Car Sales – Writing Is On The Wall

The auto industry can no longer even meet the growth forecast of 0-1 percent for this fiscal as demand has dropped because of poor macro-economic factors and uncertain sentiment.

Cars, scooters, traffic-packed roads complete with honking and the hustle bustle have long been the mascot of India’s billion plus market. The passenger car boom rallied India’s growth glory as we went from a Maruti only nation to country on all kinds of wheels. This forced Ford Motors Chairman Alan Mullaly just last year to call India a ‘tremendous market.’

12 months later, growth has descended speedily and India stares at the worst car sales in a decade. The auto industry can no longer even meet the growth forecast of 0-1 percent for this fiscal as demand has dropped because of poor macro-economic factors and uncertain sentiment. It is now bracing for negative growth as well.

In April last year, the sector had forecast a progress of 10-12 percent for 2012-13. Was this a case of ambition over-ruling realities? The auto industry had hoped that the following months would see RBI lowering interest rates, economic development progress and government support through reforms. But with every quarter, hopes dimmed and the auto body SIAM lowered projection to 9-11 percent in July 2012, then in a shocker, a steep drop to 1-3 percent in October 2012.

It’s no mistake this time. The data isn’t suspect and the slowdown is for real. As India prepares to post its worst GDP in ten years, the automobile space too has become a victim of high inflation, higher fuel prices and poor consumer confidence.

Hopefully no one in the government will come out and call this a bottom. Not yet. Fresh investments are slow; infrastructure growth is almost non-existent. In addition to agriculture these are supposed to strengthen the demand for vehicles in an economy. A banker I met earlier this week confessed that India’s infrastructure pick up was ‘nearly zero’ as his bank was getting ‘hardly any new project proposals.’ Private spending consumption, which is a good reflection of how consumers spend money, is also very volatile. There are concerns that households continue to react to persistent inflation and declining incomes by cutting back on non-essential expenditure.

The Indian automobiles industry witnessed a moderation in demand in 2012, after the double-digit growth in sales recorded in the preceding three years. Domestic automobile sales halved in 2012 compared with 14-31 percent during 2009-2011. 

Chairman of Maruti RC Bhargav is convinced the sector will languish for another three years. The company’s already declared that new expansion will be subject to higher demand only. He shares that cost of owning a car now is higher by 40 percent compared with 2011. “Demand for cars is determined by the overall growth rate of the economy. That’s becoming even more important now because costs of keeping and running a car from fuel prices to interest rate cost will remain high.” Nearly half of the demand comes from first time buyers, that’s the segment is severely hit admits Bhargav.

The car industry is also a good reflection of the manufacturing activity in the country. Quarter of manufacturing comes from the auto sector. Many companies have frozen or reduced hiring given the slowdown in demand. This cannot bode well for an economy churning millions into its workforce annually.

In January all the major carmakers struggled to post good sales numbers. Maruti, Hyundai and Tata Motors took a severe blow. Now with the budget in sight, the sector is using the poor data as a reason to seek sops. Automakers want a reduction in excise duties in the Budget and special schemes for commercial vehicles under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to boost the sector.

But given the state of the deficits, the finance minister’s hands will be tied. It’s highly unlikely that any temporary cushion will come through.

With such an outlook the sector may prepare for some gimmicks in 2013, most popular of which will include launching new car models, push for sales in smaller upcoming towns and increase rural presence. They will need to introspect whether introducing more diesel vehicles will really pay off given that now on every month diesel will also get expensive. Ironically, small to mid sized car sales will be hit more compared with the expensive discretionary spend on luxury cars says BVR Subbu former boss of Hyundai India.

The next few years promise to be challenging for the vehicle industry in India. We can be more than certain that the speed of the slide in sales isn’t going to be coped with as quickly. The writing is on the wall.