No signs of demand improvement yet, says Maruti Chairman

Moneycontrol Bureau

The automobile industry is seeing a steady decline in demand and there are no signs of any pickup yet, RC Bhargava, the chairman of India's largest passenger car maker Maruti Suzuki said on Tuesday. Automobile sales have slumped this year amid high fuel prices, expensive loans and the overall slowdown in economic activity. In Feb, passenger car sales slipped 26 percent year-on-year to 1.59 lakh units, the most in 12 years. Medium and heavy truck sales are down 23 percent. Bhargava expects the weak auto sales trend will persist going ahead as the overall sentiments remain weak. "It is not (just) the demand in the sale of cars, it is number of people who walk into showroom, it is the number of inquiries, it is number of conversion of inquiries to orders. All of that has slowed down. So it is not something which is just a momentary kind of event, it is something which is going to last for a longer time," he told CNBC-TV18. Vikram Kirloskar, the vice-president of Society of Indian Automobile Manufacturers, who is also the vice-chairman of Toyota Kirloskar Motor, also said earlier that FY14 was also likely to be a difficult year for the industry. Even if the interest rates are cut by banks the sales are not likely to see a turnaround, he feels, pointing to out that private banks have reduce auto loan rates by around 2 percent over the last few months, yet car sales have continued to tumble. The decline in sales, in-turn leading to rising inventory at dealers and factories, has forced several automakers including Maruti to take production cuts. Bhargava said Maruti Suzuki usually maintained inventory at around 21 days, but the company has resorted to shutting production as and when it feels the inventory is building up and that policy will continue. Below is an edited transcript of the reaction on CNBC-TV18 Q: What is your view on the status of the auto industry?
A: I think the auto industry is facing a decline in demand that is not momentary but a trend that is going to last longer. Q: Is the situation worse for two-wheelers?
A: No, the situation in the two-wheeler segment is not so bad. In February, two-wheeler sales dropped by 4.5 percent while car sales including SUVs dropped 16 percent. Q: Do you think the economy is bottoming out?
A: I really cannot say. When the GDP data for the fiscal was released, various experts estimated that that the second half will be much better than the first half. Now after three negative quarters, experts forecast that the fourth quarter will be better. So the auto industry will have to wait and watch for a substantial improvement in demand and investor sentiment. Q: Will the cut in rates improve either volumes or sentiment in the auto sector?
A: My belief is that rate-cuts do make an impact only in tandem with other factors that encourage people to buy cars. Cutting rates by half-to-1 percent even will not lead to a sudden change in sentiment or demand. Q: How do you explain the contradictory trends between cars and utility vehicles?
A: The only segment which is growing now really is utility vehicles. Q: And that is most expensive segment.
A: Not necessarily. There are cheaper utility models like the Bolero and the Ertiga. They are cheaper and in terms of value for money probably better than any of the other models as they offer more space at lower cost. Q: What is the situation of the inventory at Maruti?
A: As a matter of policy, we never try and show large volumes of production and sales by pushing cars to dealers. We like to keep the dealer inventory at levels which they can afford to keep and usually that is at a maximum of about 21 days of sales. It is for that reason that we have cut back on production by shutting down on certain days of the month when we feel that the inventory is building up
It is possible that there maybe an increase in the days of shutdown, but the policy of a shutdown for a day is better than reducing production everyday as it is cheaper to shut down production for a whole day than to reduce production daily. Q: Has the auto industry overloaded itself with inventory?
A: The entire auto industry is aware that the levels of inventory with the dealers is higher and have starter to cut back on production. Q: There have been frequent instances of labour unrest across the auto sector. Is this trend likely to continue resulting in higher wages impacting margins?
A: That maybe partly the case. Whenever wage negotiations are due on the expiry of three-to-four year agreements and the new agreements are to be signed, the trend of labour unrest is on the rise. Usually most of these agreements are signed peacefully and the errant workers are fined. Q: Is labour discord due to high levels of consumer price index (CPI) inflation?
A: Fortunately, inflation has reduced over the last few of months. But if it again starts to touch double-digits, that would cause some difficulty. Q: When is the earliest you expect to see a substantial recovery in volumes?
A: That depends on the perception and sentiment of the investors and consumers in the country along with some discernible improvement in the economy. Q: What about exports which looked a tad better in January?
A: The monthly data is a bit misleading. In my view, the export data should be looked at on a quarter-to-quarter basis. That will reveal a more realistic view. The export market is not by any means booming.