Demonetisation: Cash crunch woes set alarm bells ringing for India's automobile cos

Concerns over demonetisation of high value currency notes likely to put brakes on the economic growth in next couple of quarters of the current fiscal (FY17) seems to be already in works. There are reports which suggests that small and medium-scale enterprises are already feeling the heat of the current cash crunch situation and may lead to production cuts and massive job losses in days to come. Not just the SMEs, things are beginning to look shaky for one of the country’s high-employment generating automobile sector as well. Besides consumption which has been driving the country’s growth, automobile industry, too, has contributed significantly to the growth over the past decade or so on the back of improving vehicle sales year on year. However, if things are anything to go by, automobile companies could be in for tough times going ahead as effects of demonetisation could dent overall sales. Car makers such as Maruti Suzuki, Honda Motor, Hyundai Motor, Mahindra & Mahindra, Renault Nissan and Ford Motor are extending shutdowns from a week to around two weeks this and next month, the Economic Times report said. [caption id=“attachment_2584216” align=“alignleft” width=“380”]  AFP[/caption] Although Maruti and Hyundai Motor India said the shutdowns were as per their initial plans and not because of demonetisation, Honda Cars India and M&M have been suspending production for past few days due to higher inventory at dealerships, the ET report said. To give a perspective, Honda Cars India said its Greater Noida and Tapukara plants will operate for just fours days a week, and both the plans would remain shut in the last week of December for maintenance purpose. Similarly, M&M has carried out annual maintenance shutdowns from 4-8 December and plans another shutdown between 26 December to 2 January. India’s largest private sector automobile company, Maruti will carry out its maintenance shutdown between 26 December to 2 January, 2017. “The market prospects are not clear,” ET report said quoting Yoichiro Ueno, managing director of Honda Cars India. “We are carefully monitoring it and will take necessary production alignment in case we judge it is necessary.” Already, passenger vehicle sales in November grew by just 1.8 percent, the slowest monthly sales in several months. Domestic car sales ticked up to 173,606 units as against 173,111 in November last year, according to data released by the Society of Indian Automobile Manufacturers (SIAM). “While we expected an improved auto industry performance on the back of the festive season and other positive parameters such as rural demand and interest rates softening, the sudden announcement of demonetisation has brought in an immediate disruption and uncertainty,” Times of India reported quoting Pravin Shah, president and chief executive (automotive) of Mahindra. On the other hand, motorcycle sales last month declined 10.21 percent to 778,178 units, from 8,66,696 a year earlier, while total two-wheeler sales in November fell 5.85 percent to 12,43,251 units compared with 13,20,552 units in the year-ago month. Sales of commercial vehicles, too, were down 11.58 percent at 45,773 units last month. Industry experts say the cash crunch in the market owing to note ban has prompted several potential buyers to postpone their purchase plans, if not scrap the decision. Also, vehicle loan disbursals from banks have moderated sharply as most of the staff are busy dealing with the cash situation. Faced with the low-cash situation, automobile manufacturers are not anymore expecting to post double-digit sales growth this fiscal. Further, wholesale sales that automobile companies dispatch to their dealers slipped into negative for first time since December last year after volumes fell over 5 percent in November due to contraction in retail demand following the demonetisation move, said Times of India report. According to numbers released by industry body Siam, domestic wholesale sales fell by 5 percent to 15.6 lakh units in November against 16.5 lakh units in the same month last year. With this note ban, the Franco-Japanese auto alliance Renault Nissan is planning to slash around 1,000 jobs at its Indian units due to low demand in the market, another TOI report said. The Renault-Nissan alliance currently employs around 8,000 workers at its Chennai plant. Not just the automobile industry, industry experts feel auto component industry, too, are likely to feel the demonetisation heat. Brokerage firm ICRA anticipates auto component industry to grow at slower pace than earlier forecasted 8-10 percent growth in FY2017, in the backdrop of slower than expected pickup in realisation, subdued exports as well as impact on OE demand due to demonetisation measures. In the interim, auto companies as well as their vendors could witness some correction in demand. Also, continued demand slowdown in the US M&HCV market as well as moderating growth in US as well as EU PV market will further dampen overall growth expectations, ICRA said in its report.