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The Indian Automobile Sector Slowdown

Article  in  SSRN Electronic Journal · January 2020

DOI: 10.2139/ssrn.3528891

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 THE INDIAN AUTOMOBILE SECTOR SLOWDOWN

VIJAYA KITTU MANDA

Doctoral Research Scholar, GIM,
GITAM Deemed to be University, Visakhapatnam, Andhra Pradesh, India 530 045
Contact: +91 98495 19188; Email: vijaykittu@hotmail.com
https://orcid.org/0000-0002-1680-8210

BEATRICE BETSY BABU

Postgraduate Student, Department of Commerce,

St. Aloysius College, Edathua, Kerala, India 689 573
Contact: +91 77369 34990; Email: beatricebetsy.babu@gmail.com

ABSTRACT

The Automobile sector is an important pillar of the Indian Economy. Being a major contributor
to GDP, and a big job creator facing a slowdown, the crisis in the Indian automobile sector has
far-fetching consequences. This research study examines the reason leading to the decline in
automobile sales with specific reference to Indian automobile companies from a two-wheeler,
passenger, and commercial vehicles. An overall economic slowdown, liquidity issues, weak
consumer demand, disruptive entry of new players are observed to the be the prime factors
forcing automobile companies to declare plant non-working days, employee wage cuts and
even retrenchments, delaying expansion plans and technology upgrades apart from being
pushed into a deep financial crunch. Findings and recommendations from this research can
strengthen our understanding of the issues surrounding the sector and can potentially help
companies to find a way out of the crisis.

KEYWORDS

Ashok Leyland, Maruti Suzuki, Hero MotoCorp, MG Motors, Tata Motors, Jaguar Land
Rover

JEL CLASSIFICATION

L62, J60, H00

Electronic copy available at: https://ssrn.com/abstract=3528891

INTRODUCTION
Macroeconomic growth and technological advancements have facilitated the auto sector to
contribute 7.1% towards GDP and employ 37 million in India. Its sister sector auto components
(auto ancillary) employs 19 million. (IBEF, 2018) Helmed as the fourth largest sector in the
world in 2017 and with sales increasing 9.3% year-to-year, the sector tumbled down to the
seventh position by 2018 with a significant decline in growth during 2019. However, a slum in
2018-19 has made the sector to collapse with the NSE Auto Index reporting -40% during
September 2018-19.

The development strategies used by countries like India, Mexico, and China in the auto
ancillary industry are converging and thereby will impact the global value chain of the
automobile industry. (Sturgeon & Biesebroeck, 2009)

OBJECTIVES OF THE STUDY

1. To study slowdown in the Indian automobile industry
2. To study the consequences from the sectoral slowdown
3. To identify potential solutions.

SIGNIFICANCE OF THE STUDY

According to the Automotive Component Manufacturers Association of India (ACMA),
around 1 million jobs could be on the line if the prolonged slowdown in the automobile industry
continues. The decline in growth in the auto industry over the past 11 months has affected the
components industry as well. So, a study to analyze the reason for the slowdown is important.

DISCUSSION
A. OVERALL ECONOMIC CRISIS

The global economic slowdown has historically shown a direct impact on the global auto
industry. (Bai, 2012) The Asian currency crisis, Y2K, global financial crisis are some
examples where this was historically visible. Financial instability, job cuts, and inefficient
cash flow in the economy will impact buyer preferences, shift in demand to cheaper and
smaller vehicles and increased focus on energy efficiency. (Merkisz, 2009) Weak income
growth and the increasing cost of vehicle ownership are some deterrents.

B. LIQUIDITY CRISIS

Lending norms have been tightened to and by the Non-Banking Finance Companies (NBFC)
sector since the 2018 IL&FS crisis. (Vijaya Kittu & Sai Rai, 2019) The failure of some big
conglomerates in meeting their debt payment obligations has brought in a trust deficit in the
financial economy. The tightening of credit availability, particularly to car buyers and dealers,
is its immediate consequence. Already manufactured vehicle numbers outpaced the sales, and
all the unsold inventory piled up at stockyards.

C. POOR CONSUMER DEMAND

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Consumers began postponing their purchase decisions anticipating two possibilities. Firstly,
anticipations are that BS-IV vehicles will be sold at huge discounts because of Governmental
pressure to move towards BS-VI. Secondly, those who are not budget-conscious are waiting
for the availability of a broad choice of BS-VI models, but auto manufacturers are reluctant to
do that hurriedly. A situation like this has forced dealers to pile up inventory that remained
unsold for a longer than anticipated time.

Increasing inventory levels without demand will mean that capital gets stuck and remain
unproductive. A repeat situation of this occurred with two-wheelers when inventories before
the festival season (October/November) are high and with some actual sales happening during
the season has tempted manufactures to start again producing thereby again unnecessarily
increasing the inventory levels post-November.

The rise of carpooling and car-sharing services such as Ola and Uber is forcing the daily urban
commuter to think twice about owning a car.

D. GOVERNMENT POLICIES

Governmental policies play an essential role in fostering the automobile industry. (Ranawat &
Tiwari, 2009)

The automobile sector is given decent importance in the “Make in India” initiative taken up
by the Government in 2014. (Kamal, 2017)

New vehicle insurance policy, smoother scrappage policy, tweaking of freight carrying
capacity (axle load norms), EV promotion via FAME-II scheme, tax deductions on interest on
the loan for the purchase of EV vehicles, cut in Goods and Service Tax (GST) are some critical
decisions during 2019.

India contributes to 11 percent of Asia’s transportation emission in Asia as of 2016, and it is

high time that the Government implements policies to reduce carbon-dioxide emissions.
(Bhowmick, Sahoo, Bhat, Mathur, & Gambhir, 2019) While auto companies launched eco-
friendly vehicles in response to this, it is still unsure if consumers liked the green marketing
initiatives taken up by them. (Vatsa, Chakrabarti, & Kumar, 2016) The hurried transition by
the Government from BS-IV to BS-VI norms that will be implemented from April 2020,
skipping BS-V, is also hurting automakers. Further, the Corporate Average Fuel Economy
(CAFÉ) Phase II will come into effect in India from April 2022, which can potentially increase
importance to hybrid electric vehicles (HEV).

The auto sector is relatively diversified, and the Union Budget can make a profound difference.
For example, higher disposable income in the hand of individuals can foster the recovery of
the two-wheeler and passenger car segment but this is a weak and indirect case. A more direct
straightforward case will be boosting commercial vehicle sales if there is a healthy and positive
budgetary allocation for capital goods, infrastructure push and increased allocations to the
logistics sector (such as by way of freight corridor). Truck sales usually lead to an economic
recovery process before passenger cars show improved performance.

Electronic copy available at: https://ssrn.com/abstract=3528891

Owing to the deep multi-dimensional problems associated with the industry, a very sharp
economy policy is required for the revival of the industry.

E. NEW MODELS & NEW ENTRANTS

It is not uncommon for the sector to do new product launches to catch buyer attention.
Different automakers use different strategies for this. Nissan revived its strategy to turnaround
and decided to make one new model every year. (PTI, 2020) Already a competitive industry,
competition further increased during 2019 with the entrant of new players. Not just entry, but
the launches by new entrants such as MG Motors using different marketing strategies and
disruptive marketing methods are threatening existing players, as seen from the weakening of
brand concentration of the top 5 players. There is a definite shift in buyer interests and loyalty
and marked enthusiasm to test newer players.

Existing players are using joint venture routes to enter into segments it has not entered earlier.
Bajaj Auto, for example, entered into a non-equity alliance with 178-year old British iconic
motorcycle maker Triumph to enter into the middleweight motorcycles segment in order to
challenge the domination by Royal Enfield of Eicher Motors. Bajaj Auto’s earlier such global
alliance was a success when it joined hands with KTM of Australia. (Mohile, 2020)

F. SHIFT TO ELECTRIC VEHICLES

Tighter environment pollution norms, particularly in Europe, have forced automobile

manufacturers to switch from the traditional petrol and diesel-run vehicles to green fuel-based
vehicles. Some early entrants such as Tesla has not only flourished the company but also
helped the evolution of the electric vehicle industry. (Financial Times UK, 2020) The
transaction requires a machinery upgrade, which requires huge capital expenditure. Added to
this, counties like India are forcing manufacturers from BS-IV to BS-VI norms, that in a short
time frame.

Not just commercial and passenger vehicles, the EV bug has bitten the two-wheeler sector as
well. In late January 2020, TVS Motors launched iQube Electric, announcing its entry into e-
mobility space. (Abrar, 2020)

The EV saga also has built the shared-electric-scooter startups industry that is currently led by
Bird Rides and Lime. (Vartabedian, 2020)

G. NON-WORKING DAYS AT PLANTS

With weak demand and low capacity utilization, companies like Ashok Leyland, Maruti
Suzuki, Tata Motors, Sundaram-Clayton, and others are forced to declare non-working days
at their plants. Non-production days are holidays for the plant and employees will not get their
pay. The most affected will be daily wage workers who are not on company rolls.

H. DELAYING EXPANSION PLANS

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Auto companies like Maruti Suzuki and Hero MotoCorp have deferred their expansion plans.
Maruti Suzuki that planned a third production plant in Gujarat at the cost of Rs. 3,500 crores
got differed. Similarly, M&M deferred its planned capex of Rs. 1,000 crores by a year. Tata
Motors trimmed capex by Rs. 500 from their planned Rs. 5,000 crores. Hero MotoCorp
deferred expansion of its Chittoor plan apart from cutting down its capex by around Rs. 300
crores. Ashok Leyland was more prudent in its cash management and has brought down capex
from Rs. 2,300 crores to Rs. 1,800 crores.

I. DELAYING TECHNOLOGY UPGRADES

Maruti Suzuki deferred its plan to launch its WagonR Electric – an electric vehicle for personal
use - 2021 instead of its slated launch in 2019. Uncertainties about EV acceptance and lack of
sufficient EV charging infrastructure made the automaker feel that the country is not yet ready.

J. FINANCIAL CRISIS

Tata Motors acquired Jaguar Land Rover (JLR) and its associated marques in 2008. The
acquisition and subsequent costs for running the subsidiary have far overweighted its sales and
profits, thereby adding to the financial burden for Tata Motors itself.

LITERATURE STUDY
Several researchers studied the Indian automobile sector and its slowdown. (Rastogi & Gupta,
2013) discussed the slowdown analyzed the changing scenario of the automobile industry that
influences the purchasing behavior of consumers. It explains the sales analysis of various
automobile companies in India.

This paper furthers our understanding of the subject in the context of the slowdown of 2018-
2020.

RESEARCH METHODOLOGY
This study uses Descriptive Research in the form of an Exploratory Study to gather preliminary
information, observe the past, record the situation, and describe immediate possible outcomes.

DATA COLLECTION
Secondary data sources were used for collecting information necessary for this study. The data
is collected from several journals, research papers, websites, including from the official
websites of both the companies and other agencies, Annual reports, etc.

DATA ANALYSIS
The table below shows the annual sales data of all automobile companies combined. While the
annual trends look to be healthy, there are severe dots in the quarterly numbers that have caused
concerns in the past.
Table 1 Automobile Domestic Sales Trends

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 Category/ Passenger Commercial Three Two Grand
F.Y. Vehicles Vehicles Wheelers Wheelers Total
2005-06 11,43,076 3,51,041 3,59,920 7,052,391 8,906,428
2006-07 13,79,979 4,67,765 4,03,910 7,872,334 10,123,988
2007-08 15,49,882 4,90,494 3,64,781 7,249,278 9,654,435
2008-09 15,52,703 3,84,194 3,49,727 7,437,619 9,724,243
2009-10 19,51,333 5,32,721 4,40,392 9,370,951 12,295,397
2010-11 25,01,542 6,84,905 5,26,024 11,768,910 15,481,381
2011-12 26,18,072 8,09,532 5,13,251 13,435,769 17,376,624
2012-13 24,28,523 7,43,798 5,01,035 13,325,596 16,998,952
2013-14 25,03,509 6,32,851 4,80,085 1,48,06,778 1,84,23,223
2014-15 26,01,236 6,14,948 5,32,626 1,59,75,561 1,97,24,371
2015-16 27,89,208 6,85,704 5,38,208 1,64,55,851 2,04,68,971
2016-17 30,47,582 7,14,082 5,11,879 1,75,89,738 2,18,63,281
2017-18 32,88,581 8,56,916 6,35,698 2,02,00,117 2,49,81,312
2018-19 33,77,436 10,07,319 7,01,011 2,11,81,390 2,62,67,783

Source: Various reports of Society of Indian Automobile Manufacturers

FINDINGS
1. Companies have to consider the realized sales numbers as a determinant to decide the
production levels so as not to pile up inventory.
2. Globally proven methods like green initiatives and EV might not work in India in the
same way that they worked elsewhere.
3. Stable long-term policies and stronger economic push from the Government is
necessary to revive the sector.

CONCLUSION
Being one of the most significant contributors to GDP and a top employer, the Indian
Automobile and Auto-ancillary sectors are vital for the economic progress of the country. The
recent global slowdown has its toll on the Indian automobile sector and hence has a chain of
consequences. This paper examines some factors in the context of some recent experiences
observed. Companies have to take a more realistic view of determining the number of units
they need to manufacture. Further, futuristic technologies require Indian buyers to be mentally
be prepared before the products are being launched. Finally, severe economic push in the form
of Government policies is necessary for the sector to revive failing, which the slowdown cycle
would get extended further.

BIBLIOGRAPHY
Abrar, P. (2020, January 26). TVS enters e-mobility space with new scooter. 2. Mumbai:
Business Standard.

Electronic copy available at: https://ssrn.com/abstract=3528891

Bai, X. (2012). The Effects of the 2007-2009 Economic Crisis on Global Automobile Industry.
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Financial Times UK. (2020, January 25). Tesla’s rise has sparked an electric revolution. 8.

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