Indian Automobile Sector going through a Rough Patch

Growth Path:

Indian automobile industry showed signs of life in 1940's with the advent of companies
like Hindustan Motors and Premier Automobiles that garnered more than 70% of the
market share till 1970's along with M&M, Ashok Leyland, Bajaj Auto and Telco. In 1980's
came a first wave of FDI to help industry compete with global players however the
market for cars was small as there was low economic growth. As the Indian population
and the per capita income increased with time, the demand for cars picked up too. In
1982, Maruti Udyog Limited was incorporated that soon collaborated with Japanese
automobile manufacturer Suzuki, also popularly called Maruti Suzuki just to bring an
efficient car for middle class. In 1984, Maruti Suzuki launched Maruti 800 that was its
first domestically produced car with modern technology and since then there was no
turning back. Maruti soon became a pioneer in the Indian automobile industry achieving
62% market share and installed capacity of 1 lakh units by 1989. Post liberalisation
reforms, there was a second wave of FDI in 1992 that gave a propulsion to the
automobile industry to kick start through measures like new automobile policy in 1993,
weighted average tariff was lowered to 20.3% from 87%, new regulatory emission norms
were set, automatic FDI approval of Joint Ventures with a 51% majority share for the
foreign partner was allowed. Such measures brought the entry of global players,
increased competition and the companies led huge investment inflows in India. Post
2000, the Indian automobile industry had up-scaled their operations by building their
own design and used advanced technology to bring in-house product like Tata Indica
(Tata Motors) and Scorpio (M&M) by 2002. Gradually as the time progressed, with
increased competition there were seen reducing costs, enhanced quality, better
responsiveness in demand in domestic and global market and the sector was growing at
fast-pace. The Indian automobile industry has significantly grown on the strength of
cheap labour and FDI's flowing in India. Today, Indian automobile sector contributes
7.5% to India's GDP and 49% of the manufacturing GDP, one of the key sectors that
drives the economic growth and employs 3.7 crore people.

Cyclical bears in the sector:

·        The cyclicality downturn in this sector has been continuing since January 2019 after
the IL&FS debt default took place and shattered the overall credit growth of India.

·        Half of the vehicles sold in rural market are financed by NBFC's which in turn had
no liquidity left with them to lend anymore, due to the IL&FS (NBFC) crisis.

·        This default had slumped the passenger car, Commercial Vehicles, 2 wheeler and 3
wheeler segment sales drastically along with the loss of 2 lakh jobs.

·        As a result, the consumers were afraid of buying the cars due to liquidity crunch,
increase in fuel costs, high vehicle insurance costs and high interest rates. This led to
huge production costs and layoff in the jobs in manufacturing, spare parts and
dealerships.
·        The consumers had deferred their decision of buying cars and expected to buy the
old BS-IV stock at discounts before the arrival of new BS VI compliant vehicles that were
expected to hit the market by April 1, 2020.

·        There was also a rural distress due to weather uncertainties and lack of credit
exposure/lending to farmers by NBFC's. The sector was de growing at 18% in 2018-19
and the consumer sentiment was completely dampened.

Pandemic fears in the sector:

·        Besides, the prevailing prolonged cyclical downturn in automobile sector in India,

the sector is now beaten by the severe lockdown effects induced by Coronavirus
pandemic since the starting of 2020.

·        Even if the auto sector jumpstarts their business operations, there will be challenges
in terms of overall revenue per month since the consumers will be averse to discretionary
spending coupled with transition to BS-VI emission norms and the much awaited
government target of going electric on roads by 2030.

·        The current key challenges for the sector are disruption in the value chain like
shortage of raw materials, closure of assembly plants, shifting production from China to
other prospective countries, loss of migrant workers would also pinch the production
capacities, delay in the launches worldwide and the overall shrinking demand.

What is lying ahead for the sector?

 Due to the social distancing norm and bound by their financial constraints,
consumers would choose to buy used cars to save their costs and this would bring
increase in demand in the sector.
 Electric vehicles seem to be the future to keep ourselves aligned with the global trend
and norms. This would make us all go green on the roads and safe for the
environment. However, the cost of batteries, their repair and maintenance would be
expensive coupled with the need for more infrastructure needed for charging these
battery operated cars.

Final thoughts:

The automobile industry usually faces cyclical downturns in every 4-5 years and persists
for 2-3 years and revives back forming a U-shaped recovery. The last downturns have
occurred in 2008 and 2013. The downturns are caused mainly by the macro economic
reasons like low GDP and impacts all the sectors that are deeply integrated with auto
sector. The downturn can also be due to sector-specific reasons and is held responsible
for an overall downshift in the consumer sentiments in the economy. Both the shocking
events one after the other have pushed the automobile sector to its extreme bearish
phase. We wish for a speedy recovery!