Distress sale of BS IV two-wheelers likely in second half of March

by Mayank Dhingra 03 Mar 2020

While most dealers are taking an advanced deadline of March 15, 2020 to liquidate BS IV stock, there could be panic as uncertainty looms large in the Indian automobile market as regards market dynamics and the economy.

As the final countdown for the much-debated BS IV-to-BS VI transition gets underway, India Auto Inc looks to make the switch in the smoothest possible fashion. However, factors such as a continually weak market and the Coronavirus outbreak impacting component supplies for BS VI vehicles, seem to pose new challenges.

According to Nikunj Sanghi, director - International Affairs, Federation of Automobile Dealers Association (FADA), the apex dealer body in India, "The market is still very fluid and our immediate focus is to liquidate the BS IV inventory. While some pre-buying is going on, after March 10, it would be hara-kiri. Especially in the passenger vehicle and commercial vehicle segments, dealers of most manufacturers are confident of clearing the (BS IV) stocks by March 10, but two-wheelers are still reeling under tremendous pain."

Two-wheeler sales in the country remained sub-par and were pegged at 15,255,979 units between April 2019 and January 2020 (April-January 2019: 18,124,313 / -15.83%) as against the production which dropped 12.66 percent during the same period and reached 18,290,809 units.

"Internally, we are keeping a deadline of March 15 to be on the safe side as there are varying degrees of processes to get a vehicle registered and apparently, the NIC will block registration of BS IV on March 31. So, the permanent registration process will need to be completed much in advance," he said.

A temporary registration in March would not suffice and allow completion of the permanent registration process in April, he explained.

Sanghi further explained that the majority of the dealers would have cleared up their BS IV stock in their books, but if there is any leftover inventory, drastic measures will be coming in the form of heavy discounting or even registering the vehicles in the name of their employees, to be able to sell them later as second-hand vehicles. This is going to bring huge additional cost to dealers.

"So, why not push retail as much as possible in the first place? After March 10, there will be a panic situation and distress sale is possible in case of two-wheelers," Sanghi remarked.

With a price hike on two-wheelers being in the range of 9-13 percent on account of BS VI, and anywhere between 3-5 percent on petrol-powered passenger vehicles, there is uncertainty as regards their acceptance by the end-consumer.

"We are not sure how BS VI is going to be received because of the price hike, which has been happening, but not to the extent that it was made to believe. Maybe, some companies are initially absorbing a part of the price increase and will pass it on to the consumer later on," said Sanghi.

Covid-19 threatens switch
Now, even as it looks to transition to the BS VI regime, the Indian automotive industry is already feeling the heat due to the outbreak of the Coronavirus (Covid-19), which has disrupted supply chain and has impacted the production schedules of a lot of OEMs in the country which are trying to ramp up BS VI production.

With a weak performance in February at 12,430 units (-31%), Tata Motors says its March production is jeopardised as well. According to Mayank Pareek, president, Passenger Vehicles Business Unit, Tata Motors, ”The outbreak of Covid-19 in China and a recent fire incident at one of our strategic vendors affected the vehicle production and wholesale volume. Multiple actions are being taken to reduce the impact, staying close to our customers by providing transparency of the delivery situation. On a positive note, our BS IV vehicle stock is well below the targeted level and we are well placed for the BS IV to BS VI transition."

India, which imports roughly 26 percent of its automotive components from China, is seeing its other indigenous player, Mahindra & Mahindra (M&M) too getting impacted by the adverse situation. According to Veejay Ram Nakra, chief of sales and marketing, Automotive Division, M&M said, “The ramp-down of BS IV vehicle production has been in line with our plan for February. However, because of the unforeseeable challenges on the parts supply from China, our BS VI ramp-up has been affected. This has resulted in a high de-growth in our billing volume for February and our dealer inventory is, now, under 10 days. Going into March, we anticipate the challenge on parts supply to continue for another few weeks, before we get back to normalcy.”

M&M clocked sales of 10,938 units in February (February 2019: 26,109 / -58%), a substantial de-growth in its business from its predominantly diesel passenger vehicle portfolio.

MG Motor India, which is operating with a highly dependent supply chain on parent SAIC in China, also didn't see the Coronavirus coming to impede its fast-paced journey, and is looking at troubled times up ahead. According to Rakesh Sidana, director, Sales, MG Motor India, "The unforeseen Coronavirus outbreak has severely affected our European and Chinese supply chains, disrupting our production and impacting our sales in February and will continue through March. We are working towards stabilising the situation and are hopeful that reasonable normalcy will be restored by the end of March."

With recent confirmed cases of the novel virus in Korea, fear looms large on the sustainability of Hyundai-Kia in India as well.

"Shutdowns in China, Japan and Korea are going to impact us. The entire automotive industry is heavily dependent upon China for the supply of electronics components," Sanghi said.

"If the Coronavirus gets arrested at the level that it is at right now, its impact will be far-reaching in terms of the revival of the industry (in India). Secondly, companies would need to re-think on how to manage their supplies and not be dependent on one source."

"India has a great opportunity and 'Make-in-India' has the potential to become far more critical now," Sanghi concluded.