What are the reasons for Auto Sector Slowdown?

The Auto Sector in India is under severe crisis after nearly a decade of high growth. The sluggish demand, along with liquidity crisis added to the stressful situation of the sector.

 The Society of Indian Automobile Manufacturers (SIAM) reported that

• Passenger Vehicle sales have declined 24.07% to 1.39 lakh units in August 2019 over August 2018.  According to the data, August 2019 was the 13^th consecutive month since July 2018, when the sales have declined.
• The total two-wheeler sales declined by 22.24% in August 2019.
• The sales of commercial vehicles fell by 38.71% in August 2019.

The cars/passenger vehicle segment

In August 2019, the market leader Maruti Suzuki reported a year on year decline of 36.1%.

The sales of Hyundai Motor India declined by 16.58% in just one year.

Honda Cars India was the worst hit with a decline in sales of 51.3%, as of August 2019

Mahindra & Mahindra reported a decrease in sales of 32%

The two-wheeler segment

The two-wheeler segment was no different where the market leaders such as Hero MotoCorp, Honda 2 Wheelers, Bajaj Auto, TVS Motor Company, and Royal Enfield all reported a decline in sales in August 2019.

The recent data, as mentioned above, suggests that this slowdown has been plaguing the automobile industries for months. Manufacturers have been forced to cut down their productions in order to reduce the quantity of unsold inventory.

Maruti Suzuki suspended its operations for two days in September. Honda Cars India, Renault-Nissan along with Skoda Auto also went for the shutdown in May.

Reasons for distress in the industry

Insurance Policies

Automobile Insurance policies that earlier were mandatory for one year have changed recently. The new policy mandates every new automobile to have an insurance cover for straight three years. 

This has increased the upfront cost of purchasing automobiles leading to a decrease in sales and a part reason for increasing inventory of automobiles.

The NBFC Liquidity Crisis

The NBFC Liquidity crisis triggered by the collapse of the Infrastructure Leasing & Financial Services company (IL&FS) has also impacted the auto industry.

Particularly in the rural sector, half of the auto sales are financed by NBFC's. With the liquidity crisis, loans are available at higher rates or not available at all. This has led to a reduction in demand, which has increased inventories. To maintain the inventories, working capital is required, which is again financed through NBFCs.

Dealers also depend on NBFCs to buy vehicles from manufacturers. SIAM in its letter to Finance Secretary pointed out that 70% of the Two-Wheeler sales and 60% of the Commercial Vehicle sales are financed through NBFCs.

Since NBFCs play a crucial role in vehicular financing, particularly in semi-urban and rural areas, the liquidity crisis has also aggravated the situation.

Government Policies

The government has mandated that all cars that are manufactured after July 1, 2019, should necessarily have airbags, seat-belt reminders and audio alarm systems that are triggered at high speeds.  New crash norms will also have to be implemented from October 2019.

This is definitely going to add to the cost of the manufacturers, and it would be difficult to lure the customers to the showrooms because ultimately the costs will be transmitted to him.

In order to align the Indian auto industry with the rest of the world, Indian automakers will now have to upgrade from BS-IV to BS-VI standards that will kick in from April 2020 which has further added to the woes of automakers.  Upgradation to BS-VI emission standards requires a lot of investments. As a result, the price of diesel vehicles and two-wheelers is going to rise sharply. 

As a result, in the year 2019, the challenges for the automobile industry are certainly not going to end.

Government Support.

In the month of August, the government announced several steps such as making it compulsory for government agencies and departments to replace old vehicles, urging banks to make auto loans cheaper, and increase credit availability to non-bank lenders to boost demand.

Conclusion

While the government is trying its best to help the automobile sector, the GST Council meeting on September 20, 2019 is something to look forward to since the GST cut would definitely stimulate demand with the festive season around the corner.

Infrastructure spending of Rs 100 trillion dollars over the next five years as announced by the Finance Minister Nirmala Sitharaman is another welcoming step to stimulate demand for the commercial vehicle segment. Indeed, no industry is ever going, and downturns are bound to happen. However, careful measures and stringent planning is what is the need of the hour.