Sudden Slowdown in Indian Auto Sector

The slowdown in Indian auto sector-both for OEMs as well as auto component manufacturers, has been sudden and so is worrying for the country. Domestic sales are going down because of credit squeeze by banks financing it. Interest on loans and so EMIs has gone up. Banks are too cautious and reluctant. Banks have been tightening credit standards. Interest rates on car loans hover at around 14% to 18%, up from 10% to 12% not long ago. I wonder why the interest rate in India is so much high as against the rates charged by the banks in developed countries. Is it because of the lack of the operational efficiency or the greed to make too high profit? It has made customers to go either in saving mode or the waiting mode (window shopping) for better price.

Tata Motors and Ashok Leyland have cut production by closing for few days every month. Exports have reduced. Even Hyundai India that exports maximum number of cars has cut a shift, from three to two.

Every day one or the other news appears about the reduced sales of some companies. Is it the aftereffects of US meltdown that has made US Big Threes vulnerable towards bankruptcy? Can Bush bailout save the American auto sector? Will the managements of Detroit Three restructure enough for survival and growth? Will the new products in pipeline such as hybrid Chevy Volt save GM? How much time will it take for recovery of the economy? Auto industry in Europe, Japan, and even in China is in problem. Toyota for the first time has posted loss.

Drastic reductions in production of vehicles in US and even in Japan have shrunk India’s exports of auto components too. While the manufacturers might not have resorted to layoffs of workmen, the situation remains grim and it is difficult to predict what are in store if the global slowdown continues?

Everything was going fine. India’s auto component manufacturers had come out of the cocoon scaling up production, designing and manufacturing to the world class standard, and getting some brand name through TQM, Six sigma, TPM, Deming prizes and ISO certification. Some of the manufacturers were going in top gear with acquisitions in Western countries and export to almost all the big auto OEMs of the world.

Until a year ago, India was the fastest-growing automotive market in the world. Today the $33.3 billion Indian auto industry has slumped to an eight-year low. In keeping with Toyota’s global practice, the companies are resorting to training sessions during plant holidays to ensure that the workforce is not idle. Some may go to work on corporate social responsibility projects.
Slowdown has also slowed the companies’ investment plans to expand capacities. The company such as Nissan-Renault has decided to go slow on Greenfield projects in Chennai.

The Chinese auto component manufacturers are adding fuel to the fire through dumping, particularly for India’s auto component manufacturers. A large number of smaller companies are resorting to layoff and even shut down. Big manufacturers, such as Tata Motors, Bajaj Auto, Ashok Leyland, Mahindra and Mahindra, TVS Motors and Ford Motor India, find it cheaper to switch over to the Chinese imports. Instead of helping the small manufacturers, many are already sourcing important components from China and reaping the benefits of globalization. The government assumes that some tax concessions are good enough for revival or to face the Chinese competition. It is unfortunate that the government and the manufacturers associations such ACMA, SIAM or CII have no strategy to make India’s small manufacturers competitive. According to the Automotive Component Manufacturers’ Association, auto component imports from China have risen by 130% in the past two years and now constitute more than 15% of the total components imported from other countries from 1.5% in 2003-04. The value of auto component imports from China stood at Rs 2,200 crore in 2007-08. Uncertainty of orders flow from US and European carmakers in trouble is also worrying the auto component manufacturers. Some good news from some OEMs in Europe such as one from German auto major, Volkswagen AG may give hope, but such news are rare.

I don’t know if the people in general realize the consequences of the slowdown. Every truck sold creates employment for 5 persons on average. Even a car provides employment, the higher end ones more. Can one tell me the number of persons in India employed as drivers, cleaners, and motor mechanics?

To keep the auto sector booming, Indian banks, most in public sector must keep the credit flowing to the genuine customers of vehicles, cars, trucks or tractors who are capable of paying back. The banks must cut down their operational costs to keep the interest rates similar to one by MNCs using IT and other technologies.

Auto manufacturers must work drastically on disruptive cost innovations along with R&D for fuel efficiency improvements and other product upgradations. Let Nano be a guiding philosophy for pricing, and not the Western pricing methodologies.

The government must be proactive in helping the manufacturing sectors through better infrastructure, government R&D facilities, and rational tax structures. I still think that the luxury cars of higher prices including Hybrid ones must have lesser tax burdens. The amount of tax collected on these cars at higher rates can’t provide any employment even if the government invests the amount for the purpose. However, each of these cars sold will need a driver or two and some more to maintain.

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