An Overview of Automobile Industry - Part 2

In the previous part we gave a brief overview of the industry, the growth drivers and the problem faced. We also touched upon the policy support by the government. In this part we will be talking about the recent changes in the industry, what is the possible way ahead and ultimately what is the overall take on this industry.

The Recent Trajectory and the Status Quo –

The last year proved to be one of the toughest for the auto industry with the continuously falling sales and piling stock of inventory. The industry grew at a healthy rate of 14% YoY in terms of volume in 2017-18. But the next year saw only single digit growth in the initial months with experiencing a drop in the sales volume as the year drew to a close. The situation deteriorated in April-July 2019 with the sales plunging 14%.

The reason for the downturn in late 2018 included increasing fuel prices, reducing rural sales due to bad monsoon and low farm prices. The impact on the rural sector slowed car and two wheeler sales and the commercial segment was impacted by the quicker turnaround times because of GST and also significantly by the change in axle load norms which allowed trucks, etc. to carry higher loads and increase their freight capacity by 20-25 percent, thereby reducing the demand for new trucks in the market. Liquidity crunch in the market post the NBFC crisis also left a huge impact on the sales figures. The impact can be assessed by the fact that about 60% of commercial vehicle sales. 70% of two-wheeler sales, and 30% of car sales are financed by NBFCs. Efforts like reduction in repo rate could not materialize into the benefits sought due to limited transmission of the rate cut to the public by banks. Adding to the misery was the rising insurance costs in the form of premiums on compulsory third party cover which was increased by the insurance regulator. Car and auto manufacturers have cut thousands of jobs and have shut down plants and halted production as the industry grapples with these challenges.
 
The sector saw a slight recovery in October with sales increasing as compared to last year. As per a survey by FADA, at the end of October, the inventory of vehicles in different segments has come down at dealerships. This is a bright spot as it comes at a time when the industry has been witnessing a slump for months and the nearly all manufacturers are showing falling sales. However, it should be kept in mind that the rebound came as there were two festivals Navratri and Diwali during the month this year as compared to only Navratri in last year’s October. And the fact that it was supported by hefty discounts offered by vehicle manufacturers who are desperate to sell the inventory, makes it harder to take the improvement as sustainable.
 
Way Ahead

With the BS-VI norms being implemented from 1st April, 2020, there is a slight pre-buying expected in FY 2020 as consumers may get tempted by the discounts which the manufacturers would be offering to sell their old inventory. Post the implementation, there is an expected significant hike in ownership costs due to the more expensive new standard-compliant engine. This is going to dampen the demand of vehicles in the economy.  

In terms of long run, with the falling prices of batteries and increasing push and supportive policies from the government, electrification is going to significantly pick up the pace. As per the industry experts, people carriers like buses, two-wheeler, luxury passenger vehicles and light commercial vehicles could experience the highest penetration by 2030. 

In the coming time, the penetration of shared mobility in India is going to increase and while it is not at the same level as it is in developed nations, a significant change is under way in some parts of the countries where shared mobility is economically viable and this trend is also spreading to other parts of the country too.   

Along with this, Connected Vehicles are almost certain to become the norm in future as the mass adoption of smartphones, combined with low cost of internet could enable this trend to proliferate. With this, there will be some additional protocols and guidelines which will be introduced centering around data security and cyber-threats. Additionally, it will also lead to impacts on other players in the system like insurers, telecom and tech companies.
 
How GST can make a difference? 

A Structure for GST Cess, Suggested in National Auto Policy 2018

One of the interest frameworks for GST Cess suggested in the National Auto Policy 2018, is the matrix shown above. What they suggested was that we can divide the passenger vehicles into two segments i.e. length greater than 4 meters and less than 4 meters. The next was the CO2 (g/km) the initial bifurcation was set at 155 (g/km) which will decrease over the years. What is unique about this structure is that it tackles the two problems that the passenger vehicle transportation faces i.e. The Congestion and The Pollution level. With the help of this, vehicle which contributes to any of these or both of these will be taxed more than those who don't.
 
Conclusion

Keeping in mind all the potential hurdles and the change which are going to be implemented soon, it can be said that the times ahead are going to be turbulent for the industry. But with support from the government policies along with the burgeoning middle class, these changes can be very well managed. Also, it can be safe to say that things like electrification of vehicles, shared mobility and connected cars are going to gain even more momentum in the times ahead, and hence the various players in the system should be attentive, agile and quick on their feet to drive this change rather than being driven by it.
 
REFERENCES: CRISIL, Sector Report by Mckinsey and PWC, IBEF Report, Economic Times, Live Mint, Forbes India, The Hindu Business Line, Seeking Alpha