MACRO-PERSPECTIVE ON THE DOWNTURN

PRESENTED BY :
KAVAN MUKHTYAR
PARTNER – MANAGEMENT CONSULTING & AUTOMOTIVE SECTOR LEADER
PWC INDIA
EMAIL : kavan.mukhtyar@pwc.com
We are in the midst of a global slowdown;
The New World Order
Real GDP Growth Rate – YoY [%]
2014 - 2025 Today
8.00

7.00 • Trade wars (US tariff on China: US$250bn.

Vice versa US$110Bn)
6.00
• Nationalistic policies (BREXIT)
5.00
• Declining international goods trade;
4.00 increased services trade
3.00 • Greater intra-regional trade
2.00 • Slow down in Industrial Production
1.00
US (3.95% in 2018 to 0.95% in 2019)
China (6.25% in 2018 to 5.60% in 2019)
0.00
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

China EU US

Source: PwC Autofacts Analysis, ACEA, Autosap, European Commission (June 2019)

2
Economic slow down around the world is cyclical and eventually
recovers as long as fundamentals are strong

Light vehicle sales across key Global markets

H1 2018 vs. H1 2019 Brazil recovering after a difficult economic cycle

• Struggling economy since 2015, auto growth

US China dependent on exports to Argentina
(q2.4%) (q2.9%)
• 2018, exports dropped by 9% but the domestic
sales revived and continues to show a strong sign
through H1-2019
• Primary reasons – change of economic cycle,
positive sentiments with the new government,
EU Brazil pension reform bill 2019
(q3.01%) (p17.5%)

Source: PwC Autofacts Analysis

3
 Brazilian Government took several measures to uplift the
automotive sector during the recession in 2015-16

In 2015, the Brazilian economy witnessed a de-growth for

consecutive years for the first time since 1931. Light vehicle
sales plummeted thereafter Intervention from the government

GDP Growth % LV Sales(in millions) 8%

• ‘Rota 2030’ – incentives resulting in Tax Cuts
7%
6% (reduction of 3%-5%)
5%
• Process to recover cars on defaulted loans
4%
>
3% • Easing Cost of Capital (~1.1% reduction)
3.6 3.6 2%
3.3 3.4 3.3
2.5
2.0 2.2 2.1 1%
• New president, renewed sentiment
0 • High forecasted sales for 2019 (~12% growth in 2019)
-1%
-2%
2010 2011 2012 2013 2014 2015 2016 2017 2018
-3%
-4%
Lights vehicle sales for H1 2019 are up 17.5% compared to
Source: IMF, Market Lines, PwC Analysis
H1 2018

4
Implementation of new emission standards has a “mixed
response” on PV sales volumes depending on the price impact
Light Vehicle Assembly Growth [Y-o-Y] vs. Regulatory Events
EU CO2
Year-on-Year LV Assembly growth

US CAFÉ Emission
China 4 Bharat Stage IV reduction Euro 6b US Tier 3
Norms
targets

2011 2012 2013 2014 2015 2016 2017 2018

China India US EU

Source: PwC Autofacts, PwC Research

5
Indian Automotive sector witnessed de-growth across all
vehicle segments including exports

Monthly Passenger Vehicle Sales | M-o-M 2018 vs. 2019 Dom. Sales Exports
Vehicle
Q-o-Q Q-o-Q
segment
Q1 FY19-Q1 FY20 Q1 FY19-Q1 FY20
-15.9%
-14.2% -8.6% -12.3% -18.7%
-4.6% -3.6%
q 11.7% p 3.1%

q 18.4% p 3.6%
-11.3%

q 9.5% q 52.4%
15.6 Mn 13.9 Mn

q 14.8% q 27.8%
January February March April May June July YTD 2018 YTD 2019

q 7.3% q 13.0%

2018 2019
TOTAL q 12.3% p 0.2%
Source: SIAM, PwC Analysis

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In the last 24 months, Indian automotive industry has seen
various “triggers” having an impact on demand

PV sales vis-à-vis Economic & Regulatory triggers

Start of NBFC 30.00%
GST crisis
Insurance cost
Demonetization 25.00%
increase
BS IV
• OROP 20.00%
• 7th Pay
commission
15.00%

10.00%

5.00%

0.00%
Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019
PV Sales GDP Growth Consumption Growth

Source: SIAM, Ministry of Statistics & Program Implementation, PwC Research

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Key factors that affect Automotive demand in India
1
2
7 Regulations Shared Mobility
Upfront Costs Safety & Emission,
increase related New business models,
vehicle usage patterns
7-8% increase in
ownership costs
3
Pre-owned Vehicles
Factors affecting Stiff competition from growing
6 automotive sector in
Uneven organized pre-owned market
Monsoon India

Impacts rural 4
demand Traffic congestion in
5 cities
Liquidity crisis with Discourages
NBFCs ownership,
Major lenders of auto increasing pollution
loans face credit crunch

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Key economic metrics provide cues to the slow down

Interest Rates Vs. Investments Vs. Money Supply

6.5%

• Investment flow has been steady but has not

6.25%
resulted in adequate consumption / employment

Investments
(INR Bn)
• Fresh private investment announcements have
14.5K
fallen 41% in Q1 FY20 vs. Q1 FY19
14.4K 14K
5.75%
• Steady levels of currency in circulation have kept
Money Supply
145K 154K 154K inflation in check

Q4 FY19 Q1 FY20 Q2 FY20 • Unemployment : Rural (5.3%) ; Urban (7.8%)

Source: Ministry of Statistics & Program Implementation, Reserve Bank of India, PwC Research

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These macro-factors are contributing to slow down

1 2 3 4

Formalization of
Structural Age of credit Economic cycle
“parallel
Changes discipline (Ups & Downs)
economy”

• First Demonetization, • Rural unemployment at
and then GST, NPA clean 5.8% while urban
up unemployment at 7.8%
• Simultaneous vehicle • “Cash” circulation under
and emission technology duress; yet to be
changes (BS6, Fame2) replaced by private
sector investments
• Outstanding loans to • FY19-20 isn’t the first
auto dealers ~Rs 80k Cr instance
• Tighter collateral norms • (1998/1999)
imposed on lending • (2008/ 2009)
• (2013/2014)
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Recent interventions from the government, sets the right
tone for the market to pick up momentum

Retail Finance – quicker
GST refund for Dealers
Depreciation on new
Increase in registration fee
vehicles for buyers has been
deferred till June 2020
increased to 30% from 15%

Clarification on ICE 2Ws for Positive Upcoming Scrappage

2022; lighter hand on EV overhangs of policy ??
adoption push GST rate cut (new vehicle demand)

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 Indian automotive industry is likely to see a recovery over the
next 12 months
Economic Outlook Automotive Outlook

GDP Growth rate Passenger Vehicles Sales Growth Forecast – YoY [%]
Source : World Economic Outlook, IMF Source: SIAM, CRISIL, PwC analysis
Source: PwC Autofacts Analysis, ACEA, Autosap, European Commission (June 2019)
FY18 FY19 FY20 FY21

7.20% 7.20% 8% 3% (-7)% to (-5)% 1 to 2 %

8%

7.00% 3%
4%
2% 3%
1%

6.80%
-2%
-5%
-8%

-12%
FY18 FY19 FY 20F FY 21F
FY FY Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
18 19 FY20 FY20 FY20 FY20 FY21 FY21 FY21 FY21

• UVs to remain
Increasing Industrial Production (IP) growth expected to
be 4.3% from current 3.6% spot
• Fixed Investment to grow by 56 bps over FY20
a bright • SUVs remain a bright spot of growth- new entrants/launches
• Content per car - increasing Electronics & Interiors
• Excludes impact of Scrappage policy , GST cut if
implemented

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 Long term fundamentals are strong and Indian automotive
industry will remain on the growth path
RISING AFFLUENCE (%) RISE IN NUCLEAR HOUSEHOLDS (%)
(Annual gross household income, ‘000 USD)
2025
2025 2016
2016
6.0%
12% 20%
26%
11% 32%
30%
15%
68% 74%
20%
38% 24%
25%

Elite(>30.8) Affluent(15.4-30.8) Aspirers(7.7-15.4)

Nuclear families Other family structures
Next Billion(2.3-7.7) Strugglers(<2.3)

Strong market indicators

• Growth in consumption demand with income growth • Resultant of increasing urbanization
• Cars per 1000 expected to go up from 30 in 2018 to • Road building forecasted to increase from
36.7 in 2025 30km/day currently to 38 km/day by 2025.
• On average, 4.75 Mn workers enter the workforce Increased focus on improved road quality.
every year
Source: Ministry of housing & Urban Affairs, Ministry of Road Transport & Urban Affairs, PwC research

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How organizations should respond to economic slow down
AGILITY & FLEXIBILITY

1 2 3 4 5 6
Know Focus Convert Cut Review Act

Costs, P&L, cash flow On cash conversion Costs in the right Manufacturing Be Decisive, Act Fast
Fixed costs to variable
cycles place planning & Inventory
costs
Indulge in aggressive Manage cash flow & Eliminate waste but Optimization Simplify & streamline
Monetize non-core
financial monitoring, meet working capital continue to invest in Prioritize over organization
assets such as trucks,
look for early warning requirements being future ready manufacturing cost structure, optimize
warehouses, etc.
signs reduction manpower cost

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Thank You

PRESENTED BY :
KAVAN MUKHTYAR
PARTNER – MANAGEMENT CONSULTING & AUTOMOTIVE SECTOR LEADER
PWC INDIA
EMAIL : kavan.mukhtyar@pwc.com