Slowdown hits auto companies production

NEW DELHI: The economic slowdown is taking its toll on the Indian auto industry, once seen as the world's most promising by global automakers, who banked on the market to counter the slowdown in Europe and US. Slowing growth has dampened sentiments of buyers, who are reluctant to engage in new purchases at a time when interest rates and fuel prices remain high. The result — output cuts across segments and new investment plans being put off.
Indicating that tough times are here for long, companies have started slashing production, which is alarming considering the ripple effect of the move on allied industries like auto components and retail outlets. And, the downturn has also hit other key segments like medium-and heavy-commercial (M&HCV) vehicles and two-wheelers.
The coming months are expected to be even tougher. The car industry has seen four consecutive months of decline in production (year-on-year). A severe crunch in demand for petrol cars has hit the segment badly, and petrol capacity is lying idle at factories as inventories pile up at dealerships.
Maruti Suzuki has already had unscheduled day-offs at its Gurgaon (two days) and Manesar (one day) factories, and said these may happen in the future too as demand remains poor, mainly that of petrol cars. “Adjustment of production to market demand is an ongoing process. If it (demand) falls, we have to adjust production accordingly,” said R C Bhargava, chairman of Maruti Suzuki.
Maruti is not the only one facing the heat. Production has been slashed by almost every major car manufacturer, including Tata Motors, Toyota, Ford, General Motors, Volkswagen, Skoda, Nissan and Honda. The situation has become so bad that automakers’ lobby group, Society of Indian Automobile Manufacturers (Siam), has said the industry will not be able to meet the government’s previously-forecasted target of $145 billion turnover by 2016, and this needs to be extended by a decade.
Some companies have already expressed disappointment over the way the market is shaping up, and openly spoken about a halt in investments. “The policy framework here (India) is not stable. Which company will like to invest?” John Chacko, MD of Volkswagen India, said a few months back. The official blamed “uncertainties on fuel prices and diesel policy”, apart from the poor economic climate, among reasons prompting the group to go slow as it holds on to fresh investments till 2015.
Sugato Sen, deputy director general at Siam, said there has been no improvement in the market sentiment. “Economic slowdown has a tendency to impact the car industry first as here it is more of a discretionary spending,” Sen said, though adding that long-term perspective of the Indian auto industry is still positive.
The production slowdown in the crucial M&HCV segment is equally worrying. Considered a barometer of economic activity, the segment has also seen a continuous production cut since November last year, and the fall is over 40% every month (y-o-y). Even two-wheelers, which were considered to be relatively insulated from the effects of slowdown, have been witnessing pressure and production levels have not seen any perceptible change over the months.
The situation has unnerved a majority of component makers. Arvind Kapur, CEO of Rico Auto Industries, said he has been “cautious” with new investments in view of the present crisis. “For the last five years, we have been investing between Rs 80 and Rs 100 crore annually. Now we are holding on to some investments planned earlier... we are very cautious.”
Surinder Kapur, chairman of parts maker Sona Koyo, said companies have started work to rein in costs as revenues stay muted. “We will be flat this year against an expectation of 7-8% growth. We are now finding ways to cut costs and maintain margins.”, though terming the current situation as a “temporary phenomenon.”
“There has been a drop in walk-ins at showrooms and sales conversion (of inquiries) are taking time,” said Kamal K Kumar, COO of Competent Motors, one of Maruti’s top dealer in Delhi.