Auto industry confident of turnaround in sales nos

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As the Budget was unfolded there was huge excitement within the auto sector because everybody thought that the excise duty cuts, would benefit the auto sector substantially. The numbers at this point in time for the auto sector don't look particularly good -  Some of the numbers that have been put up by SIM between April to February this year period read thus - passengers sales for cars continue be up in double digit growth, but two-wheelers continue to decline and they have shown consistently negative growth over the last couple of quarters. Three wheelers growth has also fallen and the goods carrier growth, which is down substantially as well.

 

Will the auto sector actually turn it self around? Will it get back into gear?

 

To discuss some of those issues specifically based on the outcomes of the Budget and possibly what we have seen with the farm debt waiver, as well as the Sixth Pay Commission, CNBC-TV18 's Shereen Bhan spoke to a panel of men who actually know what this industry is all about and whether one would see the numbers changing or not. The Panel included Pawan Goenka , President Automotive sector, M&M and also the VP at SIM, Arvind Saxena, VP Hyundai Motors , Ravi Chopra, CMD, Piaggio Vehicles and Yezdi Nagporewalla, Head Auto Sector Practice, KPMG .

 

The discussion revealed that there is hope, belief and conviction on the Panel that the auto sector will get back into gear.  Where the prices are going to go and where the prices of steel are going to go, auto industry leaders see a big question mark at this point in time. But manufacturers are clear that this is the time for innovation and this is the time to go out and get more consumers and get more customers.

 

Excerpts from CNBC-TV18's exclusive interview:

 

Q: I request you to put on your SIM hat at this point of time and talk to us from an industry point of view. There was a lot of expectation post the Budget because firstly there was a feeling that disposable income in the hands of the consumer was going to go up, because of the change as far as the exemption slabs was concerned, plus there was the excise duty cut, which the manufacturer said would benefit the consumers, have those expectations fade off?

 

Goenka: Seemingly there has been lot of benefits that has been given to the auto industry in terms of small cars, three-wheelers, two-wheelers, and also by putting in more money in the consumers hands by income tax reductions and other subsidiaries that we have. But that is going to be enough or not is yet to be seen, because the industry has also gone through a fairly significant pressure on cost in the last year. Infact if you look at the commodity price increase, the steel prices have gone up almost by a third, where the price increase has been less than 1% in the cars and the manufactures have mostly absorbed that, by having a hit on their margins.

 

Q: What is the sense you are getting - you get feedback from consumers, you get feedback from your sales team what are they telling you about the enthusiasm within the consuming class at this point in time?

 

Goenka: I don't see too much euphoria, because of this suddenly we are going to see a turnaround in the two wheelers, three wheelers, small cars may be so but not two-wheelers or three-wheelers, we have not heard that.

 

Q: Is that because the price really wasn't the critical issue here?

 

Goenka: It is the availability of finance, which is the main problem, and the interest rates have not come down and there is an expectation that it will continue to go up marginally. And the problem is not just interest rates but also the availability of finance and because of that the two- wheelers or three-wheelers industry is suffering very badly.

 

Q: You reduced prices all the way between Rs 9,000 to about Rs 15,000 has that translated into better sales for you?

 

Saxena: Initially I can say the inquires have increased in case of small cars particularly the cars that we make, and I can see clearly that it is up by about 15-20%, than what they were earlier. But bigger cars - they are more or less in the same level; in some cases they would be able to decline because nothing has happened there. In smaller cars, the customers are coming. But I think another important issue is the interest rate and the finance, while availability of finance is there everywhere, March being the month where all the finance companies and banks also restrict their lendings and also they tighten up lot of norms which is not converting into business. In the long-term I see going forward market should improve.

 

Q: Now I'm going to ask you to put on your M&M hat and speak to us because I know that the industry was asking for an uniform excise duty structure but that hasn't come through, India is well positioned now as a small car manufacturer, as a small car hub, so somebody like you at M&M that's producing MUV's for living what is it means to you?

 

Goenka: I think we have not been able to convince the Finance Minister and the Finance Ministry MUV's are not the vehicle of the rich, may be they see the Scorpios, the Safari's, the Endeavor and think these vehicles don't require the fiscal benefit. But the MUV's are the vehicles of the rural areas the Bolero, the Sumo's these are the vehicles that people drive in the rural areas, and they need incentives as much as the small cars.

 

Infact, if you go back to 5-6 years ago the excise duties on MUV's were lower than cars of all ranges, they become equal and now they have become higher. So somehow perhaps we have not done a good job in convincing the Finance Minister that these vehicles are not the vehicles for the riches or the luxurious type. We would hope that the message will get through and somewhere along the line we will come to the same level. Even if you look at the auto policy, which is the government document that has been approved by the Prime Minister, there MUV's are put along with the small cars in terms of vehicles that is required to the given fiscal incentive to propel demand. So we would hope that happens obviously we were disappointed, but then we had to look at it in a holistic way and lot of things have happened which are positive.

 

Q: One of the other significant thing the Budget did was to announce a Rs 60,000 crore farm debt waiver - of course, there was a question mark whether that was fiscally prudent or not but purely from reviving the rural economy point of view, how much of a difference is it going to make to a sector like yours?

 

Chopra: I'm going to be very honest with you that it is not going to make any difference at all. All said and done the macro-economic indicators are very favourable; the demand potential is there but as Pawan Goenka said a little while ago, the biggest problem is the interest rate on one side coupled with the non availability of easy financing.

 

Financing has become key factor for success as far as the three-wheelers industry is concerned; that even the benefits given by the Finance Minister and the Budget. He did make a statement on the flow of the house that on three wheelers and two wheelers, the excise duties will reduce from 16% to 12%. If you see the fine print you will find that the reduction is only in the passenger segment and not in the cargo segment, where de-growth has been maximum. So unfortunately I don't think they have recognized the fact that the industry and the segment in the industry, which needs support, have been neglected. 

 

Q: You have heard the manufacturers speaking about the challenges and they are basically saying that demand isn't the one that is slowing down but its really an interest rate issue at this point in time, to your remind, given the current macro-economic situation, do you actually expect an up tick in the current quarter?

Nagporewalla: It's too early to say. But I wouldn't expect it in the coming quarters to kick in its full form as such. If you see, you can break this down frankly to a direct as well as an indirect impact, the direct impact to manufacturing which is in the form of excise, customs, those are already and we have witnessed all of those. The indirect ones would be the ones which are the economic factors it terms of affordability, in terms of financing abilities, interest rates, infrastructure, those aspects, and frankly it's the indirect ones, which perhaps are the ones coming in the way, more than the direct ones.

 

Q: If we talk about margins, that are every day - the street is getting a sense of what the margins are going to be like, give a sense for the margin picture really in the industry in the coming quarters.

 

Goenka: The auto industry has been able to absorb quite well for the last 2-3 years, all the increases that have happened. So in spite of a 2.5% or 3.5% increase in raw material or our buying cost, in spite of the inflation, in spite of the rising people cost, and a very little price increase, the margins haven't dipped that much, if you look at results for the first three quarters of all the companies, you will see perhaps a 1% point difference in the margins which is no where near the total impact in our input costs.

 

Q: Off the auto pack at this time, which is the segment you have seen the hardest being the hardest hit, Mr. Chopra has bought that point, to where two-wheelers are also seeing negative growth consistently for a couple of quarters, which is the segment you think will be the hardest hit in the coming few quarters?

 

Nagporewala:  The commercial vehicle segment will be hit quite hard, and it's a little scary at times; commercial vehicles are the base of our Indian economy, you can do without cars and bikes - you can't really do without commercial vehicles, especially when we are growing at this phase, and they have impacted as well, because of the lack of availability of the right kind of finance, so I would actually look at that segment closer and passenger cars.

 

Q: What about the business of converting people from the 2 wheeler business, on to the cheaper and smaller cars like the Nano, because that's the big debate, the Nano hasn't driven out in Indian roads yet, we don't know whether it will meet the deadline of October or not, but what sort of a Nano, impact are you actually expecting if at all?

Nagporewalla: What's really happened with the Nano is that we have created a segment of its own - so far you had segments and bifurcations, but now you have a segment which is created of its own, that segment is extremely attractive and as well as extremely competitive.

Q: How worried are you about the Nano and you actually see the telecom battle that we saw with rates slashed from Rs 32 a minute to Rs 16 a minute to now just under Re 1 a minute, do you see a similar sort of situation in the car industry, are you going to go Nano-like?

 

Saxena: Difficult to say right now, what I can only say that maybe Nano would create a new market for all of us, even if I look at my sale all that I have on the small cars, frankly the proportion of the upper variants, its far greater than the cheaper variants.

 

Q: You had the option for going in a small car, you decided to give that option apart, and do you regret that?

Goenka: The Nano perhaps is the biggest event that has happened in the global auto industry. I was in Detroit in January after the Nano launch and what anybody wanted to talk to be was about Nano and I am proud that this is something that has happened in India from an Indian company, and I don't look at what Nano has done in terms to sell the car for less than USD 3,000. But what's important is, to demonstrate that it is possible to make a vehicle with four wheels meeting all the emission norms and all the safety norms and price it less than USD 3,000 and that means re-defining the pricing and the costing paradigm, and this effect will definitely come into the other products, so it's not restricted to small cars which will happen to all kinds of cars, and every product in the industry, and that's what I am excited about to see how the industry will transform, and I am not so concerned or hung up about what demand to generate what will it take out of and what will it give into, but I am just looking at a revolution happening in the auto industry, in the way we design our products, and in the way we cost and price our products.

 

Q: How worried are you because the Nano is likely to hit your customers as well?

 

Chopra: I don't really think so; our product lines are more commercially oriented, the Nano is more of a personal car, so I don't see that type of an interest, and moreover, each segment has its space, there is an opportunity for every segment to play its role, Nano is a great event and achievement, something we all are proud of, and we will be proud of because they are able to demonstrate what they have done, its an eye opener for the whole world.

 

Q: The auto eco system, how worried is you about that?

Goenka: If you compare the component manufacturers and the OEMs, say 10-12 years ago and today, everybody is a lot more efficient, in what they are doing, and that has happened because of the pressure that has been put on us, so if we didn't have the opening of the market, the competition between the vendors themselves, they will not be so productive, so in spite of all hue and cry and all the goods supplies.

 

Q: So you are saying a lot of it as hue and cry?

 

Goenka: It's in the sense that there are pressures on us, but then we find innovative ways to get around it, because we know that we can't determine the price of the end product, that is to be determined by the consumers, competition, and therefore we have to satisfy our share holders by making good profits, and therefore we always find innovative ways of squeezing more out of what ever we have, whether it is squeezing the assets or getting more productivity from our people, or doing things in a different way, having cheaper processes so all suppliers are finding ways and competition is the best way, to get the best out of it.

 

Q: What are your thoughts on the auto ecosystem at this point in time, the whole supplier-OEM relationship?

 

Saxena: It has to be much stronger frankly because today we are working very closely because cost and productivity are two major issues, and unless there is a very close working together the OEM and the component supplier, one cannot reach the kind of cost targets and price targets which one is working today, and secondly productivity is the very important issue today, for us and everyone is trying to improve their productivity, say car per hour, or car per employee, that's the only way to survive, otherwise there is no way in which we can keep those costs in control.

 

Q: Will manufacturing be forced to hike prices if we actually see the input costs going up, will you not have the room to do that?

Goenka: Now, the biggest concern that I have, is the input costs growing up, and in spite of a 33% increase, in the steel prices, there is a threat of about Rs 8,000/ ton increase in rate in the next quarter - so that's something that you have to couple with, it's always said that we are done and we can't do any more productivity improvement but we always find some ways of doing it. So at some point of time, we may have to pass on a little bit more than what we have been passing on, and we will have to keep the balance.

 

Q: So at some point of time, but when will be that point of time?

 

Goenka: Somewhere between tomorrow and 10 years from now.

Q: What more?

 

Saxena: Quite fair, if the prices and duties have come down, they also have been passed on to consumers, so naturally the input cost goes up, and beyond a point you cannot absorb all of it.

 

Q: What about you, will you be able to keep prices at these levels if the input costs continue to sky-rocket?

 

Chopra: As Pawan mentioned earlier, the total cost management is a key factor for success, and cost efficiency is a continuous gain; it's not done today and forgotten tomorrow - we have been working on cost optimization for a last couple of years and we will continue to work for the next five years; so the only way to ensure that we are able to sustain, a cost impact, is through your own productivity, your own quality improvement, and your own cost effectiveness. But a stage comes when if the commodity prices go beyond a certain level, stage comes when we are going to call the shorts and that's the time when you have a trade off, you pass it on to the consumer, or absorb it in your bottom line.

 

Q: What do you actually see happening, do you see them absorbing it and impacting their bottomline and you see profitability being hit significantly in the next couple of quarter on account of this? 

 

Nagporewalla: The way I see it as India and Indians as a race are fairly competitive, fairly innovative in whatever they do. We have seen continuously processes whether they are manufacturing processes or the entire supply chain innovation coming in, to an extent manufacturers will look at that and beyond a point I'm sure there will be innovation passing it down.

 

Q: Given the situation, given the interest rates scenario, given the credit crunch at this point in time do you think the sector is ready to bounce back into gear?

 

Chopra: I see in the next few months there will be a recovery, certainly there has to be a recovery, this is my firm conviction.

 

Q: That is your conviction and your belief and we hope that it translates into reality. Do you think we are going to get back into gear?

 

Saxena: As far as passenger cars are concerned, I think it is still growing and I don't see any reasons of why it will not grow further.

 

Q: Continue to see double-digit growth?

 

Saxena: Yes.

 

Goenka: I think if the interest rates don't go up and if the commodity prices don't increase abnormally, then we are okay.

 

Q: Is it a double-digit growth for the passenger cars segment and do you see the negative growth being converted back into positive?

 

Goenka: I would think that the negative will get converted into small positives and I hope that the double-digit growth in the passenger car segment will continue.

 

Q: Are you optimistic?

 

Nagporewalla: I think so it might take a little longer than the ordinary but I'd expect this to get back on track.