The Indian automotive industry is undergoing a prolonged turbulent phase, with overall vehicle sales in the country on a downward trend for 11 consecutive months now.
Passenger vehicle (PV) wholesale shipments, in particular, have been rapidly falling since January 2019. It declined nearly 21% to 239,347 units in May, based on data provided by Society of Indian Automobile Manufacturers (SIAM). India’s Federation of Automobile Dealers Association (FADA), announced too that PV inventories at dealerships in April stood at a burdensome 40-45 days, compared to normal inventory levels of 15 to 25 days. The wholesale drop in during April-May period was one of the “sharpest decline” experienced in the Indian automotive industry over the last 15 years. As a result, almost all manufacturers have announced scheduled non-production days in June to correct factory and dealer inventories.
Exhibit 1: Vehicle Sales (‘000 Units), H1 2018 vs H1 2019
Several factors – political, economic, and customer-driven – have all converged together, resulting in the perfect storm of 2019. Stringent environmental and safety regulations, a moderating economic growth, growing shared mobility, political uncertainty, increasing insurance norms, and cautious lending, are all key factors attributing to the declining vehicle sales in the country. Let us look at how these factors are affecting automobile sales: –
- Cost Increases With Stringent Environmental and Safety Regulations – Automotive OEMs have already been scrambling to comply with the environmental emission standards Bharat Stage VI (BS VI), and CAFE norms – 2022, as well as mandated safety OE fitments, e., Anti-lock/combined braking system, driver side airbag, speed warning alarm, rear parking sensors, seat belt reminders, and crash test norms. In spite of OEMs looking to absorb some of the additional costs required to comply, retail prices are expected to increase in the range of 5 to 10%. For example, BS-VI compliance requires fitment of expensive technology, such as selective catalytic reduction (SCR), exhaust gas recirculation (EGR), and NOx regulators. Given that their high costs will need to be passed on to final customers, sale of diesel vehicles, in particular, are expected to see a further and rapid declines. Further, BS-VI features will also similarly impact demand for high volume, mainstream two-wheelers, with their affordability likely to be pushed out of reach.
- A Moderating Economic Growth – Current economic uncertainty, both domestic and global, coupled with a weakening Indian Rupee, and growing unemployment have affected buyers’ appetite for spending on big-ticket items such as purchasing personal vehicles. India also remains susceptible to external pressure points likely to be caused by global events, such as Brexit, the slowdown in China, and its own growing trade tensions between the US.
- Growth of Shared Mobility – Growing popularity of shared mobility, especially by a significant population of young urban millennials in Metro and Tier I towns, is beginning to show a palpable effect on passenger car sales. Based on recent findings from a first of its kind, primary consumer survey carried out by Counterpoint Research on ride-hailing and shared mobility in India, two out of three frequent users of shared mobility services consider ride-hailing more economical than owning a car. The impact of shared mobility on automotive sales is expected to increase further in the mid- to long-term.
- Political Uncertainty – Retail sales remained naturally subdued in May with buyers adopting a wait-and-watch approach during the country’s general elections. With the continuity of the previous government, automotive OEMs are pinning their hopes on stability. There are expectations of structural reforms and measures to revive economic growth when the Indian Government announces the Union Budget on July 5th. Lobbying efforts for specific incentives and policies directed to the automotive industry have already gone to a higher gear.
- Stringent Third-Party Insurance Norms – Previous mandates to increase third-party insurance to five years (for two-wheelers) and premium to be collected upfront for vehicles, has hurt the overall vehicle sales, and two-wheeler sales in particular. The change in insurance norms is being cited as a principal reason for the rapid decline in two-wheeler sales seen in 2019.
- Liquidity Crisis in Non-Banking Financial Companies – Non-banking financial companies (NBFCs) finance a majority of vehicles sold in rural India. Moreover, dealers too depend on NBFCs to fund their wholesale purchasing of vehicles from OEMs. In spite of recent interest rate cuts, tightening credit lines and cautious lending by NBFCs have adversely affected automotive sales in 2019. SIAM and FADA both have approached India’s Finance Industry Development Council, seeking government intervention to improve the health of leading NBFCs.
Exhibit 2: Impact Analysis of Key Factors Affecting the Market
Despite the above challenges, both automakers and dealers remain optimistic and foresee a market recovery, given the current lower penetration of vehicles, i.e., 102 two-wheelers and 22 cars per 1,000 people in the country. Counterpoint analysts too, expect the Indian automotive industry to recover and grow in the coming years, albeit with a slower growth rate as compared to the 2012-2017 period. The market is anticipated to start recovery post-2020, with buyers settling down to the hike in prices, an improving economy, a stable government, and a robust recovery of financial institutions. These aspects, in conjunction, with strong inherent factors such as India’s young population, increasing income levels, improvements in road infrastructure, improving rural demand, and growing preference towards performance two-wheelers and SUVs, will continue to drive market demand.
Exhibit 3 – Two-Wheelers and Passenger Car Sales, 2018-2021
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