Triple Saturation: Raison d’etre of Automobile Industry in India
Dr. Vrajlal Sapovadia
Automobile industry in India is witnessing nose dive decline in 2019. The trend indicates that since last three quarters, each segment within automobile sector is passing through its worst time in history. Till 2017 India’s huge car market was booming and global players were rushing to invest. Since turn of 2019, the automobile sector has been slammed into reverse. India had been a bright spot for carmakers until recently, with annual sales of passenger vehicles rising by about 33% over the past five years. Sales of passenger vehicles plunged 31% in July, according to figures released by the Society of Indian Automobile Manufacturers (SIAM) on Tuesday. It’s the ninth straight month of declines and the sharpest one-month drop in more than 18 years, SIAM Director General Vishnu Mathur told CNN Business.
Several economic, technical, social, financial, legal and political reasons are attributed to the current slowdown in automobile industry. Though the reasons cited by pool of experts and policy makers are relevant, we argue that fundamental reason of deep and prolong slowdown is utility, physical and financial saturation in automobile market (macro) in general and at consumer level (micro) in particular.
As per CNN report; before the slump hit, India was predicted to overtake Germany and Japan to become the world’s third largest car market by 2020 — behind only China and the United States. But the country’s biggest carmakers are now struggling. New safety and emission regulations have driven up prices, troubles among India’s consumer finance providers have hit lending and a broader economic slowdown has made consumers reluctant to spend.
Maruti Suzuki, which accounts for roughly half the passenger cars sold in India, reported a 36.7% drop in vehicle sales in July 2019. Sales at Tata Motors (TTM), which owns Britain’s biggest carmaker Jaguar Land Rover, plunged 31%.
Mahindra & Mahindra (MAHMF), the leading Indian manufacturer of electric vehicles, suffered a 17% slump. It said at beginning of August 2019 that it would have “no production days” at several plants for up to 14 days this quarter to manage falling sales. Global rivals are also suffering. South Korea’s Hyundai (HYMTF), the No.2 player in India, saw its sales fall 10% in July compared to the same month last year, while Japanese giant Toyota (TM) fell 24%.
The slump has prompted companies to slash over 330,000 jobs through the closing of car dealerships and cutbacks at component manufacturers, Mathur said, citing data from industry associations that govern those two sectors. The Automotive Component Manufacturers Association of India warned in a statement last month that its “crisis-like situation” could result in a million people being laid off. The industry has stopped all fresh recruitments. Carmakers in India have directly axed at least 15,000 temporary workers, according to Mathur.
A report by Dr Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, outlines five major reasons behind the slowdown in the auto sector. Using an econometric decomposition exercise, the report has identified a decline in rural demand coupled with the liquidity crisis stemming from NBFC defaults as the key culprits behind the slowdown. As per the report, following are the five major reasons behind the slowdown in the auto industry:
After the dramatic default by IL&FS last September, the NBFC sector has been faced with a major liquidity crunch. The overall exposure of mutual funds to financial sectors plummeted by approximately Rs 64,000 crore between July 2018 and June 2019. Since NBFCs are the major financers of customers who do not approach banks, the liquidity crisis of the NBFC sector has affected auto sales to a large extent. The SBI report assigns a 30 percent weightage to this factor in explaining the auto slowdown.
Decline in demand:
According to the report, a significant decrease in the demand, especially in rural areas, for new automobiles is responsible for the degrowth of the auto industry. This factor, as per the report, is another reason behind the auto slowdown and has a weightage of 20 percent.
Increased acquisition costs: Vehicle prices have seen an upward revision in 2019 and the trend is expected to continue in 2021 due to various safety, insurance and emission norms related compliance costs. Higher insurance costs coupled with the introduction of the GST have increased acquisition costs by 2-5 percent. This factor is 10 percent responsible for the slowdown, according to the report.
New axle load norms:
In July 2018, the government increased the official maximum load-carrying capacity of heavy vehicles by 20-25 percent with the aim of bringing down logistics costs. However, the decision adversely affected the sale of automobiles, particularly commercial vehicles and is believed to have a weightage of 10 percent in explaining the decline in the auto industry sales.
Slowdown in new car sales suggests that the demand is shifting towards a pre-owned car market because of significantly lower costs of second-hand vehicles as compared to the new ones. The pre-owned car market in India has been expanding considerably in the past few years and buying and selling of second-hand cars exceeded the sale of new cars in 2018-19. Further, the increased availability of automobile rentals promotes consumers to rent vehicles instead of buying them. Finally, the lack of a clear migration policy towards Electric Vehicles (EV) creates confusion among buyers, contributing owards a reduction in auto sales.
The auto industry slump coincides with an overall economic slowdown in the industrial sector that has affected almost all segments, barring non-durable consumption goods. The automobile sector has a strong backward linkage with overall economic growth since auto production influences the demand for automotive parts and production of intermediary materials like steel, rubber, plastic, glass, paint, electronics and other services. So, growth in the automobile industry is critical for the overall economic growth of the country.
As per Economic Times report; the slowdown in auto industry is it by a slowing economy, the U.S.-China trade war and the chaotic implementation of new emission rules.
As per NDTV report, India’s auto parts industry could be forced to slash a fifth of its five million or so workforce if the slowdown in vehicle sales continues, the president of the country’s largest industry group for auto parts makers said. India’s auto industry is in the middle of one of its worst slumps. Passenger vehicle sales fell 18.4 per cent in the first quarter, and monthly passenger vehicle sales in June fell by the biggest margin in 18 years. The slump has prompted automakers to cut production and automakers and parts makers to cut jobs.
The drop in production “has led to a crisis like situation in the auto component sector,” Ram Venkataramani, president of the Automotive Component Manufacturers Association of India (ACMA), said in a statement late on Wednesday. “If the trend continues, an estimated 1 million people could be laid-off.”
The slump in the auto sector, which accounts for nearly half of India’s manufacturing output, has been a major factor behind the slide in economic growth to a five-year low earlier this year.
Speaking to NDTV about the present condition of the auto industry, Jagdish Khattar, former Managing Director, Maruti Suzuki said, “The employment related to the automobile industry, direct and indirect is 35 million, which includes transportation, insurance, finance, dealership network, service, spare parts and all that. So, it’s a huge employment and not couple of million. The total output is ₹ 8.30 lakh crore. “The impression is manufacturers are big names, the fact is 70-80 per cent of the production of the components comes from small and medium industries. Two years back, we used to have 40 per cent diesel vehicles. Today it is less than 20. Rural areas used to have 30-40 per cent sales. The rural areas are distressed today. With Euro6, the industry has invested over a lakh and fifty thousand crore. However, Euro6 hasn’t even come yet and we are talking about electric vehicles. Euro6 will increase the prices of cars, and the Supreme Court has said that you have to take three years of insurance. I mean, everything has gone wrong as this industry is concerned. Yes, it is not the only industry, others have also been affected but this industry has a very major role to play in manufacturing, employment etc.”
“If the government was to reduce GST, it will not make much of a difference. There are far too many things. The economy should grow, people’s confidence should grow. People are losing jobs. If I’m losing a job, am I going to buy a car? No, I’m going to wait for it,” he said. Khattar also pointed out congestion, pollution, parking charges as some of the other factors against people buying new cars.
Venkataramani said investments in the auto sector have been frozen due to a lack of government clarity on its electric vehicles (EVs) policy. He said a government plan to speed up the rollout of EVs would raise India’s import bill and damage prospects for auto components manufacturers.
Saturation Point In economics, a bliss point is a quantity of consumption where any further increase would make. the consumer less satisfied. Like any other commodity, a vehicle fulfills a purpose for which it bought. A vehicle is useful for transportation of goods and human beings. It also is a symbol of prestige. An individual buy basic car model to satisfy individual and family needs. He will buy luxury model as he become financially rich. He will sale old vehicle to someone who would like to possess vehicle with smaller investment. In the last two decades, a big market has developed for sale of used vehicles. As per Statista, India is the third largest road network in the world, with total number of vehicles in the year 2016 stood at 230 million. In 2005, there were 81.5 million vehicles. It can be seen that; during the period there is 282% percent vehicle growth in terms of absolute number. Population of India in 2005 and 2016 was respectively 1.1 and 1.29 billion respectively. One vehicle was owned by 13.49 person in 2005, while in 2016, a vehicle was owned per 4.59 person. The population growth during the period was 17% while it was 293% growth in owning vehicle per person. In Ahmedabad, the registered vehicles in 2013 were 1.8 million, while by 2016 the growth of registered vehicle was doubled to 3.6 million. By rough estimate, there is one vehicle per two to three people in city of Ahmedabad. Public transport is developed and commercial vehicles like rickshaw and taxis like Uber are considered financially more viable leading to reduction of individual ownership of vehicles. Thus, there seems to be saturation in utility of vehicles. Literally and in simple terms, there is no one or very few people left without vehicle. This has led to reduction in demand of old vehicles and negative cascading effect in demand of new vehicles.
The vehicle requires space to run on the road when in use and space to store or park when vehicle is not in use. Road network in 2005 was 3.80 million Kms, while in 2016 the road network was 5.57 million Km. The road network growth during the period was 46%. The vehicle growth during the period was 282%. The number of vehicles has expanded enormously; parking space in urban area has grown marginally or remained constant or reduced due to a growing population. The land is limited and expensive, rising parking demand spaces puts immense pressure on it. The fights for parking vehicle is increasing day by day. One of the most common problems today is a saturation of parking spaces. Vehicles continue to outnumber existing parking spaces, thus clogging roads. Incidences of violence over occupancy, deformed cars due to a space crunch, and overcharging for parking are some problems that result. Most cities propose increasing parking spaces to combat the problem. Parks and vacant plots are used as potential parking spaces and multi-level facilities are being built, irrespective of the limited land space and resources. However, some academics like Donald Shoup stand firmly opposed to this approach, arguing that controlling demand is a better alternative than increasing the existing space .
India is facing a new problem nowadays – lack of sufficient parking space. With families getting smaller and the total number of motor vehicles exceeding the total number of heads per family, the parking scenario is woefully falling short of the current requirements in the country. The situation is such that on any given working day approximately 40% of the roads in urban India are taken up for just parking the cars. The problem has been further exacerbated by the fact that nowadays even people from low income group are able to own cars. The number of families with cars has become much more than what the country is able to manage . In 2015, there were about half million road accidents in India, which killed about 150,000 people and injured about half million people in India. The road and parking space are overcrowded. Traffic violations are increased geometrically and are unmanageable. In effect, the demand of vehicle is reduced due to space saturation to run and park vehicles.
Manufacturing, selling and owning vehicle/s requires capital investment and running costs. The financial saturation has gripped at macro level (manufacturers and dealers) and micro level (user/consumer). As per Reuter report , “The slowdown in the (NBFC) sector has dragged down vehicle sales growth,” said A.M. Karthik, financial sector head at ICRA. “Now the auto slowdown is becoming more visible as the liquidity squeeze continues.” Automakers including Maruti Suzuki (MRTI.NS), Tata Motors (TAMO.NS), and Mahindra & Mahindra (MAHM.NS) are feeling the heat and have either cut production or temporarily closed plants to correct mounting stocks. More than 280 dealerships have shut down in the last 18 months across India as rising costs for inventory management have made businesses unviable, according to the Federation of Automobile Dealers Association (FADA), a lobby group of auto dealers. Due to slower demand, rising NPAs in banks, NBFC failure, tighter financing and regulatory norms, poor inventory management, faster technology changes and liquidity crunch; the vehicle manufacturers and dealers are facing financial saturation. The increasing fuel and vehicle maintenance cost (road tax, insurance and repairing), environmental awareness, competitive taxi access and improved public transport has led to use public transport. Rising unemployment, poor banking system and liquidity crunch have lasting impact on vehicle users and consumers.
Among several factors, the most important factor is saturation in automobile industry. The utility, physical, and financial saturation has led slowdown in automobile industry. Therefore by piecemeal actions, the industry is not going to revive and the slowdown will last longer. Automobile slowdown will have impact on other sectors due to the loss of direct and indirect jobs, unattractive investment, poor dividends, less tax collection and repayment of credits (banks, financial institutes and suppliers).