Introduction
The Indian auto industry is one of the largest in the world. The automotive industry contributes 7.5% to the overall Indian GDP and accounts for 49% of the manufacturing sector. Indian Automotive Industry supports employment of more than 3.7 crore people and contributes to 15% of GST amounting to Rs 1,50,000 crore every year. It was the fourth manufacturer of car and the seventh largest manufacturer of commercial vehicles in 2019. The two wheelers segment dominate the market in terms of volume owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector. India is also a prominent auto exporter and has strong export growth expectations for the near future addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the Two-Wheeler (2W) and Four-Wheeler (4W) market in the world.
Advantages for India
Growing Demand: Rise in middle class income and young population will result in strong growth.
Opportunities: India could be a leader in shared mobility by 2030, providing opportunities for electric and autonomous vehicles. Focus to shifting to electric vehicles to reduce emissions.
Rising Investment: FDI inflow in the automobile sector stood at US$ 24.21 billion between April 2000-March 2000. India has significant cost advantages. Auto firms save 10-25% on operative vis-à-vis Europe and Latin America
Policy Support: The Government aims to develop India as a global manufacturing centre. Reforms like GST will boost the sector’s growth. Under the new GST regime, GST on electric vehicles is reduced from 12% to 5%, which is effective from 1st August 2019.
Market Size
Two wheelers and passenger vehicles dominate the domestic Indian auto market. Passenger car sales are dominated by small and mid-sized cars. Two wheelers and passenger cars accounted for 80.8 per cent and 12.9 per cent market share, respectively, accounting for a combined sale of over 20.1 million vehicles in FY20.
Overall, automobile export reached 4.77 million vehicles in FY20, growing at a CAGR of 6.94 per cent during FY16-FY20. EV sales, excluding E-rickshaws, in India witnessed a growth of 20 per cent and reached 1.56 lakh units in FY20 driven by two wheelers.
Two wheelers made up 73.9 per cent of the vehicles exported, followed by passenger vehicles at 14.2 per cent, three wheelers at 10.5 per cent and commercial vehicles at 1.3 per cent.
Investments
In order to keep up with the growing demand, several auto makers have started investing heavily in various segments of the industry during the last few months. The industry has attracted Foreign Direct Investment (FDI) worth US$ 24.21 billion between April 2000 and March 2020, according to the data released by Department for Promotion of Industry and Internal Trade (DPIIT).
Some of the recent/planned investments and developments in the automobile sector in India are as follows:
· In April 2020, TVS Motor Company bought UK’s iconic sporting motorcycle brand, Norton, for a sum of about Rs 153 crore (US$ 21.89 million), making its entry into the top end (above 850cc) segment of the super bike market.
· In March 2020, Lithium Urban Technologies partnered with renewable energy solutions provider, Fourth Partner Energy, to build charging infrastructure across the country.
· In January 2020, Tata Auto Comp Systems, the auto-components arm of Tata Group entered a joint venture with Beijing-based Prestolite Electric to enter the electric vehicle (EV) components market.
· MG Motor India planned to launch MG ZS EV electric SUV in early 2020 and have plans to launch affordable EV in the next 3-4 years.
· BYD-Olectra, Tata Motors and Ashok Leyland will supply 5,500 electric buses for different state departments.
Government Initiatives
The Government of India encourages foreign investment in the automobile sector and has allowed 100 per cent foreign direct investment (FDI) under the automatic route.
Some of the recent initiatives taken by the Government of India are :
· The Government aims to develop India as a global manufacturing center and a Research and Development (R&D) hub.
· Under NATRiP, the Government of India is planning to set up R&D centers at a total cost of US$ 388.5 million to enable the industry to be on par with global standards
· The Ministry of Heavy Industries, Government of India has shortlisted 11 cities in the country for introduction of EVs in their public transport systems under the FAME (Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles in India) scheme. The Government will also set up incubation center for start-ups working in the EVs space.
· In February 2019, the Government of India approved FAME-II scheme with a fund requirement of Rs 10,000 crore (US$ 1.39 billion) for FY20-22.
Road Ahead
The automobile industry is supported by various factors such as availability of skilled labor at low cost, robust R&D centers, and low-cost steel production. The industry also provides great opportunities for investment and direct and indirect employment to skilled and unskilled labor. Indian automotive industry (including component manufacturing) is expected to reach Rs 16.16-18.18 trillion (US$ 251.4-282.8 billion) by 2026.
Running in the top gear
India is expected to be the world’s third-largest automotive market in terms of volume by 2026. The industry currently manufactures 25mn vehicles, of which 3.5 mn are exported. India holds a strong position in the international heavy vehicles arena as it is the largest tractor manufacturer, second-largest bus manufacturer and third largest heavy trucks manufacturer in the world.
Challenges currently faced by the automotive industry
· Managing costs and target return on capital employed – It is critical for automakers to be able to enable them to manage high costs and maintain profitability in wake of low sales volumes.
· Shift to BSVI – The shift to BSVI by April 2020 will be challenging for automakers as it will result in price increase which is likely to adversely impact demand. Customers are likely to postpone their buying decision further worsening the demand scenario. In order to counter this, companies are launching newer products in the market with attractive features
· Liquidity crunch – Significant number of two-wheeler and commercial vehicle sales are financed by NBFCs. Hence, the demand was impacted due to squeeze in the NBFC financing.
Covid-19 Impact
Before Lock-down: Demand for new cars declined sharply in 2019, forcing automakers to cut production across the year. Sales were expected to revive during the annual festive season from October 2019 but failed to do so. In fact, there was an encouraging spike in sales in Q3 – stimulated by promotional offers, aggressive discounts, new model launches, and the increasing availability of models offering Bharat Stage-VI (BS-VI) emission standard. However, volumes dipped soon after the season was over. Counterpoint Research expected the negative month-on-month sales trend would continue in Q1 2020.Most auto stocks have been down 40-70% since February 2020. Automobile sector was already facing short consumer demand, government announcing the rules of Bharat Stage VI (BS VI) norms to adopt new emission standards on one hand led to increase price of Original Equipment Manufacturer and on the other hand has deferred customer demand.
In Between Lock-down: Besides the low demand and an existing slowdown environment, the outbreak of Covid-19 in mid-March 2020 added more distress to this industry. The pandemic caused disruptions in supply chains and brought manufacturing activity to a halt for nearly 30 days. Due to multiple lock-downs in the country, various OEMs, ancillaries and dealers located in containment zones, witnessed near nil activity in April and few days of May 2020.
After Lock-down: Automobiles production, sales as well as exports sequentially rose in June 2020, after two consecutive months of decline. Measures taken to promote sales in June: OMEs are using digital platforms to attract customers, which to an extent helped increase the number of inquires for new car buying. Automobile named Piaggio Vehicles Private Limited are great examples of using digital platforms by launching online sales facility for its commercial vehicles to enable customers to book vehicle online by paying an initial amount, check ex-showroom and on-road prices for their cities and applying for loan, among others. The launch of this unique platform in the commercial vehicle space will enable customers to book their selected model from the comfort of their homes without visiting the showroom. Also, to enhance retail financing for consumers and ensure the credit availability at competitive interest rates with low down payment requirements, the players established tie-ups with commercial banks NBFCs and regional rural bank.
Approach taken to recover loss
Thus, utilizing capacity is one way to overcome fixed cost which has not been possible. In April and May 2020, both sales volumes as well as capacity utilization fell much below the pre-Covid levels. These two factors, along with high sales promotion expenses negatively impacted the margins of automobile OEMs in Q1-FY21. Companies could partially off-set the impact by increasing cost reduction measures. Keeping in the mind the present situation a preferable move would be to promote the two-wheeler market focusing on its electric wing. According to a 2016 survey the two-wheeler is owned by 1/3rd of population in India and is also one of the most popular modes of transport. By 2030, the two-wheeler sales are expected to grow more evenly across states and by 47 million units. Additionally, the inherent cost economics of an electric two-wheeler, lower global battery prices and the comparatively low long-run operating costs of ownerships, present a strong argument for the segment. While the electric option remains more expensive, battery swapping mechanisms and a strong market opportunity would contribute to reducing the showroom costs. With rising concerns over the health of an individual, the market would see a lot of first-time consumers who would be able to afford a two-wheeler rather than a car. Eicher Motors (two-wheeler segment) Managing Director, Siddhartha Lal said Royal Enfield was witnessing a strong initial customer interest with the gradual easing of the coronavirus-led lock-down A quite likely scenario is one where the mid to higher segment of vehicles would stabilize first, since the rich find their incomes to be least affected.
Other ancillaries
The on-going rise in fuel prices in lieu of raising government expenditure is expected to further delay consumer demand by reducing money available with people. With the rising unemployment and job loss it is difficult to meet the households for people and considering the hike in fuel prices will add huge burden to common citizens and further add troubles to automobile sector. India is dependent upon China for a huge chunk of their exports, especially for the automobile industry. In 2018-19, an estimated $4.5 billion worth of auto-component imports was seen from China and a whopping 27% of the automotive parts are manufactured in China and imported to the Indian companies. However, according to the China Association of Automobile Manufacturers (CAAM) several automakers are facing complete shutdowns. Therefore, the current situation puts this relationship at a fragile position. Additionally, most operation in India have been shut down during the lock-down. This means a need for ramping up production as soon as situation permits. The new work from home trends will hit the white-collar professionals leading to a reduction in the demand for cars. Additionally, it is a little absurd to think that commuters of public transport would now suddenly be able to afford a personal car, especially with a possibility of reduced incomes and slow lending rates by banks and Non-Banking Financial Companies (NBFCs).
Predictions
Overall future of automobile sector looks dull with no positive sign of improvement. If another nation-wide lockdown gets imposed, automobiles sector, their large workforce, employment status will get negatively affected and OEMs may have to further delay their product launches and capex plans. Customers would expect more of promotional schemes in such scenarios from automobiles. It is important for various industries to encapsulate their plans for a post COVID economy in order to safeguard their employees against continued purchasing power negatives. The sector needs a strong government policy push. In pushing the auto sector, specially the electric vehicles segment the country also manages to hit the nail on its green ambitions. Supply chain disruptions in the wake of COVID-19 outbreak coupled with weak demand for vehicles in India and overseas is likely to squeeze the revenue of the automotive component sector by 16 per cent this fiscal, says a report. This will add to the pain from an estimated de-growth of 10 per cent in the industry's revenue to Rs 3.2 lakh crore last fiscal, Crisil Ratings said in its report. The growth projections are based on an analysis of 300 Crisil-rated auto component suppliers that account for 40 per cent of the sector's revenue
Impact of Budget 2020
While the auto industry was quite hopeful that the GST reduction will take place in the budget in order to compensate for the price hike bound to happen because of BS6 transition which could eventually help by reducing the import costs but sadly that didn’t happen. Especially electric vehicle manufacturers had several expectations from the budget relating to reduction in GST or customs duty on lithium-ion cells. One major highlight of the 2020 Budget is the changes made to the Income Tax slab which will now put more money in the hands of the consumer and the largest benefit seems to go to middle-class families. This would mean that since buying capacity would improve, we can expect to see an improvement in car sales which have been witnessing a major slump. However, the Budget 2020 turned out to be a disappointing one for the auto industry as most of the expectations of the automotive manufacturers and related companies remain unmet.
Expectations from Government
Automotive industry lobbies are appealing to the government against the 100% manual inspection of Chinese goods at ports because it was hurting the industry’s production schedules at a time when companies were trying to get their supply chains back in order after the lockdown to contain the coronavirus pandemic. Some of the items imported from China are critical components, such as parts of engines and electronics items for which we are yet to develop domestic competence. The automotive value chain is a highly complex, integrated and interdependent one; non-availability of even a single component can, in fact, lead to stoppage of the vehicle manufacturing lines. Imported auto components amounted to $4.75 billion annually, or about 4% of the $118-billion annual turnover of the automotive industry in the country. Reduction in the Goods and Services Tax (GST) rate applicable to automobiles to 18% from the current 28% to absorb the additional price impact of shift from BSIV to BSVI. A cut in the personal income tax rate will provide more disposable income in the hands of consumers which could lead to automotive demand recovery. An incentive-based vehicle scrappage policy be introduced to remove old vehicles off the roads and trigger demand for new vehicles. Abolish the customs duty of 5% on Lithium-ion cells to promote local manufacturing of the batteries in the country. This will further reduce cost of electric vehicles and accelerate its adoption. Incentive for lithium-ion battery manufacturing for EV applications. Allocate adequate budget to state transport undertakings to procure buses which will boost demand for commercial vehicles. Speed up NBFC revival to stimulate rural demand growth
Data Insights
Auto Industry Decline by 75% During the 1st Quarter of 2020-21 Compared to Same Period Last Year Significant Improvement in June 2020 for Passenger Vehicle and Two Wheelers Compared to Previous Months
Monthly Performance: June 2020
Production: The total production of Passenger Vehicles, Three Wheelers, Two Wheelers and Quadricycle in the month of June 2020 was 1,094,363 as against 2,253,407 in June 2019 with a degrowth of (-) 51.44%.
Domestic Sales:
· Passenger Vehicles sales was 105,617 units in June 2020, compared to 209,522 units in June 2019 marking a decrease by (-) 49.59%.
· Three-wheeler sales was 10,300 units in June 2020 compared to 51,885 units in June 2019 marking a decrease by (-) 80.15%.
· Two-wheeler sales was 1,013,431 units in June 2020, compared to 1,649,475 units in June 2019 marking a decrease by (-) 38.56%.
Quarterly Performance: April - June 2020 (Q1 FY-21)
Production: The industry produced a total 1,486,594 vehicles including Passenger Vehicles, Commercial Vehicles, Three Wheelers, Two Wheelers and Quadricycle in April-June 2020 as against 7,213,045 in April- June 2019 with a decline of (-) 79.39%
Domestic Sales:
· Passenger Vehicles sales was 153,734 units in April-June 2020, compared to 712,684 units in April- June 2019, down by (-) 78.43%.
· Commercial Vehicles sales was 31,636 units in April-June 2020 compared to 208,310 units in April-June 2019, down by (-) 84.81%.
· Three-wheeler sales was 12,760 units in April-June 2020 compared to 149,797 units in April-June 2019, down by (-) 91.48%.
· Two-wheeler sales was 1,293,113 units in April-June 2020, compared to 5,013,067 units in April-June 2019, down by (-) 74.21%
According to Federation of Automobile Dealers Associations (FADA), which collected vehicle registration data from 1,230 out of the 1,440 regional transport offices (RTOs), passenger vehicle sales stood at 2,05,011 units in June 2019. Two-wheeler sales declined 40.92 per cent to 7,90,118 units last month as compared with 13,37,462 units in June 2019.Commercial vehicle sales plunged 83.83 per cent to 10,509 units as against 64,976 units in the year-ago period. Three-wheeler sales fell 75.43 per cent to 11,993 units last month as compared with 48,804 units in June 2019. Total sales across categories slipped 42 per cent to 9,84,395 units in June 2020 as against 16,97,166 units in the year-ago month. However, noted that rural markets, led by a robust crop harvest and timely arrival of monsoons, witnessed demand recovery in comparison to urban areas, therefore leading to a surge in retail sales of tractors as well as positively impacting offtake of two- wheelers and small commercial vehicles. But the recent locust attack could still play spoilsport.
Sources: International Organization of Motor Vehicle Manufacturer, Department for Promotion of Industry and Internal Trade (DPIIT), Automotive Component Manufacturers Association of India (ACMA), Society of Indian Automobile Manufacturers (SIAM), Budget 2020, Economic Times, Mint, Press Release https://www.investindia.gov.in/team-india-blogs/emerging-covid-19-trends-automobile-sector