India's car industry stalls as demand wanes

India's economic slowdown, the growing popularity of ride hailing apps and a liquidity crunch among non-banking lenders are all hurting the sector

In India, prices have fallen causing more real estate loans to turn sour, pushing more shadow banks toward default.. EPA

Stalling car sales in India have prompted dealerships to close down and factories to temporarily shut up shop amid the worst slump in almost 20 years, analysts say.

“The biggest challenge that the industry faces is weak consumer demand,” says Rahul Agarwal, the director at Wealth Discovery, a stock broking firm based in New Delhi. “There are just not enough car buyers who are willing to buy a car right now. Subdued buyer interest has led to inventory build-up, production cuts and massive job losses in the auto ancillary industry.”

More than 280 dealerships have shut down since the start of last year, according to the Federation of Automobile Dealers Association, a lobby group for the sector in India.

India's economic slowdown, the growing popularity of ride hailing apps and a liquidity crunch among non-banking lenders - which had become a popular source of loans for consumers – are factors that have dampened demand for cars.

The car sector is considered a bellwether for the wider Indian economy - and those trends have also been worrying. On August 7, the Reserve Bank of India, in its bi-monthly monetary policy meeting, lowered its growth projection for the current financial year to 6.9 per cent, from its earlier forecast of 7 per cent. India has already lost its tag as the world’s fastest-growing major economy after GDP growth in the March quarter of financial year 2019 slipped to 5.8 per cent, government data show.

Car sales in India in the quarter to June saw their sharpest fall in almost two decades, according to the Society of Indian Automobile Manufacturers (Siam). Its figures reveal that 712,620 cars and  utility vehicles and vans were sold in the quarter, down 18.4 per cent on the same period a year earlier.

The car industry in the country accounts for more than 7 per cent of India's GDP and directly and indirectly employs 29 million people, according to Siam.

“With no signs of an imminent and fast turnaround, the industry is staring at its worst slowdown, which has deep negative ramifications for the overall Indian economy,” says Mr Agarwal. “The current slump in the sector is a prolonged one and this is the 10th month of continuous decline.”

The malaise is so deep that car makers, dealers and parts manufacturers may have cut some 350,000 jobs since April, Reuters reports, citing an unnamed senior industry source. Unemployment is a worry for the country and prime minister Narendra Modi's government, which was re-elected in May. Official data have revealed that unemployment in India hit a 45-year high of 6.1 per cent in the year to June last year.

Amid the slowdown and reports of job losses, which include temporary positions at car factories, India's major car companies have suffered dramatic declines in business.

The country's largest car maker Maruti Suzuki saw its passenger vehicle sales tumble more than 36 per cent last month compared to a year earlier to 98,210 vehicles.

Meanwhile, Honda's sales in India fell 49 per cent and Toyota's sales last month were down 24 per cent on a year earlier to 10,423 vehicles sold in India.

“The industry is deeply concerned with the increasing pressure of low customer sentiment faced by the sector,” says N Raja, the deputy managing director at Toyota Kirloskar Motor, the Indian subsidiary of Toyota Motor. “High insurance costs, rise in taxes and a liquidity crunch across the non-banking finance segment, tightening of lending norms, have significantly affected domestic sales in the last few months.”

He adds that “we are trying to lend maximum support to our dealers through the hard times faced by the industry by maintaining lean inventory”.

India's Tata Motors is also having a bumpy ride.

“In the short to medium term, the sector faces some challenges due to the ongoing credit crunch, low consumer spending and the transition in emission norms by 2020,” N Chandrasekaran, Tata Motors' chairman, said in the company's latest annual report, released last month.

BS Rai, automotive expert at Singhi Advisors, an investment bank headquartered in Mumbai, says the sector is “witnessing job losses, lower profitability and a high inventory of cars at the dealers’ end”.

A significant factor in all this stems from a crisis in the non-banking financial sector in India, which started towards the end of last year. With non-banking financial companies (NBFCs)  facing a liquidity squeeze, this has severely impacted their ability to lend to potential car buyers.

“A significant decline is due to scarcity of easy finance by NBFCs. NBFCs have been a major driver of growth in recent times by way of liberal financing,” says Mr Rai. “Also, across the board, there is lower credit growth in automotive financing.”

Other factors that have weakened demand for car purchases include a surge in the use of ride-hailing services across the country's major cities – in particular Uber and its homegrown Indian competitor Ola - and the broader trend of “millennials having less interest in car ownership”, he says.

Maruti Suzuki in India cut its production in July on the year by about 25 per cent to make 133,625 vehicles in the month, the car maker said in a stock exchange filing.

“In order to align production with sales, manufacturers are taking deep production cuts and having temporary shut downs at their various plants,” says Ashwin Patil, the senior research analyst at LKP Securities.

And many analysts do not see the situation in the car industry improving any time soon, unless steps are actively taken by New Delhi to address the challenges that the sector is grappling with.

“Going forward, this crisis is going to continue for a longer duration considering the fact that internal factors within the sector like new launches will not revive the sector,. But something like external stimulus, for example GST [goods and services tax] rate cuts, and NBFC finance easing will help,” says Mr Rai. “If the government does not take quick and effective steps then the sector will be under immense pressure.”

Mr Raja says he wants the GST rate in sector to be brought down from 28 per cent to 18 per cent “to accommodate the downturn in sales”.

Authorities have already started to take some steps that could help the industry. The Reserve Bank of India on Wednesday cut interest rates by 35 basis points to 5.40 per cent, which should bring down borrowing costs for car buyers who take out bank loans for their purchases.

The central bank also announced measures to help the non-banking financial sector, including increasing the ceiling for a bank’s exposure to a single NBFC.

“Given the importance the sector has for the Indian economy, the Indian government cannot allow the sector to be in distress for any longer,” says Mr Agarwal. “A well-timed and focused bailout of sorts would go a long way in turning around the fortunes of this most critical sector.”

But another concern is that car makers are also dealing with higher costs.

New emission norms that are due to come into effect in April 2020 and the cars that comply with those standards are more expensive for car companies to build and come with a higher price tag for customers. The Indian government is also eager to push people towards electric vehicle ownership.

“The introduction of electric vehicles raises a number of questions about production capital expenditure, pricing, research and development expenditure, and this will cause further uncertainty in the sector as the government is hurrying the procedure of transition,” says Mr Patil.

But despite these hurdles, the long term outlook for India's car sector is promising, analyst and car manufacturers say.

There are only 30 cars for every 1,000 people in India, according to the  Federation of Automobile Dealers Association, meaning there is huge scope for an increase in car ownership in the country.

“In the Indian context, the automotive industry is expected to emerge as the world’s third-largest passenger vehicle market by 2021, driven by the underlying economic growth, increasing consumption demand and mass urbanisation,” says Mr Chandrasekaran

With a peak season for buying cars being just around the corner, it will soon become clear whether there might be any relief at all for the sector before then.

“We hope that the upcoming festive season brings in a breather for the industry, with a spur in customer sentiments,” says Mr Raja.