[Auto] Indian auto’s big bet amid a bleak year

[_Happy boy]

 

 

In an upmarket stretch of south Delhi, lined with a row of nearly half-a-dozen automobile dealerships, the air is rife with nervousness. In front of the Maruti Suzuki outlet, about 25-30 cars lay parked. Cars heavily outnumber humans in most dealerships.

The number of sales executives has steeply dropped following a pandemic-induced lockdown and nearly two years of bleak auto sales, but the absence of customers is starker, especially around this time of the year. “Many used to come in to enquire about the cars they want to purchase and even just to take pictures next to the cars they were interested in," said a Maruti sales executive, who did not wish to be named. New, pandemic-induced crowd control norms partly explain the lack of hustle and bustle (only 10 people are allowed to enter at a time and digital sale channels are seeing an uptick). But, more importantly, consumer interest remains depressed.

“Physical enquiries by customers has improved but not as much as last year," the executive said.

Manufacturers, though, are risking it all in anticipation of a surge in sales. Maruti Suzuki plans to manufacture a record 180,000 vehicles or more in October, while Hero MotoCorp will also produce around 800,000 units during the month, according to multiple sources.

Already, in September, the local unit of Suzuki Motor Corp reported a 33.4% year-on-year growth in domestic wholesale sales to dealers (amounting to over 150,000 units). On a sequential, or month-on-month basis, Maruti’s factory dispatches have shot up from around 100,000 in July. Hero has also reported a 16.11% year-on-year rise in its domestic wholesale dispatches for September. Hyundai and other manufacturers, too, are headed down a similar path.

Though India is still in the middle of a pandemic, more cars and two-wheelers are now being churned out of the factory floor than even last year.

Naturally, showrooms are ballooning with new inventory. Whether and when these arrivals will turn into retail sales is the open question. For now, upstream players like manufacturers and dealers seem to be operating under the belief that an imminent turnaround in the long-depressed auto market is just around the corner. Perhaps, the festive sale wave can raise all boats, including auto?

According to Vinkesh Gulati, an automobile dealer and president of the Federation of Automobile Dealers Associations, the hope is that sales in some segments will touch at least the low base of last year.

“Most of the stock building happened in September and companies are going for near record-level production in October. Though sales have been recovering, it’s difficult to match their (manufacturers’) level of buoyancy. Still, if retails match last year’s level, then, we should be fine," added Gulati. But, will it?

Lockdown woes

In the first week of May, when the Union government decided to gradually lift the lockdown measures which had been in place to control the spread of covid-19, automobile manufacturing companies struggled to operate their assembly lines as the supply chain and retail network was significantly disrupted by the months-long restrictions.

In the subsequent months, though, top executives of leading vehicle manufacturers like Maruti Suzuki India Ltd, Hyundai Motor India Ltd and Hero Moto Corp Ltd chalked out plans to push production of vehicles to near-record levels by September and October ignoring the grim realities of the Indian economy, which is expected to shrink by nearly 10% in the current fiscal year, according to the estimates released the International Monetary Fund (IMF).

The rationale behind such a sudden change in strategy was the expectation that retail sales will witness a robust turnaround during the Navaratri and Diwali festivals. Hence, almost all automakers are now in the process of replenishing the inventory at dealerships on a war footing.

The hope is fuelled by a set of broad trends: Once lockdown was lifted, sales of entry-level motorcycles and small cars, in particular, recovered very quickly, indicating that a pronounced shift toward personal mobility, due to fear of crowded spaces, may indeed be underway; tractor sales have also seen a healthy uptick due to a decent monsoon; finally, while the urban market lagged for many months, early signs of revival started showing up in August.

Incidentally, the lockdown in March also coincided with the auto industry’s transition to the more stringent Bharat Stage 6 emission norms. Hence, when operations restarted in May, most automakers’ inventories were depleted and production had to be increased to replenish the stocks. However, from September, high production levels don’t match the retails on the ground.

Justifiably, some of the dealers are apprehensive that they might face acute financial pressure if retail sales don’t take place as per expectations.

In most dealerships, the stocked inventory has by now stretched to 35-40 days’ worth of regular sale volumes. According to the retail vehicle sales data released by the Federation of Automobile Dealers Associations, showroom sales of the overall passenger vehicle segment increased by just 9.8% y-o-y in September even as two-wheeler sales declined by 12.6%.

Building up of inventory is usual before the festival period, but given the current circumstances, if dealers are saddled with excess inventory by the end of November and beyond, then it might adversely impact their financials.

According to a Maruti dealer based in Telangana, sales of small cars like Alto and S-Presso has increased in cities like Hyderabad and Chennai which was not the case earlier (as more expensive vehicles like Swift and Baleno were the preferred choices), indicating that a recovery on the back of a customer shift towards personal mobility could help boost sales of small cars as new customers enter the space.

“Before covid, sales of Alto were not that great, but now sales of Alto has begun to peak. Also, sales of S-Presso has increased to more than 30 units per month compared to just 10-12 units earlier," said the dealer who requested anonymity.

In addition to small cars, the shift towards personal mobility has also drawn somewhat well-off customers towards a niche class of more expensive offerings, especially in the sports utility vehicle segment—like Hyundai’s Venue (a compact SUV) and Creta (mid-size SUV). Retails of newcomer Kia Motors’ Seltos has also shown reasonable growth due to the evolving trend.

Why season is important

For the auto industry, vehicle sales during the year-end festive days constitute around a fourth of the overall annual volumes. But over the last two years, vehicle sales in Diwali and Navratri have remained subdued due to a prolonged economic slowdown.

In FY20, sales of vehicles fell in the range of 15% to 25% across categories after reporting low single-digit growth in FY19. According to ratings agency Icra, sales of passenger vehicles will decline between 22% and 25% this fiscal too, while, for two-wheelers, it is likely to drop by 16-18%. Thus, the expectations driving the industry are in opposition to long-term trends and analyst predictions.

Y S Guleria, director, sales and marketing, Honda Motorcycle and Scooter India Pvt Ltd, admits that it will be difficult to match even last year’s low base since the reason for a decline in sales this year is an unprecedented stagnation in economic growth, which is likely to be the worst in the history of independent India. Honda, though, has witnessed a 43% month-on-month jump in bookings in the first ten days of October, he says.

“We are upbeat about sequential growth. There is a 75% surge in enquires and test rides over the last 15 days, which shows that anxiety levels among people is coming down. On the retail front, we are behind in double digits on a year-on-year basis and it will remain like that I think," added Gularia.

Instead of pushing more inventory to dealers, Honda, the leading manufacturer of scooters, has adopted a “cash and carry" strategy, wherein, dealers who expect increased demand in their respective regions will have to pay in advance to book their vehicle dispatches.

Due to subdued sales in the last two years, more than 300 dealerships in the country have shut shop and some are in the process of winding up as the covid-19 related economic downturn has further made businesses unviable.

Media campaigns

The big bets might, in effect, be entirely linked to the dire straits. If not this Diwali, then when? To back hope with some substance, auto firms have also decided to go on a marketing and promotional overdrive.

All major auto manufacturers have planned new launches and facelifts of existing models and are expected to spend over ₹1,500 crore in advertising over the next two to three months as per estimates of leading media buyers.

Television, print, outdoor, digital and experiential marketing always had a critical role to play in the automobile category, but under the current circumstances, the whole consumer buying journey is being reset. Most brands are now promoting the fact that they offer a contactless experience to customers, which includes virtual walk-arounds to demonstrate the vehicle’s feature, home delivery of vehicles for test drives, and even online ordering to some extent.

“For the first time, there has also been a significant shift from print to digital platforms," said Sandeep Goyal, chairman, Mogae Media, a Mumbai-based marketing and communication agency. “Due to the pandemic scare, consumers are taking virtual test drives and looking for recommendations online. Therefore, companies have invested in augmented reality (AR) and virtual reality (VR) experiences to provide an idea of how a particular car model looks. The process of car buying is changing," he added.

beyond festive season

Notwithstanding the gradual recovery which was seen after the lockdown, top executives in auto firms and parts suppliers are concerned about a further contraction in demand after the festive season if there is no meaningful recovery in the wider economy and if a second wave of covid-19 infections begin to sweep through the country during the winter months.

Auto sales started recovering initially due to pent-up demand and, subsequently, rural demand has supported a nascent recovery. But, almost 70-80% of auto sales, especially four-wheelers, are in the urban market, which is yet to recover and is most prone to further damage from a resurgence in covid cases.

“To ascertain the robustness of the recovery, we have to see how the industry fares from January onwards. Auto industry depends on the economy and it will depend on the kind of stimulus on offer (to spur demand in the economy). It will take us almost three years to reach the three million mark again (which was the annual sales volume in 2017)," said Rajeev Chaba, president, M G Motor India.

“Business will be fine till the festive season, but everyone is worried about what is in store after that, said a top executive in one of the leading component manufacturing firms who did not wish to be named. “We are possibly looking at a lean period from January. That’s the reason we are going to remain cautious on capital investments." Whether and when India’s auto dream run will begin again is not a question that will have to wait till 2021 though. The ongoing do-or-die push will provide a definitive answer perhaps as early as December.

Saumya Tewari contributed to this story