In a four-part series, Moneycontrol looks at how some of the major sectors of the Indian economy are faring
As NDA 2 gears up for its first Union Budget, all eyes will be on first time Finance Minister Nirmala Sitharaman. She has her plate full, laden with issues like farm distress, sluggish investment cycle, flagging exports, among others. But on top of the heap will be the issue of jobs, and lack of employment opportunities for India's burgeoning young population.
The problem is not merely about enough jobs not being created. In some of the industries, the crisis is also due to a sluggish response to structural changes, leaving many jobless.
In a four-part series, Moneycontrol looks at how some of the major sectors of the Indian economy are faring.
In the first part, we look at how the slowdown in the auto industry has forced companies to cut production, causing tremors across the entire automobile ecosystem. Among the major casualties of the slowdown are auto dealers, with hundreds going out of the business.
A longtime car dealer of Maruti Suzuki was forced to shut down his dealership in NCR after a poor festive season of 2018. This dealer had been soldiering on for a while even as sales had been falling for the past many months. About 20 people employed at the dealership lost their jobs.
Managing the overheads—staff salaries, rent, utility bills—in the face of declining sales and thin margins became unsustainable after banks refused to provide working capital. On their part, the banks were aware that the road to recovery for the sector would be a long one.
"Margins were negligible at 2 percent and managing every expense to run showrooms while bearing the squeeze on funding by banks -- it was prudent to exit the business than to bear losses every month,” said the dealer on condition of anonymity.
He is not alone.
Ford Motor Company’s first dealer in India Wasan Motors shut down its dealerships in Mumbai after continuous fall in demand. Ford did not introduce any blockbuster models to follow its earlier successful mini SUV Ecosport. The dealer liquidated all his stock at huge discounts before closing down the showrooms, which had around 30 employees on its payroll.
The flock that has taken the maximum blow of the slowdown in the auto industry is the dealer community. More than 300 dealerships across India closed shop last year and about 500 are expected to go out of business this year. Each dealership employs between 10 to 30 people depending on the location and the kind of dealership, such as those selling cars, two-wheelers or trucks.
Auto companies such as Toyota, Volkswagen, Eicher Motors, Honda, Nissan, to name a few, have handed down severance letters to several of its dealer partners. There are more than 15,000 operational dealers in India having 25,000 dealerships that employ 2.5 million people directly and another 2.5 million indirectly.
Worst in a decade
On May 8, the Federation of Automobile Dealers Association (FADA) acknowledged that there has been an unusual spike in closure of dealership in recent times, especially in metros and tier 1 cities. A substantial number of these were due to the financial stress caused by accumulated losses and reduced access to working capital needs.
The situation at allied sectors such as parts suppliers, tyre manufacturers and dealers is not too different, with several entities exiting the business or being on the verge of quitting.
With car and SUV sales falling 21 percent in May, the biggest monthly fall in 18 years, the automotive industry is experiencing its worst period since the meltdown of 2008-09.
Production rate at factories producing cars, SUVs and trucks are running at half of their peak capacities owing to the continuous slowdown in the market.
Several companies are forced to take unscheduled production holidays to reduce inventory and avoid unnecessary pile up at warehouses and with dealers.
Most companies refused to speak on record about the cut back in jobs. Howeverm sources say that owing to the slowdown in production rates across factories, companies are looking to trim flab and the first to take the hit are the temporary workers.
Tyremaker Ceat is nine months behind in its production schedule and the capacity ramp-up has been slower than expected in certain segments such as specialty tyres. Lower production has led to reduced employee costs.
Kumar Subbiah, CFO, Ceat said, “We had slightly lower level of activities in our factory in terms of volume reduction during Q4 vis-à-vis Q3 so that also has contributed to lower employee cost.”
Maruti Suzuki, the country’s largest carmaker, cut production for four months in a row. The maker of Swift, Dzire and Baleno slashed output by 18 percent in May as buyers stayed clear of showrooms.
Mumbai-based rival Mahindra and Mahindra (M&M) said it will shut its factories for 5-13 days in the ongoing quarter to align vehicle supplies to demand. The move is surprising from the SUV-specialist given that it introduced three new models in the market in recent months.
The situation is grim at Tata Motors, too, which was riding on an uptrend driven by new launches such as Tiago, Nexon and Harrier. Its commercial vehicle making factories are operating at 50 percent of their full capacity.
“We have not sold even one unit of those large car carriers in the last six months and negligible units of two-wheeler carriers,” said a senior executive of Tata Motors, which is India’s largest manufacturer of trucks and buses.
Rival Ashok Leyland sent a letter to workers at its Hosur (Tamil Nadu) plant stating that reduced allowances will be paid to those who are not required to work on ‘optional working day’. This was one of the ways to reduce costs.
A silver lining
But this has brought an opportunity for companies to look at cost cuts and redundancies.
“We had to let go of some the dealers and it was done on mutual understanding. The slowdown has brought us the opportunity to clean up our distribution channels,” said a senior executive of Honda Motorcycle and Scooter India, trying to spot the silver lining in this gloomy situation.
Speaking to media persons after announcing the March quarter results, Siddhartha Lal, managing director, Eicher Motors said, “During strong growth phases, all dealers ride the tide. But when the market goes the other way, you identify the underperforming ones. We replace dealers who are not able to rise to the right level of customer experience."
As per predictions made by the Society of Indian Automobile Manufacturers (SIAM), the apex auto lobby body, the passenger vehicles (PV) segment comprising (car, SUV and vans) is expected to grow 3-5 percent this year while commercial vehicle and two-wheelers are expected to grow at 10-12 percent and 5-7 percent respectively.
But the start of the year hasn’t been well. During the first two months of the year PV sales have declined by 19 percent whereas CV sales have slumped by 8 percent. Two-wheeler sales have come down by 12 percent during the same two months.
If the sales don't pick up, the bad news will only increaseThis is the first story in a four-part series. Tomorrow's story will talk about the crisis in insurance sector where 5 lakh have lost their jobsThe Great Diwali Discount!
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