RC Bhargava: ‘Car sales cannot happen in big numbers if GDP is between 1-2 percent."

by Mayank Dhingra 13 May 2020

After announcing its annual results for FY2019-20, which followed its Board meeting earlier today, Maruti Suzuki held a virtual press conference inviting media persons to speak with its top management.

While it reported a steep 25 percent drop in its bottom line in the last financial year to Rs 5,650 crore due to lower sales volumes and higher expenses, the company has offered a Rs 60 per share dividend to its shareholders and also clearly indicated being in a relatively better position to sail through the current Covid-19 crisis with its surplus cash.

RC Bhargava, chairman, Maruti Suzuki India (MSIL), told journalists that the company is not looking at salary cuts and will go ahead with its earmarked capex of Rs 2,900 crore for FY2020-21, even as it reported nil sales last month, like the rest of the industry players. “We have worked out our capital budget for the long-term and have complete confidence in the country’s economy and cannot afford to not invest that amount,” said the top official of MSIL.

Now, even as it tries resuming operations with its Manesar plant starting-off yesterday after the relaxations being received from the Haryana government, there are still challenges in the pipeline.

Manesar second line operational next week, Gurgaon plant by May 18
Bhargava said that the company plans to resurrect operations at the second line in Manesar next week, along with resuming operations at its Gurgaon plant around May 18 or 19. However, its parent Suzuki Motor Corporation’s plant in Hansalpur, Gujarat is still closed given that the neighbouring village still has a lot of active coronavirus cases. “There are uncertainties regarding manpower movement from one district to another and getting approvals from the authorities,” Bhargava told reporters.

Maruti Suzuki has a combined production capacity of 1.58 million units in Gurgaon and Manesar and another half-a-million units at its two operational lines at Gujarat which build models such as the Dzire, Swift, and Baleno.

Dealership network begins networking
Along with manufacturing operations, part of Maruti’s widespread dealer network across the country has also resumed work. “One-third of our dealers have opened for work with 60 percent of them being in rural areas. All of roughly 2,000 dealers are also set to gradually resume operations in the coming weeks. Dealers are working for either 4, 5 or 6 days at the maximum,” he said.

At this moment, the company is seeing most of its new-car enquiries come through the digital channel and claims having received 5,000 bookings so far, with around 2,300 cars being delivered.  “The market, of course, is very uncertain at this moment and nobody knows how it is going to behave,” Bhargava mentioned. He also said that while nearly 1,900 workshops are also functioning, the initial service load was very low and expects that this function will also pick up momentum gradually.

In terms of dealer viability, the MSIL chairman mentioned that by and large they have managed because there has been some revenue inflow such as from insurance renewals and the little bit of aftersales vehicle servicing orders that have started to come in. “If a dealer has genuine difficulty, we can look at those cases,” he reassured.

Supply chain constraints
While the automotive industry is trying to get back to work and start producing cars and motorcycles at its assembly lines which have seen a deserted look for all of the last several weeks, the business is also very complex and inter-related in the form that it relies on a ‘Just-in-Time’ supply methodology for a component going from a supplier to an OEM. It is delivered right when it is about to go to assembly, so as to minimise inventory costs.

However, with a lot of its vendor partners still not being able to resume operations, supply-chain issues loom large. Talking about the current supply-chain constraints being faced, Bhargava said, “To completely assemble a car, you need 100 percent of the components and to get that it means all the vendors have to be able to work without interruption. Unfortunately, many of our vendors and their sub-vendors are located in containment zones and in some cases, even in red zones.”

“Vendor partners are also facing the same problem regarding manpower, much of which has gone away to their villages. Thirdly, many smaller vendors are facing financial issues and they need help from their customers.”

“We have given advances against delivery of supplies to some vendors and we can also help wherever it is required. Sometimes vendors get into difficulties because of their other customers not having paid their dues,” pointed out Bhargava.

Labour migration to affect suppliers more than OEMs
Commenting on the huge migrant labour crisis, which has seen many companies suffer due to lack of workers, who have returned to their hometowns and villages, Bhargava added, “I don’t think there is a problem with workers not coming to work whether temporary or otherwise, the problem is in the restriction on movement. Labour migration is going to affect vendors more than it is going to impact us. They use far more contractual labourers than OEMs.”

“But some of the migrant labour has gone away and some will come back when jobs become available and things start becoming better,” he added.

He remarked that the supply chain will become more robust and secure, and that by the festive season, we would need much more volumes than what we are seeing today.

“We will see a gradual ramp up,” Bhargava remarked.

Low GDP means lesser car sales
With the Indian economy slowly coming to terms with the massive financial implications of the extended lock-down, which might continue into its fourth phase after May 17, the GDP projections of the country for FY2020-21 are already taking a significant hit with the latest IMF revision pegging India at 1.9 percent growth amidst the Covid-19-induced global recession.

According to Bhargava, “No point speculating when we will get back to pre-2019 volumes; this depends on a lot of factors including supply side, demand side, as well as the recovery of the economy. Car sales cannot happen in big numbers if GDP is between 1-2 percent.”

With the Union Finance Minister also rolling out the sector-wise nuances of the mega Rs 20 lakh crore economic relief package announced by the Prime Minister yesterday, Bhargava said, “A GST cut needs to be timed by the government. Right now, the production volume of all automakers is really low. A cut will be relevant when the production can be increased to higher levels and the supply is going to exceed the demand.”

“It is not the most certain solution at this moment,” Bhargava said.

He added that while it is too early to have a firm view on how the market will react, “Early indications do suggest an uptick in small car sales. But it’s too early to consider as a firm trend as only a few dealers were functioning at the moment.”

Safety protocols and shooting overhead costs
With the new safety protocols in place for companies to be able to restart operations, there has been an impact on overall productivity and costs.

The Haryana government, where Maruti operates its plants in the Gurgaon and Manesar districts has seen the relaxations being offered with a limited number of employees who could return to the facilities. As reported earlier, only 3,704 personnel have been allowed to work in Gurgaon, and just 600 employees in Manesar, compared to the 4,696 employees Maruti Suzuki had originally sought permission for.

Manufacturing units are now required to frequently sanitise the shopfloor while also ensuring that social distancing is being maintained among employees.  “The new safety protocols actually reduce the effective working time of a shift and therefore, reduce productivity to an extent. The one-hour gap between shifts and transportation, which now needs to be doubled for the same number of people have increased overheads.”

“Similar things are also being implemented at the showrooms as well to ensure customer’s safety. In some states, the registration of the vehicle can be done online and it reduces the need for the customer to drop by. These processes will all keep getting improved as we go along,” Bhargava said.

“At this moment, these protocols that result in cost will have an impact on increasing the overheads for us, but the company doesn’t have a plan to pass it on to the consumer,” he added.

As regards cost rationalisation, Bhargava said, “Cost control has been a part of our DNA in Maruti from the beginning and we have always continued to control costs. While most of the shopfloor practices remain unchanged, increased safety measures notwithstanding, a lot of earlier practices are being replaced by technology and allowing us to reduce costs. Going forward, entertainment and publicity costs that involve big functions will go away. These changed practices are seeing us savings in cost.”

Short-term approaches to spur demand
Answering a query on prevalent discounts and the company’s short-term approach in terms of new product launches, Bhargava responded with, “The question of discounting will depend on market conditions. With restricted production, I don’t think there will be any surplus production for the next couple of months. When we go forward, we don’t know what the situation will come out to be. The market situation changes every month and there is no prediction to that.”

MSIL’s managing director, Kenichi Ayukawa, who was also present in the online conference, added that while there have been some delays on new model timelines due to the lock-down and a major portion of the workforce still working from home, “We would like to catch up to our original schedules.”

Bhargava concluded by responding to another query on the company’s long overdue plans of relocating its Gurgaon plant and said that while the relocation could be postponed but it definitely cannot be put in cold storage.

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