Slowdown Jitters Pradip R Kamdar, President Dear friends, There is no gainsaying that the business sentiment is at its low ebb. That is what the auto industry and trade had not bargained for when the new financial year started. The ghost of slowdown aided by various adverse factors acting in combination, is staring us in the face again. We can only hope that the dark clouds lurking over the horizon will blow over and that the buoyancy will return soon. Aggravating the situation brought about by the spiralling prices in general, unstoppable rising crude oil prices in the global market, hardening of interest rates and credit squeeze, is the political uncertainty facing the country in the wake of withdrawal of support by the left parties over nuclear deal. As if the economic and external factors were not enough to depress the mood, the political situation has brought the Government to a standstill on the economic agenda. We cannot but be alarmed by the situation we find ourselves in. Maybe, this is a blessing in disguise and the Government may move ahead with the reform process faster, as it was earlier hamstrung by the contrary views of Left parties on many issues of economic reform. However, there is hardly any time left for the Government to move meaningfully in this direction, as the Government may be bogged down with nuclear deal and political stability as well as the impending general elections for better part of the time. Crude oil at $146/barrel is at its all time high, so is inflation at 11.6%. In this election year, it is but natural that containing inflation has come to assume the highest priority for the Government. After a series of measures taken earlier by RBI to suck out excess liquidity from the banking system failed to make a dent on rising inflation, the apex bank has further increased the Repo Rate and CRR by 50 bps. Therefore, high interest rates and credit crunch that have played spoilsport to a large extent for the automotive sector are going to haunt us for much longer period than we had hoped for. However, our Finance Minister is unfazed by these unpleasant developments and hopes that the economy will bounce back if people have the "right attitude and patience". "We came out of crises like the 1997-98 Asian financial crisis and the 1989-90 foreign exchange reserve crisis. Can't we come out of the present situation? India had bailed itself out of other crises like the 'first oil shock in 1973' and the 24 per cent inflation rate in 1979-80", he said at one of the functions recently. I am somewhat inclined to agree with our Finance Minister's observations. There is no doubt about the resilience of Indian people. We had a brush with many a crisis in the past and acquitted ourselves creditably. I am sure, we, the Indians, can do it again. Having said and done, the June 2008 sales figures do not inspire much confidence. With a number of negative factors at work, we are faced with the challenging times ahead. The auto market is likely to hit a rough road in this financial year. Long-term outlook is promising, though, according to the experts and analysts. Therefore, all of us in automotive business including automobile dealers need to prepare for the sluggish market in the near future and revise business plans and strategies. The position of automobile dealers is unenviable in that we cannot recourse to cost cutting in a significant manner as the manufacturers and some other players in automotive business can do. For example, manufacturers have been able to cut significant costs by lean manufacturing, automation, downsizing and use of substitute materials. Similarly, banks are becoming more and more risk-averse and are reducing their exposure for the vulnerable segments in the automotive market. Automobile dealers find themselves in a bind inasmuch as no such flexibility is available for them to play around. Rather, costs of dealership operations are going up through the roof with each passing day, thanks to rising inventory cost resulting from expanding product portfolio, ever increasing salary bills due to shortage of skilled manpower & extra marketing efforts, skyrocketing real estate prices, zooming compliance costs as a result of growing number of consumer cases & compliance with a host of regulatory laws and stringent environment & safety regulations. In addition, automobile dealers have a little choice when it comes to creating infrastructure, as world class showrooms with standard interiors, facia, fixtures & furniture and state-of-the-art workshops have become norms and necessity to attract and retain customers in this highly competitive market. While dealerships' costs have gone up stupendously, sales margins have remained stagnant at best. In this highly competitive market, discounts and freebies have become the order of the day rather than an exception. No wonder then, net margins have been seeing free fall over the years. Advent of DSAs/DMAs on the scene and undercutting among fellow automobile dealers are putting further pressure on the viability of auto retail. As such, there is an urgent need for a dialogue between manufacturers and dealers. The dealer viability is vital for the industry to sustain growth, as the automobile dealers are an important link in the value chain and direct interface with the customers. Adverting to the activities of FADA since my last column, FADA Council held a meeting after a long interval on 5th July 2008 at Ahmedabad. Apart from statutory matters, such as, annual accounts, annual report and the date, time & venue of the next AGM, the dealer viability was the focus of discussion. We have decided to collect and collate data on automobile dealership business model for presentation at the appropriate forum. Regarding the next AGM, we have decided to hold it some time in September 2008. Exact date, time and venue of the AGM will be published in his Journal. I request my fellow dealers to participate overwhelmingly at the AGM. Coinciding with FADA council meeting, a regional meeting of automobile dealers was also organised at the same venue. I am thankful to Mr Nitish Nagori & Mr Anil Nankani of ICICI Bank for their very interesting presentation and Mr Deepak Mohanty of HDFC Bank, who all made it convenient to interact with the participants at the Regional meeting on the issues of auto financing and dealership funding. These are among the major issues facing automobile dealers in the backdrop of rising interest rates and finance availability crunch. Close on the heels of our Council & Regional Meetings at Ahmedabad, a meeting of FICCI Auto Retail Task Force, chaired by Mr Vinay Nevatia, our Past President was held on 9th July 2008 at New Delhi. A conference organised by the Task Force about two years ago was a tremendous success inasmuch as the conference had been able to enlist the participation of Hon'ble Union Minister of Road Transport & Highways, Transport Secretaries/Commissioners of a number of States, and authorities from the Finance Ministry, Government of India and DDA. We would like to build on the momentum created by the previous conference and are planning to hold the second conference some time during this year. Look forward to your suggestions and inputs. With best wishes, Yours sincerely, Pradip R Kamdar