Indian Automobile Industry’s Slowdown: A multifold perspective

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By Suhani Singhal

The Indian automobile industry is currently in the middle of a major slowdown, leaving investors worried because the industry has a transmission effect to a majority of businesses across the country as well as on the employment opportunities. Every day brings new blues when it comes to the automotive sector as updates revolving around volume decreases and job cuts have become common. The 2 Wheeler’s industry has witnessed its first decline after 11 years while the Passenger Vehicles industry has declined by 15% YoY.

The current slowdown can be majorly accrued to (1) weak retail sales due to weak consumer sentiment, increase in vehicle prices due to regulatory changes and high financing cost and (2) inventory correction by OEMs (Original Equipment Manufacturer) in June 2019. 

Slowing income growth and NBFC crisis are primary reasons for the current slowdown compared to earlier cycles which had majorly been triggered by global events like the Asian Crisis in 1998, the Dotcom bubble in 2001 and the global financial crisis between 2008-09. The recent NBFC crisis has curtailed lending to customers for new vehicles which can be attributed as one of the reasons for the slowdown. Moreover, Over FY19-21, vehicle prices are estimated to rise 5-30% due to various safety, insurance and emission norms related compliance costs. Given that general price hike over the previous decade was 1-2% p.a., a sharp increase in vehicle prices over FY19-21 can restrict the recovery. The ability of consumers to absorb the same will depend on availability of finance on the increased amount. 

As the slowdown is creeping deeper into the businesses, renowned names like Tata Motors, Hero MotoCorp, Mahindra, Suzuki, Toyota and Ashok Leyland have announced production cuts and more than 15000 temporary and casual workers have lost their jobs.

The Budget announcements in July also led to a sense of dismay amongst the auto producers because of its emphasis on the growth of Electric Vehicles. The GST on EVs has been reduced from 12% to 5% and an income-tax deduction of up to Rs 1.5 lakh has been introduced on the interest paid on loans taken for EVs. The Budget also reduced Customs duty on parts exclusively used for EVs“. According to a research report by Angel Broking, this move would prove to be positive for EV manufacturers like Tata Motors and M&M. However the traditional fuel manufacturers who would not be able to adapt to the changing infrastructure of production as well as the changed demand profile of customers after the introduction of EVs would be the losers in the segment.

The decline in gross and EBITDA margins in the current cycle is far higher compared to previous slowdowns. This is a result of a combination of huge inventory reduction exercise as well as genuine demand softness. Drawing parallels from past, it is concluded that we are mid way in the slowdown for 2 Wheelers and Passenger Vehicles with Q1FY20 being the first quarter of sharp sales decline At the current juncture, volume recovery will not be as sharp as in the past, unless fiscal support, is provided. Also, OEMs may be willing to absorb some of the BSVI costs in order to revive volumes. The BSVI norms, i.e, Bharat Stage VI Emission Norms aim to reduce the sulphur and nitrogen oxide emissions and will come into effect in April, 2020. 

Slowdown phases for the three sub-segments- 2 Wheelers, Passenger Vehicles and Commercial Vehicles- have been different in terms of duration and extent. In 2 Wheelers they have always been shorter and shallower than the other two segments. And, they usually last for nearly a year.  On the other hand, slowdowns in Passenger Vehicles last for one-three years. Not surprisingly, recovery trend also mirrors declines—while the extent of recovery is the lowest in 2 Wheelers, the sharpest recovery is in Medium and Heavy Commercial Vehicles. Key demand recovery drivers for the same can be attributed as liquidity and GDP growth.  In the case of Medium and Heavy Commercial Vehicles, it is believed that the current slowdown is more due to the economic cycle rather than over capacity in the system, which had induced slowdowns in the past.

Whether or not the current slowdown sees a reversal in the near future is a question that would be answered only with the passage of time. But one major thing is assured that the face of the auto sector in India is going to witness some significant and revolutionary changes.

Suhani Singhal is a business analyst at Vistas News

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