India’s automobile industry closed at 19,89,451 units last year (2007) inclusive of commercial vehicles (Passenger cars alone 11,78,006 units). In the beginning of 2008, it was predicted that the total industry should clock somewhere around 22,32,000 units (Passenger Cars 12,83,360 units). “But because of the slow down, India’s vehicle sales are now expected to close at 19,87,414 units (Passenger cars, 12,09,063) units which means if you look at the total automotive industry, the growth is going to -0.1% (negative growth) and in the passenger cars, probably may end with a growth of just 2% or may be flat,” believes P Balendran, VP, General Motors India.
It seems that the industry would take sometime to recover this time as Indian economy has now been largely integrated with the globle economy. “Car market would recover fully only with the recovery of the global economic scenario, including India,” stated Dilip Chenoy, Director General, Society of Indian Automobile Manufacturers (SIAM). Whereas, car industry hopes to see good future by end of 2009. “Turnaround could range between 6 to 12 month,” believes Balendran.
There would be no double digit growth and expecting lower single digit growth in volumes for FY2008-09. “This time round recovery could take slightly longer, where other core fundamental factors such as the Index of Industrial Production (IIP) and GDP are taking a setback. These are the key income drivers of per capita income. Thus, despite softening of interest rates consumer confidence as well as spending on automobiles will take some time to revive,” echoes Vaishali Jajoo, Sr Auto Analyst with Mumbai based Angel Broking Ltd. The recently announced government stimulus package could help boost demand, but it may not reverse deceleration in growth. Also, effective integration of operations would be a tough task on hand over the next few years, so as to generate strong financial rewards, as most of the Auto players have gone in for ambitious expansions vertically as well as horizontally.
There is a difference of opinion about the over production of cars in India. “There is no over-capacity in the market although the market is sluggish these days because of various reasons explained above,” thinks Balendran. The production cut will depend on market conditions prevalent next year. Whereas industry observers feels that capacity has been increased by 25 per cent in FY 2008. “As per industry announcements it could further go up by another 25-30% end of by FY2010. However, players may postpone their expansion plans due to slowdown in domestic as well as global market,” stated Vaishali. Few players already announced partial shutdown in production like Tata Motors & M&M after a recent demand slowdown. “Keeping in view the low penetration of only 7 cars per thousand human population against more than 500 in most developed countries, we do not think there is any deliberate need to cut production in India,” thinks Dilip Chenoy, Director General, Society of Indian Automobile Industry (SIAM).
As per observers worst hit is going to be the Lower Medium Segment featuring models like Optra, Toyota, Skoda Octavia, Honda Civic etc. This segment has clocked 40,420 units in 2007 and it was projected to generate a volume of around 56,000 units in 2008 whereas the segment is expected to generate only some 29,000 units this year which means a negative growth of more than (-32%). “Commercial vehicle segment would also be affected in the ongoing fiscal,” added Chenoy.
The Indian automobile scenario turned challenging in FY2008 and began turning harsher since the beginning of FY2009. ‘The Auto companies are burdened by high input costs and high interest rates (albeit on a high investment base), which have impacted volumes. Further, owing to high inflation and interest rate coupled with liquidity contraction in the system, sentiment has weakened substantially,’ observed Vaishali. The hikes in diesel and petrol prices have aggravated the woes of the sector with the ownership cost of vehicles increasing significantly.
Automobile industry has to create new market exploring new segments and creating excitement by launching new models. However, recent economic downturn is beyond anyones expectation and Government interventions have become a must. “In fact keeping the market sentiment in view, Government had come out with fiscal measures and has announced reduction of excise duty. Industry is passing every benefit being provided by the govt to the customer. People need to realize that this is the best time to buy vehicles,” sums up Chenoy.