India Auto Inc's turnaround only likely by 2021, says BloombergNEF

As the automotive sector in India continues to tumble, completing almost an entire year of downturn that began in June 2018, captains of industry and owners of associated businesses like automobile dealers and logistics providers, among others, are a worried lot. They have been contending with the prolonged and unanticipated slowdown which has given a big blow to one of the most streamlined sectors in the Indian economy, that contributes a sizeable 7.5 percent to the country's GDP.

The birth of the slowdown can be traced to the crisis in the non-banking financial sector last year which led to shrunken liquidity in the market, thus impacting rural sales, commercial vehicle purchases as well as dealership businesses. A malaise which continues to this date. The situation further aggravated with changes in policies, making vehicle ownership arguably more expensive.

Reacting to the slowdown, industry pundits first felt it was the negative impact of shared mobility, later misreading it as a being a blip that would last till the end of the election. However, with no signs of respite even after the re-election of the government in majority in May this year, the sales downturn is being attributed to the wait-and-watch attitude adopted by consumers in the light of the changeover to BS VI, now barely 8 months away, the government's tough line on fossil fuel-powered vehicles and the ambitious game-plan for mass electric mobility.

Pedal to the metal some time away
Early numbers coming in for sales in the domestic market in July 2019, indicate that India Auto Inc, across vehicle segments, will be in for a shocker in terms of negative growth. Some optimistic sections of industry though believe the upcoming festive season of Diwali could fire up some sales. However, there are others who think that hope is a fallacy.

Speaking to Autocar Professional on the sidelines of the BloombergNEF Summit held last week in New Delhi, Ali Izadi-Najafabadi, Head of Intelligent Mobility, BloombergNEF, said, “There is a short-term slowdown in the automotive industry globally. While that varies from market to market, the common underlying trend which we can see right now is that people are worried about the economy in most markets. There is a bit of an economic emergency and everywhere people are worried about a recession.”

“Cars are discretionary spending, and if you're worried about your paycheck, you're not going to buy a car,” said this analyst, who works at Bloomberg Korea.

“That's the first major concern, which even China is facing right now. The other factor is that prices of vehicles, on an average, have increased in most markets. Now what that has led to is that the automakers are being made to offer huge discounts on their new products. But because automakers are also under tremendous pressure to invest into this technology transition towards e-mobility, they are also in a bit of a bad position on how to do that."

“If they look at boosting the short-term sales by giving more discounts and at the same time continue investing into new technology, they could risk their solvency. So, this is the crossroad that the auto industry is stuck upon at the moment,” he explained.

Shared mobility not a concern
While the definitive growth in the use of ride hailing services such as Uber and Ola is being touted as one of the reasons for declining new car sales in India, at least in the major metros, Najafabadi explains that the country still has a lot of headroom for growth in its vehicle parc.

“We don't think shared mobility to be exactly taking away from new car sales because the motorisation rate in India at 28 per 1000 people is so low and, at the same time, with the market being so huge, there is immense headroom for growth. Yes, the trend of multiple car ownership within a household is declining but there is huge potential still,” he said, discarding the common prevalent notion in the market.

“The sales growth rate is not that much affected by shared mobility as much as it is affected by people's incomes and their affordability,” he added.

He added, "This phenomenon is rather visible in advanced economies such as the US, Europe, Japan and South Korea, where we do see shared mobility taking away some of the demand from the market. The initial effect of shared mobility is that people who own cars start using them less, leading to a drop in the utilisation rate. However, people who don't own cars, like the younger generation, then they may delay buying a car and contribute to the slow growth of the industry.”

“So, the low utilisation rate is a big factor determining demand in these markets,” he said.

“But if we look at South East Asia, it is more of affordability issues that people tend to rely on services like Grab and Go-Jek than owning a personal vehicle. But, at the same time, we don't also see sales peaking just yet. Sales have peaked in countries like Japan and Korea primarily because of demographics, where you have an ageing as well as declining population, so there is no demand.”

“On the contrary, in the case of shared mobility, the lifetime of the vehicle is actually lower due to the significantly higher utilisation rate, thus demanding a quicker replacement as well,” he added.

India Auto will take two years more to return to fast lane
Talking specifically about India, Najafabadi said, “The automobile sales growth in the last five years has been very rapid in the country. Also, the market has seen some timing issues, for instance, the demonetisation drive of 2016, which impacted growth.

“Analysing the numbers correctly, we see a proper recovery happening only by 2021 (FY2022). While we don't expect the next year (FY2021) to be lower than the current one (FY2020), we don't expect it to be significantly higher as well. There would be marginal growth in FY2021 on a percentage basis and there would be an uptick, but nowhere near the potential that the industry has shown in the past. These scenarios usually take a bit of time before the industry could bounce back.”

“Alliances as well as cost sharing is the only way out for automotive companies to survive such challenging situations. While that in itself is difficult due to internal cultural differences, but one has to lower one's bottom-line when the top-line is under such tremendous pressure,” he concluded.