Introduction about Automobile Industry
The Automobile industry is one of the largest sectors in India, employing over 3.7 crore people both directly and indirectly. However, in the year 2019 the Automobile industry has faced certain turbulence, with a deficit in sales and the alleged reasons are plenty. In the year 2019, a downfall of 18.71% in sales has spurred a moment of crises within the Automobile industry, since it is the steepest slump experienced in the past 19 years. According to a leading newspaper ‘The Hindu’, the year 2018 marked its sales figure at 22.45 lakh units, whereas the year 2019 pinched the automobile sector with a disruptive sales figure of 18.25 lakh units sold.
An economic slump in a sector as significant as the Automobile sector often brings bad news. A major setback in sales has led to job cut-downs and unstable production growth. ‘The Hindu’ further reported figures that account for 15,000 temporary jobs being trimmed by original equipment manufacturers (OEMs). The scarcity in working capital has led to a nation-wide shut-down of three-hundred dealerships. Thus, creating a condition of distress and immediate need for considerate measures to be implemented.
The Cause of Slump in Automobile industry
The slump in automobile industry, employing over 3.7 crore people and maintaining a 50% share in the manufacturing GDP, has severely affected the job sector. The downfall of the automobile industry began from the last quarter of 2018-2019 and has only been increasing in magnitude ever since. As reported by ‘The Hindu’, since July 2019 the production has reduced to half, from 60,000 to 30,000 vehicles being produced on a monthly basis.
Ever since July 2019, the domestic passenger vehicle industry has suffered most significantly. Several reasons are claimed to be feeding the downfall of the automobile industry, among-st which higher vehicle insurance cost, hike in fuel prices, ambiguous stock market trends and inefficient liquidity are the primary reasons. These very reasons have consequently reduced the demand for automobiles and especially domestic passenger vehicles.
Since 2014, everybody’s hope was at an all-time high with the BJP-government coming into power . However, various implementations by the ruling class proved to have contradictory repercussions on the economy of the country. While initiatives like ‘Make in India’ implementation injected a lot of enthusiasm in the manufacturing sector, on the other hand, ‘demonetization’ effected the manufacturing sector in a way that caused deceleration.
Demonetization discouraged the usage of high-value cash and India has typically been a cash-dependent country. Implementation of demonetization reduced the cash-in-hand, thus critically affecting the expenditure regime of people. One of the hidden and unraveled side-effects of demonetization was reduced demand. Even though, cash has returned to the nation to some extent – it remains confined in fewer hands.
The Shift Towards Electric Vehicles
The fall in demand is also being accredited to the implementation of BS-VI norms by April 2020. BS-VI is the regulation-scheme incorporated by the ruling-government, designed for the purpose of limiting the emissions of air pollutants due to vehicles. As metropolitan cities such as Delhi, Mumbai, Bangalore, Chennai have shown an increased rate of poor AQI (air quality index).
The requirements put forward by the BS-VI norms would require manufacturers to invest more on the production to meet the norms. Secondly, this would also skyrocket the fuel prices – since, BS-VI compliant fuel is bound to be more expensive. The deteriorating environmental conditions and growing awareness of global warming have shifted the focal point towards electric vehicles.
The shift of focus towards electric vehicles has made automakers focus less on internal combustion engines (ICE) due to its high emission potential. This shift of focus has led consumers slowly getting inclined towards the merits of electric vehicles over ICEs. Although the majority population is yet inclined towards ICEs as EVs are comparatively costlier, a minor shift towards electric vehicles will definitely contribute towards the declining demand for domestic passenger vehicles.
How to Re-spark India’s Automobile Sector?
Typically it is seen that the downward spiral of the automobile industry is merely a regeneration process that was mandatory and the leading manufacturers need to stick through the tough phase. The commercial vehicle industry typically faces cyclical challenges, its now time for the domestic passenger vehicles and two-wheeler industry to sustain the cyclical challenge. ‘The Mint’ has put forward brilliant ways to sustain and get through the slump.
Respect the Cyclic Renewal Of the Automobile Industry
It is clear that until early 2018 the automobile industry was experiencing a steady growth rate, only after the month of July 2018 everything started spiraling downwards. While some enterprises might look at it as ‘crisis’, others might leverage the potential of under-appreciated growth into a competitive advantage.
There is a strong connection amongst commercial vehicles, tractors and construction equipment in terms of GDP growth, industrial output and agricultural output with a correlation coefficient of 84%. The economic setback in these automotive sectors would lead to a re-priming of the core segments of the economy.
Similarly, the automobile industry will re-focus on the agriculture sectors to maintain mechanized farming practices consistent and accelerated. Focusing on the agricultural sector would indirectly bring attention to the stagnant MSP (minimum support prices) which has been at 6% from the past five years.
Never Throttle Consumption Enablers
In the competitive times of today, where every country is only emphasizing on ways to improve economically, India still has a long way to catch up. India, as a nation still depends on its domestic consumption for steady economic growth. This very reason resists the nation from affording to throttle key enablers such as disposable income, easy credit availability and maintaining product pricing and usage costs efficient.
NBFCs (Non-Banking Finance Companies) have played an extensive role in providing credit to the automobile industry in different categories – commercial vehicles, construction equipment (fleet owners), tractors for farmers and also consumers (cars, two-wheeler). The narrowing of credit boundaries has led the NBFCs to suffer a 60-70% setback in loan disbursal, leading to lower sales.
As a nation, opting for a loan shouldn’t be a major burden and hence, more emphasis should be invested in reducing the interest rates. Higher interest rates are equivalent to lesser people choosing for a loan and at times higher interest rates also result in inefficient repayment of the loan taken.
Disposable income is the third enabler. Since the consumer sentiment is down by 14% due to higher personal debt and lack of employment confidence, the reduction of corporate taxes might be the ray of hope that can impact personal investments and create more jobs, consequently increasing the disposable income in the hands of consumers.
Focus on Scale-Effects For a Win-Win
China teaches a great lesson by being the leading economy worldwide. China has been able to achieve this by simply trimming the production costs and indirect taxation, which leads to optimal pricing and overall utilization costs – the primary reason that drives higher consumption in a country.
In the current world scenario, India is not even disproportionately on this path. In the year 2000, India and China were at equilibrium in terms of car sales, that is, 0.6 to 0.7 million car sales per annum. However, in 2018 China sold approximately 23 million cars, whereas India touched 3.3 million in car sales. The real cause of such deceleration in sales is due to multiple indirect taxes charged in different stages of the supply chain. Whereas in China, the situation is completely opposite and also why it is troublesome owning a car in India.
Adapt a Coherent and Regulatory Technological Stance
The consumer market has often portrayed resistance when a particular technology is sold forcefully. The buying decision of consumers is based on a paradox of choices that revolves around functional and economical parameters. It is highly advisable to follow regulations after foreseeing the outcomes (fleet emission norms, safety, particulate matter emission norms etc). Instead of opting for one technology over others, leave it up to the market to choose an internal combustion engine (ICE) or a hybrid electric vehicle (HEV).
It should be completely left up to customers to choose any of the available technologies keeping into consideration usage requirement and total cost of ownership. For instance, it wiser to incorporate HEVs for daily usage, in vehicles such as taxis and cabs. Whereas, for a minor and personalized usage an ICE would be more cost-efficient.
Even though the automobile industry is facing turbulence that seems tough to withstand, it is an opportunity for winning organizations to leverage the competitive difference. Currently, a critical challenge that the Indian automobile industry is facing, is the marginal difference between operational efficiency in comparison to other countries like China and Japan.
The only way for the manufacturing sector to revive it’s lost growth is by reducing operational complexity and reducing structural costs. A massive opportunity lays in front that demands rationalizing variant speeds, consolidating supplier base and embedding new-age manufacturing practices.