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CRUNCH IN AUTOMOBILE INDUSTRY : Why is the Auto Industry facing the trouble?

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What has happened so far?

It was in July when the sale of vehicles across categories in the country drops 18.71% to about 18.25 lakh units, down from about 22.45 lakh units, a year ago in the same month.

It has been the steepest fall in nearly 19 years.

This data, by the Society of Indian Automobile Manufacturers (SIAM), gives out wholesale figures — i.e. the number of vehicles despatched to dealers by vehicle manufacturers.

The pasenger vehicle segment, which comprises cars, utility vehicles and vans, has been one of the worst performing segments, registering its highest drop in sales since December 2000 : almost 31%, to a little over two lakh units from nearly 2.91 lakh units in July 2018. This has also led to the trimming of over 2.15 lakh jobs in the sector.

What has happened to the automobile sector?

The industry which started off 2018-19 on a positive note with sales of vehicles across different categories growing 18% to approximately 70 lakh units in the first quarter of April-June 2018, later faces a crunch in the sales for the first time after 9 months in July 2018.

During the quarter, passenger vehicle sales rose close to 20%, commercial vehicles sales spiked 51.55%, and that of two-wheelers boosted at 16%. However, it appeared to be difficult for the demands to pick up for the first time in July 2018.



Why did inventory pile up?

The total cost of vehicle ownership which went up largely due to an increase in fuel prices, higher interest rates and a spike in vehicle insurance costs leads to stress in the demand side. In such an environment, the festive season too failed to boost demand, leading to a huge inventory pile-up with dealers.

Severe liquidity crunch caused by the IL&FS crisis late last year almost killed up credit for dealers and customers. Also, nearly half the vehicles sold in rural markets and experiencing a higher growth than the urban counterparts are financed by non-banking financial companies (NBFCs).

More working capital was required by the dealers who were stuck with higher inventory due to a lacklustre festive season.

Result of all these factors was that  all the vehicle categories, including commercial vehicles and two wheeler began experiencing negative growth beginning December.

Are people holding off on purchases?

There are possibilities that people might be waiting for the release of vehicles conforming with the Bharat Stage VI (BS-VI) norms while others might be waiting for some exclusive discount offers on the existing BS-IV conforming vehicles. Also, too much focus on electric vehicles (EVs) by the government may also be encouraging buyers to postpone the purchase of petrol and diesel vehicles.

How many jobs have been lost?

The automobile sector being one of the largest employers in the country, employs about 37 million people, directly and indirectly. According to the latest available figures, original equipment manufacturers (OEMs) have removed about 15,000 temporary workers in the last 2-3 months.

A lack of working capital amid low demand has led to closure of nearly 300 dealerships across the country. According to the Federation of Automobile Dealers Associations (FADA) - the apex national body of automobile retail industry engaged in the sale, service and spares of two- and three-wheelers, passenger cars, utility vehicles, commercial vehicles (including buses and trucks) and tractors - has led to over two lakh people losing their jobs.

Separately, it was warned by the Automotive Component Manufacturers Association of India (ACMA) that in July nearly 10 lakh jobs were at risk.



Why is the current slowdown different?

  • Research has pointed out that the current slowdown in the sector is very different from the earlier ones. 
  • First, the slowdown is driven by domestic factors, including the NBFC crisis, while the earlier ones were triggered by global events.
  • It also pointed out that over FY 19-21, vehicle prices are estimated to see a growth of 13-30% due to safety, insurance and emission-related compliance costs
  • Meanwhile, growing competition from the pre-owned cars market is also causing the sales of new vehicles to drop. 

What does the auto industry want?

The problem of constant drop in sales in auto industry in spite of new launches and offers has been demanding immediate government intervention. The auto sector is hoping that the government will come out with a revival package in order to yield benefits.

The industry demands a reduction in GST to 18% from  28%, which will help in an immediate price reduction. In addition to this, it has sought measures to handle the NBFC crisis to infuse liquidity into the system, and clarity on policy for electric vehicles and introduction of vehicle scrappage policy, which will also give boost to the demand for new vehicles.

How long will the slowdown last?

With BS-VI variants to be rolled out April 2020 onward, the prices of vehicles will go up. While the increase for petrol vehicles is likely to be in the range of Rs. 20,000-Rs. 50,000, in the case of diesel vehicles it could well be between Rs. 1 lakh and Rs. 1.5 lakh. The transition could also trigger some demand for BS-IV compliant vehicles in the remaining part of the year, due to the price difference.



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