Auto crisis: No festive cheer in industry this season amid concerns over slowdown, BS-VI norms

Optimism is in short supply in the board rooms and corner offices of automobile companies in the country today, which is rather unusual for this time of the year. The 45-day period between the onset of Onam and Diwali that marks the festive season in India accounts for sales between 25-30 per cent for the industry. Manufacturers ramp up stocks, dole out offers and plan their launches around this time knowing that the consumer has a higher propensity to make big ticket purchases in this period. This year though, the mood is deflated and there are no major expectations of an uptick in consumption. It is easy to see why.

The $119 billion industry that accounts for 7.1 per cent of the country's GDP, 49 per cent of manufacturing GDP, 15 per cent of GST revenues and provides employment to 37 million people, is in the midst of an unprecedented slowdown. In April-July, overall sales have dropped by more than 10 per cent. In more sentiment driven segments like passenger vehicles, sales have fallen by more than 20 per cent in this fiscal, declining for 10 straight months so far and in 13 of the last 14 months.

The impact is being felt across the value chain. Nearly 300 dealerships in the last 18 months have shut down, component manufacturers are feeling the pinch and even big manufacturers are cutting down on production and laying off contractual workers. Nearly 3.5 lakh people have already lost jobs and another 10 lakh jobs are on the line. At a time when the prospects of the overall economy are not very rosy -- GDP growth slid to a 6-year low to 5 per cent growth rate in the first quarter of this fiscal -- the nervousness around festive season within the industry is not surprising. More poignantly, the slowdown actually aggravated from the festive season last year when companies stocked up vehicles at their dealerships hoping for a bumper sale that never happened. Industry is keen to avoid a repeat.  

"It is so difficult to forecast how the festive season will be this year when in industry we have stopped forecasting anything beyond four hours from now," said Pawan Goenka, managing director, Mahindra & Mahindra. "The industry will not make the same mistake of over estimating the demand as in last festive season, which led to a huge inventory pile up at the dealers. At Mahindra we have recently announced production cuts due to lack of demand, and we may go in for more cuts in October if the festive season sales do not pick up. We are strictly in a wait and watch mode and analysing trends on a weekly basis."

Typically, the automobile industry carries an inventory of up to a month at anytime of the year but it swells to between 2-3 months in the run up to the festive period in anticipation of bumper sales during this period.

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"It is not uncommon for an entire month's stock to get liquidated within the week of Diwali when retail sales are at an all time high," says Puneet Gupta, associate director, HIS Markit, a leading market research and sales forecasting firm.

This year, the industry is keeping it simple, treating the festive month of October as regular even as both Navratra and Diwali are falling in it. Most carmakers are trying to keep a much more regular stock of between 20-25 days for October. Dealers having learnt their lesson from last year, are also reluctant to accept anymore.

Ashish Kale, president, Federation of Automobile Dealers Associations (FADA), says the dealer community is cautious and wary of taking too much stock from the manufacturers, which explains the steep double digit cut in production at automobile factories across the country. Kale says this year's festive season is expected to remain flat or at best grow marginally over the low base of last year.

"Last year, retail sales in September were still fine and passenger vehicle sales began to decline at the end of the month. This time we won't see huge growth," he says.

The fear is compounded by the fact that the industry would have to brace itself for BS VI emission norms in April 2020. This would mean another round of wholesome inventory clearance as any leftover BS IV vehicle stock cannot be registered for sale from April 1, 2020. The sector cannot afford a pile-up of stocks from a depressed festive season stretching into the New Year.

"This year is very unique because unlike every year when we can still manage inventory over a longer period of time, a BS IV vehicle being sold in the market today will become absolutely redundant on the stroke of midnight on March 31, 2020," Goenka added. "We cannot afford that. So the industry is being conservative with this festive season. It may not be a bad idea to err on the side of caution."  

New launches have largely continued unabated as they are planned much in advance but the low consumer sentiment has affected their fate. Last year's festive season launches like the Hyundai Santro, Mahindra Marazzo and Alturas have not fared as well as expected. Others like the Nissan Kicks, Ford Aspire and Toyota Glanza have flopped while the likes of Tata Harrier and Honda Civic that were launched later have only flattered to deceive.

"Ideally anybody would like to launch a car when the consumer sentiment is robust but that cannot be predicted beforehand and a launch is planned much in advance," a top executive at a leading car maker said. "Besides we are all biased towards our products. The age old saying in the industry goes that there is never a good or a bad time for the right product. No company thinks that their product isn't perfect. Some know the reality of the market but we bluff our way through it."

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The industry has been lobbying with the government for a 10 per cent reduction in GST for automobiles, even if for a limited time, so that the depressed sentiment with the consumers could be reversed. Should the government comply, a swift revival in demand may be possible but nobody is banking on it.  

"The consumer sentiment continues to be low and there is clearly a trust deficit in lending money to the dealers," said Rajan Wadhera, President, SIAM. "The industry has done everything in its power to stay afloat by offering attractive deals and discounts to the customers. But we can only offer limited deals as profitability is also under pressure. It only highlights the need for government to consider reducing the GST rates from 28 to 18 per cent which would significantly reduce the cost of vehicles and in turn create demand."

The expectation of a price cut however, has presented a unique problem. Sales have come to a virtual standstill at dealerships across the country today in anticipation of a cut being announced at the GST council meeting on September 20. This has already accounted for two festivals in the country -- Onam in the South and Ganesh Chaturthi in the West.

"Kerala recorded poor demand for the second year in a row. Mumbai is flooded and we don't know how the market will respond tomorrow. That is the level of uncertainty we are dealing with," said Y S Guleria, senior Vice President, sales and marketing, Honda Motorcycle and Scooter India.  

"Let's actually take it in a very dramatic way and let's conclude, the Indian automotive growth story is about to collapse. In order to get out of the current crisis and not miss the festive season, we require clarity from the government, here and now, on GST and scrappage policy," said Guenter Butschek, managing director and CEO, Tata Motors. "If the government does not believe, for whatever reasons, that it will not be able to reduce the GST, then actually let us know it here and now, loud and clear. Because that's the customer expectation at this point of time, and it's the reason why we currently see lots of cancellations of bookings. Why we actually see empty showrooms is because of the fact that customers expect there is a better deal coming, if not tomorrow then after September 20."

It could be a red October for the automobile industry.

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