India’s great automobile revolution hits a speed breaker

“Nothing is happening, nothing at all,” says a senior executive of one of India’s largest motorcycle makers, when asked about festival season sales during the annual meeting of automobile industry heads on Thursday (September 5).

As the slowdown in automobile sales has now percolated to the rural markets, two-wheeler makers are worried. This executive said one in two bikes of his most popular brand sell in the rural markets and monthly numbers of this brand have fallen significantly.

“There is no trigger for sale, the first big festival is Onam where vehicle buying starts in Kerala. Unless the government cuts GST rates for two-wheelers – we are taxed along with sin goods at 28% – I don’t think there will be any growth even in the festival season,” said an executive on condition of anonymity.

CIBIL woes

Road transport minister Nitin Gadkari on Thursday assured the industry of all help in fighting the slowdown and even promised to persuade finance minister Nirmala Sithraman to lower GST rates.

After Gadkari, Uday Kotak also sought to assure the automobile industry that banks are willing to finance vehicles, but in the absence of good CIBIL scores of buyers, lending has been facing bottlenecks.

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A significant number of vehicles are bought on finance and the rates at which a vehicle is financed depends on the customer’s CIBIL score.

Kotak said with economic downturn, vehicle buyers’ CIBIL scores have suffered. This has become one of the major issues with two wheelers and first time car buyers.

Auto revolution failing

It is no secret that India’s famed automobile revolution is fading, with sales consistently in the slow lane. But the contours of the slowdown have undergone a transformation now, with sales of entry-level cars, most affordable two-wheeler brands and truck sales falling alarmingly.

A decline in entry-level cars signals the slowdown has percolated down to the first time buyers, ditto for entry-level bikes while a decline in truck sales is a sure sign of slowing overall economic activity.

Surely, the rise of Uber and Ola and the bugbear of shared mobility impacting vehicle sales cannot very well be applied to falling truck sales.

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India’s largest selling and most affordable small car, Maruti Alto, has seen a drastic decline in demand in August. This, despite dealerships offering anywhere between ₹25,000-30,000 upfront cash discount and also some other perks.

Together with the old WagonR, Alto is considered as the bread and butter model for Maruti Suzuki India and the biggest attraction for first-time car buyers. Sales in this segment declined by an average of 418 units every single day since April this year.

In August alone, the decline in their sales was a whopping 72% when Maruti’s total sales declined by about 33%. In other words, Maruti sold just a fourth of these two cars this August at 10,123 units compared to what it was selling in August last year.

When the slowdown reaches the humble Alto, it is clear that automobile sales have hit rock bottom. Vehicle sales have been slowing steadily quarter on quarter.

For the April-June period (Q1) of 2018-19, sales of passenger vehicles were up 22% year-on-year. But since then, they have been declining, -4%, -1%, -2% in the remaining three quarters of FY19.

Sales were -18% in Q1 of 2019-20 and in the next two months, they have cumulatively been down by nearly 30% year on year. Domestic sales of two-wheelers have also shown a similar trend. Their growth rates declined from 16% in Q1 of 2018-19 to 5% and 7% before turning negative at -9% in January-March 2019. In Q1 of 2019-20, two-wheeler sales were -12% and now, -17%.

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In August, a major drop in volumes of the biggies has been seen. Maruti fell 33%, Tata Motors by 58% and Hyundai Motor India by nearly 17%.

Hero MotoCorp and Bajaj Auto reported sales lower by 20% and 13%. Truck makers reported 60% fall in sales (Ashok Leyland, Tata Motors, Mahindra & Mahindra and VE Commercial Vehicles).

The four makers of medium and heavy commercial vehicles reported sales of 12,568 units this August versus 31,067 units in the same month last year. Transport fleet owners are suffering a double whammy: declining truck rentals and declining freight movement across the country.

Truck rentals fall

The Indian Foundation of Transport Research and Training pointed out that truck rentals fell by 2- 2.25% last month and over the last 10 months, rentals have dropped by 15-17%. This decline is steeper than during the 2008-09 global downturn when rentals had dropped by about 13% over 10 months. Fleet utilisation for transporters is down by a third.

Analysts at brokerage Spark Capital said, “Confluence of a multitude of factors impacting freight demand and new truck sales, including:

a) Heavy rains across India – particularly in South and in Maharashtra, paralysing the movement of trucks for weeks

b) Freight demand in the long haul segment – primarily engaged in the transportation of automobiles, engineering and white goods – was impacted due to the muted demand

c) Freight demand for mining and construction material, particularly in the South, was impacted by delays in awarding new contracts/withdrawal of contracts in Karnataka and AP consequent to the change in government.

Depending on festive season

Automobile manufacturers and dealers are both pinning their hopes on the festive season but revival may yet be some time away.

A leading car dealer pointed out that the lower middle class, prime customers for entry-level cars like the Alto, had begun investing in mutual funds these last couple of years. This segment has seen such massive erosion in national wealth due to crashing equity markets that its confidence in making big-ticket purchases has eroded.

“Enquiries are coming in but purchases are not happening. Everyone says they are hopeful that sales will revive during the upcoming festival season but I would be happy if sales just remained flat and did not decline further this year over the last festive season,” a car dealer said on condition of anonymity. This dealer said discounts for the Alto could even be around ₹50,000 or 12-15% of the cost of the car this month.

Economics of Alto

How do the economics of the Alto work out? The middle variant of this car comes for around ₹4.5 lakh. If one were to get it financed (most Altos are bought on EMIs), the monthly outgo would be upwards of ₹12,000 for a three year loan and almost ₹6,500 a month for a seven year loan, at about 10% rate of interest.

But if the loan taker doesn’t have a respectable credit score as per CIBIL, then the EMIs would be bigger for sure since interest rates could jump to even 14-15%.

With rampant job losses being reported across businesses, perhaps even an additional ₹6,500 burden is too much to shoulder for a common man.

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Another car dealer dismissed all talk of shared mobility impacting sales, saying ride-sharing apps like Uber and Ola are popular only in 10-15 Indian metros. “Ola has been recruiting drivers in at most 7-9 cities, not everywhere. So shared mobility is reducing demand but only in limited markets. Mobility continues to be a necessity everywhere else,” said the dealer.

This dealer’s observation at least partly answers this question: is the slowdown in India’s automobile market structural or cyclical? Is it here to stay or will the gloom lift, if and when the country’s economic growth revives? At the dealers’ end, there have already been close to two lakh job losses and nearly 300 vehicle dealerships have shut shop.

These job losses do not include the benching of temporary staff at the big manufacturers such as Maruti Suzuki or others.

Analysts at brokerage Equirus note that India’s domestic automobile sales have always been volatile. “Indian auto sales have always been volatile. The standard deviation (SD) of four wheeler and two wheeler growth numbers are a whopping 19% and 13% respectively.

This data alone means that a host of external factors are at play, including the monsoon, government stimulus, an impact of rise in minimum support prices and wealth effect of land and property prices.”

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These analysts also noted that despite increasing penetration of both category of vehicles, the Indian market was far from oversaturated. In other words, the current slowdown in vehicle sales wasn’t alarming according to these analysts and things should improve in the near term. According to them, only 60 in every 1,000 Indians owned a two-wheeler in 2009-10 and despite this having doubled to 120 in every 1,000 Indians in 2018-19, there obviously remains a large potential for incremental two-wheeler sales. Penetration of four-wheelers has, in the same time period, inched up 1.5 times to around 22 per 1,000 population.

Analysts at brokerage Motilal Oswal said in their interactions with vehicle channel partners indicate no signs of demand recovery at retail levels, as inquiries remain tepid. “Feedback on pre-festive demand is not very encouraging, partly impacted by floods in several parts of the country and demand deferment in anticipation of some sops from the government. Most OEMs continued their inventory cutting efforts through production cuts in August,” analysts said.

Motilal said despite production cuts, inventory for two-wheelers remains high. In passenger vehicles also the demand trend remains weak with inquiries and conversion remaining weak for existing models.