Year 2018 in review: Auto industry shows mixed trends

Year 2018 turned out to be a mixed bag for the domestic automobile industry. While the commercial vehicle industry that remained in doldrums for most part of the last three years registered a full turnaround this year and returned to the high growth trajectory, passenger vehicle manufacturers found the going tough, especially in the second half of the year after a rather dour festive season.

The year started off with a bang with the usual excitement that surrounds the biennial Delhi Auto Expo that was held in February this year. Amid the flurry of new vehicles and concepts that were displayed, the biggest splash was made by the debut of Kia Motors, a subsidiary of Hyundai, which would launch its first product by the middle of next year. The others were no less optimistic as the industry was motoring along well having digested the pangs of demonetisation and the partial disruption due to the roll-out of GST. The passenger vehicle industry grew by 7.2 per cent in the January-March quarter. It gained momentum going forward to register nearly 20 per cent growth during April-June quarter.

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Things went awry thereafter as adverse macroeconomic factors such as rising fuel prices and interest rates took a toll.

Crude oil prices started rising from March onwards and went up by over 45 per cent year-on-year between April-October 2018 as compared to the same period last year. Between April and October this year alone, retail prices of petrol went up by over 11 percent, a sharp increase for a six-month period. Interest rates also went up by 25 basis points in the first half of this fiscal year over last year. Further, change in regulations in insurance that made payment of three-year premium in the first year of purchase for third party liability mandatory while increasing personal accident cover (PAC) from Rs 2 lakh to Rs 15 lakh led to an increase of Rs 6,000 (Rs 4,500 if PAC is opted for one year) for even an entry-level car such as the Maruti Alto.

As a result, sales declined by 2 per cent in the next quarter (July-September) as the industry went into a tailspin with red ink for three consecutive months for the first time since fiscal year 2013-14. This was followed by a bleak festive season that turned out to be the worst in five years. Typically the months of October and November that witness the twin festivals of Navratri and Diwali ring in over a quarter of the annual sales for passenger vehicle manufacturers. According to Federation of Automobile Dealers Association, retail sale of passenger vehicles during the 42-day period of festive season between October 10 and November 20 this year, declined by 14 percent compared to the festive season of 2017.

"We have not seen such a dull festive season, in the past few years," says FADA President, Ashish Harsharaj Kale. "It is a matter of deep concern for our dealership community."

Talk of electric mobility also gathered steam during the year with the government and industry deliberating at length on the way forward for India. From taxing conventional vehicles more, banning diesel vehicles in its entirety, to incentivising only vehicles for fleet or battery technologies, a number of options were debated. Yet, by the end of it, the government could not firm up on a policy and the dream of e-mobility remains a pipe dream.

"The calendar year 2018 for the auto sector started off on a high note with the momentum following through from the previous year post GST and almost continued on that note right through three-fourth of the year starting with flurry of new introductions post the auto show continuing through the year, a budget which provided the right kick, timely onset of monsoon, etc. Commercial vehicles and 2 wheeler segments were on a roll with CV especially supported by the infrastructure growth," says Sridhar V, Partner, Grant Thornton India.

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"While PV showed growth in the first part of the year, the challenge arose in keeping the trend on account of a high base in 2018. The speed of growth slowed down towards the end of the calendar year across segment with the fuel price increase, NBFC issues and high interest rates. The festival season also disappointed the segment with almost tepid sales of PV's."

As the year draws to a close, there are some early visible green shoots of recovery. Oil prices have softened with Brent crude prices declining from over $80 per barrel to $50 range. Interest rates have also been capped with the RBI maintaining status quo in its quarterly review in early December. The one-time shock of the rise in insurance cost has also been digested by the industry. Yet, there is a hangover of high inventory from the festive season and some spillover of that may act as a spoiler in the first few weeks of 2019.

"We have done an analysis of the past numbers and the conclusion is that in the last two pre-election years, sales always fell," says R C Bhargava, chairman, Maruti Suzuki India Ltd. "In the election years sales always go up substantially. Let's see how the next year pans out."

There was a subtle shift in two-wheeler industry this year as motorcycles were back in vogue at the cost of scooters. In the last 8 years, scooters exploited its unisex appeal to outgrow motorcycles. In 2018, the tables turned thanks to good monsoons and healthy demand from rural areas. Motorcycle sales between April and November grew by 13.36 per cent on a higher base to scooter's 5.7 per cent.

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"Strong demand from rural customer base has brought a recovery in the entry level motorcycles after a hiatus of 5 years," says an ICRA report. "This is likely to continue in the near future though scooters will also continue to grow."

While the general elections may usher in some demand for passenger vehicles, there will be challenges like new safety norms and the transition from BS IV to BS VI fuel in 2020 that may act as speed breakers. In preparation of the new regulations, manufacturers may also hold back some new product introductions. At the same time, there will be some advancement of purchases in the last few months of 2019 that will mean a high growth on the back of low base of this year. Vehicles compliant with new emission norms and safety features will be significantly more expensive.

"2019 will see the OEM working towards BS VI regime and could see faster phase out of BS IV vehicles and earlier introduction of BS VI vehicles, thereby keeping up the pace of new introductions, which have always shown buyer-interest to go up. One could see more introductions in the second half of 2019," Sridhar says. "Hence initial part of the calendar year 2019 may see some challenges and could settle down for an improved performance post elections. The update of FAME and new policies covering phase out of older vehicles including developments on the electric front will keep the sector

engaged."

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