Revival of Auto Market - Chasing a Mirage

Dear friends,

The turnaround of auto market is becoming a mirage with slowdown bug continuing to haunt the market. The sales figures for the month of November 2013 once again depict a gloomy picture as has been the case for over 20 months now, a reasonably decent performance of two-wheelers notwithstanding.

There is no respite or breather for commercial vehicle and passenger vehicle segments, which are reeling under severe slowdown. The worry is compounded by the fact that the economy is not looking up and the business sentiment remains low as a result. Macroeconomic data emerging of late does not inspire much confidence either. 

The Indian economy expanded by 4.8 per cent during the second quarter of the current financial year versus 5.2 percent during the same period of 2012-13. Sub-5% growth of GDP for the fourth consecutive quarter is a cause of concern. The two drivers of growth this year - good monsoons and exports - are insufficient to pull the economy out of the present slowdown, as mining, manufacturing and service sector output remains subdued.  Unless the Government gets its act together and quickly fixes the problems in manufacturing, the stress in other sectors will also be reflected.

Issues relating to policy implementation and administrative roadblocks need to be addressed immediately, as otherwise we do not see the sentiment or the auto market improving in the near future until after the formation of a strong Government at the Centre in 2014.

Hon’ble Union Finance Minister had used in this year’s Union Budget a GDP growth estimate of 5% for 2013-14 for the purpose of pegging various targets. Since the GDP growth rate for the six months April-September is 4.6 per cent, it will have to be at least 5.4 per cent during October-March if India is to achieve a growth of 5 per cent in 2013-14. 

Achieving 5.4 per cent growth in the second half at the moment seems difficult. This means the Finance Minister will probably have to press in even greater budget cuts to meet the fiscal deficit target he has set himself, restricting the investment and growth further.

The disturbing news is that the rating agency Standard and Poor’s (S&P) has warned that India’s sovereign rating could be downgraded to junk status next year if, post-general elections 2014, the next government fails to revive stalled structural reforms, faltering economic growth and the stress of subsidies on state finances. 

Another major concern and cause of low sentiment prevailing in the market is the continuing high level of inflation that is showing no sign of climbing down. Food inflation, in particular, remains at worrisome level. There is a downtrend of late, though. The problems accruing from low investment and consumption demand together with high food inflation are holding back the economy.

However, it is not a gloomy story all the way. There are a number of experts and analysts who view the macroeconomic developments of late as sign that Indian economy is on its way to recovery.

Agriculture has performed better on the back of good monsoon. Agriculture growth rose to 4.6 per cent during July-September from 2.7 per cent in April-June, the growth for the first half of 2013-14 for the farm sector being 3.6 per cent.

Recently, the prime minister's Economic Advisory Council projected 4.8 per cent growth for agriculture in 2013-14, although skeptics do not agree with this projection. In comparison, agricultural growth last year was 1.9 per cent.

Healthy growth in agriculture sector will come as a shot in the arm for the ailing Indian economy. Robust agricultural growth is expected to contain inflation, support industry and services, and increase employment opportunities in rural India. Good performance of agriculture sector is also likely to drive industrial growth and consequently have a positive impact on services. It might ease pressure on government employment schemes as well. 

Agriculture's contribution to the overall gross domestic product (GDP) has fallen from about 30 per cent in 1990/91 to about 15 per cent in 2011-12. Nonetheless, given that roughly half of India's workforce is engaged in agriculture, it remains the backbone of the Indian economy. 

The industry remains cautiously optimistic and feels that the higher than expected growth in the second quarter of 2013-14 is an indication of revival in economy. 

Secondly, the exports have been doing very well for the last 4-5 months and CAD is gradually coming down to the manageable level with imports, particularly the import of gold, displaying downward trend. 

While agriculture sector and exports offer some cold comfort, the situation for auto market is alarming and unprecedented and calls for urgent special measures on the part of both the OEMs and the Government.

The problem faced by the members of automobile dealer community is that they do not have elbow room for cost cutting. While manufacturers have some leeway in cutting their costs, like recourse to lean manufacturing, temporary shutdown of the plant and retrenchment/layoff, automobile dealers cannot significantly play around with their cost structure.  On the contrary, their marketing and inventory holding costs have gone up steeply due to fewer footfalls and sales, resulting in huge inventory build-up at automobile dealerships. It must be mentioned that the automobile dealers, dealing in passenger vehicles, are saddled with inventory worth over Rs. 20,000 crore. The situation is no better in the case of commercial vehicles.

The situation is assuming serious proportion. Not surprisingly, J D Power Asia Pacific in its Dealer Satisfaction Survey has brought forth an alarming finding that only 44% of the automobile dealers expect to make profit during the year 2012-13.

It is, somewhat, comforting that few manufacturers have already come up with measures extending support to their dealers in one form or the other, like interest free credit for inventory procurement, enhanced sales margins, incentives, etc. to tide over the current situation.

Since this is an unprecedented recession, we would request that OEMs may initiate special measures for improving the viability of their dealers, which is under severe stress due to acute recessionary conditions prevailing in the market for over 20 months.

While the automotive scenario may not be something to write home about, rest assured, we, in FADA council, are making earnest efforts to improve the viability and profitability of automobile dealer fraternity.

Hopefully, Auto Summit 2014 – FADA’s 8th biennial event – scheduled for 7th & 8th February 2014 at New Delhi, which will bring various stakeholders, namely, the Government, the industry, management consultants & academia representing independent perspective and members of auto retail fraternity from across India and abroad on a common platform, will address key issues of concern to automobile dealers and come up with workable solutions in the interest of growth and development automotive business as a whole.

The Auto Summit is also an occasion to build and deepen relations with various stakeholders. I am happy to inform that FADA will be honouring Mr Ratan Tata and Dr Brijmohan Lal, the industry stalwarts in their own right, with Life Time Contribution Awards.

It is heartening to note that the programme of Auto Summit 2014 is shaping up very well. Mr Praful Patel, Hon’ble Union Minister of Heavy Industries has already consented to inaugurate and to deliver his inaugural address at the Auto Summit 2014. The confirmations from the leaders of eminence representing industry & allied businesses, renowned management gurus and members representing auto retail in other parts of the world are pouring in thick and fast.

I reiterate my appeal to my fellow dealers to register for the Auto Sumit 2014 in large numbers and participate overwhelmingly to make most of this unique opportunity.

Likewise, the preparations for Automotive Dealership Excellence Awards for the year 2013 (ADEA 2013) are progressing very well. I am gratified to note that the response in terms of entries for the awards is very good so far. As you are aware, the awards presentation ceremony for the 5th edition of ADEA has been scheduled, as a part of the programme of Auto Summit 2014, in the evening on 7th February 2014. ADEA is an opportunity for my fellow dealers to get recognized and rewarded for their excellence in various areas of dealership management and outstanding work in social & community welfare. Please come forward and send your nominations for the award, if you have not done so earlier, to showcase your outstanding performance & practices and to make the awards truly representative of excellence in auto retail and social & community work.

Look forward to your support in making Auto Summit 2014 and ADEA a grand success as in the past.

Please feel free to send your suggestions and inputs, if any.

Wishing you a Merry Christmas and a Happy New Year,

Yours sincerely,

Mohan Himatsingka

 

 

 

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