The Fall in the Automobile sector

The automobile sector is one of the fastest growing industries of the world and is very crucial for improving the GDP of our India as it contributes to nearly 22% of the country's manufacturing GDP. However, the downturn in the automobile sector has started in the year 2019 and COVID-19 has made it worse. Automakers were expecting the sales-revival during the annual festive season from October 2019 but failed to do so. According to Crisil Rating, the automobile sector will see a decline of 10-15% during 2020-2021.

TYPE	MARCH 2019 SALES  (in units)	MARCH 2020 SALES (in units)	PERCENT DECLINE
PASSENGER VEHICLE	2,91,861	1,43,014	51%
TWO WHEELERS	14,40,593	8,66,849	40%
THREE WHEELERS	12,68,000	6,36,569	50%
COMMERCIAL VEHICLES	10,07,319	1,09,030	89%

 

 

The current decline of the automobile industry can be contributed to various factors. Behavioral changes, and the lack of funds have been specified as the main contributors for the slowdown in the automobile industry but there are certain regulatory changes have occurred that have also affected this sector’s growth adversely.

 

·       The supply disruption from China:

Nearly 27% of India's automotive parts are imported from China which is retarded because of COVID-19. As a result, the production and delivery of vehicles have been delayed due to lockdown.

·       Moderating Economic Growth:

Consumers are postponing their vehicle-buying decisions because of increment in unemployment as well as a decrease in overall economic growth. According to the Bureau of Economic Analysis, real gross domestic product (GDP) decreased at an annual rate of 4.8 % in the first quarter of 2020. Moreover, the International Monetary Fund (IMF) has cut its growth forecast for the Indian economy from 7% to 6.1% for 2020.

·       Increasing unemployment:

The unemployment rate in India jumped up to 7.8 % in February 2020 and in rural areas, the rate has increased to 7.4 % from 6 %. In rural areas, the demand for two-wheeler vehicles is affected by lower annual rainfall.

·       Stringent environmental regulations:

Government of India has mandated to conform BS-VI emission standards for all vehicle types by April 2020.Due to which the cost is estimated to increase by 5-10%. Automakers might have to face huge loss as a huge chunk of BS-IV stock is not sold due to lockdown. According to the Federation of Automobile Dealers Associations (FADA), an inventory of 15,000 passenger cars, 12,000 commercial vehicles and 7,00,000 two-wheelers are unsold due to the overall slowdown in the economy as well as by the cautious approach of consumers due to the pandemic.

·       Electrification:

The government of India has placed a definitive emphasis on electric vehicles. This was confirmed when last year transport minister Nitin Gadkari has declared that only electric vehicles would be allowed to run post-2030. Such announcements are confusing customers as to purchase petrol/diesel engine cars or wait for electrical vehicles.

·       Growing Popularity of Shared Mobility:

According to  Counterpoint Research, primary research shows that two out of three frequent users of shared mobility services consider ride-hailing more economical than owning a car. Due to such preferences, leading players in taxi-hailing services such as Ola and Uber have planned to expand their services further into tier-2 and tier-3 cities in the next few years. Moreover, start-ups such as Bounce, Vogo, and Yulu are expanding their bike rental model whereas Rapido has adopted the bike aggregation model and consumers find it more convenient.

·       Decrease in demand of two-wheelers:

In two-wheelers vehicle segment, demand from rural areas is expected to be better as compared to urban markets due to better Rabi prospects. However, low rainfalls as well as delay in harvesting due to the lockdown are the main contributors to diminishing demand.

·       Cautious Lending by NBFCs:

NBFCs (Non-Banking Finance Company) have been a major source of investment for the automobile industry, primarily lending to customers in semi-urban and rural areas where credit availability from the banking sector is generally difficult. However, the credit crunch that has now hit the auto sector is leading to a decline in automotive loan disbursals. Majority of dealers depends on NBFCs to fund their purchasing of vehicles from OEMs (Original Equipment Manufacturer). The recent solvency issue surrounding India’s NBFCs has affected the lending and in return that has adversely affected automotive sales in 2019 and shows no signs of abating. 

·       Insurance policies:

According to new automobiles insurance policies, the buyer has to have insurance of the car for 3 years which was earlier 1 year. This has increased the cost of purchasing automobiles which in turn has affected the sales. This is also one of the major reasons for the increasing inventory of automobiles.

·       Decline in exports:

      The industry was already facing disrupted supply chain and in the last week of March 2020 auto companies announced a shutdown of their manufacturing units due to COVID-19. This has affected exports very badly as the exports were declined by 24.5% to 2,8,032 units in March 2020 as compared to 3,78,914 units in March 2019.

According to Counterpoint Research’s forecast, automotive sales of India remains cautious for the year 2020, with several factors affecting especially tight credit conditions, the moderating economy and the transition to BS-VI emissions standards – creating uncertainty and obstacles.

Thank you.

Regards,

Riddhi Rajput,

Kautilya,

IBS Mumbai.