Maruti Suzuki chairman RC Bhargava says, in the light of negative forecast of auto sales, that the options are limited for the government with no possibility of providing tax-cuts on passenger-vehicles or even cut in fuel-prices. "The situation for the auto industry is very grim," RC Bhargava told CNBC-TV18.
"Maruti will be very close to achieving its FY13 export target by March but the month of February is not going to be better than January for the auto sector."
Offering a vendor-perspective, ACMA (Auto Components Manufacturing Association) president Ashok Taneja adds that the impact of the negative forecast auto sales wil affect suppliers directly and the situation does not bode well for suppliers.
"Component manufacturers are working shorter hours now with the most affected being the small and medium segment." Taneja demanded the government start handholding small and medium enterprises engaged in the manufacture of components for the auto industry.
Below is the edited transcript of the discussion on CNBC-TV18
Q: SIAM has announced a dismal forecast for the automobile industry. This is the worst forecast in a decade. The industry of course is clamouring for government attention. But what can the government really do in this situation where it has fiscal constraints to deal with?
Bhargava: I agree with you. I think the options with government are very limited. I don’t think there is any possibility of tax-cuts or excise-duty reductions or any such initiatives on passenger cars to alleviate the situation. I don’t think fuel prices can be brought down as the subsidies on diesel are too high and the government is planning to increase diesel prices.
These are the two major factors that influence customer-buying because the cost of running a car has gone up with petrol prices having climbed since 2011 and diesel prices are now beginning to climb. So, the situation actually looks pretty grim, not only for the automobile sector, but actually for all manufacturing.
Q: Do you think there will be an impact as far as suppliers are concerned especially suppliers of the commercial vehicles (CV) segment because there the sales have fallen off sharply, has that been the worst hit?
Taneja: Auto component manufacturers depend on three segments for their sales - the largest segment is the sale to the original equipment manufacturer (OEMs) and as production of CVs or tractors is declining or the production of passenger vehicles is flat, this is having a direct impact on the sales of components.
The second segment is the aftermarket, which unfortunately continues to be soft. There maybe no de-growth, but certainly there is no growth. The third segment is exports. There is also a slowdown in the export markets. For example, Europe, which accounts for 36 percent of component exports from India is in a slowdown mode and therefore auto component manufacturers are in a tight spot at this point of time.
Q: The government has limited options at this point in time. The industry is going to have to pretty much ride it out. Do you believe we are going to be faced with serious production cuts? Companies like Tata Motors which are bearing the brunt of the sales decline have already cut back production by almost 40 percent. Do you see others forced to do so?
Bhargava: The fourth quarter of of FY12 was actually a very good quarter for the industry. Sales was very high but this year in the same quarter, to achieve the same level of sales has become very difficult. Most companies are not going to be able to match last year's sales figures for the Q4 of this fiscal.
Having said that Maruti is still hoping to more or less match what it has been doing in last year and as a result our estimate for growth in this financial year is at 5-5.5 percent. At the moment we are about 6.5 percent. So, there might be a slight decline.
For the rest of the industry, the month of January saw an 8 percent decline in sales compared to the last year, excluding Maruti. According to reports, February is not going to be a better month at all. Tata Motors saw the largest drop in sales amongst car-makers.
Q: What kind of assistance are component makers going to seek from a) OEMs and b) government? Some suppliers had to shut down their plants; we are perhaps going to see large scale layoffs as well, at least that is what we are picking up. What is your opinion on this?
Taneja: Component manufacturers are not shutting down plants but are working shorter working hours. Many of the plants are working four or five days a week. This is in tandem with the OEMs which are also working for less number of days in the week.
The most affected component manufacturers are the small and medium enterprises. Their staying power is very limited and they are the ones who are bleeding.
In a recent ACMA-E&Y analysis of 100 listed companies, we found that two-thirds of the companies had a negative growth in their profits in Q2 and Q3 appears to be worse. Therefore, there is pain across the component segment. We must start with hand holding the small and medium enterprises that are most vulnerable.
Secondly, there has to be a greater understanding and cooperation between OEMs and component manufacturers at this time so that if anyone is in serious difficulty, help can be provided to them to keep their head above water because once the supply chain dries up even for a single component, it can have a serious consequence when the demand revives.