Loan taps are drying up, rains are playing hide and seek, and a technological disruption is looming. Not exactly the best of times for automobile companies.
Abhijit Kumar Dutta
The sales engine of the Indian automobile industry has been stuttering for quite some time now, fuelling doubts about when and how carmakers will be able to reverse the trend and get back on the growth track.
According to data of industry body Society of Indian Automobile Manufacturers (SIAM), domestic sales in June across passenger, commercial vehicles as well as two- and three-wheelers have fallen 12 per cent year-on-year. This is the third straight month when passenger vehicle sales have shrunk by double digits. Vehicle sales had fallen 17 per cent in April and 20.5 per cent in May. For the record, automobile companies in India count deliveries to dealers as sales.
While the double-digit de-growth over the past three months has caught the attention of many, carmakers have been actually trundling along a wobbly path from the second half of 2018-19. After a comfortable ride in the first half of FY19, passenger vehicle sales started going downhill from the September quarter when it slipped 3.6 per cent. Thereafter, the slide has continued with the drop in the first quarter of the current financial year (2019-20), one of the sharpest in nearly two decades.
The reasons for the deceleration in passenger vehicle sales are perhaps both short term and long term. As a short-term example, we can recall the Kerala floods in August last year that slammed immediate brakes on passenger vehicle sales. An uneven monsoon last year further added to the woes. These events led to one of the worst festive seasons and huge inventory backlog at dealerships across the country. The worrying point is this year also rains have been truant so far and a deficient monsoon can dry up discretionary spending of consumers.
While floods and vagaries of monsoon are natural phenomena over which man has little control, there are other speed breakers that are affecting the automobile sector. SIAM, for example, attributed the prolonged contraction in auto sales to multiple factors ranging from a slowing economy, low consumer sentiment, lack of finance availability, drop in rural demand and increase in insurance cost.
Let us look into these reasons a bit more closely. According to a customer care executive of a dealer, who has several years of hands-on experience of selling cars, the lack of availability of finance has been hurting sales since demonetisation in late 2016. With the noose tightening on the cash economy, buyers became wary of walking away with his or her car of choice by paying in wads of cash.
While cash purchase took a hit, the black money drive by the Modi government made financiers extra careful about giving loans and they tightened their due diligence. The problem of vehicle financing got accentuated after the fiasco at IL&FS last September. The whole NBFC sector took a hit and liquidity situation tightened, making things more difficult for an industry where financing plays a critical role — almost 80 per cent of new cars being sold are financed.
Another reason that is throttling the automobile industry is the higher insurance cost for new buyers. From October last year, the Insurance Regulatory and Development Authority of India had asked insurers to offer only three-year motor third party insurance cover for cars and five-year covers for two-wheelers. The premium has to be collected for the entire term (three years or five years as the case may be) at the time of getting insurance. This means instead of paying annual third-party premium, it has to be paid as a lump sum in the initial year and again only in the beginning of the fourth year.
According to industry observers, a steep rise in insurance cost is virtually negating the discount baits that car companies offer to lure new customers. They are also of the opinion that the advent of new-age shared mobility in the form of Ola and Uber has also played its part in driving some of the potential customers away from buying new cars.
For the debacle in auto sales growth in the first quarter of the current financial year, some are also trying to find an excuse in the dip in consumer sentiment owing to a sudden slowdown in the economy in the March quarter and the general elections in May and its after-effect. If this explanation has any merit, then vehicle sales should start picking up going forward as elections are over and the new government has promised to pump-prime the economy.
But the problem is, the Modi government seems to be more focussed on pushing electric mobility and has largely left the conventional automobile sector untouched in this year’s Budget. The automobile industry was expecting some sort of GST rationalisation in the Budget to turn their fortunes. But that hasn’t happened.
With government support hardly forthcoming, loan taps remaining largely dry, rains remaining uncertain and a disruptive technological change on the way (introduction of BS VI norms from April next year), the automobile industry is likely to experience a bumpy ride for some more time to come.Abhijit Kumar Dutta is a freelance writer. Views expressed are personal.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.