016, India signed the Conference of Protocol known as the Paris Climate Agreement or the Paris Agreement. Countries across the globe came together for this landmark agreement to fight global warming and climate change. Being a signatory, India is bound to cut its carbon footprint by 33-55 per cent.
Several Original Equipment Manufacturers (OEMs) faced a setback when India decided to roll out Bharat Stage VI (BSVI) emission norms for stricter implementation of the Paris Agreement way ahead of its scheduled year of 2024.
The OEMs were asked to get their vehicles BSVI-compliant by 2020 instead of the original date of 2024. The research and development required for the roll-out took a toll on the OEMs resources.
Currently, BSIV emission norms are in effect. India has decided to skip BSV and directly adopt BSVI norms. Under the new norms, NOx emission will come down by approximately 25 per cent for petrol engine and 68 per cent for the diesel engines. The particulate matter emission will also see a substantial decrease of 80 per cent in diesel engines.
The Supreme Court has passed a judgement where it has banned the sale and registration of BSIV-compliant vehicles across the country from April 1, 2020.
Not all carmakers have clarified their position regarding the upcoming shift and how their product lineup will be affected. Maruti Suzuki and Tata Motors, who are major players in the industry, have already decided to phase out their small capacity diesel engines and completely stop production of these engines before the April 1, 2020 deadline citing higher input cost required to get the engine BSVI-compliant as this would also increase the vehicle cost substantially.
Many buyers are also delaying their new vehicle purchase until there are more details and clarifications regarding the availability of BSVI-compliant model choices. The clear preference being shown to newly entered manufacturers like MG and Kia as they have tasted stupendous success majorly attributed to the fact their SUVs are either BSVI-ready or BSVI-compliant which served as a major boost.
In 2019, consumer sentiment remained subdued as the total cost of vehicle ownership went up largely due to an increase in fuel prices, higher interest rates, complex tax regimes and a hike in vehicle insurance costs. In such an environment, the festive season too failed to boost demand, leading to a huge inventory pile-up with dealers.
Original Equipment Manufacturers (OEM) are dependent on their dealers to clock in the numbers. The general practice of the industry is - the dealer buys the vehicles and then sells them. But in between this buying and selling are the things that make or break the dealer. Once the vehicle lands with the dealer, he is entitled to spend on the interest and safe-keep of each vehicle until the time it is in his stock. Higher the stock, higher the fixed expenditure without any guaranteed returns. When the dealer sells this stock vehicle, his margin retention is very poor thereby hampering his overall profitability. That puts the dealer in a financial fix, limiting his ability to render better service.
With the country inching towards BSVI norms, the pile of already manufactured cars is being dumped on dealers to sell. Many are even offering heavy discounts and offers on the products to clear the pending stock which will become redundant once the new emission norms kick in. Buyers, on the hand, are sceptical.
Businessman Shantanu Limaye has put his new luxury car plans on hold and is waiting for the April deadline. “I had finalised the car but in just a few months, my brand new car will turn into an older version. There is also no guarantee that the government will not come up with any policies which will make my BSIV car unsellable later. What do I do then? It’s better to wait,” he says.
The rise of cab services and self-drives
Finance Minister Nirmala Sitharaman’s recent comment on millennials contributing to the slowdown of the auto sector cannot be immediately dismissed as trash talk. Believe it or not, statistics point to the fact that not only millennials but people from across various age groups are preferring cab services to buying, maintaining and driving a car. Taxis and hired car services have been around for decades. However, they were always quite expensive, especially if for a short distance, hard to find and one had to pre-book well in advance. Today, thanks to the smartphone and cheap internet, we have access to convenient cab services from global app-based aggregators like Uber and India-based Ola. In fact, in the last year or so, these two aggregators have gone beyond just booking a cab but now also provide autorickshaws and motorbikes in some cities for shorter distances. Ola also offers outstation rides for those who want to travel for a longer distance. With the added convenience of online fare payments, the use of these apps is a favourable prospect for many.
Speaking of the hassles of owning a car for an urban citizen, the first one to mind is that of being stuck in traffic. A large volume of car sales is driven by young, upcoming professionals with growing incomes and fewer liabilities. But even if you have the money to buy a car, you will likely spend a lot of your time driving it in congested traffic and/ or looking for a suitable parking space.
Ritika Tiwari, a freelance writer who lives alone in the city, says, “I travel mostly by cabs because Pune does not have a proper transport system. There are only buses but they aren’t well connected to other areas of the city. Buying and maintaining a car takes a lot of effort, plus traffic and parking issues. If it takes me 1.5 hours to 2 hours to travel somewhere, I would rather take a taxi and get some work done on the way than waste my time on driving.”
Siddhartha Joshi, a designer, travel blogger and photographer based in Mumbai also prefers to use Uber or an auto. “They are both easily available and there’s no hassle of owning a car,” he says.
Over a period of time, the aspirational value towards owning a car has gone down.
Tiwari says that millennials are just trying to get most of the current situations. “For the generation before us, buying a car was a symbol of pride and success. But the newer generation has different metrics for success which don’t include owning a house or a car,” quips Tiwari.
Many youngsters are also becoming more environment-conscious. “I feel it’s more environment-friendly not to own a car and I currently have no plans or aspirations of owning one,” Joshi says.
Mumbai couple Nisha and Vasu recently sold their car and have no plans to buy one. “It had become a white elephant for us. Pathetic roads, poor infrastructure, lack of parking spaces and traffic sense and sudden unexpected rise in fuel prices were the reason for our decision,” they say.
Despite the ‘slowdown’, manufacturers continue to launch new vehicles in the market. Kia, MG, Renault, Maruti Suzuki and VW have all launched new products in the past couple of months. Kia Seltos and MG Hector and Hyundai continue to grab bookings. The overwhelming response to the Hector forced MG to momentarily stop taking bookings citing production constraints and longer waiting periods. There is a slew of new products and variants expected to be launched as the country gears up for the Auto Expo in early 2020. Manufacturers are hoping this slowdown is a temporary phase and sales pick up with time.
The Commercial Vehicle dynamics
In the next 12 months, infrastructure-driven sales will make or break the commercial vehicle (CV) industry and a lot rides on the continuing government focus on building roads across the country which will spur demand for construction equipment and tippers.
The monsoon is active across the country, so it will be another three months or so before the CV sector benefits from rural growth. Furthermore, after-sales services will also flourish (read authorised service stations) as all BSVI vehicles will need to be maintained and attended by these workshops and not local garages due to investment demands on BSVI-compliant infrastructure, tools and equipment and trained manpower.