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AUTOMOBILES: FALL IN SALES
Hicks was Right; They are Wrong!
Rising Interest rates are Massacring The Automobile industry but players are hoping that the upcoming Festive Season will reverse the sluggish trend. Well, will it?
Issue Date - 18/08/2011
 
In the end, the ISLM model won. What were they thinking? That auto demand in India will keep rising irrespective of interest rate spikes? Well, John Hicks (who propounded the ISLM theory) might have had to pawn his Nobel if that had happened. While the going was good, the automobile industry in India was on a roll. Car sales put up a scorching pace; FY2010-11 wound up with a mind-boggling growth of 26.17%. The launch of new products and growth in rural areas fuelled the boom, stoking the ambitions of automakers to make India overtake Brazil and become the sixth-largest automobile market by next year. Had it come to pass, Society of Indian Automobile Manufacturers’ (SIAM) forecasts – of India finding a place amongst the world’s top six carmakers by 2015 – might have even cut much ice with us; well, despite the rising interest rates, some industry experts claimed that even the forecasts of 12-15% growth for the current fiscal were pretty low. Quite a few were willing to wager that auto growth would surpass the 20% mark as Indian consumers did not care about interest rates. Well, our experts forgot three words – macroeconomics, macroeconomics and macroeconomics.

When numbers arrived for the first quarter of this fiscal, the cookie was already crumbling. As per SIAM, the passenger vehicle industry managed a growth of 8.77% in the first three months of this fiscal (April-June). In terms of number of cars sold, the figure stood at 601,547 units. If 8.77% looked deceptively fulsome, the news waiting around the corner for the month of July was shocking. Out of the 19 automakers in the country, 12 posted a sales decline of 10.56% during the month. Unit sales stood at 1,73,615 units as compared to 1,94,122 units sold during the same period last year. The worst hit were India’s big three automakers – Maruti Suzuki, Hyundai Motor India and Tata Motors – whose sales dropped by 26%, 11% and 38% respectively. Market leader Maruti Suzuki, which has over 42% market share in the domestic market, sold 66,504 units in July 2011 as against 90,114 units in the same period last year. Tata Motors, at the other end, once again took a big hit as unit sales for the world’s cheapest car, Tata Nano, fell precipitously to 3,260 units. The slide sent Nano’s sale into negative territory, a fall of 64% over the same period last year. It’s quite surprising then that SIAM last month claimed that the passenger car sector will still grow by 10-12% in 2011-2012.

 
For SIAM, even this 10-12% growth forecast admittance is a huge ego hit, as it comes after a growth forecast claim by SIAM of 18% just three months back. Clearly, rising interest costs and spikes in fuel prices have pushed the industry into a spot which seems worse than even the slowdown era. The question is, will the upcoming festive season lift the gloom that the industry is currently facing? Can the ‘spirit’ of purchasing overcome the shadow that the oversized Hicksian spanner is casting? More importantly, does the Indian consumer really have it, to provide the kind of growth that the auto sector expects?

By the look of the super-sized investments that many auto majors have chalked up for India, faith and confidence in the Indian market looks as strong as ever. New entrants like Volkswagen, Renault-Nissan have already invested Rs.38 billion and Rs.45 billion respectively in India. Another heavyweight, Ford, has recently announced an additional investment of Rs.40 billion for setting up a new plant in Gujarat. Even though India will continue to remain a small-car market in the years to come, the low penetration level in the passenger car industry is the reason why players are drooling over the Indian market. Currently, only 11 out of 1,000 Indians own a passenger car as compared to over 900 people in the US. According to JD Power and Associates, 11 million cars will be sold in India annually by 2020, making it the third-largest market for automobiles and only behind China and the US. But that much is already known.

But then, did these investments and forecasts mentioned above take into account the interest rate vagaries in India? Over the past 15 months, lending rates have risen 11 times, which has translated into a hike of 300 basis points on auto loans. “Though customer enquiries have increased, the conversion rate has slowed down due to the increase in fuel price and interest rates,” rues Arvind Saxena, Director - Marketing & Sales, Hyundai Motor India to B&E. Ajay Seth, CFO, Maruti Suzuki, tells us that “the silver lining is that incomes are still rising.” Unfortunately, the real incomes are actually falling as the inflation is rising faster than the income growth.

          

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