Carmakers to go ahead with planned expansion regardless of slowdown

Last fiscal, makers of cars, two wheelers, trucks and buses invested a whopping Rs 22,000 crore in adding fresh capacities. And capacity addition is not stopping even now, despite the automobile industry facing one its worst phases in India.

A senior official of the Society of Indian Automobile Manufacturers (SIAM) said today that a specific query to all its members, on whether any of their capacity expansion plans were being put on hold or scrapped, got one answer: No. Not a single manufacturer wants to stop investments though analysts have warned that capacity utilisation was only about 60% in the first quarter till June. Which means a third of capacities across the Indian automobile industry were idling.

“When a new model is being launched, no one will put up small capacities because then achieving economies of scale becomes impossible. Also, no one wants to be caught napping when the market rises, everyone wants to hold on to market share,” this official said.

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[caption id=“attachment_951649” align=“alignleft” width=“380”] Analysts have estimated that production capacities will rise close to 40% between last fiscal and FY16 AFP[/caption]

Analysts have estimated that production capacities will rise close to 40% between last fiscal and FY16 (which means four years to 2015-16). By FY16, they are estimating industry passenger vehicle capacity to reach 6.5-6.7 million units. The official quoted earlier said in the best of times, industry’s capacity utilisation has been 80% and he is not surprised that previously planned expansion is being completed.

But he pointed out that at least some global automobile OEMs which were eyeing India have sensibly postponed or scrapped their plans.

Malaysian car maker Proton - which has been circling India and had earlier even tested two of its popular cars across the country - has abandoned any immediate plans to come in. This official said Proton has realised the excessive competition which already exists in the Indian market. PSA Peugeot Citroen is another company which has scrapped plans of making a mega investment in India.

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Nissan thinks differently though - It is expected to unveil the Datsun brand on Monday, a brand which it had killed deliberately in the mid-1980s but is reviving now for a play in emerging markets including India. This need not involve mega investments in manufacturing though, since Nissan already has a huge facility outside Chennai.

So will car and two wheeler makers go ahead with planned expansion between now and 2015? Yes, regardless of how their sales fare.

According to SIAM data, car production was down by more than 13% in the June quarter, production of commercial vehicles was flat while that of motorcycles actually grew by almost 10%. This, when sales during the quarter were down more than 10% for cars and more than 8% for CVs. Bike sales were up by over 14%.

But if we look at June alone, the picture which emerges is quite different. Production of cars was lower by 14%, domestic sales fell 9% and exports declined by 21%. Production of bikes was down almost 7% and domestic sales by more than 9%, exports were down almost 5%.