Vijay Kumar Gaba: Auto Sales Slowdown

Wednesday, November 27, 2019

A trip to motown

To understand the current state of automobile market in India, we met numerous people in the supply chain, users and prospective buyers over the last few days. Both rural and urban markets were covered in 4 states - UP, Haryana, Punjab and Delhi.

The key takeaways from my discussions could be noted as follows:

(a) A sizable number of existing 4W passenger vehicle (4WPV) users has postponed their replacement decision in past one year. Most of the users who have replaced their vehicles in past one year have up traded. SUV still remains a preference in rural area.

(b) Almost 65% prospective 4WPV buyers (mostly first time buyers) of entry level vehicles have postponed their decision to buy. Most of these prospective buyers are not likely to buy in next 6 months also. The postponement of decision is due to a variety of decision - economic uncertainty (job, profession or business), poor availability of credit, buying vehicle decision linked to buying or shifting house which has got postponed, wait for new model, were some of the common reasons.

(c) Only 20% of the prospective 4WPV buyers of higher variants have postponed their buying decision. Most of these prospective buyers plan to buy a new vehicle in next 6 months. Most prominent reason for their decision postponement was cited as waiting for new model.

(d) Less than 30% existing and prospective 4WPV users were aware of the impending changeover to BSVI emission norms.

(e) Fuel price does not appear to be a key factor in decision making for anyone. However, insurance cost is a matter of concern, though not a deterrent.

(f) The situation in 2W passenger vehicle (2WPV) is quite the opposite. Here a small minority of the existing users have postponed the replacement decision; while almost 60% of prospective buyers have postponed their buying decision. Economic uncertainty and poor credit availability are cited as the primary factors in postponement decision. Nonetheless, most of the existing users seeking replacement and prospective buyers have expressed their intention to buy a new 2WPV in next 6-12months. Only 18% of 2WPV users indicated that they may up trade to a 4WPV in next 12 months.

(g) All the local motor repair workshops reported material decline in business in past 12 months.

(h) All dealers of second hand passenger motor vehicles indicated 30-40% decline in transactions over past 12 months. Most local dealers are yet not worried about the impact of the growing presence of large national players in this trade.

(i) The spare parts dealers reported huge jump in sale of unbranded and spurious parts post GST. Almost all dealers reported 25-30% fall in revenue over past 12 months. It is felt that there may be 20-25% elimination in this space before the business normalizes in next 6-9months.

(j) The dealers of both 4WPV and 2WPV indicated sizable rundown in inventory over past 3months. However, only a few of them indicated intentions to rebuild the inventory in next 3 months. Almost all of them highlighted decline in NBFC finance to be one reason for poor demand. About 20% of these dealers indicated intentions of quitting the business over next 24months.

For commercial vehicles and tractors the sample we got was meaningless.

We intend to cover the states in west and south over next three months for taking a view about investing in auto sector stocks.

Thursday, September 12, 2019

The seeds of auto slowdown were sown much earlier

Conventionally, automobile industry performance is widely accepted as a lead indicator of the overall economic performance of any economy. No wonders if the recent slowdown in automobile demand is being represented as a mark of the slowdown in overall economic activity.

However, the reactions from policy makers - ministers, MPs, senior advisers & bureaucrats, etc - are perplexing.

They have mostly sought to trivialize the issue of slowdown either by outright rejection or some lame explanation. The suggestion of the finance minister that use of app based taxis may be a key reason for slowdown in demand of automobile has been criticized widely on social media as a completely illogical. These unmindful assertions from the official side have raised doubts over the policy makers' understanding of the current state of Indian economy. These doubts may impact the already faltering business and consumer sentiments.

In this context it is important to note that—

(a) The GDP growth rate in India peaked at 9.6% in FY07. Since then, the popular target growth rate of 8% has been achieved only twice inFY11 and FY17.

(b) The monthly growth rate in sales of automobiles in India had peaked in 2010 at around 60% yoy. Since then it has ranged between -10% to 20% with a declining tendency.

(d) The share of private consumption in India's GDP consistently declined since 2000, from a peak of 70% to below 60%. Since 2012, it has mostly ranged between 57-60% of GDP.

(e) The fall in private consumption has distinctly coincided with the rise in household debt that has risen consistently from 2% of GDP in 1998 to over 10% of GDP in 2019.

(f) In past 25yrs, since 1995, India’s economy has grown at an average rate of 6.8%. However, the total employment in economy during this period has grown at just 0.3% CAGR. Moreover, the real wages have grown at significantly lower rate than the economic growth. The anecdotal evidence suggests that the real wages in private sector may be mostly stagnant for past 3 years. The affordability quotient of household is obviously lower.

(g) Post GST implementation, the operating efficiency of truck fleet has reportedly improved materially. Some unconfirmed reports have suggested that pre GST a truck took 10-12 days to make Chennai to Mumbai round trip. With implementation of GST and removal of check posts on state borders, the same round trip takes 4-5. So a lorry that was making two trips up & down in a month is now making 6 trips. The demand for trucks is obviously impacted. Improvement in railways is also reflecting on CV demand. The full operationalization of dedicated freight corridors will further impact the CV demand.

Restrictions on mining, slowdown in demand from housing construction sector, slowdown in imports, and delay in purchase decisions due to BS6 implementation schedule, etc also reflect on slowdown in CV sales.

(h) Moreover, the slowdown in auto sales is not a India specific phenomenon. Its more of a global trend. As per a Forbes report-

"The world car market is about to take its biggest hit since the financial crisis of 2008, according to a report from Germany’s Center for Automotive Research (CAR), with sales diving more than 4 million in 2019.

The fall, triggered by U.S. sanctions policy and led by a huge fall in China’s sales, will extend over four years and be exacerbated by harsher CO2 regulations and the challenges this implies from the enforced take up of electric vehicles in Europe.

The forecast, authored by CAR’s director Professor Ferdinand Dudenhoeffer, doesn’t include the impact from a possible crisis when Britain leaves the European Union (EU), or if the U.S. imposes tariffs on European vehicle imports.

Dudenhoeffer said world sales in 2019 will fall to 79.5 million from 83.7 million last year, and won’t recover to 2018’s levels until 2022 when sales will rise back to 84 million." (see here)

Ola and Uber are obviously the last things to impact the demand of personal vehicles. It may be worthwhile to note that only 30-35% of India is urbanized and Ola & Uber so far address about 30% of this urbanized India.

Shortage of parking space in cities and spread of Metro network might impact the growth of automobile sales more than Ola and Uber.