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THE rising cost of fuel and soaring interest rates are forcing automakers in India — both domestic and international — to revisit their ambitious growth strategies for the country.
Last year, when car sales shot up by 30 per cent, almost touching the two million mark, many automobile manufacturers drew up multi-billion-dollar plans to scale up production to meet the apparently never-ending demand for cars and two-wheelers.
India, which is the world’s sixth-largest auto market, is set to emerge as the third-largest market by 2020, according to J.D. Power and Associates, a leading information services firm. It was also set to emerge as the global hub for small cars, with manufacturers like South Korea’s Hyundai drawing up ambitious plans.
However, the past few months have seen some of these plans hitting speed-breakers, as concerns are being expressed about the auto sector in the country. The distorted price of fuels, with the government offering hefty subsidies for diesel, rising interest rates and uncertainties on the labour front have resulted in growing dissatisfaction among manufacturers.
Hyundai, for instance, has shifted part of its production of i20s to Turkey, following labour problem at its Chennai hub in south India.
Maruti Suzuki India Ltd (MSIL), the country’s largest automaker, is also facing labour problems. So too are Honda and General Motors.
Bajaj Auto, a leading two-wheeler manufacturer — which has had to relocate its manufacturing hub from Pune near Mumbai because of high labour costs — moved part of its production to China, from where it exports its 100 cc Boxer bikes to Africa and other parts of the world. Bajaj, India’s largest exporter of motorcycles — selling about a million bikes abroad each year — has shifted a large chunk of its production of motorcycles for export to China.
TVS Motors, a Chennai-based auto major, is following in its footsteps, shifting two-thirds of its export production from Tamil Nadu to China. The company, India’s third-largest motorcycle manufacturer, exports about 200,000 bikes every year.
According to Venu Srinivasan, chairman, TVS Motors, the company will relocate its export production base to China in two phases; in the first phase, which will commence soon, 50 per cent of its export production will be shifted to China, while in the second phase, 70 per cent of its total exports would be from there. Srinivasan says the company is finding it ‘unviable’ to manufacture bikes for exports from India.
Besides rising interest rates, there are concerns about rigid labour laws that are forcing automakers to shift part of their production facilities to countries like China. The cost of production there is nearly 20 per cent cheaper than India, the quality of infrastructure is superior and there are hardly any labour issues.
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FOR an automobile firm — whether manufacturing cars, commercial and heavy vehicles, or two- and three-wheelers — it makes sense to go in for huge volumes of production to ensure lower costs per unit. But in India, setting up massive production facilities is becoming increasingly difficult because of the problems related to acquisition of land.
Tata Motors, which unveiled the world’s cheapest car — the Nano — a few years ago, had to wind up its ambitious project to manufacture the car in Singur near Kolkata in West Bengal, following a politically-instigated agitation by a section of the farmers against it. The company, part of the Tata group, had enough resources to relocate the project to the investor-friendly state of Gujarat, without suffering hefty losses.
But automakers are increasingly finding it difficult to acquire vast tracts of land in many parts of India, as vested interests instigate owners not to sell their land to them. Even MSIL, India’s largest carmaker, is now looking at Gujarat, after facing labour problems in Haryana. The company plans to invest about Rs60 billion (about $1.3 billion) in a new plant.
Worse, dithering by the government on important issues such as pricing of fuel is taking a huge toll on manufacturers. After the government dismantled the regime of administered pricing of petroleum products, there were hopes that the hefty subsidies on diesel would be withdrawn. But the government is still reluctant to slash subsidies; the result is that there is huge variation in the price of petrol and diesel.
Many manufacturers had not launched diesel versions of their vehicles, hoping that buyers would prefer petrol cars as there would be price parity between the two fuels. But with diesel continuing to be cheaper by nearly Rs25 a litre, buyers are increasingly opting for diesel vehicles.
International companies including Ford, Honda and Hyundai feel cheated as they did not invest much in diesel engine manufacturing facilities, expecting the government to correct the price distortion. While Hyundai has recently announced a new Rs15 billion diesel plant in Chennai, it lost significantly in the race to catch up with automakers already operating such plants.
Honda, which has no diesel engine in its line-up, recently cut the price of its City sedan, as sales plunged after Volkswagen and Maruti launched diesel versions in the same segment. The Japanese carmaker slashed the price by 7.5 per cent to ensure that it could match up with the two other manufacturers’ products.
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BUT the biggest blow for the auto industry has been the constant increase in interest rates. The Reserve Bank of India (RBI) has jacked up rates nearly a dozen times since March 2010, as it persists with its battle with inflation.
A majority of cars in India are bought on loans, but with the equated monthly instalments (EMIs) rising, buyers are reluctant to go for new cars.
The result is apparent. According to the Society of Indian Automobile Manufacturers (SIAM), cars sales dipped by nearly 16 per cent, the steepest decline since November 2008, in July.
“The overall sentiment in the market is negative due to high interest rates and fuel prices,” remarks Vishnu Mathur, director-general, SIAM. “People want to buy cars but they may be postponing purchases hoping for a drop in interest rates, as well as to choose from new car models that will hit the market during the festive season.”
Adds Abdul Majeed, head, automotive practice, PwC: “Chances of another interest hike have dampened the prospects of the auto industry for the upcoming festive season. This comes at a time when the market is already reeling under pressure from high interest rates and rising fuel costs.”
MSIL reported a 26 per cent fall in production, its sharpest-ever monthly fall, because of production disruptions and rescheduling of its new models. Tata Motors and Hyundai also reported negative sales.
SIAM has revised its forecast for the current fiscal — from an earlier projection of 16 to 18 per cent growth to 10 to 12 per cent. “The market will be back in form and may be positive in sales with the softening in crude and raw material prices likely to improve customers' sentiments,” adds Sugato Sen, senior director, SIAM.
The total sales of vehicles across all categories — passenger cars, two- and three-wheelers and commercial vehicles — were however, up by 8.99 per cent to 1.35 million in July, according to SIAM.
Many carmakers are now planning to focus on the lower-end of the market, introducing cars in the affordable bracket. MSIL, which phased out its hugely successful M800, now intends to launch a new model in the sub-Rs250,000 range. Hyundai is also planning to launch an entry-level car, the H800.
“The opportunities in this segment are enormous,” explains Arvind Saxena, director, sales and marketing, Hyundai Motors India. “This is the largest segment in India's car industry today and in times to come.” Indeed, small cars in the sub-1,000 cc range are expected to drive the auto industry in India over the coming years.
