Automotive Sector Loses Speed And Traction
A series of setbacks faced by the automobile and automotive component sectors has brought about a slump in sales even as the transition to BS-VI emission norms has brought about a greater challenge. Not to forget that the outbreak of corona virus has only added to the woes, Geyatee Deshpande takes an overall view of the industry and finds out the triggers.
India achieved the distinction of becoming the fourth-largest automotive market and the seventh-largest manufacturer of commercial vehicles back in 2018 with sales increasing by 8.3 per cent year-on-year. In this scenario, the two-wheeler segment dominated the market in terms of volume owing to a growing middle-class and a young population. Moreover, the sector’s growth was aided by growing interest of the companies in exploring rural markets with an expected increase in demand from them. However, the situation isn’t as rosy any more. Currently, the Indian and global equity markets have been very volatile.
The spread of the coronavirus and its impact on production and manufacturing lines has raised concerns among investors with their focus on the Indian automotive and automotive ancillary sector. There is an underlying current of anxiety and concern among investors given the fact that the automotive industry has been trapped in a downturn since a long time. Post a slight chance of recovery, the Auto index shows that returns have been negative for the past few years. This is a clear indication of the fact that the sector has reached its bottom. As of now, improvement in demand with surplus purchasing power remains the only hope for this industry.
A Bumpy Ride
Recent sales data from automotive makers support the general sensation of continued weak sales in the sector. While many factors are responsible for the same, this is a prolonged phenomenon and likely to drag on for some more time. The agricultural machinery segment of Escorts Limited sold 8,601 tractors in February 2020, registering a growth of 18.8 per cent against 7,240 tractors sold in February 2019 but on the contrary its 11MFY20 sales fell by 4.7 per cent to 80,574 units as compared to 84,507 units during 11MFY19. One of India’s popular car manufacturer, Maruti Suzuki India for February 2020 reported decrease in sales by 1.1 per cent on a YoY basis to 147,110 units from 1,46,045 units. Its domestic sales also dropped by 3.6 per cent to 136,849. Mahindra and Mahindra also reported a drop in sales by 32 per cent YoY with sales of 40,634 units. Subsequently, the domestic sales were down by 34 per cent YoY at 38,002 units and commercial vehicle sales were down by 33 per cent YoY. Since the domestic sales of Ashok Leyland fell by 39 per cent to 10,612 units, its total sales declined by 37 per cent YoY as well.
Motorcycle manufacturer Hero Moto Corp announced 19 per cent drop in its sales for February 2020 with sales of 498,242 units. The domestic sales fell by 20 per cent to 480,196 units but exports rose by 8 per cent YoY. Total sales of TVS Motor also fell by 17 per cent to 253,261 units whereas exports went up by 25 per cent to 82,877 units. As a result of drop in automobile sales, we can see from Table 1 the pressure on sales and profits faced by automotive ancillary companies as well.
BS-VI Transition Troubles
The Bharat Stage Emission Standards (BSES) are emission standards instituted by the Government of India to regulate the output of air pollutants from compression ignition engines and also from spark ignition engines equipment which includes motor vehicles. The government’s policy decision to strictly implement BS-VI norms has created tremors in the automotive sector. Automakers sensed fear when the government announced skipping the BS-V stage to directly implement BS-VI stage norms from BS-IV stage. The European industry gave itself 10 years to make this gradual shift whereas Indian automakers are expected to make the shift in three years by April 1, 2020, post which sales and registration of only BS-VI vehicles will be permitted.
As a result of the sudden change, the inventory levels of automotive companies rose as dampened economic conditions failed to boost consumer demand even during the festive periods in 2019 in spite of huge discounts offered to potential buyers. Many automobile manufacturers followed multiple ‘no production’ days to release their BS-IV stock. As per the Federation of Automobile Dealers Associations (FADA), the inventory with dealers averaged between 25 and 30 days of stock for two-wheelers and commercial vehicles at the end of January 2020. As for passenger vehicles, this was between 15 and 20 days.
A Viral Opportunity
China exports goods of around USD 70 billion to India. It is also one of the leading suppliers of automotive components in India, contributing around 27 per cent of the total exports. India imports dashboard display units, turbochargers, sensors as well as electric vehicle and engine components from China and South Korea. As of now, there is an uneasy calm across businesses in India since the outbreak and global spread of the coronavirus has the potential to derail bilateral trade worth USD 87 billion. The automotive industry, which is already seeing the worst slump in nearly two decades, is facing the heat as supply chains get disrupted. It is expected to impact the Indian automotive sector and therefore also the automobile component and forging industries.
Manufacturers such as Tata Motors, Mahindra and Mahindra and MG Motor India have already reported facing challenges in terms of component supply from China where the virus first originated. With the virus spreading across Europe, overall sales are expected to further decline. While such hiccups create various obstacles, for an economy like India it is a very opportunistic stage as well. The Indian automotive sector’s dependence on China has decreased – though slightly – over a period of time. The path ahead would be to focus more on assembling products indigenously and developing an ecosystem in domestic markets to de-risk dependency on a particular market. This will allow for domestic expansion and growth.
It is believed that most of Chinese automakers are full of funds and are exploring attractive markets outside China’s market which is currently in a stage of stagnation in growth sales. By the end of fiscal year 2019, Japan’s Suzuki Motor Corp. and South Korea’s Hyundai Motor Co. together commanded 67% of the market. Due to the availability of resources, technology and given the long-term growth potential of the Indian economy and automotive industry, the Indian market presents an alternative supply chain market opportunity especially for automotive component manufacturers. These factors have contributed towards foreign players partnering with Indian automakers. Additionally, the government’s focus on electric vehicles has allowed for various tax deductions and incentives on purchase of electric vehicles. Thus, looking at a long-term investing opportunity, the automotive sector seems to be very promising post its recovery. This is because India is considered as a prominent automobile exporter and has strong export growth expectations for the near future. Automobile exports grew 14.50 per cent during FY19. Further, it is expected to grow at a CAGR of 3.05 per cent during 2016-2026. This allows for the industry to attract strong foreign direct investment. To be on par with the global automotive industry and its standards, the government aims to boost the sector and make it a global manufacturing centre and research and development hub.