IT'S a wheeljam. After three years of robust growth, the Indian automobile industry is suddenly in the throes of one of its worst recessions ever. Markets are at an unprecedented low, demand at its nadir and sales have recorded a negative growth.
The state of the automobile sector is quite often reflective of an economy's health, as unlike conventional methods of measuring macro-economic factors, modern economic gurus consider the automobile industry the fulcrum of any country's economy and take it as a reliable method of measuring the economy's health. "It is the backbone of any economy and will affect and be affected by any change in the overall economic structure," says Shiv Gopal Awasthi, managing director, Daewoo Motors.
While the economy itself is shrouded in uncertainty, industrial growth slipped halfway back from a record 12.1 per cent in 1995-96 to 6.8 per cent in 1996-97. For the current year, the figures are even more horrifying; up to September, it was just over 5 per cent and, for the first time since 1993-94, growth in the manufacturing sector, of which the automobile industry is an integral part and a major contributor, has been lower than overall industrial growth.
As for the automobile industry itself, following a high growth of 13 per cent in the full year 1996-97, it managed a negative growth of 2 per cent in April-September 1997. That is, sales have actually shrunk. Growth in April-September 1996 was 19 per cent. Performance on the export front has been even more dismal. Last year, exports grew by a mere 3 per cent and in April-September 1997, exports were significantly lower by as much as 14 per cent. In April-September 1996 they grew by 7 per cent.
"The situation in the automobile industry is directly proportional to the state of the economy. It is directly related to economic activity in the country," says Rajat Nandi, executive director, Association of Indian Automobile Manufacturers (AIAM). He feels the downtrend is a result of a lack of confidence among investors and a lack of government initiative to boost industrial performance, resulting in depressed overall market sentiments. The uncertainty over the future direction of the economy has also depressed and delayed demand for automobile products, he says.
With no signs of recovery currently in sight, analysts, who were earlier drawing recovery charts for the automobile industry from the last quarter of the current financial year, have now postponed them to the second and third quarters of 1998-99.Says Nandi: "We do not expect anything drastic to happen this year. If at all something is done, it cannot be done before January 1998, the effects of which will not be visible before June-July 1998."
"The overall economic growth which generates more disposable income at the hands of the people, thereby generating demand, was not there this year," says Awasthi. Industry feels that in the period of political and economic uncertainty most potential buyers have adopted a wait and watch policy. Awasthi points to another factor: "The Indian markets have been experiencing monopolies and shortages for decades, but now with the novelty of shortage not around with available choices, calculations have gone haywire.
" V.M. Raval, AIAM president and executive director (automobiles), Telco, says the lack of government initiative to arrest depressed sentiments in the Indian industry has aggravated problems. He points out that stagnant demand in the core sector resulted in low commercial demand for vehicles. Consequently, unless the government takes immediate steps to boost expenditure in infrastructure, the Indian automobile sector will not be able to attain a respectable growth rate in the near future.
Subodh K. Bhargava, chairman, Eicher group, attributes the slowdown to manufacturers' inability to read the signs and deciding to crank up volumes in March. But the customer stayed away. A significant contributor to the industry's misery was the lack of availability of affordable credit. With banks wary of taking risks against some strict government guidelines and NBFCs almost non-functional, the cost of credit has become very high. This further hobbles a market where about 70 per cent of total sales are through lease and hire-purchase schemes.
The sectors bearing the maximum brunt of the recession are commercial vehicles and scooters. Trucks, buses and small pick-up vehicles have seen sales fall by a massive 31 per cent during April-August 1997 and scooter sales shrank 9 per cent. The main sufferers have been Telco, Ashok Leyland and Bajaj Auto. While commercial vehicle sales are intrinsically linked to economic growth, the principal reason for the dip in scooter demand, according to Nandi, is the failure of companies to offer new technology and launch new models, despite announcing them.
The only two segments that have done well—OK, relatively well—are motor cycles and passenger cars which recorded 9 per cent and 6 per cent growth, respectively, with Hero Honda and Maruti Udyog showing excellent sales figures. "As far as Maruti Udyog is concerned," says managing director R.S.L.L.N. Bhaskarudu, "there has been no direct impact of the general softening of demand, as growth is still decided by our production capacity in the Maruti 800 and Zen segments." However, the situation in passenger cars is expected to tighten with the coming in of other players—Hyundai, Honda, Volkswagen and Mitsubishi—which will further intensify the competition in the already stretched-out market. Added to this, the 3 per cent increase in import duty is expected to put further pressure on companies engaged in reassembling CKD kits.
And even in passenger cars, the best that can be said is that sales have not fallen. For growth has been far less than expected. "The market size for the mid-size cars (Rs 7-9 lakh) was read wrongly by the manufacturers and multinationals," says Bhargava. As a result, there has been a crowding of these cars in the Indian market. While the initial picking up of cars is not being followed up by picking up of new models, people are also waiting for more new models in India. "Quality could be one of the issues," notes Bhargava, who feels that customers have been belied the expectations of a 'zero problem car'. "There are too many brands and too many promises," he says. And not all of them are being kept.
A new trend has emerged out of this crisis.Companies have now started offering hefty concessions on their price line, to improve their bottomlines. While none of the companies confirmed these as official, dealers are offering some severe discounts. Some retailers are selling a model of Daewoo's Cielo (Rs 6 lakh-plus) at the price of a Maruti Esteem (Rs 5 lakh-plus); 1,200 litres of petrol (roughly worth Rs 27,000) free with a Maruti Esteem; a Tata Sumo free with every four multi-axle Telco trucks bought; one month's credit from Telco to dealers on slow moving vehicles and cash incentives of up to Rs 10,000 to dealers per vehicle; and Rs 80,000 discount on a Cummins truck.
But is there no respite? There is, if economic peripherals improve, says the industry. The revival of the economy will see a revival of the automobile sector, says Maruti Udyog executive director Jagdish Khattar. The industry has a bright future, says Raval, and this phase is temporary and will improve with economic stability. Awasthi too is optimistic: "If potential was not there, then there was a question of worry. But there is a huge potential—both within the industry and of demand which means that the industry is bound to bounce back within a year."
Bhaskarudu lists out the problems that the government should tackle on an emergency footing: "High excise duty (40 per cent) on vehicles, slow growth of infrastructure such as roads, the liquidity crunch, high interest rates." The recent credit policy has tried to tackle the last two areas; the effects, however, may take a bit of time to show up.
Meanwhile, the intelligent thing to do as a consumer may be to be contrarian and buy that car you have been musing about. The prices will never be so good again.
