[Year in review 2019] Things that went wrong with Indian auto industry last year

From rising fuel prices and lending crisis to increase in third-party cover and new safety norms, 2019 was probably the worst year for the auto industry in the last two decades
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The Indian automotive industry witnessed an estimated fall of 13 percent in car sales last year. In fact, 2019 was probably the worst year for the auto industry in the last two decades.

Dealer-level inventory across the industry for passenger cars crossed only over five lakh units in June 2019. Manufacturers, including the likes of Maruti Suzuki, Mahindra and Mahindra, and Tata Motors had to halt production at their factories several times over the year to ease the pressure on dealers.

Trouble in paradise

If one were to track the origins of this slowdown, the market started experiencing a sharp pinch due to rising fuel prices in October 2018 when crude hit a high of $86 a barrel. A weak monsoon and low MSP (minimum selling price) of crops led to a slowdown in the rural sector as well.

As rural sales comprise a bulk of the volumes, especially during the festive season, this hit the two-wheeler sales hard.

Adding another nail to the coffin was the lending crisis, which hit the market in October 2018. Following the defaults made by IL&FS (Infrastructure Leasing & Financial Services Limited) and its entities on the repayment of dues and the fraud that was unravelled later, saw non-banking finance companies (NBFCs) run short of liquidity.



Hence, these NBFCs could not lend money to vehicle buyers during the 2018-19 festive season (Dussehra-Diwali). This also hit hard because 70 percent of two-wheeler sales and approximately 30 percent of passenger car sales in India are fuelled by NBFCs, according to SIAM.

That’s not all. The insurance regulator also increased the mandatory third-party cover from one year to three years for cars. Two-wheeler consumers were also hit as they had to pay for five years, pushing up the final cost of buying a vehicle.

Buying decisions for two-wheeler consumers change with a price difference of even Rs 100. A rise in price by several thousand rupees severely impacted sales. The more premium the bike, higher is the profit margin. However, with the rise in prices across the range, we saw the market shift from 150cc to the 125cc, which also impacted the revenue stream.

The government induced the safety norm for two-wheelers (ABS in vehicles above 125cc and CBS for vehicles displacing below 125cc), which is a good thing for the segment, but added further stress from April 2019.

Passenger vehicles too met with new hurdles such as safety norms. As over-speeding is one of the main reasons for road accidents in India, all cars that were on road after July 2019 were fitted with a speed alert system - a beep after every 60 seconds whenever a car crosses 80 kmph. After this, the car will beep continuously at speeds above 120 kmph. Adding to the safety net as well as ease of driving, all cars are now also fitted with reverse parking sensors.

July 2019 also saw Indian cars getting a manual override for the central locking system, mandatory driver side airbags, and seat belt reminders for the driver and front passenger. All these safety norms do make our cars safer, but also increased the prices, further impacting the sales.

The government stepped in, or rather did not

The affordability and availability of retail finance, as well as finance for dealers, was a major concern for the industry. The release of Rs 70,000 crore for PSU (public sector unit) banks recapitalisation in August 2019 added enhanced liquidity in the system, adding a bit of relief to the auto industry.

Linking of repo rate to interest rates charged for vehicle purchase helped lower EMIs for auto purchases, thereby boosting demand.

The industry demanded relief in GST rates from 28 percent to 18 percent, but the government did not agree.

Earlier, the government had supported the industry in 2008 and 2014 by announcing several excise duty cuts. Besides that, the government’s over-aggressive push towards electric vehicles without a concrete plan for scrappage of old internal combustion vehicles confused buyers even more. Controversial statements by several ministers continued to add stress to the industry and confusion amongst the buyers.

Nitin Gadkari, Minister for Road Transport and Highways, Govt of India, first spoke about a scrappage policy in 2015. However, with a possible launch of it “soon”, the government is unlikely to offer any incentives or tax sops. In fact, sources close to the development suggest that state governments will be asked to offer rebates on road tax against a scrapping certificate.



However, the market received some relief when finance minister Nirmala Sitharaman announced a reduction of corporate tax rate to 22 percent with no minimum alternate tax for companies not availing incentives under Income Tax Act in September 2019.

Speaking on the tax reforms, Rajan Wadhera, President of SIAM (Society of Indian Automobile Manufacturers), said,

“The reduction of Corporate Tax to 15 percent for new companies making fresh investments from October 1, 2019, will support investment and also FDI in the auto sector. This is expected to give a big boost to Make in India for automobile industry. Expansion of scope of CSR expenditure to include incubation centres and R&D activities will also help with R&D expenditures in automobile sector. All these set of fiscal measures are expected to uplift market sentiments and improve demand for automobiles.”

Lacklustre launches and new tie-ups

To beat the slowdown, carmakers also used tried and tested methods of introducing new products.

Tata Motors launched Harrier based on the new Omega Arc (Optimal Modular Efficient Global Advanced Architecture) platform. This platform traces its origins to the Land Rover D8 architecture, which has seen over one million SUVs around the world. Besides that, the SUV even flaunts a killer design language previously unseen in any Tata vehicle. The company, with the Harrier, also improved its build quality several folds. However, that did not help Tata garner volumes, just like the Aria.

Other launches like the Nissan Kicks and the Renault Duster facelift failed to create excitement in the segment.

Another shocker for the industry came in October 2019 when industry long-timer Ford announced a joint venture with Mahindra. The Indian company bought a 51 percent stake in the Indian arm of the US auto major.

Valued at Rs 1,925 crore, this joint venture will see seven new vehicles being launched by two brands. Ford also transferred its India operations, including the two plants (Chennai and Sanand), and employees to the new joint venture.

But is the worst over? To be honest, the full effect of the BS-VI norms has not been seen yet. Estimates suggest that petrol cars will see a price rise of nearly three to five percent while diesel cars will experience a hike in the range of eight to 10 percent.

Not only will the price hike impact volumes, but with several carmakers dropping small diesel mills from their portfolio, the market is also set to be severely impacted, the consequences of which may linger on for a while.

(Edited by Saheli Sen Gupta)