Why India's car industry may face more roadblocks ahead in its recovery

Automobile sector is facing fresh headwinds from rising prices, new emissions regulations and higher borrowing costs for consumers

FILE PHOTO: Workers assemble a Tata Tiago car inside the Tata Motors car plant in Sanand, on the outskirts of Ahmedabad, India, August 7, 2018. REUTERS/Amit Dave/File Photo
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India's car industry is facing multiple hurdles as manufacturers are forced to manage inflation-driven cost increases and extra expenditures to comply with new emissions regulations.

The sector had been on the road to recovery following the Covid-19 pandemic with strong sales numbers, but fresh headwinds at a time when borrowing costs for consumers are rising, may slow the pace of recovery.

“There are multiple challenges that the automobile industry is facing,” says Anurag Singh, managing director at Primus Partners, an Indian advisory company based in New Delhi.

India's automobile industry — which includes cars, motorcycles, and commercial vehicles — is worth more than $222 billion, accounts for 7.1 per cent of India's gross domestic product and is poised to become the world's third largest market by 2030, government body Invest India says.

This makes it too big to be ignored by all stakeholders, be it policymakers and industry bodies who need to put their heads together to find solutions for challenges facing the sector. For international manufacturers, India remains an attractive market despite all the challenges it is facing.

“The car market in India is very, very important for all the international players, because size wise it is significant,” says Mr Singh. “India has the highest potential to grow, because still, the car penetration in India is quite low compared to the developed countries.”

Only 8 per cent of households in India own cars, the National Family Health Survey shows.

But industry insiders are keeping a close eye on potential roadblocks for the sector.

The Reserve Bank of India on Wednesday raised interest rates for the fifth consecutive time in an effort to control stubbornly high inflation, bringing the key repo rate up to 6.25 per cent with the latest 35 basis point increase.

This makes borrowing more expensive, including car loans.

The rate rises and the possibility of further increases “may dent the consumer confidence”, the Federation of Automobile Dealers Association (Fada) a New Delhi-based trade body, said on Friday.

This comes as the industry has otherwise been enjoying a boost.

“The buoyancy among customers is on account of better perceptions on the general economic situation, employment, and household income,” according to Fada. “This, along with the ongoing festive season, has continued to help in bringing customers to the showrooms.”

This is reflected in India's car sales figures.

Fada's data shows that the automobile industry clocked historic high sales last month at 2.38 million vehicles. Sales were up 21 per cent in November to 300,922 compared to a year earlier, while they rose slightly over 5 per cent compared to November 2019, before the pandemic before the pandemic.

But Fada warns of other risks for car companies that struggled with the global shortage of semiconductors, an essential component, during the pandemic.

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“Along with this, the China lockdown may play its part in slowing the supply of semiconductors. If this happens, it may act as a speed-breaker and add to the supply-demand mismatch, which was improving in the last few months,” the association says.

Mr Singh says that there is reason for “cautious optimism” amid difficulties that the sector has been grappling with over the past few years.

Even before the pandemic, the sector faced challenges. US car maker Ford exited India last year, saying that it did not see a path to profitability in the country.

“The car industry has undergone a lot of pain in the last four or five years which included the sales drying up because of Covid, then the supply constraints because of the chip shortage, and significant changes in technology required for meeting the emission norms, and also with the industry moving towards electrification and lots of technological changes going on,” says Mr Singh.

“Now that chip shortage is kind of abating and the situation is improving, the production numbers are going up, the sales numbers are going up,” he adds.

Car manufacturers in India are adapting well to electric vehicles, analysts say, with strong programmes in place as the government aims to increase the proportion of green cars on the road.

Maruti Suzuki's plant at Manesar, in the northern state of Haryana, India.  Reuters

But there are other steps to control carbon emissions that are affecting car companies.

The Indian government has made it mandatory for carmakers to comply with stricter fuel efficiency regulations by April next year in an effort to reduce emissions in a country, with some of the world's most polluted cities.

These are adding to the already high costs that car companies have been grappling with this year.

India's largest car maker Maruti Suzuki this month announced that it plans to raise its prices from January.

“The company continues to witness increased cost pressure driven by overall inflation and recent regulatory requirements. While the company makes maximum effort to reduce costs and partially offset the increase, it has become imperative to pass on some of the impact through a price increase,” it said.

Maruti Suzuki did not reveal by how much it would increase prices and said that the rise would vary across different models.

Rishi Vora, an analyst at Kotak Institutional Equities, says emission regulations “will have cost implications” for all car manufacturers.

“As per the norms, all the vehicles must be equipped with self-diagnostic devices and programmed fuel injectors,” he said.

Capital expenditure for the automobile industry increased to 70 billion rupees in the first half of this financial year, running until the end of March, which is “the highest in many years”, said a recent research note by financial services firm Motilal Oswal.

Retail inflation in India cooled to a nine-month low of 6.4 per cent last month, the latest official data that was released on Monday showed. But this is still above the upper tolerance level for inflation set by the Reserve Bank of India.

“Most of the [automobile manufacturers] are announcing price hikes going forward,” Fada said.

“To counter this and for the lower end of the pyramid, manufacturers have started announcing discounts for slow-moving products, lower variants and to clear their year-end stocks,” it adds. “This may help year-end sales to remain healthy.”

Mitul Shah, head of research at Reliance Securities, based in Mumbai, says that he expects India's automobile industry to see low double-digit growth in the current financial year.

“Despite a stronger first half on a low base, ongoing global geopolitical issues and depreciating currency continue to keep pressure on economies and elevate the inflation level,” says Mr Shah. “This has been limiting the industry-wide recovery at the moment.”

An employee assembles door plates for Mahindra & Mahindra Ltd. XUV 500 sport-utility vehicles (SUV) on the production line at the company's facility in Chakan, Maharashtra, India, on Monday, April 2, 2018. Mahindra & Mahindra is India’s largest SUV maker. Photographer: Udit Kulshrestha/Bloomberg

He says there are, however, some signs of positive drivers.

“Softening commodity prices and lower fuel prices would support the industry ahead on both the volumes and margins front,” he says.

The “long-term fundamentals continue to remain intact for automobile sector”, he adds.

Jatin Ahuja, founder and chief executive of Big Boy Toyz, India, which sells used luxury cars from brands including Porsche and Maserati, says that he is noticing positive trends amid rising incomes and a young population in a country of 1.4 billion people, which are factors helping to drive demand for cars.

“We have experienced the youngsters between 25 to 35 spending the most,” he says. The company has seen sales growth of more than 35 per cent this year over the previous year, he adds.

“We are expecting the market to grow even more.”

Updated: December 12, 2022, 5:30 AM