Edited by Vani Rao
Auto majors facing severe slump; focusing on rural demand to drive growth
India’s flagship automobile show, Auto Expo, continued to draw big crowds despite being held far away from the capital, recording an estimated 1.05 lakh visitors on Monday, 10 February 2014. The Auto Expo has seen an array of car launches from spanking new concepts, brand new production models, and fresh variants of existing models amid the glitz, fanfare, and the presence of Bollywood stars. On top of this, a motley crew of 1,750 hacks (250 of them international), an average per day crowd of 60,000, and you would forget to believe that the Automobile industry is witnessing a booming growth phase. The Auto Expo is expected to deliver innovation with panache. However, if one looks closely enough, it is easy to sense that the flavour was missing in the expo. The Greater Noida Expo Mart’s air was rather heavy than fresh.
Is this the real picture?
The Indian Automobile industry got off to a bad start in 2014 with all major car manufacturers reporting a decline in sales in January compared to the same period last year.
Annual passenger car sales declined for the first time in 11 years in 2013, falling by 9.59% to 1,807,011 units sold, compared to 1,998,703 units in 2012. As shown in the figure, the trend continued in January 2014 with domestic car sales coming at 1,60,289 units compared to 1,73,449 units sold in the same month last year.
With growth rates of around 30% four years ago, India looked well set to become the world’s third-largest car market by the end of the decade, behind China and the US. However, things went awry in 2012 as the economy slowed down, putting the brakes on the Manufacturing sector and other related industries. Last year proved worse, with sales plunging against a backdrop high interest rates and rising fuel costs. Exports have not been helpful either with most overseas markets witnessing a slump.
Although about $4.4 billion worth of investment has been made in the last two years for adding vehicle manufacturing capacities in India, the world’s sixth biggest automobile market is facing a multitude of problems.
Idling manufacturing plants, forced holidays for shop floor workers, mounting inventories – Indian car makers have not seen worse times than this in a long, long time. Over the last 18 months, there were only five months when even car production increased; for 13 of these 18 months, production had to be curtailed following a massive sales decline.
The Indian Automobile industry has been on a downtrodden path for around two years now. It has reached a point where it does not matter what product a company is selling: new, used, leased through various schemes such as deeply discounted, attractively financed, or buy now pay later. The customer just does not have the confidence to investment in an automobile given the economic gloom that is currently prevailing in the market.
The industry also witnessed major vehicle recalls with Ford India, announcing the recall of 166,021 of its Figo and Classic car models. General Motors India, faced bigger issues as it not only recalled around 114,000 units of its multi-purpose vehicle Tavera to sort out emission and specification issues, but also had to face a government probe into the matter.
While elements like rising input costs and interest rates, the unstable rupee, and fluctuating fuel prices are primarily detrimental to the health of India’s economy, including the Automobile industry, the colourful political landscape plays a major role in distorting the consumer sentiment.
Fighting the Glut
Years of heavy investment meant that virtually all of India’s major auto players produce more cars than they can sell, a trend that is set to worsen over the next three years as the likes of Fiat-Chrysler renew attempts to crack the market.
Many international motor groups, which have channelled more than $8 billion into India since the mid-1990s, now view exports as the only answer to chronic oversupply in a country where vehicle capacity will more than double to 9.5 million by 2018, up from 4.5 million last year, according to LMC Automotive leading provider of automotive production, sales and powertrain forecasts and automotive industry market intelligence.
The likes of Ford, Volkswagen, and Renault-Nissan are focussing on their plans to transform India into an auto manufacturing and export hub for targeting the US and European markets. This will in turn act as a means to mitigate the impact of overcapacity and shrinking demand in Asia’s third-largest economy. Volkswagen, the world’s second-largest car company by sales, plans nearly to treble Indian exports to almost 55,000 units this year, having failed to achieve a breakthrough in the nation’s ultra-price-sensitive domestic market.
US-based auto major Ford is also increasingly focussing on exports as it opens a $1-billion factory this year, bringing the company’s annual production capacity to 440,000 vehicles, despite selling only 77,000 in India during the last financial year. Renault and Nissan, which operate in a global alliance, also hope to increase exports, having sent abroad more than 60% of the roughly 600,000 vehicles that the duo has so far produced in India.
Indian automakers are projected to export about 553,000 passenger and light commercial vehicles by 2020, up from about 375,000 in 2011, according to IHS Automotive leading provider of business intelligence for the global automotive industry.
India’s under-used factories and geographic locations see the country’s well-placed to cater to the growing needs of the emerging markets in Africa, Asia, and the Middle East. In addition, exports to Europe and even the US are also seen to be increasingly attractive.
Bloom Amidst the Gloom
India’s Automobile industry has skidded onto an icy patch and is set for a second straight year of decline. However, one segment that is still on a steady growth path is luxury cars. While India is still reeling from its worst downturn in a decade, years of rapid growth have created a new money-eyed class that is pampering itself with prestige marques, keeping the Luxury Cars segment above water.
World Bank figures mention that 33% of the planet’s poor reside in India; the country is also home to 65 dollar billionaires and hundreds of millionaires.
Not long ago, the only luxury car that could be spotted on the famous potholed roads of India was the German Mercedes, which set up shop in India in 1995. However, in recent years, the sight of Audis, Jaguars, Bentleys, Porsches, and other top-of-the-line cars managing the mad traffic on Indian roads has been pretty common.
Some of the big spenders are the top executives, prosperous farmers who’ve sold property for vast sums to developers, and a younger, wealthy generation that likes to show off their new-found prosperity.
A recent report by research firm IMRB and industry body Confederation of Indian Industries (CII) valued the size of the Luxury Car segment in India was worth $1.46 billion in 2012. This niche segment is said to have grown nearly 20% over the last three years and is expected to grow by at least 15% in 2013.
Hopes on Bharat
The global slowdown that has affected the fortunes of the Automobile industry in India, has failed to weigh down rural India. Unaffected by most factors that have dented urban populations and their livelihoods, the rural Indian’s spending is governed by the monsoons and base prices set by the government for their crops. A generous monsoon is thus being celebrated, not only by the Indian farmer, but also by automakers whose dwindling sales have received a new lease of life thanks to purchases in rural India.
One out of every three cars that Maruti sells goes to customers in rural India. In 2007-08, the corresponding number was one out of every 30 cars.
Automobile companies are now designing offers that are likely to attract rural customers. Bearing in mind the constraints faced by the rural customer in terms of road conditions and the presence of fuelling stations, automobile companies are offering smaller, fuel-efficient cars in these areas. The companies are also cementing their presence with a larger dealership network in rural areas
The buoyant rural market has provided a much needed relief to automobile manufacturers in India. Companies doing business in India would be well-advised to pay attention to this flourishing and upcoming segment, nurture it by launching products suited to the needs of the rural customers, and provide incentives to attract customers.
Importance to India
The Automotive industry has shown that it is a key contributor to any country’s economy, be it in terms of contributing to the nation’s gross domestic product (GDP), creating employment, or raising the standards of living. For a country as large and diverse as India, providing affordable, accessible, and sustainable mobility solutions for people and goods are key factors for the development of this industry. India is already the sixth-largest automotive manufacturer in the world, with the industry contributing about 6% to the GDP, 22% to manufacturing GDP as well as generating direct employment for over a million people and indirect employment for 15 million.
Long Road Ahead
The passenger vehicle sales have touched their lowest point in a decade. However, most players believe that the downtrend has bottomed out and with the launch of India-specific products, growth is just around the corner. The Auto Expo did not witnessed global models modified for the Indian customers, rather every company either showing a new hatchback, compact sedan, or a compact SUV developed specifically for India.
Having the right products might not be able to guarantee success as some of the gloom is “psychological”. The auto makers are pinning their hopes on the general elections later this year and are looking to see whether a stable government that can improve the overall business sentiment. It also remains to be seen if government can enhance the country’s economic growth trajectory and thereby put more money in the hands of consumers to spend on discretionary purchases like cars.
While auto enthusiasts thronged the venue of Auto Expo 2014 in Greater Noida, we sincerely believe that it translate into sales for the struggling automakers and not just about getting a glimpse of luxury cars, superbikes, and Bollywood stars. The Auto Expo is expected to put the Automobile industry on the right path, there’s a long road to recovery yet…