Motown's Slow Ride

For years I thought what was good for our country was good for General Motors, and vice versa." This is how Charles Erwin Wilson, the legendary former CEO of General Motors and US Defence Secretary after World War II, reacted to a question how he would handle a decision involving a conflict between his former company and the country.

India of 2019 could do well to be mindful of Wilson's reply as it grapples with an automobile slowdown that is so severe that it can bring its growth story to a sorry end. With overall revenues of $119 billion that account for 7.1 per cent of the countrys gross domestic product, 49 per cent of its manufacturing GDP and 37 million directly and indirect jobs, the sector has a direct bearing on the economy at large. And vice versa.

The distress in the industry, say experts, is unprecedented, if not totally unforeseen. Passenger vehicle sales declined on a year-on-year basis every month from July 2018 till September 2019. In October, there was marginal growth. It took only a little longer for the slowdown to show up in other segments. Sales of commercial vehicles, one of the barometers of overall economic growth, started declining in December last year.

They have declined in seven of the nine months since then. Sales of two-wheelers, the biggest pie in the automobile industry in India, have been in the red since December. The slowdown that is on the verge of turning into a full-blown recession in the sector has not spared tractors either. After growing a healthy 18.5 per cent and 23.7 per cent in 2016/17 and 2017/18, respectively, tractor sales growth fell to just 7.8 per cent in 2018/19. In the first half of 2019/20, sales fell 14.6 per cent, matching the performance of the other industry segments.

The stock market has been unsparing. The auto and ancillary index saw the biggest fall in market capitalisation in the 12 months between October and September of 2017/18 and 2018/19. A near 23 per cent fall led to a Rs 2,71,278.7 crore erosion in market value. "This is unprecedented. We have never seen all the segments of the industry decline at the same time like this. And for this long," says Rajan Wadhera, President, Society of Indian Automobile Manufacturers (SIAM).

There are numerous reasons for this mess. To begin with, retail prices of petrol and diesel hit record highs in October 2018 due to high international crude oil prices. At the same time, bankers became risk averse in the aftermath of the IL&FS default and the ensuing NBFC crisis and decided to lend less. On top of these were a raft of regulatory changes in the sector. Insurance regulations mandated payment of three-year premium in the year of purchase for third-party liability and increase in personal accident cover from Rs 2 lakh to Rs 15 lakh. This meant increase of Rs 6,000 for an entry-level car such as Maruti Alto. New safety norms that mandated anti-lock braking system for two-wheelers and airbags for cars increased the cost of vehicles. Many state governments also increased the road tax on vehicles. All in all, the cost of owning and operating a vehicle became significantly higher.

In commercial vehicles, change in norms in the middle of last year permitting higher loads at a time when there was less freight to ferry around came in as a demand dampener. "Lets actually take it in a very dramatic way and let's conclude, the Indian automotive growth story is about to collapse. I have seen the statistics published by the entire automotive industry in the first quarter, then the continuing statistics on wholesale in the month of July, August. I dont say it has collapsed(but) it's about to," says Guenter Butschek, CEO and Managing Director, Tata Motors, India's largest automobile company.

"Low economic activity leading to subdued demand, triggered by liquidity crisis and increase in axle load for commercial vehicles and uncertainty in minds of consumers have severely hurt the sector. Block closure (when factories are shut for days on end) has become the word of the year," adds Butschek.

The ancillary industry, the backbone of the sector, has fared worse. Cumulatively much bigger than the vehicle manufacturers, it operates at relatively lower margins. The individual companies lack of scale makes them more vulnerable to slumps. A slowdown of this magnitude has tested the mettle of even the best. "We are facing an unprecedented slowdown. Vehicle sales in all segments have continued to plummet for the last several months," says Ram Venkataramani, Managing Director, India Piston Rings. "Considering the auto component industry grows on the back of the vehicle industry, a 15-20 per cent cut in vehicle production has led to a crisis-like situation in the auto components sector. If the trend continues, an estimated ten lakh people could be laid-off."

The ancillary industry grew a respectable 14.5 per cent to $57 billion in 2018/19 but the downturn, when it came in the second half, hit them hard. While vehicle manufacturers, with their deeper pockets, have somehow weathered the storm so far and retrenched only temporary or contractual workers, layoffs in this side of the business have been more significant. "The first half of 2018/19 witnessed robust double-digit growth. However, the second-half saw a significant slump in vehicles sales," says Vinnie Mehta, Director General, Automotive Component Manufacturers Association (ACMA).

"This industry employs about five million people and 70 per cent of them are on contract. That is where retrenchments have begun but it is likely to get worse if the slowdown persists. We are looking at a possible 15-20 per cent reduction in workforce if things do not improve soon."