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Why is the auto industry facing trouble?

The automobile sector is in the news as it is experiencing prolonged negative growth. What are the reasons? Why are jobs being lost? And how can the government help?

August 18, 2019 12:02 am | Updated November 28, 2021 10:23 am IST

Applying brakes: The automotive industry continues to face headwinds as sales continue to contract. | File

Applying brakes: The automotive industry continues to face headwinds as sales continue to contract. | File

The story so far: In July, the sale of vehicles across categories in the country slumped 18.71% to about 18.25 lakh units, down from about 22.45 lakh units, a year ago in the same month. This has been the steepest fall in nearly 19 years . This data, by the Society of Indian Automobile Manufacturers (SIAM), gives out wholesale figures — i.e. the number of vehicles despatched to dealers by vehicle manufacturers . The pasenger vehicle segment, which comprises cars, utility vehicles and vans, has been one of the worst performing segments, registering its highest drop in sales since December 2000: almost 31%, to a little over two lakh units from nearly 2.91 lakh units in July 2018. This was also the ninth straight drop in monthly passenger vehicle sales. In fact, barring a low single digit uptick in October 2018, segment sales have been falling for the past year. With the industry failing to arrest the downturn that started almost a year ago, despite deep discounts and new model launches, it has been forced to undertake production cuts. This has also led to the trimming of over 2.15 lakh jobs in the sector.

What has happened to the automobile sector?

The industry started off 2018-19 on a good note with vehicles sales across categories growing 18% to nearly 70 lakh units in the first quarter (April-June 2018). During the quarter, passenger vehicle sales were up nearly 20%, commercial vehicles sales were up 51.55%, and that of two-wheelers grew 16%.

 

However, domestic passenger vehicle sales declined for the first time after nine months in July 2018. In July 2017, vehicle sales spiked due to the benefits extended by the rollout of the Goods and Services Tax (GST). However, demand failed to pick up in August and September, after the floods in Kerala and heavy rainfall in several other States.

Why did inventory pile up?

In the ensuing months, consumer sentiment remained subdued as the total cost of vehicle ownership went up largely due to an increase in fuel prices, higher interest rates 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. To add to this, the IL&FS crisis late last year led to a severe liquidity crunch, almost drying up credit for dealers and customers. Nearly half the vehicles sold in rural markets — a segment that has been witnessing a higher growth rate in comparison to urban markets — are financed by non-banking financial companies (NBFCs). Being stuck with higher inventory due to a lacklustre festive season, dealers too needed more working capital.

As a result of all these factors, all vehicle categories, including commercial vehicles and two wheelers, began experiencing negative growth beginning December setting alarm bells ringing. The industry found some solace in the fact that historically, vehicle sales decline in the months preceding elections, and expressed the hope that demand following the elections would pick up. However, this did not happen.

Are people holding off on purchases?

There is also a possibility that some customers are waiting to buy the latest Bharat Stage (BS)-VI emission standard compliant vehicles or are waiting for more incentives from vehicle makers who will be looking to sell off their BS-IV compliant stocks before the April 1, 2020 deadline. Many industry players have also expressed concern that too much focus on electric vehicles (EVs) by the government may also be encouraging buyers to postpone the purchase of petrol and diesel vehicles.

How many jobs have been lost?

The automobile sector is one of the largest employers in the country, employing about 37 million people, directly and indirectly. The prolonged demand slowdown has triggered production as well as job cuts in the sector. According to the latest figures that are available, original equipment manufacturers (OEMs) have removed about 15,000 temporary workers in the past two to three months. A lack of working capital amid tepid demand has led to closure of nearly 300 dealerships across the country. This has led to over two lakh people losing their jobs, according to the Federation of Automobile Dealers Associations (FADA), the apex national body of automobile retail industry engaged in the sale, service and spares of two- and three-wheelers, passenger cars, utility vehicles, commercial vehicles (including buses and trucks) and tractors. Separately, the Automotive Component Manufacturers Association of India (ACMA) warned in July that 10 lakh jobs were at risk and urgent action was needed to bring the industry back on track.

Why is the current slowdown different?

Edelweiss Research has pointed out that the current slowdown in the sector is very different from the ones that the industry has gone through earlier. First, the slowdown is driven by domestic factors, including the NBFC crisis, while the earlier ones were triggered by global events. It also pointed out that over FY19-21, vehicle prices are estimated to jump 13-30% due to safety, insurance and emission-related compliance costs. For end consumers, such a steep price hike can prove a hurdle in growth recovery. Meanwhile, growing competition from the pre-owned cars market is also pulling down sales of new vehicles. For example, in the passenger vehicles segment, while the new vehicles market grew 2% in FY19, the pre-owned market saw double-digit growth.

What does the auto industry want?

The auto industry has been unable to arrest plunging sales in spite of new launches and offers and has been demanding immediate government intervention. Pointing out that the industry’s turnover is close to half of the manufacturing GDP, accounting for about 11% of the entire GST revenues of the country, the auto sector is hoping that the government will come out with a revival package ahead of the festive season to yield benefits.

The industry’s demands include a reduction in GST to 18% from the current rate of 28%, which will help in an immediate price reduction. It could kick-start demand in the short term, particularly ahead of the coming festive season. Besides, it has sought measures to handle the NBFC crisis to infuse liquidity into the system, and clarity on policy for electric vehicles and introduction of vehicle scrappage policy, which will also boost demand for new vehicles. These demands were also placed before the Finance Minister, Nirmala Sitharaman, during a recent meeting.

How long will the slowdown last?

That is anyone’s guess. With BS-VI variants to be rolled out April 2020 onward, the prices of vehicles will go up. While the increase for petrol vehicles is likely to be in the range of ₹20,000-₹50,000, in the case of diesel vehicles it could well be between ₹ 1 lakh and ₹1.5 lakh. The transition could also trigger some demand for BS-IV compliant vehicles in the remaining part of the year, given the price difference.

 

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