A streetcar named slowdown

The many reasons for the big slump in automobile sales show that there could be a spillover to some other sectors as well

By Author  |  Published: 15th Sep 2019  12:58 amUpdated: 15th Sep 2019  12:43 pm
slowdown
Illustration: Guru G

India’s largest car manufacturer, Maruti Suzuki, decided to shut production of passenger vehicles at its Manesar and Gurugram plants for two days on September 7 and 9, and that’s just the tip of the problem. Panic has spread across the entire sector as major automobile companies like Mahindra & Mahindra, Hero MotoCorp and Ashok Leyland are being forced to increase ‘non-working days’ owing to a massive drop in demand. What started as a rough patch for manufacturers of commercial vehicles has now grown into one of the worst slumps the Indian automobile industry has ever seen.

The biggest crash came this August — on a year-on-year basis — since the time the Society of Indian Automobile Manufacturers (SIAM) has been collating data (from 1997-98) when the sale of automobiles in India crashed 23.5%. In precise numbers, the overall automobile sales in August 2019 fell to 18,21,490 units as against 23,82,436 units in the same month last year.

The automobile industry, which contributed 7% to India’s gross domestic product in 2018, provides direct and indirect employment to many due to its linkages with other sectors. The sluggish demand is resulting in hundreds of thousands of job cuts. The slump in automotive sales is also affecting sectors such as tyre and steel, which is adding to the problem.

Clouds of Uncertainty

Layoffs, non-working days, cut in production and resultant anxieties are growing by the day as experts are citing various reasons for the slowdown but are also clueless about the road to recovery. Sources from the industry share that some companies, before the sales started to drop last year, invested heavily in building capacities and brought into play their sister companies while the trend was bullish.  But now these companies are forced to cut production in large numbers due to the big drop in demand. Industry experts also believe that certain global (looming recession and trade war) and domestic factors are forcing the slowdown in the sector. However, they firmly believe that the domestic factors are playing a much more prominent role in the current slowdown. So what are these factors that have sent the sector as well as the government into a tizzy?

  • Rising fuel prices: This is perhaps the silent factor behind the slump. According to data from the state-run Indian Oil Corporation, the price of petrol has risen by 15% between August 2015 and August 2019. Rubbing salt into the wounds, the government in the Union Budget 2019 raised excise duty on petrol and diesel by Re 1.
  • Government’s push for electric vehicles: Governments across the globe are rooting for electric vehicles and it is no different in India. The government’s constant push for electric mobility has created doubts in the minds of buyers, who are now comparing the ownership cost of a petrol/diesel car with that of a battery-powered car. Meanwhile, several automobile giants have come out with their own models of electric vehicles, but cost considerations, lack of adequate options and doubts on the future of electric vehicles have meant that customers are not walking this new path too in good numbers.
  • Bharat Stage VI regulatory policies: There is way too much ambiguity over the future of BS-IV vehicles after India adopts BS-VI on April 1, 2020. This has stymied the demand for automobiles considerably. Speaking to Telangana Today, industry experts say that customers who do not have an urgent need have postponed their plans to buy vehicles owing to the unclear future of BS-IV vehicles.
  • Three-year mandatory insurance: The compulsion of multi-year purchase of third-party insurance has pushed the cost of automobile ownership higher, which too is acting as a deterrent for new vehicle purchases.
  • Overproduction and stocking: The expansion of capacities by many automakers has led to overproduction and stocking. When other factors led to significant drops in sales, not just the business but production too got hit hard. In fact, automobile czars believe that the current crisis is largely due to “overproduction and stocking” by companies based on growth forecasts. In a statement, Bajaj Auto’s Managing Director Rajiv Bajaj unequivocally said: “They roll the dice sans any logic. The result is a matter of luck-by-chance. We don’t waste time or money on forecasts. We simply expand capacity once we’re close to full.”
  • Leasing and self-drive: With companies like Volkswagen, Mahindra and Mercedes, to name a few entering the car leasing space as a means to boost usability of their inventory, the actual sales Meanwhile, the rise of companies like Bounce, Zoomcar and Myles, which rent out vehicles for self-drive, paved the way for the availability of passenger vehicles at cheaper prices in terms of subscriptions, which completely take maintenance and insurance charges out of the picture.  Trends show that the number of people willing to subscribe to these services is on the rise.
  • New Motor Vehicles Act: Stricter rules for driving and penalties, which have risen by four to ten times, compared with their previous levels, thanks to the Motor Vehicle Amendment Act, 2019, have acted as a deterrent for new vehicle purchases. While Maharashtra, Madhya Pradesh, Chhattisgarh and Punjab have not yet implemented the New Motor Vehicles Act, some States like Karnataka and Gujarat are implementing it with reduced penalties. But a truck owner in Rajasthan being fined Rs 1.41 lakh to a man riding a scooter worth Rs 15,000 being slapped with a penalty of Rs 23,000, such bizarre news has kept flowing in ever since the Act took effect on September 1.

Revving Up the Sector 

With the prices of automobiles continuously climbing due to factors like insurance, mandatory safety features, higher registration fee, input costs, etc, coming in of new BS-VI as well as traffic norms; and with buyers having other options like self-drive cars, app-based taxis, etc, the automobile industry truly finds itself stranded at the slowdown street. Heads of several automobile companies have urged the government to revive the sector. One of the key demands is a cut in the Goods and Services Tax rates, even if only as a temporary measure.

Spinning on Social Media

Blaming the millennials for the slowdown, Finance Minister Nirmala Sitharaman stated that youngsters now prefer taxi aggregators like Ola and Uber, and this is resulting in the crisis in the auto sector.

A day after the Union Finance Minister’s remarks kicked up a storm of hashtags on social media, an old interview of Anand Mahindra started doing the rounds on Twitter all over again. In 2015, the chairperson of the automobile giant Mahindra had said: “The age of access being offered by taxi-hailing apps like Uber and Ola is the biggest potential threat to auto industry. Since these apps operators have made transportation a commodity, (auto) sales could be hit and volumes get impacted.”

While Mahindra’s statement provides credence to the logic of the Finance Minister, analysts and industry insiders point to data, which shows that the growth in the daily rides of the cab aggregators over the past six months has been a meagre 4%, translating to 3.65 million from 3.5 million. Netizens — majority of them millennials — and Ola, Uber drivers also completely disapprove the FM’s theory.

India’s largest carmaker Maruti Suzuki has also said that cab aggregators may not be a big factor in the slowdown. Maruti Suzuki India Executive Director (Marketing and Sales) Shashank Srivastava told PTI that the ownership pattern in India still has not changed and people purchase cars with an “aspirational aspect. The Ola and Uber factor may not be strong enough to contribute to the current state of slowdown.”

While views and opinions abound, an expert from the industry perhaps got it right when he said that this quarter, coinciding with the festive season, will determine whether the automobile sector will fall behind or begin its drive back to recovery.


Now you can get handpicked stories from Telangana Today on WhatsApp / Telegram everyday. Click these links to subscribe and save this number 9182563636 on your contacts.

Click to follow Telangana Today Facebook page and Twitter