Auto sector sailing through turbulance

As the country goes through an economic slowdown the auto sector seems to be witnessing one of its worst phases. Compounding the demand shrinkage are the misguided government policies portraying a bleak scenario for the days to come.
….. Article by Arijit Nag

Over the last year or so the automobile sector has been going through an extremely rough phase. If one goes by the numbers emanating from the industry, it’ll seem as if things have turned really grim. The slowdown has hit the sector so hard that even the arrival of the festive season has failed to revive it even partially.

Almost all the major car makers have cut down on production. Even heavy vehicles and two-wheelers have witnessed a major slowdown in sales. Auto companies like Ford Corp., Hyundai Motors, Tata Motors, Maruti Suzuki, etc. shut down production in more plants than was expected.

An unheard of concept – non-working days – was introduced to the Indian auto sector. This affected the contractual workers the most as the term meant the plant will remain open but there won’t be any work done.

The September results continued to look dismal. Tata Motors registered a drop of 48.02 per cent in sales, according to a report in The Hindu. On a year-on-year (YoY) basis, Maruti Suzuki India – the passenger car market leader, reported a 24.4 per cent decline in its total vehicle sales, including exports.

A total of 122,640 units of Maruti, including exports, were sold in September, compared to 162,290 vehicles sold in September 2018. Out of the total sales, domestic sales fell 24.8 per cent to 115,452 vehicles. The auto major’s exports in the same month were recorded at 7,188 units, 17.8 per cent lower than 8,740 units exported in September 2018.

Another auto major, Hyundai Motor India (HMIL), also reported a fall of 8.1 per cent in its overall sales from 62,757 units in September 2018 to 57,705 units in the same period this year. Interestingly, the company’s exports registered a growth of 13.5 per cent but it didn’t reflect in the overall results as its domestic sales plunged by 14.8 per cent.

The situation of the commercial vehicle sector is even worse where sales dipped more than 62 per cent last month. Tata Motors sold only 8,097 passenger cars in September, which is a decline of 56 per cent compared to the same period last year when the company had sold 18,429 units.

Furthermore, Mahindra & Mahindra’s automotive sales went down overall by 21 per cent in September 2019 to 43,343 units compared to 55,022 vehicles in the same period last year.

Having said all that there was some positive impact of the recent policy changes made by the government. Sales momentum during August 2019 did move up marginally, however, most market observers opined that more time was required for the recent policy measures to take effect and extra incentives need to be given to customers for the growth trend to re-emerge.

In an apparent effort to boost consumption and increase investments by private companies, the government reduced corporate tax rate from 30 per cent to 22 per cent. The effective tax to be paid by the companies will be 25.17 per cent.

However, in my opinion the government measures are slightly misdirected. Instead of equipping the consumer with the necessary buying power, the measures focus on the supply side. The problem is – if the consumer does not have the resources how will he buy anything? No matter what we proclaim about our consumption pattern, buying a car in India is still a status symbol. Hence, the priority of owning an automobile in an Indian’s life is still way below many other things.

However, sales plunged once again in September as passenger car off-take went down by 23.69 per cent and that of commercial vehicles by 62.11 per cent. This proves that government measures have not really helped the ailing sector. Maruti-Suzuki, the country’s largest automaker has cut down production for the eighth time in as many months.

Seemingly, the government is missing the woods for the trees. This is evident from the statements emanating from the Union finance ministry. The Union finance minister blaming the millennials for the downturn does not only show a lack of understanding but also a blatant trivialising of the problem.

According to most economic experts, things won’t change in the near future and definitely not in October. Unless the demand side is reinvigorated chances are bleak that things will look up for the automobile sector.

Another point to be noted is that while we are focused on the production of automobiles we seem to have become distracted from the auto ancillary industry. This segment witnessed an overall decline of around 10 per cent and job cuts of approximately eight to 10 lakhs. The captains of the ancillary industry don’t expect any relief in the immediate future.

However, there is a streak of good news amidst all this gloom. According to data from TAM, there has been some growth in auto advertisements in the southern parts of the country. In the four major southern states of Andhra Pradesh, Tamil Nadu, Kerala and Karnataka, automobile ad volumes have shown a hefty hike in print media. Festive ad volumes from automobiles in print media showed a 3.3 times growth this year as compared to Onam 2018.

The rise in ad volume is led by tyres that have shown 8.7 times increase in print compared to Onam in 2018. In TV, tyres saw 7.9 times growth against the same period last year, and for radio it was 11.1 times growth.

Meanwhile, all three financial institutions namely, Reserve Bank of India, World Bank and International Monetary Fund, have cut down on India’s growth figures drastically. While RBI has projected the GDP growth to be 6.1 per cent down from 6.9 per cent which the apex bank had predicted in April this year, the World Bank has projected six per cent, down from 7.5 per cent. The IMF forecast is a little better at seven per cent which is still considerably lower than its earlier figures.

People seem to be getting euphoric over the surge in the stock markets after the government slashed corporate taxes. What nobody seems to realise is that buying or selling shares do not boost industrial activities or produce physical assets or generate employment. A share market boom can happen even when foreign institutional investors pour in money into the exchange. Stock markets are not really a very good indicator of an economy.

It is unlikely that the economy will turn around any time soon in the face of global slowdown and misdirected policies. To revive the auto sector mere tax cuts won’t suffice, the demand has to be rekindled to offload inventories. We can only hope the government will do something to revive the demand side of the economy in the next few months.

Arijit Nag is a freelance journalist who writes on various aspects of the economy and current affairs.