Auto sector mayhem: Are we misreading distress signals emerging from plummeting sales and steep production cuts?

  • What is happening in the auto sector is a direct result of the huge demand slump in a fast slowing economy

  • If behavioral changes and spending patterns or shift to a new type of vehicle is impacting auto sales, it would have primarily reflected in passenger sales only

  • Not just auto sales, every other sector and their allied sub-sectors, be it FMCG, real estate, manufacturing, exports and construction, is slowing down

Yet another month has passed with auto companies posting a massive decline in the sales. In fact, auto sector sales figures are sending distress signals on the state of the economy demanding urgent action to save the industry from the crisis phase.

Maruti, the market leader in the passenger cars segment in India, just announced that it is going to cut production by a whopping 34 percent as sales are plummeting. Last month, Maruti had posted a high double-digit fall in sales. What is even more disturbing is that the production cut has come the steepest in the mini segment, by 63 percent. Remember, this is the segment comprising cars like Alto and Wagon R, typically the entry-level affordable segment which shows that demand slump is hurting the lower bracket the most. If this is the case with Maruti, it is needless to talk about its competitors.

What exactly is wrong in the auto sector pushing it to such a big crisis mode? Well, there is a group of observers who argue that the auto sector slowdown doesn't necessarily relate to the larger economic slowdown. This section doesn’t see this as a warning of the fast-developing economic crisis that is turning into a structural one from a cyclical problem.

According to them, the auto sector flop show is happening due to one or more of the following factors.

1) There is a major behavioral change with the consumer. People are now increasingly opting to rent vehicles rather than own them as they find it a more convenient and economical solution to their daily commuting purpose than owning a car and face the hassles of maintaining, parking and fuel expenses. For eg, Ola and Uber. Hence, car sales are slowing.

2) There is a big generational shift happening in India. The spending priorities of the new generation has changed. Instead of investing in assets like house and vehicle, this generation wants to spend money on travel or pursue their passions. This probably has led to lower auto sales.

3) There is a big shift veering towards Electric vehicles. Customers have postponed their vehicle purchases in the anticipation of EV vehicles in the near future and hence auto sales are impacted. The Government's push towards EVs are encouraging this group to wait and watch.

4) More people are now resorting to public transport on account of high fuel prices, parking issues.

 Auto sector mayhem: Are we misreading distress signals emerging from plummeting sales and steep production cuts?

Representational image. Reuters

All the theories cited above may be partly true. For instance, there may be a section of customers in major metro cities who used to earlier drive to office but now prefer using pooling services offered by cab aggregators; there may be people who have shifted to public bus services or trains as a means of cheaper transport or it could be also true that the younger generation, who are just out of colleges and are on their first job, wants to avoid the hassles of owning a vehicle.

The important point is that none of these factors justify such a dramatic fall in sales witnessed over a period of just one year. Yes, should they happen, these factors can play out in auto sale trends over a period of time, but to say that the record flop sales happened over the last 10 to 12 months is bunkum.

Just consider this: In August, major automobile manufacturers including Maruti Suzuki India, Mahindra and Mahindra, Tata Motors, Honda, and Hyundai posted high double-digit dips in their sales figures reflecting one of the worst demand slumps the Indian auto sector has witnessed in several decades.

Just to give a perspective, Maruti, the market leader posted a 33 percent drop, Tata Motors logged a 58 percent drop and Honda 51 percent. For other automakers too, the figures present largely a similar pattern. The slowdown in sales figures of automakers has had a cascading effect on allied activities such as the auto component industry. Job losses, in the auto and allied sectors, have crossed 3.5 lakhs just this year.

Auto industry representatives are seeking urgent intervention from the government to save the industry by lending a helping hand in the form of GST rate cuts. The auto sector isn't standing in isolation. Almost all sectors are facing a severe downtrend pushing the economy to the slowest growth in at least seven years in the April-Jun quarter.

If behavioral changes and spending patterns or shift to a new type of vehicle is impacting auto sales, it would have primarily reflected in passenger sales only. But that's not the case here. Even tractor and truck sales are down. For instance, in August, Mahindra and Mahindra sold 14,684 commercial vehicles as compared to 20,326 vehicles in August 2018. Also, it logged a 15 percent drop in domestic tractor sales to 13,871 units in August against sales of 16,375 tractors in August 2018. Now if one talks about the cost of vehicles and parking problem, remember even the sale of mopeds are nosediving. The production of the light-powered two-wheelers dropped nearly 30.64 percent in April-July 2019. TVS Motor produced 2,15,247 mopeds in April-July compared to 3,10,330 units during the same period last year, marking a decline of 30.64 percent. How does one explain that?

The fact is, what is happening in the auto sector is a direct result of the huge demand slump in a fast slowing economy. In an economic scenario where jobs are under threat and consumer confidence is down, it is only logical that people are cutting down their spends. The point is it is not just auto sales, every other sector and their allied sub-sectors are also slowing. FMCG, real estate, manufacturing, exports, and construction--everything in India is feeling the heat of an unprecedented economic slowdown.

The poor performance of the manufacturing sector played a big role in dragging the GDP numbers to the lowest in 25 quarters. Manufacturing grew at just 0.6 percent, barely escaping the negative growth zone as against a growth of 12.1 percent over the year-ago quarter. This is the real problem area because manufacturing is the backbone of the economy and directly connects to employment. In the previous quarter, the growth was at 3.1 percent.

The bottom line is this: It is unwise to find excuses and attribute the record slowdown in auto sales that India is witnessing to consumer behaviour and seasonal factors. Those theories don't hold. It is time for all to wake up and smell the coffee.

Updated Date: Sep 03, 2019 11:12:56 IST