No Room For Manoeuvre
The Rs 4.5 lakh crore domestic automotive industry is in the throes of an unprecedented existential crisis. It cannot manufacture more cars, bikes and commercial vehicles because of several demand-side constraints, including high input cost, continued consumer apathy, rising fuel prices and pressure of turning 'green'. The cost of ownership of a personal vehicle—cars and bikes—is going up every month. With the central bank hiking the interest rates, loans are set to become costlier, thwarting any hopes of early recovery.
The financial year gone by did have some bright spots for the industry though. FY2021-22 that ended on 31 March 2022 saw the sale of electric vehicles (EVs) more than triple to 4.29 lakh units compared to 1.34 lakh EVs in the previous fiscal and more than 155 per cent increase over the pre-pandemic numbers of FY20. The bulk of the sales came from electric two-wheelers. But EVs make up a very small share of the industry.
Even the ICE or internal combustion engine segment (vehicles running on petrol and diesel) saw passenger car sales grow 13 per cent to little over 3 million units thanks to increased demand for utility vehicles. Of course, two-wheeler sales dipped 11 per cent, in equal measure for both scooters and motorcycles.
CVs in fine fettle:
Commercial vehicles sales too jumped 26 per cent, which is a good sign for the sector. Tata Motors, India’s largest commercial vehicle manufacturer, recently launched the all-new Ace EV, the electric version of the ever-popular Ace. The new Ace EV, which the company describes as “most advanced, zero-emission, four-wheel small commercial vehicle (SCV)”, is a green and smart transport solution ready to serve myriad intra-city applications.
N Chandrasekaran, Chairman, Tata Sons and Tata Motors, said, “At Tata Motors, we are moving with speed and scale to lead e-mobility – in passenger cars, commercial vehicles and Jaguar Land Rover. With the launch of the Ace EV, we are entering a new era of e-cargo mobility.”
While that happens, the Federation of Automobile Dealers Associations (FADA) president Vinkesh Gulati says the overall full recovery in the auto sector is yet to be seen. Auto retails in FY22 were down 25 per cent compared to FY20, which was largely pre-Covid and a year of transition to BS6 from BS4. FADA is an apex national body representing automobile dealers of India and comes out with monthly data for vehicle registration across most parts of the country.
Constant government push:
With India's huge crude oil import bill of $100 billion (more than Rs 7.5 lakh crore) per year, it is but certain that the central government has been nudging the Indian automobile manufacturers to 'Go Green'. And that push has been evident in most aspects of the automotive industry. The government wants more EVs, more battery manufacturing units, more charging stations, more scrappage plants and faster adoption of green fuels like ethanol, methanol and green hydrogen.
"As transport minister, my dream is diversification of the automobile industry towards ethanol, methanol, biodiesel, bio-CNG…and green hydrogen," Nitin Gadkari, Union Minister for Road Transport and Highways said addressing an industry body event this month. Last November, while addressing the automobile companies, Gadkari had hoped that the size of the Indian automotive industry would double to Rs 15 lakh crore by 2026. According to him, the vehicle scrappage policy had the potential to bring down the manufacturing cost by as much as 33 per cent and boost auto sales by 12 per cent.
The government expects to get Rs 10,000 crore in additional investment in the scrapping and recycling sector. “Within the next two years, I am confident that there will be 200-300 new scrapping and recycling facilities in India. Our aim is to develop 3-4 such centres in every district. This will not only create 200,000 jobs but also generate up to Rs 40,000 crore additional GST from vehicle sales,” Gadkari had said then.
Of course, these targets are important to stay on a planned course of action for any sector. But the challenge is the big gulf between what should happen and what is happening on the ground. It has to be noted that the surge in the sales of electric two-wheelers is a direct result of sustained encouragement from the government to the industry. There are about 50-60 two-wheeler electric makers in the country and about 300 original equipment manufacturers for all EVs. And many among these have come up in the last 5-7 years.
The developments around EVs were not without hiccups though. More than 7,000 electric scooters were recalled in the last fiscal after several incidents of batteries catching fire. The government is not happy with these outcomes. In fact, Gadkari prompted the EV makers to voluntarily recall their vehicles after more incidents were reported. He said: "While the government wanted to encourage electric vehicle adoption, companies would be wise to take advance action to recall all defective vehicles as 'safety was the highest priority for the government' and there could be no compromise with human lives.”
The EV industry is not unduly worried by these mishaps and terms these incidents as 'minor' setbacks while the ICE manufacturers look at it critically. In a virtual interaction with the members of the media, R.C. Bhargava, Chairman, Maruti Suzuki India termed the EV market as one that is "still nascent". He said: "When we will enter it by 2025 we will be coming in probably at the right time for this product, by which time the technologies will be a little bit more assured and reliable and some of the problems that EVs are facing at present hopefully will disappear by then."
Back to reality:
Overall, despite some bright sparks and an increase in month-on-month sales of cars (especially SUVs), the sector is far away from stabilising. In the last fiscal, impacted by supply-side challenges, total automobile dispatches fell 6 per cent in all segments, dragged down by lower sales of two-wheelers and entry-level cars amid rising vehicle and fuel costs, as per the Society of Indian Automobile Manufacturers (SIAM).
“Despite some recovery from a low base, sales of all four segments of the auto industry are below even the 2018-19 level,” Kenichi Ayukawa, President, SIAM said. “While some segments like commercial vehicles and SUVs are seeing improvement in demand, the mass segments like two-wheelers and smaller cars are facing serious affordability issues.”
Aykawa maintains that the immediate challenge for the industry in most segments is constraint in semiconductor availability. Rajesh Menon, Director General, SIAM adds that all segments are facing supply-side challenges and the industry is yet to see complete recovery following the disruptions it has been facing since early 2020.
The state of affairs of the carmakers can be understood from the state-of-affairs at Maruti, the largest carmaker with around 44 per cent market share. In the earnings call, the management of Maruti said the company had an order backlog of 3.20 lakh units (40 per cent of which were for CNG). Why? Because higher fuel prices led to increased demand for CNG vehicles. In FY22, Maruti said it sold 2.30 lakh units of CNG vehicles against 1.60 lakh units in FY21. The company also reported loss of production of 2.70 lakh units due to semiconductor chip shortage.
Every other carmaker is facing similar situation today. To counter it, the carmakers were left with no choice but to increase the retail prices. Maruti increased it five times in the last fiscal. Others followed. And that is why Maruti Suzuki said its profit after tax (PAT) grew 57.7 per cent year-on-year (YoY) to Rs 1,838.90 crore in the fourth quarter of FY22 from Rs 1,166.10 crore in the corresponding quarter of previous fiscal year.
April, the first month of the new fiscal continued to bring some cheers to the automotive sector. The total vehicle retail for the month of April 2022 increased 37 per cent, as per the latest report from FADA. On a year-on-year (YoY) basis, all categories including two-wheelers, three-wheelers, commercial vehicles, passenger vehicles and tractors were in green.
But there is a cautionary note from Vinkesh Gulati, President, FADA. "Auto retail has still not recovered from the jitters of Covid. When compared with April 2019, total vehicle retail was at (-) 6 per cent. Except passenger vehicles and tractors, which were up by 12 per cent and 30 per cent, all the other categories were down." On RBI's move to increase the rate, Gulati said: "RBI’s move of increasing repo rate by 40 bps has clearly taken everyone off guard. This move will apply brakes and dampen the sentiments further."
Shrinking small car market:
Bhargava, who termed the small car market as the 'bread and butter' for Maruti Suzuki India, said it is shrinking. "The 'butter' from the segment has gone away with only bread left now," Bhargava said. He concedes that the entry-level cars have become more expensive due to various factors, including new regulations, higher taxes and rise in commodity prices. Bhargava said a set of customers at a certain end of the market is getting squeezed out because of higher costs. This has forced Maruti to rethink its strategy. "It is making the company adjust to the market conditions and do what we can to the best of our abilities in the circumstances which exist."
In his recent interaction with media, Bhargava said over the last three years the market at the lower end for people who either use two-wheeler or use entry level hatchbacks for commuting, has been shrinking significantly. He termed the trend "worrying". In 2021-22, the hatchback segment clocked sales of 11.5 lakh units as compared to 15.5 lakh units in FY19, down by over 25 per cent. The fear is that Maruti sees no likelihood of small cars market reversing substantially any time soon. How will it address this challenge? "We have to take note of what the customer wants and what the market is doing. As you are aware, we are launching vehicles in other segments and the bigger segments, also including the SUVs." Maruti's overall market share down to 43.4 per cent in FY22 as a result of decline in small car sales. "Maruti Suzuki will again strive to get 50 per cent market share, but we will have to change some things in our product strategy and we are doing that and will continue to do that," he added.
Is the decline in small car sales because customers are upgrading and opting for bigger vehicles? "No! That is not the case," said Bhargava. "Only the SUV segment has gone up but other segments have not gone up...sales of sedans have gone down. It is not as if there are more customers in the market. The people with money are able to buy cars because they can pay the higher prices. The people with limited incomes are not able to buy even a two-wheeler and that's the reality today," he said. What can reverse the situation? "It depends on how the commodity prices move, which can lead to a reduction in the cost of small cars. It also depends on Maruti Suzuki, as how well we are able to make changes and improvements which will lead to a reduction in the cost of production of small cars to some extent.”
EV and challenges:
Indeed, going green, adopting clean and green technology is not an option but a mandate. Currently, the overall numbers for clean-fuel options like EVs are lower when compared to ICE vehicles. But with each passing year, more EVs are being sold. But the recent incidents of EVs/ battery catching fire resulting in loss of life and property is one major challenge before the EV makers. According to Rishabh Jain of Council on Energy, Environment and Water, a Delhi-based think tank, although three-wheelers make up 40 per cent of the EV sales, we rarely hear about fires in them or for that matter in the four-wheelers. He says the recent hype around electric two-wheelers could have lured startups and tech companies flush with funds to cash in on the electric vehicle boom without having developed the necessary expertise, say, for instance, in battery making or there not being adequate regulations governing quality control and testing.
Lowering dependence on petrol and diesel will happen with time. Blended fuel, green hydrogen and battery system are evolving technologies. Should the government then be pushing and nudging and hurrying the industry? Is the domestic auto industry going green and clean on its own? If consumers get an affordable, clean, green, cost-effective and safe vehicle, the sales will pick up. This has been the observation and learning from past two decades. And the automotive sector is clued into it well. Let's keep our fingers crossed and hope for better days ahead for everyone.
