A CRISIS OF CONFIDENCE?
Sales of vehicles in all categories are down, with no respite in sight (Domestic sales, January to June 2019, in thousands)
Colin Pereira, general manager (services), at Vitesse, one of Maruti Suzuki’s oldest showrooms in Mumbai, confirms that dealerships have been grappling with this problem for over a year. “There has been a 20 per cent drop compared to last year, both in new bookings and walk-ins,” he says. More telling is the fact that about 20 dealerships have already downed shutters in Mumbai, impacting multiple car manufacturers. “It’s a severe slowdown,” agrees FADA president Ashish Harsharaj Kale. “The biggest shock was that even the festive season didn’t lead to an uptick in demand.” The pain is being felt across the country, with dealerships in New Delhi reporting much the same. “I have never seen the market this bad,” says Yadur Kapur, executive director of Deutsche Motoren, which sells vehicles produced by a number of OEMs, from Honda to Rolls Royce. “People are calling to ask me for jobs—people who started their careers with us. But even we are trying to rationalise and cut costs.”
And the downturn is reverberating across the industry ecosystem. Maruti Suzuki, the country’s largest passenger vehicle manufacturer, recently reported sharp back-to-back falls in net profit from the fourth quarter of 2018-19 onward. The company sold 4.02 lakh units in the April-June quarter this year, down 17.9 per cent from a year ago. Its chairman, R.C. Bhargava, recently told india today: “The magnitude of the slowdown is apparent from the figures. There are
“Even if I add up all the reasons for the slowdown, it doesn’t explain what we are seeing. There is something about consumer sentiment that is causing the slowdown. My concern is that the worst is not over” PAWAN GOENKA, MD, Mahindra & Mahindra
no clear signs of a revival, and as a result, capacity is lying idle. The prime minister’s vision of making India a manufacturing hub by 2022 cannot be achieved without the auto sector.” Ashok Kapur, president of the Auto Ancillaries Association and chairman of Krishna Maruti, a supplier of components like car seats and roof headliners, says much the same. “Everybody is really worried because we don’t know how or when this slowdown will end.” He has so far been able to avoid lay-offs by reducing employee shifts and salaries, but others have not been so fortunate.
HOW DID THE AUTO SECTOR SLIDE?
There are many reasons for the decline in auto sales, including the crisis at non-banking financial companies (NBFCs), the dent in consumer purchasing power as a result of rural distress, a general caution among buyers who are worried about their jobs, to a big shift in emission control standards from April 2020 that is making auto companies stop production of variants of their products.
PURCHASING POWER: The sustained distress in the rural economy has led to a significant drop in consumer purchasing power. Wage growth numbers paint a stark picture—from 2008-2012, real rural wages grew by more than 6 per cent per annum. Then, in November 2013, that trend faltered. Between May 2014 and December 2018, real wages for agricultural labourers grew at only 0.87 per cent, with non-agricultural labourers gaining a mere 0.23 per cent per annum. Worse, construction workers, one of the largest labour groups outside agriculture, saw real wages falling, reducing by 0.02 per cent per annum. Highlighting this, Sanghi draws attention to the fall in the fast-moving consumer goods (FMCG) market. “A person might need a vehicle, but they are prepared to wait—it is a discretionary purchase. However, people don’t normally stop purchases of essential products—if they do, it means that purchasing power has really fallen.” Bearing this out, market research firm Nielsen has lowered its growth projection for India’s FMCG market to 11-12 per cent in 2019, down from 13.8 per cent in 2018. V.G. Ramakrishnan, managing director of Avanteum Advisors, also points to the long-term impact of demonetisation, announced in November 2016. “Demonetisation left a mark on the psyche of consumers,” he says. This has led to consumers putting off vehicle purchases, or choosing to buy second-hand cars, which are significantly cheaper. In 2018-19, while 3.6 million new cars were sold, the number of second-hand cars sold was four million.
CONSUMER FINANCING: Another major issue is the lack of credit. In recent years, banks, burdened by the long-term impact of the NPA crisis, have not been as willing to issue loans as they once were. Dealerships report frequent cases in which potential buyers have visited showrooms and decided on a vehicle, but have not been able to complete the transaction due to a lack of financing. This is a far cry from 2009-10, when auto dealers and bank executives would roll out the red carpet for customers. Further stifling purchases is the fact that credit remains expensive—despite rate cuts