The Indian Auto Industry -Treading Cautiously Sanjay Bhargav From heady growth till last year, the auto industry presents a mixed picture. Till October this year, motorcycles and trucks have experienced negative growth, cars and scooters have grown in double digits and three wheelers have stagnated. Within each segment too, there are sharp winners and losers. But the overall picture is a sense of stagnation and of the brittleness of growth. Of the 34 vehicle manufacturers in the country, 4 have experienced more than 10% growth, GM(due to spark), Mahindra (including Logan), Maruti and Honda Motorcycles. Five have experienced a decline greater than 10%, Yamaha, Kinetic, TVS & Bajaj in 2-wheelers and Force Motors. An overwhelming majority of 25 have experienced tepid growth or decline. How does one explain this in an economy growing by 9%? The explanation is to be largely found in finance. The industry, especially motorcycles and cars had been growing far ahead of economic growth in the last 5 years or so. This was fuelled by rising incomes and easier availability of low cost finance. Now finance has not only become costlier but also lending norms have got tightened as finance companies look more closely at their bottomlines. Financing of motorcycles had become close to sub-prime lending. Agents of finance companies had at times even been motivating customers to fudge their income figures. Many customers had taken home loans and repaying their higher EMls has taken priority over two-wheelers. There is a lot of red ink on the books of finance companies, including a conservative Bajaj Auto Finance. At such times, consumers tend to de-risk, leading to market leaders increasing their market shares. If one is not quite sure whether Yamaha or Kinetic would be around 5 years from now why buy it? This may to an extent explain the gains made by Hero Honda & Maruti. But an issue is the tendency of companies to not recognize market realities quickly. Cycles come and go. Reading those cycles right or adjusting quickly to them is essential. In November last year the first hints of trouble in motorcycles was evident. I pointed this out to a major motorcycle manufacturer. But it was pooh-poohed. Since February 2007, this manufacturer has been in the negative zone. In February 2007, car companies were gung-ho on growth, almost gloating at the troubles of motorcycles. The structural shift from 2-wheelers to 4-wheelers had begun in their opinion. A couple of months later, they are chastened, offering huge discounts and circumspect about growth. We tend to be seduced by our own delusions. In 1986, at the first Auto Expo, a series of seminars were held. Back then, we did not even make EDD quality steel. But presentations by Indian companies were full of CAD, CAM. When an Engineer from Honda came up to present his work on the measly connecting rod, he got the most condescending of looks from the audience. But over half an hour, it was clear that he knew his stuff, understood combustion, materials and had used that understanding to radically improve costs and performance. Two decades later, things do not seem to have changed much. There is the strutting about insolently when humility is what is needed. Case in point is the obviously incorrect decision of Tata Motors to set up a new plant at Singur, their good supplier base is in Pune, or their lusting forJaguar, and the Bajaj insistence that 100cc bikes are dead. An uncritical media that is sustained by advertising from companies is only too happy to go along. It makes a good story. And who cares if one has got it wrong. The big picture is that global majors are taking control of Indian auto industry. In 2-wheelers, there are only Bajaj and TVS left. In cars/personal vehicles, only Tata and Mahindra. It is an inevitable process but it has been facilitated by Indian owners preferring to let the company go to the dogs rather than remove their incompetent children from management positions. Not that MNCs have covered themselves in glory. Only Suzuki, Hyundai & Honda have settled down. The rest are still floundering for viability, including the venerable Toyota. The core dilemma is that the market is at lower prices where margins are thin and investment requirements high. It’s changing but the base markets are still more than 60% of the market and those not present in them would not be serious players for long. Where margins seem fatter, volumes are low and customers want frequent model changeovers. Without volumes dealerships are not viable. The way out is going to be not investing but importing from elsewhere. Our import policy which treats anything not a CBU (completely built unit) as a component and levies a 10% duty on it facilitates this. Any country serious about manufacturing, including Indonesia, defines a SKD and CKD and levies higher duties on them. With the rash of FTAs with East Asia and even EU in 10 years, the import duty on most components would be zero. But this would have its own impact on employment generation in the country. From where will people earn to buy these cars? Indian companies have exported and are likely to export more. India as an automotive base for MNCs is a bit of chimera, as the record of Suzuki confirms. The compact cars that sell in our country are a small and shrinking part of global demand. In the US or elsewhere, Corolla is a compact car! At any rate, Asean and soon China would offer a much more congenial policy & infrastructure base for exports. Every one is waiting for the Tata car. I am skeptical about its volumes, even assuming that it is technically acceptable. For a car market that has abandoned the Maruti 800 for Alto, it may be too down market, and for the 2-wheeler buyer a temptation he can't afford. Moreover, in most cities already there are unending traffic jams. Travel time by a car in Pune city is almost twice that of a 2-wheeler. If a car is not for use but as a status symbol to be parked at home, then is not a secondhand car that can be driven even out of town a better option? Congestion charges for cars in cities are round the corner. Bangalore is already toying with a car ownership surcharge. In the short term, a soft market seems likely despite the increasingly suspect 8% plus growth of the economy. If nothing else, the inevitable petrol price shock would ensure this. The reverberations of the US sub-prime crisis are far from over. While not directly affected by it, thanks partly to our unfashionable capital controls, its indirect effects are going to be there. The US & EU growth will slow down, the US dollar will weaken, with consequent impact on oil prices, and on our IT industry and exports. God forbid, if the US bombs Iran, which seems pretty likely, then oil prices will go through the roof. Karl Rove's resignation may be a pointer to that possibility. Senior level exits are a good indicator of something amiss. Enron's MD Skilling resigned four months before it went bust. Ravi Kant's resignation from LML signaled the end of the relationship of LML and Piaggio. The political paralysis at the centre and the likely mid-term elections add to the uncertainties. I would not be surprised that Congress's wishful thinking about it benefiting from mid-term polls comes askance. BJP may be in disarray, but regional parties are not and certainly not Mayawati ! Our auto markets would grow but at a pace slower than the economy as a whole. At least during this year and the next one. With the overcapacity already in existence or being created, this cannot be good for bottom lines in general. Note: The author is the Director of Novotech Enterprises Pvt Ltd, manufacturing Dnovo brand of accessories for two-wheelers. E-mail: dnovo@dnovo.in. The views expressed by the author are his own and do not represent the view of FADA.