Auto industry enters the slow lane

With substantial unutilised capacity across the auto industry, the major players are obviously averse to making fresh investments. Ford Motors, with a lowcapacity utilisation rate of 59 per cent, is exiting its independent operations as its joint venture with Mahindra will be the platform to sell its vehicles. General Motors has even left the country although this has presented an opportunity for China’s SAIC Motor Corp, which acquired a 50 per cent stake in GM India in December 2009

The travails of the USD 70 billion auto industry are emblematic of the flagging India growth story. Faced with declining demand for vehicles, rising inventory levels, especially since the second half of 2018-19, most of the production facilities in the country are running well below their capacities. With the future outlook uncertain when demand picks up again, most of the players are not ramping up existing capacities or making fresh investments. This is indeed what bedevils the economy: falling growth of private consumption and tepid increase in investments underlie the growth slowdown in 2018-19 according to India’s finance ministry.

India’s auto industry contributes 7.5 per cent to the nation’s GDP. It accounts for 49 per cent of the manufacturing sector’s GDP and employs around 35 million people directly and indirectly. Globally, India is the fourth largest passenger-car manufacturing country with 4.1 million vehicles in 2018, according to the International Organization for Motor Vehicle Manufacturers. It is also the largest market for two-wheelers. It is also the largest tractor manufacturer. The industry thus has acquired critical mass and is a bright spot at a time vehicle manufacturing in advanced countries has reached maturity.

For such reasons, the year-on-year slump in sales in February and March for cars, motorcycles, scooters, commercial vehicles and tractors has wide implications. The downtrend persisted in April for leading players in cars like Maruti Suzuki India Ltd, Hyundai, Mahindra, Tata Motors, and twowheelers like Hero Motocorp and Honda. As far as cars are concerned, sales slipped since the second half of 2018-19 due to various factors including rising oil prices, higher insurance costs and tightening financing, thanks to the crisis in non-bank finance companies. These factors dampened consumer demand during festive season.

Consumers, especially in metropolitan India, might postpone car purchases over the near term as there are new mobility solutions that are disrupting the global auto industry. The notion of car ownership is itself being called into question with ridehailing options provided by Uber and Ola. Electric mobility is also in the ascendant. India in fact has a stretch target for allelectric vehicles by 2030. Although connected cars and autonomously–driven vehicles are still some distance away, the emerging possibilities on mobility are bound to result in a pause in buying cars with internal combustion engines run on polluting fuels like diesel.

Maruti Suzuki India Ltd, the dominant player that accounts for 50 per cent of India’s car market, exemplifies the adjustments being in the industry due to subdued demand. For starters, in March it announced a significant cut in vehicle production by 21 per cent across its factories. In 2018-19 as a whole, this auto giant which can produce 2.25 million units had a capacity utilisation rate of 81 per cent. Maruti also plans to launch an electric version of its compact Wagon R in 2020. It has also taken a decision to phase out its diesel car models by April 2020 when the new BS V1 emission norms kick in and makes them more expensive.

With substantial unutilised capacity across the auto industry, the major players are obviously averse to making fresh investments. Ford Motors, with a lowcapacity utilisation rate of 59 per cent, is exiting its independent operations as its joint venture with Mahindra will be the platform to sell its vehicles. General Motors has even left the country although this has presented an opportunity for China’s SAIC Motor Corp, which acquired a 50 per cent stake in GM India in December 2009. Its subsidiary MG Motors India is launching two SUV models by 2020. The disinclination of foreign and domestic investors to invest is not good news for the growth story.

Whichever regime comes to power after the elections must address the needs of the auto industry so that it can be an engine of growth. The Goods and Services Tax on vehicles must be lowered from the existing 28 per cent slab. While the push for electric mobility is in the right direction, it will not take off with policy flip-flops. The charging infrastructure must also be in place as a topmost policy priority. India can learn from the example of Norway that has pushed electric mobility through generous tax subsidies.

Above all, an enabling business environment in various states of the country is warranted.